SMITHKLINE BEECHAM, MARION MERRELL DOW COMBINED OTC BUSINESS HAS BASELINE SALES OF $660 MIL.; VENTURE PROVIDES CRITICAL MASS, LAUNCHING PAD FOR SWITCHES
SmithKline Beecham and Marion Merrell Dow are combining their U.S. OTC businesses Sept. 4 in a partnership with pro forma baseline revenues of $660 mil. in 1991 and operating income of approximately $120 mil. The partnership will be based at SmithKline Beecham Consumer Brands headquarters in Pittsburgh. SB initially will have a 90% interest in the partnership (both in terms of costs and profits), while MMD will own the remaining 10%. The operation will bear the name SmithKline Beecham Consumer Brands. While initially a U.S. only agreement, "the partners are committed to examining the potential for similar cooperation in other countries." Announced jointly on Aug. 18, the partnership will have rights to "all present and future over-the-counter products of the two parent companies," SB and MMD said. MMD's OTC line, including the antacid Gaviscon, Cepacol throat lozenges, the laxative Citrucel, and Os-Cal multivitamins and minerals, had 1991 sales of $110 mil. SB's consumer brands, including the antacid Tums, the Contac cold line, Oxy anti-acne products and Aquafresh toothpaste, had sales of $550 mil. in 1991. The 1991 recession hurt both companies' OTC businesses. SB reported 3% sales growth in 1991 for its worldwide consumer brands business (to $2.54 bil.). However, for OTC medicines, the company said in its annual report only that "sales...were maintained despite being adversely affected by a flat market plus destocking particularly in the U.S." MMD's OTC sales declined 10% during 1991. SmithKline Beecham has successfully boosted Tums' U.S. market share in the first six months of 1992. The company reported that it held a 42.7% share of the antacid market at June 30, up from 32% at the end of 1991 ("The Pink Sheet" July 27, p. 18). SB's 1991 annual report also states that its Oxy brands hold a 27% share of the U.S. anti-acne market. Folding the MMD product line into SB's consumer health division "strengthens the infrastructure and scale of our consumer business providing us with a strong portfolio of current products and a promising pipeline for the future," SmithKline Beecham CEO Robert Bauman said. The deal will add new products to SB's streamlined OTC line: as one of a series of divestments following the SmithKline and Beecham merger, the company sold off 32 "small consumer brands" ("The Pink Sheet" April 16, 1990, T&G-3). For MMD, the short-term impact of the deal will be to provide critical mass in a consolidating marketplace. The company's decision to retain partial ownership represents a longer-term interest in establishing a platform for possible Rx-to-OTC switches similar to that created by the 1989 Johnson & Johnson- Merck joint venture. "Our real focus is on the potential for growth as we move through the 1990s," Marion Merrell Dow CEO Fred Lyons said. At a 1991 meeting with securities analysts, Lyons said that MMD wanted to build its OTC business from about 7% of corporate sales to 20% by the year 2000 ("The Pink Sheet" March 4, 1991, p. 14). While the partnership initially will be majority owned by SB, "over time the ownership will be adjusted to reflect the products that each partner contributes with the potential for the partnership to become a 50-50 arrangement," the firms said. If "the products contributed reach a designated level," the partnership will adopt the name SmithKline Beecham Marion. New products will come through product licensing, acquisitions and internal development, the firms said. Another key source of growth will be through Rx-to-OTC switches of brands from the parent firms. Potential Marion Merrell Dow switches include the antihistamine Seldane (terfenadine) and the smoking cessation products Nicorette/Nicoderm. SB has an NDA pending for an OTC version of its anti-ulcer drug Tagamet (cimetidine). Other possible switch candidates for SB include the topical antibiotic Bactroban (mupirocin) and the nonsteroidal anti-inflammatory drug Relafen (nabumetone). When SB and MMD began negotiations for the joint venture, the potential Seldane switch was doubtless a centerpiece of any proposed agreement. Marion Merrell Dow said it began discussions about OTC business combinations with SB and other firms "several months ago." In July, however, MMD agreed to relabel Seldane at FDA's request, contraindicating its use in patients taking the antibiotic erythromycin or the antifungal ketoconazole due to reports of serious cardiovascular adverse reactions ("The Pink Sheet" July 13, p. 9). MMD said at that time that it was re- evaluating its OTC application, which had been set for a second quarter filing. The application is still on hold, MMD indicated. The company said it has submitted safety data to FDA and is waiting to receive data from the agency. MMD then plans to meet with FDA to review the data and decide the future of terfenadine's switch prospects. OTC marketing of Nicoderm and other newly-launched nicotine transdermal patches has been discussed by the various developers of the products; however, it is likely to be several years at least before FDA will entertain OTC switch applications, especially in light of concerns about a possible increase in heart attacks among patients smoking while using patches ("The Pink Sheet" June 20, p. 8). Nicorette chewing gum, launched in 1983, does appear to have the requisite length of marketing experience to support a switch application. Like Nicoderm and the other nicotine patches, however, Nicorette is currently indicated for use only as part of a comprehensive smoking cessation program. A switch application for Nicorette could provide a test-case for the patches. SmithKline Beecham's NDA for an OTC version of Tagamet for treatment of episodic and nocturnal heartburn has been pending since December ("The Pink Sheet" Jan. 13, p. 3). The company has set a target of launching the OTC version before the prescription Tagamet patent expires in May 1994. Another MMD switch candidate, the anti-ulcer drug Carafate (sucralfate), is "not included in the partnership at this time," the two companies said. Schering-Plough has been working with MMD to develop an OTC version of Carafate, although no application has yet been filed. If OTC versions of sucralfate and cimetidine are both approved -- and neither comarketing agreement is amended -- MMD could be in the position of marketing two potentially important new entrants into the gastrointestinal remedy marketplace. The company, however, noted that the indication for OTC Carafate has not been determined and could be complementary to an OTC cimetidine. SmithKline Beecham Consumer Brands will have a staff of approximately 1,700 compared to its current staff of approximately 1,600. Marion Merrell Dow said it will transfer some of its 88- person headquarters staff from Cincinnati to Pittsburgh, as well as some of its 20-30 person field force. Some MMD personnel will be reassigned within the company or let go, the company said. MMD's 200-person part time sales force has been transferred to prescription detailing, the company said. MMD said that it will take a restructuring charge against earnings this quarter associated with the partnership, although the company added that the charge would not affect its ability to meet Wall Street earnings estimates for the period. SB will not take a charge in conjunction with the agreement. The partnership will be headed by SB Consumer Brands President-North America John Ziegler. MMD Consumer Products Division President John Dishaw will not be joining the partnership. Dishaw will be leaving MMD "to pursue other interests." The partnership's board of directors will include SB Consumer Brands Chairman Harry Groome, SB Consumer Brands Managing Director Peter Glynn-Jones, SB Chief Financial Officer Hugh Collum, MMD Chief Operating Officer David Sharrock and MMD CFO Edward Mehrer.
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