Pharma Companies Switch Drugs to OTC Market

Global pharmaceutical company AstraZeneca Group PLC ADR (NYSE: AZN) has suffered since late last year thanks to both expiring patents on key drugs and several developmental drug failures. The company has a much more substantial patent cliff than many of its peers with about half of its $33 billion in annual revenues expected to disappear by 2016. On the experimental drug side, it recently ended a second stage trail of CytoFab, a potential blockbuster drug treatment for sepsis, because it was found to be ineffective. In December, the company took a $382 million writedown on two other drugs which failed in late-stage trials.
So AstraZeneca's management has to come up with different ways to generate revenues in order to remain a big player in the pharmaceutical sector.

One strategy management is now following was on display recently with its deal with Pfizer (NYSE: PFE). AstraZeneca sold the global rights for an over-the-counter version of its leading (with $4.4 billion in 2011 sales) heartburn drug Nexium – the little purple pill – to Pfizer. The OTC version may go on sale in 2014 if FDA approved. Pfizer will pay $250 million upfront and has committed to a series of future milestone and royalty payments to AstraZeneca. These future payouts are substantial enough that AstraZeneca raised its 2012 earnings guidance upward by 16 cents to between $6.00 and $6.30.

AstraZeneca retains the rights to the pharmaceutical version of the drug. But the Pfizer transaction should aid the company in realizing the full long-term value of Nexium and it may open the door to other similar deals for other drugs in its portfolio. Already there is talk of Pfizer paying for the OTC rights to the company's allergy medication Rhinocort Aqua.

This strategy adopted by AstraZeneca is hardly unique in the industry. Take a look at the French pharmaceutical company Sanofi ADR (NYSE: SNY). In 2009, it bought Chattem just to acquire that company's expertise in marketing OTC products in order for Sanofi to be able to successfully switch its blockbuster allergy drug Allegra from a prescription-only drug to now having an OTC version. And thanks to Chattem's expertise, it has done so successfully. Its OTC sales were up in excess of 100 percent in 2011, mainly due to Allegra.

The problem is that the strategy does not always work, either because the FDA will not approve an over-the-counter version of a drug or more widespread use of a drug across a broader population reveals previously unknown side effects. When it comes to lack of FDA approval, just ask Pfizer about the Food and Drug Administration's reluctance to approve an OTC version of Viagra.

As for the second problem, the prime example has to be the fiasco called Alli from GlaxoSmithKline PLC ADR (NYSE: GSK). Back in 2005, it bought the rights to the diet drug Xenical from Swiss pharmaceutical company Roche Holding AG ADR (NASDAQOTH: RHHBY.PK). Its plan was to alter it enough to comply with regulators (which it did) and then market it like heck over-the-counter to people globally who were looking to lose weight. It began to market Alli in the U.S. in 2007.

Two problems arose, one of which was limited efficacy. The other was embarrassing to both the company and the users of Alli. A major side effect was diarrhea and flatulence among users who did not limit their intake of fatty foods. No wonder then that sales disappointed and that GlaxoSmithKline is now trying to unload Alli, but as of yet no buyers have stepped up.

The trend toward switching drugs to OTC status is sure to continue. Consultancy Kline Group estimates that already more than a fourth of over-the-counter sales in the United States are switched products such as Advil, for instance.

What investors should look for in drug companies looking to switch some of their most popular drugs to OTC status is what type of drug it is the firms are looking to switch. The FDA seems reluctant to approve cholesterol, diabetes and blood pressure drugs. So far it has been much easier to obtain FDA approval for drugs that are used to treat pain, allergies and heartburn like Nexium. In fact, allergy-relief products were the fastest growing segment of the OTC drug market in 2011, with sales increasing by 16.3 percent. Companies sticking to those sectors should be successful in generating revenues from OTC versions of drugs coming off patent.

This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.