Chapter 2: Why Switch? Evaluating the Value of Switch Candidates
26
life or by developing a plan to secure Hatch-
Waxman regulatory exclusivity.
The Strategic Decision for
Pharmaceutical Companies—Build,
Borrow, or Buy?
Switch partnerships are relatively common
because of the numerous key differences between
prescription and consumer healthcare business
models. Table 2-12 provides some key differences.
Switch is an attractive lifecycle manage-
ment option for may prescription products. For
pharmaceutical companies, Rx-to-OTC switch
provides an opportunity to leverage prescrip-
tion assets by extending their lifecycle and to
potentially gain a revenue stream via partnership
payments. Nonetheless, pharmaceutical com-
panies realistically cannot switch without OTC
capabilities.
For consumer healthcare companies,
Rx-to-OTC switch provides a mechanism to
launch new consumer healthcare brands, often
with market exclusivity, and the opportunity to
offer “newer” active ingredients that will address
unmet consumer needs. Nonetheless, consumer
healthcare companies cannot switch without
access to prescription assets.
As a result, classic pharmaceutical compa-
nies need to decide how they will secure OTC
capabilities, either by building the capabilities
internally, securing a joint-venture partner or
licensee, or securing a company with OTC
capabilities.
Switching a prescription asset without an
OTC partner means that the pharmaceutical
company is willing to prioritize the investment
in the OTC program, with an up-front and
long-term commitment to compete in the OTC
market. There is a risk that the Rx-to-OTC
switch program will fail, especially if the phar-
maceutical company does not have experience
with switch programs. Under this scenario, the
pharmaceutical company will retain 100% of
the financial returns upon product launch if
the switch is approved, although the company
may need to accept lower margins (compared to
Table 2-12. Key Differences Between Prescription and Consumer Healthcare Business Models
Rx OTC
Clinical Studies Focus is on efficacy, although safety matters Focus is on safety, although efficacy matters
HCP makes diagnosis and treatment decision Average consumer needs to self-diagnose and
self-treat
Can target very specific populations Study endpoints are more behavioral
Marketing Target is mainly HCPs Target is mainly consumers
Communicate clinical benefits Often communicate emotional benefits
Marketing involved later in development
process
Marketing involved at beginning of
development process
Marketing importance decreases at/near
patent expiry
Marketing can drive brand success into
perpetuity
Sales/Distribution Sell to drug wholesalers Sell to retail and via ecommerce
Control maintained by licensed pharmacists Over 100,000 points of distribution, including
convenience stores and dollar stores
Launch when drug available Trade dictates launch date based on shelf reset
P&L Marketing spend is a fraction of revenue At launch, marketing spend may be 100% of
sales
Nearly 90% sales lost within weeks of patent
expiration
With innovation, sales can continue to grow
Highly profitable 75% gross margin considered “good”
26
life or by developing a plan to secure Hatch-
Waxman regulatory exclusivity.
The Strategic Decision for
Pharmaceutical Companies—Build,
Borrow, or Buy?
Switch partnerships are relatively common
because of the numerous key differences between
prescription and consumer healthcare business
models. Table 2-12 provides some key differences.
Switch is an attractive lifecycle manage-
ment option for may prescription products. For
pharmaceutical companies, Rx-to-OTC switch
provides an opportunity to leverage prescrip-
tion assets by extending their lifecycle and to
potentially gain a revenue stream via partnership
payments. Nonetheless, pharmaceutical com-
panies realistically cannot switch without OTC
capabilities.
For consumer healthcare companies,
Rx-to-OTC switch provides a mechanism to
launch new consumer healthcare brands, often
with market exclusivity, and the opportunity to
offer “newer” active ingredients that will address
unmet consumer needs. Nonetheless, consumer
healthcare companies cannot switch without
access to prescription assets.
As a result, classic pharmaceutical compa-
nies need to decide how they will secure OTC
capabilities, either by building the capabilities
internally, securing a joint-venture partner or
licensee, or securing a company with OTC
capabilities.
Switching a prescription asset without an
OTC partner means that the pharmaceutical
company is willing to prioritize the investment
in the OTC program, with an up-front and
long-term commitment to compete in the OTC
market. There is a risk that the Rx-to-OTC
switch program will fail, especially if the phar-
maceutical company does not have experience
with switch programs. Under this scenario, the
pharmaceutical company will retain 100% of
the financial returns upon product launch if
the switch is approved, although the company
may need to accept lower margins (compared to
Table 2-12. Key Differences Between Prescription and Consumer Healthcare Business Models
Rx OTC
Clinical Studies Focus is on efficacy, although safety matters Focus is on safety, although efficacy matters
HCP makes diagnosis and treatment decision Average consumer needs to self-diagnose and
self-treat
Can target very specific populations Study endpoints are more behavioral
Marketing Target is mainly HCPs Target is mainly consumers
Communicate clinical benefits Often communicate emotional benefits
Marketing involved later in development
process
Marketing involved at beginning of
development process
Marketing importance decreases at/near
patent expiry
Marketing can drive brand success into
perpetuity
Sales/Distribution Sell to drug wholesalers Sell to retail and via ecommerce
Control maintained by licensed pharmacists Over 100,000 points of distribution, including
convenience stores and dollar stores
Launch when drug available Trade dictates launch date based on shelf reset
P&L Marketing spend is a fraction of revenue At launch, marketing spend may be 100% of
sales
Nearly 90% sales lost within weeks of patent
expiration
With innovation, sales can continue to grow
Highly profitable 75% gross margin considered “good”