When Johnson & Johnson paid $16.6 billion last week for Pfizer's consumer health business, trumping GlaxoSmithKline in a spirited bidding war, it supplanted Pfizer as the world's largest pharma company.

Analysts say the cash deal--which included top brands like Visine, Listerine, and Benadryl--further insulates J&J from some of the uncertainty of drug discovery. Pfizer took a greater risk, trading stable brands for quick cash to initiate stock buybacks and make acquisitions to strengthen its pipeline.

Analysts were pricing the deal at $12 to13 million, about three times the revenues of the consumer business. J&J paid more than four times annual revenues.

"Our decision is based on the strength of the offer," said Paul Fitzhenry, Pfizer's senior director of corporate media relations. "Over the next 30 months, we'll be putting that money to work."

Pfizer is concentrating on its prescription business, which remains the largest in the industry.

"The old adage is: it's great to be a pure-play company if you do that really well," said Jason Napodano, senior biotechnology analyst at Zacks Investment Research, adding that Pfizer has the potential for "explosive" growth. "Pfizer definitely wanted to become a more pure-play behemoth. A company like J&J builds its entire business on safety and diversity."

But Fitzhenry denied that the sale was a change in strategy for Pfizer. Instead he described it as "unlocking what we perceive as trapped value," a $4 billion unit lost in a $52 billion goliath. (At J&J, in contrast, consumer goods will represent about a quarter of revenues.)

"This is actually a very good outcome for both J&J and Pfizer," said Peter Young, president of specialty investment-banking firm Young & Partners. "Pfizer was never that great at that type of business. J&J has made higher margins in its consumer business."

J&J told investors that the deal doubles the size of its consumer business and allows the company to expand into new global markets. It also noted that consumer-directed healthcare has been driving patients to seek more affordable therapies, like OTC drugs.

The deal also includes the rights to acquire allergy drug Zyrtec when it completes its Rx-to-OTC switch.

"J&J made a very shrewd decision to go after the consumer market more aggressively," said Elgar Peerschke, head of the global healthcare practice at Bain & Company.

He added that consumer brands, while less profitable, offer stability to an industry that is often stymied by regulatory, R&D, and liability issues. At the same time, he noted, Pfizer is following the trend of pharma companies that sell off ancillary businesses, such as agriculture or chemicals.

J&J, which recently lost its bid to purchase Guidant, will likely continue to pursue other ways to build its medical device and pharma divisions. "That part of the business is very important; I don't think they're going to walk away from it," said Young, who added that J&J has recently changed its strategy to focus more on licensing than acquisitions.

Pfizer's stock buyback will increase prices in the short-term but has limited long-term value, according to Michaela Drapes, pharmaceutical editor at Hoover's.

"When done on that scale, it's the kind of move that can point to some problems with cash flow," she said. "They really need to do something about their pipeline."

Napodano agreed. "This is a company that has pretty anemic top-line growth," he said. "I would rather see the company go on a biotech buying spree."

Fitzhenry noted that Pfizer has made six biotech acquisitions since September 2004, and is planning more activity in the $1 to 4 billion range. "We're looking at targeted acquisitions, and we are taking a disciplined approach to investing to grow the company."

Articles

Drug giants explain sale of Pfizer's consumer business.

J&J Shows Pfizer the Money

Drug companies have a new avenue to reach dispersed independent pharmacists, a group that traditionally has stronger ties to local communities than industry or distributors.

McKesson Pharmaceutical has launched a franchising initiative to give independent pharmacists more negotiating power with pharmacy benefits managers (PBMs) and open communication with drug makers.

By joining the Health Mart franchise, independent pharmacy owners are united under a national brand, and can maximize their buying power and share market intelligence.

The franchise also offers drug companies a single avenue into local communities, giving marketers the ability to devise consistent education and promotional programs across franchises that also have a local feel.

Independent pharmacists also want greater interaction with drug makers.

Douglas Hoey, senior vice president and COO of the National Community Pharmacy Association, noted that the organization recently surveyed its members on whether they wanted more interaction with drug sales reps. "Overwhelmingly, the answer was yes," he said.

"The big [pharma] companies tend to ignore the independents," said Tim Canning, vice president of retail marketing for McKesson. "There's no consistent retail execution."

Yet independent pharmacists are often involved not only in selling drugs, but in programs such as clinical-trial recruitment. They can also spot local drug utilization trends that could be beneficial to manufacturers.

Through Health Mart, "the branded manufacturers have a communication vehicle into those pharmacies," said Andy Burtis, vice president of marketing services for McKesson.

Cardinal Health already operates its Medicine Shoppe franchise for independent pharmacists. But McKesson executives say Health Mart requires no sign-up fees or long-term commitments, unlike many other franchises.

A national advertising campaign for Health Mart will focus on the patient-pharmacist relationship, and McKesson is also working with Interbrand on branding efforts.

"They're able to keep their independence but have a collective strength," Burtis said.

He added that 350 pharmacies have already joined Health Mart, and that McKesson aims to have 1,000 stores on board by next year. It hopes to draw members from stores that are already part of its AccessHealth managed care and contracting program.

The increasing dominance of PBMs, as well as new pressures created by Medicare Part D reimbursement, have put pressure on community pharmacists. But even as the landscape has changed, fewer pharmacy schools are providing courses on how to manage a business, according to Hoey.

McKesson's new program helps build bridges.

Drug Makers Reach Independent Pharmacists

Merck lost patent protection on Zocor. But now the company wants to win a price war with Teva, the generic company that challenged its patent.

In an unprecedented move by a brand name manufacturer, Merck announced last month that it would reduce the price of Zocor to undercut Teva's price for simvastatin, the generic drug.

After declining to challenge Teva in court, Merck appears to be building a new strategy for the battle with generic manufacturers. Instead of fighting for the patent, Merck is fighting to retain Zocor's market share.

That strategy has prompted some insurance companies like UnitedHealth to offer Zocor at a lower co-pay than the generic--at least until Teva's six months of marketing exclusivity come to a close.

"This is really a short-term arrangement," said Tim Heady, CEO of UnitedHealth Pharmaceutical Solutions. "We all thought there'd be a lot of generics coming to market."

At least one insurer, Aetna, has said it will continue to offer the generic at a lower price to avoid sending the wrong message to consumers.

But Heady noted that in an age of consumer-directed healthcare, customers should be more sophisticated about pricing issues. "We don't underestimate that there is some confusion," he said. "But it doesn't help [consumers] to believe that a generic is always cheaper when it's sometimes not."

Merck did not respond to a request for comment.

Edward Thwaite, president of EW Thwaite Associates, a generic consulting firm, noted that the move is particularly unusual since Merck is already collaborating with drug maker Dr. Reddy's on an authorized generic for Zocor.

"I don't think it's a trend; I think it's a fluke," he said about Merck's pricing strategy for the brand name drug. "Authorized generics have become the operational standard when a brand goes off-patent."

But Lee Bromberg, founding partner of law firm Bromberg & Sunstein, noted that the pricing maneuver would allow Merck to capitalize on the goodwill Zocor has earned through branding efforts.

"There's a large segment of the consuming public that will insist upon the brand name drug, and not accept generic substitutes," he said. "I think [aggressive pricing] is something new that we're seeing now. If Merck is successful in this strategy, I think we'll see other companies explore it."

Michael Russo, a partner at consulting firm The Bruckner Group, noted that there's another reason why Merck would be interested in investing in the Zocor brand: Vytorin, its Zocor/Zetia (ezetimibe) hybrid developed with Schering-Plough.

"There's no incentive to extending the life of a brand if the brand has run its course," he said. "I think the impetus is to keep the brand alive, because that gives them leverage for switching [patients to Vytorin]."

Pfizer meanwhile expressed confidence that Zocor competitor Lipitor (atorvastatin) would be able to hold onto its market share.

"I believe there's probably going to be a peaceful coexistence," said Walt Johnston, Pfizer's group leader of cardiovascular marketing. "When Lipitor was introduced, it was a quantum leap in the marketplace. Lipitor is a better product and a better value than Zocor."

Pfizer has developed an extensive, three-prong marketing plan to support Lipitor, Johnston noted. On the professional front, the company is planning to promote the message that Lipitor is different from its competitors, and it has optimized its field force. It also launched a consumer advertising campaign in March.

"They're very intelligently running additional studies on outcome benefits," Russo observed. "They've really built up a wealth of knowledge."

 Johnston noted that Pfizer is unlikely to change the price of Lipitor because of generic competition in the category.

Thwaite said that generic simvastatin was unlikely to have a significant spillover effect on the rest of the category. "In the past, therapeutic substitution hasn't been a big deal; it hasn't had a major negative impact," he said. "This one may be somewhat different, but it won't be catastrophic."

Branded drug makers hand generic companies a new challenge.

Pharmaceutical Executive-07-05-2006

J&J Shows Pfizer the Money

Drug Makers Reach Independent Pharmacists

Merck Slashes Zocor Price