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Executive Summary

J&J's McNeil Consumer Products sales and marketing forces could begin selling the Mylanta antacid and Mylicon antiflatulent brands as early as the beginning of 1990 as a result of the J&J-Merck agreement-in-principle to purchase ICI's U.S. OTC business. The $450 mil. acquisition accelerates the development of the J&J-Merck OTC joint venture and gives the firm a trial-run product in the gastrointestinal/antacid market to prepare for its anticipated Rx-to-OTC switch for famotidine (Pepcid).(END ITALICS) That switch is believed to be at least three to four years away. Mylanta looks like a good stalking horse for famotidine OTC in the antacid market. It is an established, but under-promoted, product that offers J&J-Merck the opportunity for an aggressive rebuilding campaign. The ICI product is the OTC antacid most frequently prescribed by physicians. It has annual sales of approximately $90 mil. However, the product's support in the professional community has not been strong enough to hold ICI's position in the $775 mil. OTC antacid market. A recent consulting report on the antacid market, by POV Inc., estimates that Mylanta has lost ground since the middle of this decade, slipping about one share point over the last four years. ICI has not promoted the brand to consumers in several years and reportedly cut advertising support to about $1 mil. in the current year. McNeil Consumer, which will handle the marketing and sales for the joint venture, should be tempted to revive consumer promotions soon to build the combined J&J-Merck name in the marketplace and to rebuild Mylanta sales. Moving Mylanta from an ethical/trade-promoted product into the consumer ad market could also be good practice for the future treatment of an OTC famotidine launch. McNeil is a recognized leader in OTC consumer marketing, but the company has little background in the gastrointestinal business and none in antacids. Since 1988, McNeil has been marketing loperamide OTC as an antidiarrheal, Immodium AD. As an OTC, loperamide has been promoted directly to consumers. The product is also marketed simultaneously in the same formulation as a prescription item. Mylanta ranks about sixth in the overall OTC antacid market behind Rorer's category-leading Maalox (1988 sales of over $100 mil.), as well as Procter & Gamble's Pepto Bismol, SmithKline-Beecham's Tums, Warner-Lambert's Rolaids and Miles' Alka Seltzer. Mylicon also has high physician visibility but low consumer recognition. The brand, with sales of approximately $20 mil., could also benefit from a boost to consumer marketing. The product is currently promoted for gas distress and competes against Block's Phazyme. If McNeil's sales force comes out strongly for the joint venture, the revised Mylanta campaigns could be particularly troublesome for Rorer. That company is said to be in the midst of a $20 mil.-plus marketing effort for Maalox. The campaign was initiated in July to shore up softening brand sales ("The Pink Sheet" June 26, p. 10). The J&J-Merck access to Mylanta may also expedite the development of an OTC Pepcid by providing a possible famotidine/antacid combo and an established brandname base for the combination. Merck acknowledged in its press release on the ICI deal that it is developing an "OTC formulation" of Pepcid. The reference to a new formulation implies that the company does not intend to try to shift the existing Rx product directly to OTC status. Pepcid will compete with planned non-prescription versions of SmithKline Beecham's Tagamet (cimetidine) and Glaxo's Zantac (ranitidine). As an Rx product, Pepcid is expected to have volume of over $340 mil. in 1989, up more than 20% from 1988 totals. One focus of speculation on the H[2] OTC development race has been on the potential for combining existing OTC antacids with H[2] antagonists for the OTC market. The OTC ingredients may be able to improve the onset of action of the H[2] antagonists. The combo studies to support those mixtures, however, may be very difficult because of FDA's interest in seeing the contribution of each ingredient ("The Pink Sheet" May 15, p. 17). Announced as an agreement-in-principle on Oct. 9, the acquisition of the ICI Americas OTC subsidiary of Imperial Chemical Industries plc gives the J&J-Merck consumer pharmaceuticals joint venture a total of 12 ICI OTCs with 1988 U.S. sales of $125 mil. In return, ICI is getting cash and considerations valued at over $450 mil. -- including Merck's transfer of the U.S. rights, including trademark rights, to its antidepressant, Elavil. The high acquisition price catapults the J&J-Merck venture from zero to fourteen among U.S. OTC businesses in less than eight months. J&J-Merck will be the "fourteenth largest firm in the United States OTC medicines market," according to the company, with annual sales bigger than the consumer products businesses of Upjohn, Ciba-Geigy and Sandoz. Perhaps the most significant aspect of the purchase is the level of cooperation between J&J and Merck that the deal intimates. The two major companies have been able to put together a working structure quickly and given the managers enough autonomy and contact back to decisionmakers at the parents to pull off a major deal in a stunningly short period of time. The ability to locate a potential purchase, negotiate a price and work out a cash and product trade formula for fulfilling that price indicate a high degree of flexibility, maneuverability and confidence between partners in the administration of the joint venture. One sign of the close working arrangement between J&J and Merck is the contribution of Elavil. The two partners had to agree on the value of the Elavil contribution to the deal before they could work out an equitable 50%-50% sharing of the acquisition price. That kind of complexity can tie up a deal unless both parties are committed to the overall project. The deal is subject to a definitive agreement and due diligence. The price includes cash, certain mutual manufacturing obligations and the purchase of an ICI facility in Pasadena, California. That OTC manufacturing plant employs 300. J&J-Merck will also try to recruit the 50-person ICI consumer product sales force. Merck's contribution to the deal is particularly noteworthy as it reinforces the picture of a company ambitiously manipulating its current product profile to advance future projects. The divestiture of the amitriptyline rights is Merck's second product trade deal in less than three weeks. On Sept. 28, the company announced a swap of U.S. rights to the Parkinson's drug Sinemet with Dupont in return for co-development and marketing rights for the latter's angiotensin II receptor antagonist hypertensives. Merck also agreed to share co-promotion rights with Dupont for its ACE inhibitor/diuretic combo Vaseteric ("The Pink Sheet" Oct. 2, p. 7). Sales for the 28-year-old, off-patent product Elavil are over $50 mil. annually: approximately $25 mil. in the U.S. and "several million dollars" over that internationally, according to Merck. For ICI, which has traded product rights with Merck before in the statil/lisinopril deal, amitriptyline provides an entry into the CNS product category. The OTC divestiture frees up resources the firm can now devote to building its U.S. prescription drug business. Ironically, ICI is taking a narrowing approach to focus on its prescription business which is similar to the path that Merck followed in the 1970's. Merck, coming off a string of successful introductions this decade, is pursuing a strategic course back into consumer marketing. From that perspective, the trade makes sense for both companies. ICI will launch the I.V. anesthetic Diprivan (propofol) on Nov. 3 and hopes to receive NDA approval by year-end for Zoladex (goserelin acetate), a treatment for advanced prostate cancer. The company has an NDA pending for Catatrol (viloxazine), an orphan antidepressant for cataplexy and narcolepsy, and for Carwin (xamoterol), a cardioselective beta agonist for mild to moderate congestive heart failure. The NDA for Carwin was filed in March 1988.

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