Consolidation time for OTC drug manufacturers

Since the days of the wandering snake-oil salesmen, the business of "over the counter" (OTC) medicines has lacked glamour. For one thing, the market for prescription pharmaceuticals is far bigger and more profitable than the $117 billion global market for OTC drugs. For another, the brightest researchers prefer to work on glamorous life-saving drugs rather than on mundane stuff like cold remedies. The head of research for an American OTC firm has been known to joke: "If the customer takes our syrup, his cold will go away in seven days; if he doesn't, it'll go away in a week."

Perhaps it is no surprise then that Pfizer, the world's biggest pharmaceutical firm, has let it be known that it is thinking of selling its OTC arm—which peddles, among other things, Listerine mouthwash, Rogain, an anti-baldness treatment, and Benadryl allergy pills. June 6th was the deadline for outsiders to bid for the division, which Goldman Sachs, an investment bank, reckons may fetch $10 billion-12 billion. Britain's GlaxoSmithKline and America's Johnson & Johnson (prescription-drugs firms with big OTC arms), as well as Reckitt Benckiser, a British household-products firm, and others are rumoured to have placed bids. Pfizer is expected to unveil a shortlist of bidders in a matter of weeks and—assuming the board decides not to float the division on the stockmarket—a final sale will probably take place this autumn.

But this week's reported bidding frenzy raises an awkward question. If outsiders find Pfizer's OTC division so desirable, why is the firm eager to get rid of it? Revenues at the consumer division are nothing to sneeze at: they made up $4 billion of the company's overall sales of roughly $51 billion last year. While its prescription-drug sales have stagnated, OTC sales grew 19% in 2004 and 10% last year; Goldman Sachs reckons the division had profit margins above 15% for the past two years. What is more, the OTC business is generally much less risky than the expensive and frustrating quest for the next breakthrough prescription drug. But that may be one reason why Pfizer is flogging its OTC division. Between 2005 and 2007, the firm is set to lose patents on drugs earning some $14 billion a year in revenues. Finding new drugs to replace them will cost many billions of dollars. During that same period, the firm also plans to launch perhaps ten new prescription drugs, which will also need lots of marketing money. Selling the consumer business will bring in much-needed cash and may focus managers' attention.

Pfizer may also reason that this is a particularly good time to sell an OTC company. The sector looks ripe for consolidation. Andy Tisman of IMS Health, a consultancy, points out that none of the leading OTC firms holds even a 5% share of the world market (see chart), and the top ten command less than a third. A merger wave began last year when Reckitt Benckiser paid £1.9 billion ($3.4 billion) for Boots Healthcare International (BHI), which owned popular brands like Nurofen and Clearasil. As that valued BHI at over 20 times earnings, Pfizer bosses took immediate notice.

Bigger OTC firms would be better placed to establish global brands and capitalise on growth in developing markets—especially China. Euromonitor International, a research outfit, estimates that while global OTC sales will grow at 3% per year from 2005 to 2010 (and sales in Japan and America at barely 2%), sales in China should soar by 9% a year over the same period.

At present Pfizer has only a weak presence in China's OTC market. It does, however, have a strong prescription-drug business there, but that has been hobbled by piracy and legal battles over intellectual property—until now. Just this month, a Chinese court upheld Pfizer's patent protection on Viagra, the firm's much-pirated prescription remedy for impotence. And although the Chinese customers' taste for the delights of Western OTC products like Listerine mouthwash remains to be proven, nobody doubts that the country has a gargantuan appetite for impotence remedies. If you doubt that, ask any of the few remaining rhinoceroses in Africa.