A Huge Business Wrapped Up in Tiny Packages

They're not as exciting as their friends that hang out with pharmacists; they hardly ever hit blockbuster status. But investors still shouldn't ignore over-the-counter products. There's good and bad aspects to pharmaceutical companies selling over-the-counter products and investors should keep a weather eye on both.

Let's start with the good
Combine all those tiny packages and there's some serious revenue adding to the bottom line.

Company

Fourth-Quarter Revenue From Consumer Products (in Millions)

Percentage of Total Revenue

Year-Over-Year Increase

Johnson & Johnson (NYSE: JNJ  )

$4,249

25.7%

10.2%

GlaxoSmithKline (NYSE: GSK  )

$1,907

14.6%

5%

Novartis (NYSE: NVS  )

$1,623

12.6%

20%

Pfizer (NYSE: PFE  )

$494*

N/A

N/A

Merck (NYSE: MRK  )

$149**

N/A

N/A

Source: Company transcripts. N/A = not applicable.
*Includes about 2.5 months of post-merger Wyeth sales.
**Includes about two months of post-merger Schering-Plough sales.

You'll note the irony that Pfizer sold its consumer health division to Johnson & Johnson and then picked one up again when it purchased Wyeth. Merck also diversified into consumer products when it purchased Schering-Plough, getting products like Coppertone sunscreen and Dr. Scholl's foot-care products. Sanofi-aventis also has joined the fun with its purchase of Chattem.

A little diversification is nice, but investors should be cautious of any drug company that says it plans to make a major push into over-the-counter products because the margins there aren't that great. Not every company is nice enough to break out margins by segment, but at least for Novartis, the consumer health division only manages a core operating profit margin -- excluding corporate expenses -- of 15.3%; pharmaceuticals manage a 28.5% operating profit margin.

But it's not without problems
Over-the-counter products aren't perfect though. Because many of them are regulated by the Food and Drug Administration, they're just a susceptible to issues as their prescription counterparts.

Last month, Johnson & Johnson recalled a variety of over-the-counter drugs including antacid Rolaids, allergy drug Benadryl, and pain relievers Tylenol and Motrin. Apparently the packaging used to ship the drugs caused a moldy smell that made some customers nauseated. And let's not forget the large 1982 Tylenol recall, which wasn't even linked to the company, but still required Johnson & Johnson to remove 264,000 bottles of Tylenol from shelves to keep its brand intact.

Novartis won't be pulling its product from the shelf, but it won't be able to rely on its Maalox brand to help out its new offering either. Last week, the FDA ordered the company to rename and repackage its Maalox Total Relief because customers were confusing it with the milder form of the heartburn reliever, which just goes by Maalox. The total relief version contains bismuth subsalicylate, which is similar to aspirin and shouldn't be taken by people with certain conditions like stomach ulcers or those on certain medications like Bristol-Myers Squibb (NYSE: BMY  ) and Sanofi's Plavix.

Selling over-the-counter drugs also opens up drugmakers to lawsuits like they would be for prescription drugs -- maybe not to the level of a Merck-Vioxx issue, but it's something to keep an eye on. For instance, both Glaxo and Procter & Gamble (NYSE: PG  ) are being sued over their denture creams, Super Poligrip, and Fixodent respectfully. The denture products contain zinc that is toxic at high levels. I'm not sure if the plaintiffs have a tooth to chew with, here -- you have to use quite a bit to exceed your zinc intake -- but last week, Glaxo announced that it would remove the zinc from the denture products anyway.

Don't forget about me
It's easy to focus on the major products in a company's arsenal: They're in the headlines of the news, and they often dictate how a stock performs. But investors shouldn't forget about the little guys either. While individually they may not have a material effect on revenue, added together, over-the-counter products are a contributing factor in the future of many pharmaceutical giants.

There's no prescription needed to read Anand Chokkavelu's best shot at a 10-bagger.

Pfizer is a Motley Fool Inside Value pick. Novartis is a Global Gains selection. Johnson & Johnson and Procter & Gamble are Income Investor picks. Motley Fool Options has recommended buying calls on Johnson & Johnson stock. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of both GlaxoSmithKline and Procter & Gamble and has a disclosure policy.


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