Cabinet shuffle may be just the remedy for Glaxo
April 27, 2006

Glaxosmithkline is on the verge of doing a deal with tiny Futura Medical to bring its erectile dysfunction cream to the market. The deal, which is yet to be announced, is revolutionary because it will be the first time in the UK that men suffering with impotence will be able to find help at their local pharmacist or even corner shop, and will not have to go to the doctor for a prescription of pills.

As well as transforming the fortunes of Futura, the tie-up is also significant for GSK, as it underlines the fact that Britain's biggest drugs company is keen on the "over-the-counter" (OTC) market.

GSK, which owns a wide variety of non-prescription brands from Nicorette patches and Tums heartburn tablets to "healthy" drinks Lucozade and Ribena, is also thought to be on a shopping mission for a much larger OTC business.

That is the bumper portfolio of brands owned by Pfizer of the US. Such a deal would give GSK a lot to digest - Pfizer's group of businesses are up for sale for about $14bn (£7.8bn) - but the deal would bring more well-known household names such as Sudafed cough medicine and Listerine mouthwash into its portfolio and would further its presence in the US.

Whether GSK will win Pfizer's business is not clear.

A fierce auction led by Lazard has kicked off, and other interested companies include the household products giant Reckitt Benckiser, which bought Boots' OTC business last year, Switzerland's Novartis and America's healthcare products group Johnson & Johnson.

What is clear is why many companies want to bulk up in the OTC market. Products in this sector, which range from non-prescription painkillers and vitamins to soft drinks, generate very healthy cash flows.

For pharmaceuticals companies, owning OTC businesses also provides a balance to the high-risk, high-return business of researching and developing new drugs, especially at a time when the possibility of a multi-billion-dollar lawsuit is only one bad drug away.

Navid Malik, an analyst at Collins Stewart, believes growth of the OTC market chimes in with the public's greater desire for "lifestyle" drugs, such as those which treat sexual dysfunction and even obesity.

It also fits with the Government's wider health agenda to get people out of overcrowded hospitals and GPs' surgeries and redirect them to pharmacists.

"There is a transfer of ownership of your health from a physician-led environment to a pharmacy-led one," Mr Malik said.

The Government's desire to see this happen has led to its decision to give pharmacists wider responsibility for diagnosing and prescribing medicines, creating new sales opportunities for drugs companies in the OTC market.

The OTC sector also represents a valuable source of growth for pharmaceuticals companies which are under attack from low-cost generic rivals and are struggling with the fact that fewer new drugs are being discovered now than 20 years ago.

Mr Malik points out that an advantage of being in the OTC market alleviates both problems because many drugs whose patents are running out can be repackaged by lowering their dose to make them appropriate for sales without prescriptions.

Regulators are usually relaxed about agreeing such a move because these drugs have had years of being prescribed, making their efficacy and safety profile well known.

Companies which have already gone down this route include AstraZeneca, Britain's second biggest drugs company, which is struggling from a dearth of new drugs in its pipeline.

In the US, however, AZ has salvaged something from its blockbuster ulcer treatment Losec going off patent by doing a deal with Procter & Gamble to make Prilosec, one of the most popular OTC medicines in its sector. GSK, too, has a history of boosting drugs going off patent over to the OTC market.

It did this successfully with its heartburn medicine Zantac in the late 1990s.

The company is now campaigning with the US drugs regulator, the Food and Drug Administration, to allow it to sell a lower-dose version of its obesity drug Xenical in the OTC market.

If successful, the drug, which has been prescribed for years, would be the first obesity drug to be available over the counter, creating a potentially hugely lucrative market.

Not all of big pharma sees the OTC sector as a salutary shot in the arm for sales growth and profits.

While large companies can use their sales forces to sell an increasing portfolio of OTC products, extracting major costs savings, they still need to plough serious cash into advertising and frequent launches of new variations of products needed to maintain shelf space with retailers.

Pfizer - which is trying to shave $4bn from its annual costs by 2008 as five major drugs lose their patents over four years - has decided not to use its cash on its OTC business, and instead to concentrate on being a pure R&D company.

Bristol-Myers Squibb of the US has taken a similar view and sold its OTC business to Novartis and Roche divested its holdings in the sector to Germany's Bayer.

In contrast, Novartis, which has developed a three-legged strategy of having prescription drugs, generics and OTC, and GSK have made it clear they do see opportunities in the OTC market.

Indeed, Jean-Pierre Garnier, GSK's chief executive, is rumoured to be much keener on the sector than his predecessor, Sir Richard Sykes. Sources said GSK was not a serious contender for Roche's OTC portfolio and did not reach the final round of bidding for Boots' business, which includes Nurofen and Strepsils.

Even though the price of the Pfizer portfolio is likely to be high, Mr Garnier may not be able to resist putting it in his shopping basket.

Source: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/27/ccglax27.xml