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MERCK PREPARING TO RE-ENTER OTC DRUG BUSINESS: VAGELOS SAYS FIRM IS LOOKING AT RIGHT "MECHANISM" -- JOINT VENTURE, IN-HOUSE, OR NEW COMPANY SPIN-OFF

Executive Summary

Merck appears close to a decision on its route back into the over-the-counter drug business after an 11-year hiatus. The company highlighted its interest in the re-development of an OTC business after an 11-year hiatus. The company highlighted its interest in the re-development of an OTC business during a November 3 meeting with financial analysts in New York City. "We are definitely looking at the over-the-counter drug market," Merck Chairman Roy Vagelos declared during a review of external growth possibilities for the firm. The OTC field appears "attractive" to Merck and the logical extended market for some of its more mature Rx products, Vagelos indicated. he noted that several in-house Rx-to-OTC switch projects are already under way. "We are developing a couple, several actually, Merck drugs within the company for the OTC market, Vagelos said. Merck is categorically ruling our the use of M&D marketing resources to handle the OTC switch products. Vagelos pointed out: "We are not going to market them within MS&D." The main issue for Merck's re-entry into the OTC business has been narrowed to the type of structure. "We're looking for an appropriate mechanism to get into the over-the-counter business," Vagelos said, assuring the analysts that "we will do that very shortly." During Q&A, Vagelos listed types of OTC arrangements that Merck is investigating. "We are considering acquisitions, joint ventures, starting de novo, a separate company," Vagelos answered. He reiterated that Merck will be ready to "crystalize those thoughts and do something within the very near future because these products are coming very rapidly." The acquisition route for an OTC marketing group is probably unlikely. Vagelos pointed out that Merck has very tough criteria for acquisition candidates. "Any acquisition must present growth potential equivalent to the alternative of investing in our own research and marketing and sales organizations," the Merck chairman explained. He also said Merck demands synergies in R&D and marketing to add to the value of the acquisition. Vagelos was pressed during Q&A for the rationale for such restrictive objectives. Vagelos said the company uses a 13% cost of capitol figure to calculate desired returns. "We see that as a hurdle rate that is very safe for us and assures long-term profitability of ]new[ projects." Merck's declaration to the analysts that a decision is forthcoming may have been meant as a signal to potential OTC marketing partners that the deadline for linking with Merck is fast approaching. Vagelos preceded his discussion of the renewed OTC effort with comments on the company's continued interest in trading products. He said Merck has a lot of quids in its pipeline for making deals to bring in new projects for its pipeline. The company may be dangling the OTC development efforts as some of the bait. Merck was one of the first of the major drug companies to back out of the OTC business, with the sale of Calgon (including the Sucrets line) to Beecham in 1977. At that point, Merck was at the cutting edge of the trend among the major ethical businesses to focus their efforts more tightly onto the Rx drug area. The lack of an outlet for switch candidates, however, has been frequently mentioned in recent years as an Achilles heel in Merck's long-term plans in the health field. The coming battle among the H]2[ antagonists in the OCT gastrointestinal class is clearly a catalyst for Merck's decision. Vagelos pointed out that Pepcid (famotidine) is one of the company's "pretty obvious" candidates for a switch. With Glaxo and SmithKline actively developing ranitidine and cimetidine for the OTC market (for co-marketing with established OTC firms), the handwriting is on the wall for the whole class of drugs. Lilly, which also has a new H]2[ Rx product Axid (nizatidine), is in a similar position to Merck when looking to the future of that class. Dolobid (diflunisal) in the analgesic category was also specifically mentioned by Vagelos as an obvious switch candidate. He said "there are other things within the company that we are not discussing outside yet which are potential OTC products and which are within full development within Merck -- targeted for the OTC market." The range of the switch potential at Merck is broad. The company has two NSAIDS (Clinoril and Indocin) which could be considered for switch or as the basis for other other formulations of NSAID products. Merck's muscle-relaxant Flexeril (cyclobenzaprine) was almost switched OTC against the company's will in the early 1980's by FDA. Merck's Rx hold on the product was saved at that time, however, by an advisory committee recommendation against the switch. Flexeril might be ripe for a change now, in Merck's eyes, as generic competition is set to begin from Danbury on May 3, 1989. Merck is embroiled with Danbury in a patent suit; Danbury has won the most recent round ("The Pink Sheet," Oct. 3). Industry discussions of the types of OTC treatments in the future have occasionally mentioned antihypertensives. Merck has the kind of recognized first-line treatments which could qualify for that type of more dramatic switch efforts.
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