Business Case Analysis Pepcid AC

Summary
The late 80s and early 90s era witnessed more than 200 drugs make the switch from
prescription to over-the-counter (OTC) status, owing to consumers increasing desire to selfmedicate. There is massive market potential for OTC drugs and the OTC marketplace is a
lucrative opportunity for pharmaceutical companies such as Johnson & Johnson/Merck
Consumer Pharmaceuticals Co. (JJM).
In 1994, advisors to the FDA recommended against selling JJMs heartburn remedy drug, Pepcid,
in the OTC market. Clinical trials conducted by JJM failed to authenticate the claim that Pepcid
AC (a low dosage form of Pepcid) not only relieved symptoms of heartburn but also prevented
its incidence if the drug were to be taken prior to the onset of symptoms. The FDAs rejection of
similar drugs from JJMs competitors now also provided the opportunity for Pepcid AC to be the
first-to-market, but only if the prevention claim (a key product differentiator) was dropped. JJMs
management must now decide on how to address this predicament.
Strategic Situation Facing Management in the Case
Pharmaceutical companies stand to gain huge profits from switching prescription drugs to OTC
status. This is especially important to JJM as the patent for Pepcid prescription drug expires in
six years and the company can ensure continued revenue and profits if it makes the switch to
OTC before fierce competition from generic drugs arises. Pepcid belongs to a class of
medications, called H2-receptor antagonists, which have been increasingly prescribed to treat
symptoms of GERD and heartburn which affect nearly 90 million adults in the United States
alone in a given year. Antacids, which were traditionally used in lieu of H 2 receptor antagonists,
have an overall market value of $750 million in 1994. JJMs own antacid brand, Mylanta, holds
16% of the antacid market share falling closely behind Smithkline Beechams Tums brand. The
prescription drug market for H2-receptor antagonists was at a whopping $ 3.3 billion dollars with
an average sustained growth of 15% every year since 1977. Nearly nine million use both H 2receptor prescription and antacid drugs (dual users) in a given year.
Since its introduction, Pepcid has always trailed behind Zantac (by Glaxo Wellcome) and
Tagamet (by Smithkline Beecham) in the prescription drug market. The FDAs recent rejection of
Tagamets movement to OTC market opens the door for Pepcid AC to be the first-to-market.
Market research conducted by JJM using BASES methodology demonstrated that a considerable
population of dual users were inclined to switching to OTC Pepcid AC. The BASES analyses
also revealed that users preferred treatment over prevention. However, focus group studies found
that the prevention claim could offer better market positioning, product differentiation and ensure
long term growth and success.
Zantac and Tagamet, which were released to the prescription drug market years before Pepcid,
have become well-established, household names in the United States. Pepcid, a later entrant, was

only able to obtain a minor share of the market. Given the market potential, fierce competition is
anticipated from existing prescription drugs and OTC antacids.
Pepcid AC may have a cost disadvantage compared to Tagamet HB (OTC Tagamet) due to
licensing fees involved. However, Tagamet may cause adverse side-effects especially when
combined with other medications. Tagamet also had an inconvenient 4-times-a-day regimen,
whereas Pepcid AC could provide relief from heartburn symptoms for up to 8 hours on a single
tablet dosage. Zantac, another competitor drug for Pepcid, rapidly gained popularity and ranks
first among all prescription drugs currently sold in the market. Zantac was marketed aggressively
and had a competitive advantage over Tagamet in that it had a more convenient regimen (twicea-day) and fewer side effects. None of these products claim prevention and treatment of
heartburn. Pepcid ACs one tablet dosage is easier to manage and lasts four times longer than the
average antacid. However, H2-receptor antagonists take effect slower than antacids.
To challenge competition from Pepcid AC, JJMs competitors may react in a couple of different
ways. They may choose to price their products much lower to attract more users. Challengers
may also choose to market their own products aggressively to emphasizing lower price and/or
and prescription heritage. Alternatively, competitors may invent a superior new OTC heartburn
drug altogether which may seriously cripple Pepcids market share. However, the possibility of
such drug entering the OTC market in the near future is slim.
Historically, when a drug makes the switch to OTC status, the prescription drugs price is steered
down. BASES analyses indicated that nearly 30% of users would replace their prescription drug
with Pepcid AC while approximately 31% of users would use it to substitute OTC antacids. Thus
Pepcid AC may have potential to cannibalize prescription sales of Pepcid as well as OTC sales of
JJMs antacid, Mylanta. To assess the possibility of cannibalization, JJM conducted another
BASES study which estimated that in the first year of sales, Pepcid AC would cut into 8% of
Pepcids sales volume and 11% of Mylantas volume. In the long-run, given Pepcid ACs
prevention claim, long- lasting relief and dosage ease, it may pose a serious threat to Mylanta
OTC antacid.
Strategic Alternatives Available to the Firm
After JJMs efforts towards getting Pepcid AC approved as an OTC heartburn remedy was
hampered by the FDA, JJMs management are left with two strategic alternatives. The first
option to the firm is to continue pursuing Pepcid ACs prevention and treatment claim with the
FDA. The prevention claim is a critical product differentiator and competitive advantage for the
product. This will establish Pepcid AC as the first drug to receive approval for both prevention
and treatment of heartburn and GERD symptoms and in the long-run preserve its market share
when fierce competition arises, especially from generic drug brands. However, this move will
require substantial time and financial investment towards intensive clinical trials and research to
prove the prevention claims. It may be several months before JJM is able to prove Pepcids
prevention claim to the FDA and delay its introduction to the OTC market. Pepcid will lose its
first-mover advantage and penetrate the market as a second entrant, as was initially determined.

As a later entrant, JJM may have to invest heavily in switching costs to attract customers to their
products.
The second option available to the firm is to drop the prevention claim and proceed with the
treatment only option. This is far more likely to be approved by the FDA and gives Pepcid the
first-mover advantage and dominate the market share. Pepcids convenient one tablet regimen
and fewer side effects still contribute strongly to its competitive advantage. Take for example,
Zantac: When Zantac (a late entrant) was first introduced to the market, Glaxo aggressively
marketed Zantacs Twice-a-day dosage which rapidly popularized the drug and its ranking. As
more and more competitor drugs enter the market, JJM may choose to re-visit the prevention
claim and request approval from the FDA in order to differentiate itself. Tagamets sales dropped
by 37% in the United States alone when its patent expired. Being a first-mover in the OTC H 2receptor antagonists market will allow JJM to gain superior brand recognition and customer
loyalty as well as capitalize on the six years remaining on Pepcids patent.
Recommended Strategy
After carefully considering the alternatives available to JJM, I recommend that JJM proceed with
the second option it is critical that Pepcid AC to enter the OTC market before Zantac and
Tagamet. As far as the FDA is concerned, prevention is not always better than cure. The FDA has
long considered consumer education as the best means to prevention. There are also lingering
concerns of users over-dosing on medication in an effort to prevent ailments. Thus the treatment
only claim is more likely to receive FDA approval with the process being a lot quicker and
easier. Additionally, data from the BASES analyses indicated that the treatment concept (71%)
dominated the prevention concept in terms of sales volume relative to spending. Only within a
small group of prescription users was there an increased interest in the prevention claim. Overall,
the study revealed that consumers in the primary market (OTC) were drawn closer to attributes
such as long-lasting relief and ease of dosage rather than prevention of heartburn symptoms.
By seizing the first-mover opportunity, JJM would reap better returns on investment by
minimizing additional R&D costs, controlling buyer-switching costs, establishing brand name
and customer loyalty, and controlling retailer resources.

Exhibits
1. SWOT Analysis:

We
Strengths
Lack of Experience (Prescription to OT
Product Differentiation (Long-lasting, fewer side-effects, single-dose)

Brand Status ( Zantac ranks much higher; established house

Mercks R&D Expertise (JJM joint venture)
Brand Name (Ranks 16 in drug sales)
J&J Retail Expertise (JJM joint venture)
Six years of Patent Protection Remaining

SWOT
Opportunities
Rapidly growing OTC Market

Threats
Potential Cannibalization of Mylanta

First-Mover Advantage (Since FDA advisors recommended againstSubstitute

Tagamet) Brand in the Future
Existing Antacid Brands
FDA Approval Process (Could take long)

2. Porters 5 Forces Analysis:

Established firm can dictate prices

Resources and raw materials can be
obtained through multiple suppliers

Bargaining Power of Suppliers

LOW

Threat of Substitutes
HIGH

Bargaining Power of Buyers

Given the number of MEDIUM
substitutes
available, consumer trends will change
if price is not competitive

Competitive Rivalry
HIGH
Highly competitive H2 receptor antagonists
market.

Companies are well known

pharmaceutical giants
OTC antacids
High barriers to entry FDA approval
process
Generic substitutes once Pepcids patent
Challenging regulations in the industry
expires
Threat of New Entrants
MEDIUM

3. Marketing Mix:

H2 - receptor antagonists relieve

heartburn symptoms by blocking
cells that produce stomach acid
First product from JJM to potentially
make the switch to OTC status

Retail price of $2.95 forPrice

a six
jkgdose
package
Price based on market research study allow JJM 60% gross margin

Product

Supermarkets, drug store

independent pharmacists

4 Ps
Marketing Mix
chains,

Television advertisements, doctor

recommendations, radio and print
media commercials

Promotion hjh

Place