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Executive Summary

The ultimate objective of the Johnson & Johnson-Merck joint venture in the U.S. OTC business is a new stand-alone company with its own sales, marketing and product development groups. During the start-up years, the joint venture will rely on the McNeil Consumer Products sales force to market and distribute the products and on Merck's product development skills to determine the appropriate OTC formulations. Merck will apparently hold the primary responsibility for securing FDA approval of Rx-to-OTC switches. Famotidine (Pepcid in its prescription form) was spotlighted by both companies as an example of the type of switch product to be considered in the current MS&D armamentarium. As an entry into the closely-watched race for an OTC H(BRACKET)2(BRACKET) antagonist, famotidine is an obvious example for the companies to cite. The emphasis on famotidine may be a red herring to deflect attention from some of the other possibilities, especially in the analgesic category. J&J and Merck declined to comment publicly on other possible switch candidates. Merck has previously acknowledged that it has several other Rx products already in development for OTC use. As recently as November of last year, Merck Chairman Roy Vagelos declared that the company had several products "which are within full development within Merck -- targeted for the OTC market." During a presentation to securities analysts four months ago, Vagelos mentioned both the NSAID analgesic Dolobid (diflunisal) and famotidine as logical OTC switch candidates. With the McNeil Tylenol marketing machine to push possible switch products, Merck's long list of maturing NSAIDs may be a particularly attractive group for the the new venture. J&J and Merck highlighted the blue-blood marriage by pointing out that J&J is the world's leading consumer health care company ($ 3.7 bil. in consumer health care product sales in 1988) and Merck is the leading Rx drug marketer in the world (with just under $ 5 bil. in human drug sales in 1988). To build the new venture, each company has designated a general manager for the project. The venture will also have a separate management board comprised of an equal number of executives from each company -- including several senior level execs. Merck's general manager will be G. Theodore Mascott, who has been in strategic planning and market research for MS&D and Merck during the last eight years of a 23-year career with the firm. J&J's general manager will be Edward F. Chase, a 15-year J&J veteran with 11 years of personal products and international marketing experience and a recent position in charge of business development for McNeil Consumer. Merck credits Mascott with heading the effort to evaluate its opportunities in the self-care area. He has reportedly had a long interest in the company's direct contact with the ultimate consumer going back to a product manager role with one of Merck's early hypertensives two decades ago. As product manager for that antihypertensive, Mascott is said to have pushed for patient information associated with the product. Merck, while clearly not among the most aggressive of the prescription drug companies to pursue consumer promotion, has edged closer to the consumer during the 1980's -- with influenza vaccine ads directed to the elderly at the beginning of the decade and an active role in cholesterol management education in conjunction with Mevacor (lovastatin). Merck, however, appears to be scrupulously protecting its Rx corporate culture for MS&D. The company has repeatedly emphasized that one of the goals of the joint venture is to separate the new self-care effort, and the types of promotion and marketing that that effort will require, from the existing Rx business. Vagelos, for example, declared in November that no MS&D sales reps would be diverted to the marketing of OTC products. Mascott will also head a new internal Merck business unit called the Consumer Healthcare Group. That group will be charged with building Merck's worldwide consumer health care presence. The joint venture with J&J appears initially limited to the U.S., which may indicate that the company is open to similar marketing/switch ventures with other partners outside the U.S. Mascott will report to Senior VP A. E. Cohen, who is portrayed in the company's just-released annual report as the fourth most senior corporate executive. The two companies are apparently trying to avoid the possibility of a two-headed monster by clearly segmenting responsibility in the beginning between development (Merck) and marketing (McNeil). Both companies are experienced in joint ventures: J&J more than Merck. J&J has had a checkered experience in its joint ventures. The company is typically the much larger partner and it has developed a reputation, in a number of fights with smaller firms, as being a demanding and difficult partner. The company's ongoing fight with Amgen over the EPO registration in the U.S. is a case in point. In that venture, J&J has successfully brought the product out in Europe. McNeil's Rx business ironically is currently involved in a co-promotion arrangement directly competitive with MS&D, working with Squibb to market Capoten against Merck's ACE inhibitors. Merck's major joint venture partner has been Astra. Merck tied into the Astra Rx pipeline in 1982 at a time when Merck's own pipeline prospects did not look so bright. One of Merck's current development projects drawing close scrutiny, the anti-ulcer agent Losec (omeprazole), is a part of the Astra agreement. At the time of the joint venture signing between Merck and Astra, the companies set a 10-year target for the development of a new stand-alone marketing arm in the U.S., Merck-Astra. That remains an objective of the agreement. Merck's ability to work with Astra toward that goal over a long period of time could indicate the company's fortitude and patience with joint ventures. At J&J, the deal was consummated and announced on the cusp of the top management change. Chairman James Burke and President David Clare are stepping down in three weeks to make way for Ralph Larsen and a new three-person office of the chairman. As befitting a deal of its size, it has reportedly been under discussion for well over a year. Merck's public discussion of its OTC interest last November presumably was an indication that the negotiations with J&J were near completion at that point. The announcement of the deal now lets the credit and any potential risks be attributable to either the outgoing or incoming J&J management group. Should J&J-Merck develop into a strong new entity in "the family of J&J companies," it is likely to occur on Larsen's watch and could provide a peg for the outside world to view his impact on the large corporation. It is noteworthy that J&J put its corporate imprimatur on the joint venture. The firm is usually very sparing with the use of its Johnson & Johnson name for operating subsidiaries, especially for consumer products outside the health aids and baby care business. While the agreement really links McNeil Consumer resources to Merck, the new venture will combine the full corporate names. With McNeil's strength in the analgesic category, Merck's stable of nonsteroidal products appears a likely temptation for the joint venture. The Merck NSAID stable includes indomethacin (Indocin), which already faces heavy generic competition in its standard and controlled release versions, and sulindac (Clinoril), which is due to come off patent in early 1990. The objective with several other major NSAIDs has been to get an OTC version approved prior to loss of patent life or Rx exclusivity. If that is the case with sulindac for the new joint venture, both parent companies are protecting the secret carefully. Some trade sources believe that Merck may be well underway with an OTC version of sulindac. Sulindac and diflunisal could offer new angles for the OTC analgesic marketing wars. Diflunisal, for example, carries labeling that clearly identifies it as a longer-acting analgesic than aspirin. Its slower onset of action, however, would traditionally be viewed as a potential drawback in the OTC area with its emphasis on quick symptomatic relief. The joint venture also could break new ground if it seeks a bursitis indication through an OTC NDA for sulindac. Bursitis is not included in the current analgesic monograph description of pain. As an Rx product, sulindac carries approved labeling for acute subacromial bursitis as well as three forms of arthritis and ankylosing spondylitis. The labeling cites a study finding that 300 mg to 400 mg daily of sulindac was equivalent in relieving acute painful shoulders to 400 to 600 mg daily of the formerly marketed oxyphenbutazone. Merck also has Flexeril (cyclobenzaprine) in the pain category. In 1982, at the time that FDA took the initiative to try to switch metaproterenol to OTC in the asthma medication field, the agency also took a first step towards looking at Rx switches to OTC for back pain products ("The Pink Sheet" Nov. 8, 1982, p. 7). FDA took several questions about the safety of Rx compounds, including cyclobenzaprine, to an advisory committee as a precursor to seeking a switch recommendation. The agency did not take further action on that switch concept but the advisory committee said at the time that one of the key characteristics of an appropriate Rx-to-OTC switch candidate in that category would be a high therapeutic-to-toxic ratio. Merck is close to facing generic competition on Flexeril. Danbury is claiming that it should get an exclusive generic competition period of six months beginning in early May of this year ("The Pink Sheet" Oct. 3, T&G-9). Flexeril had an extremely successful year in 1988: dispensed prescriptions increased 13% and dollar volume 21% to nearly $ 100 mil. in the U.S. based on data from Pharmaceutical Data Systems. Further into the future, Merck has a stable of mature products in such classes as hypertension, which could be used to develop entirely new categories of OTC products for the joint venture.

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