Why Does Merck Switch Pepcid To OTC Status?

Pepcid Case Analysis

1. Why does Merck want to switch Pepcid to OTC status when the patent is good for another six years? How attractive is this opportunity?

Over-the-counter market growth is attractive to pharmaceutical companies like P&G who successfully changed Aleve from prescription strength to OTC. Once the patent for Pepcid expires in six years there will inevitably be fierce competition. Since the FDA usually takes so long to process an approval for a prescription-to-OTC switch, JJM can go through the process while they still have patent protection for Pepcid and get a stronghold on the market. Also, Pepcid is a treatment for a common chronic problem that is relatively easy to self-diagnose and treat. An OTC Pepcid would
be available to a larger group of consumers. Pepcid as a prescription drug has already gained its market as a brand name drug, and now they can capitalize in the OTC market. The OTC market seems to be calling for Pepcid. It had a strong performance in the OTC market compared to other antacids, and it has attractive qualities like long-lasting relief and convenience. Pepcid AC can produce considerable gross margin over the counter – around 60% at $2.95. Antacid users intend to buy Pepcid AC – 82% for heavy antacid users and 76% for other antacid users – and dual users also have a high trial rate. The OTC market appears to be very attractive for Pepcid AC.

2. How will sales of OTC Pepcid affect sales of the prescription version? How will cannibalization affect sales of JJM's Mylanta antacid?

Usually when a drug makes the switch to OTC, the prescription product suffers. About 30% of surveyed consumers intend to replace their prescription product with Pepcid AC, and between 28%-34% would use it as a substitute for nonprescription antacids. The OTC Pepcid AC would, therefore, cannibalize both prescription sales of Pepcid and the OTC sales of Mylanta. However, BASES II estimated that, in the first year, sales of Pepcid AC would only draw 11% of Pepcid AC’s dollar volume from Mylanta, and 8% from prescription Pepcid. The effect of cannibalization is not too substantial, so the prescription Pepcid and Mylanta antacid can keep their relative positions in the market. Since Pepcid AC has better performance in long-lasting relief and convenience than other antacids in the OTC market, Pepcid AC can be expected to substantially cannibalize Mylanta antacid sometime in the future.

3. What are the relative merits of positioning Pepcid as a "treatment" as opposed to "prevention" for heartburn/indigestion? How does FDA view them?

The FDA takes prevention studies very seriously.
The FDA considers education as a means to prevention rather than medication. From the perspective of medication, over-medication in pursuit of prevention might mask serious medical problems. JJM is likely to approval much easier and faster if they only claim “treatment.” If JJM wants to enter the market early, dropping the “prevention” claim can reduce the risk of the FDA’s disapproval and speed up Pepcid’s OTC introduction. According to the BASES I test results, consumers are more attracted to Pepcid AC by its long-lasting relief than by prevention of digestive symptoms anyway. OTC users want the treatment benefits and unique qualities of Pepcid AC and are less interested in the prevention benefits. Only prescription users expressed higher interest in prevention than treatment (64% compared to 49%), and the prescription market is smaller than the OTC market. JJM should consider the advantages of appealing to a larger market sooner rather than later to benefit from the higher profits waiting for them. The sales promotion on the treatment concept could yield the best return on investment. Also, the attribute of prevention is difficult to communicate to ordinary antacid
users.