J&J Bullish On OTC Drug Pricing, Consumer Regard For Its Brands

Brand strength, not price cuts, drives J&J OTC product sales, says Worldwide Group Chairwoman Sandra Peterson. The firm has returned 80% of its recalled brands to store shelves and will restart Tylenol Arthritis distribution later this year, leaving one “substantive” product to re-launch.

Johnson & Johnson will not ride price discounts and coupons as it attempts to reach the market share its consumer health care products claimed before stumbling over quality-control problems, says J&J Worldwide Group Chairwoman Sandra Peterson.

Peterson says Tylenol, Motrin, Benadryl and other OTC brands manufactured by the firm’s McNeil Consumer Healthcare subsidiary are regaining market share lost to other brands and to private label products after widespread recalls in 2009-2010 due to malodorous packaging, contamination with particulate matter and other quality concerns, and as product was slowed during remediation of three McNeil plants required under a 2011 consent decree with FDA.

Sandra Peterson, J&J World Group chairwoman

Brand strength, not price cuts, drives sales, says Peterson, who joined J&J in 2012 and has broad executive responsibilities including the consumer products business. McNeil has returned 80% of the recalled brands to store shelves and later in 2015 will restart distribution of the Tylenol Arthritis stock-keeping unit.

“We never really lost the trust and the emotional connection that consumers have to these brands,” she said at the Goldman Sachs Global Healthcare Conference in Rancho Palos Verdes, Calif., on June 11.

Private Label Alien To J&J

Market analysts speculating J&J will bid for OTC private label giant Perrigo Co. PLC might reconsider – J&J global executive Sandra Peterson says private label manufacturing is “not in our world.”

Commenting on Goldman Sachs analyst Jami Rubin’s questions about the consumer business, Peterson said “adding a private-label business is counter to what we do.”

Although private label sales lead most OTC drug categories and market research shows most consumers who switched to lower-priced store brands during the economic recession are not returning to national brands, Peterson spoke of J&J brands as differentiated by higher quality and better reputation.

J&J’s consumer businesses “go to market” with “consumer-insight driven, scientifically based, better-for-you products,” most with “health care professional endorsement,” she said.

“Doing all of that and doing it well is inconsistent with being in the private label business.”

Rx generics and specialty product firm Mylan NV soon will ask for its shareholders’ approval to make a hostile takeover bid for Perrigo, which has declined Mylan’s bids so far. With Mylan also resisting an acquisition bid by Teva Pharmaceutical Industries Ltd., industry analysts have said Perrigo could be a target for other suitors including J&J.

While J&J has no interest in entering the private label market, the firm turned to Perrigo to manufacture some of its OTC brands as it remediated its manufacturing operations under a consent decree with FDA.

And J&J counts on that trust to drive sales of its OTC brands. The New Brunswick, N.J.-based firm said soon after it entered the consent decree that consumers’ affinity for its brands would be key when the recalled products returned to the market.

“We did not discount them. We did not do a lot of couponing, which I think a lot of people thought we would do,” Peterson said.

She said the firm worked with retailers to present its brands as invitations for consumers to return to buying OTCs. “We partnered with retailers to say, how do we bring these back, to bring consumers back into these stores, to get consumers to pick up these products again and start using them in a meaningful way.”

J&J also expects to boost consumer health product sales with changes in its marketing structure. Peterson said the firm moved from regional or sometimes local OTC brand management to global management of 12 brands.

“We get a massive amount of better consumer insight and efficiencies and better reach and frequency in how we market our products to all of our consumers around the globe,” she said.

Eight brands, though, “are very relevant in just certain parts of the world” and require more narrowly focused management, she said.

Additionally, J&J has moved about 30% of its consumer product marketing to digital, which “improves” the firm’s view into the impact of marketing spending compared to print or broadcast advertising, she said. “Every marketing dollar, you actually know the ROI in a better way.”

Fulfilling Remediation

The focal point of J&J’s consumer rebound under the consent decree, though, is the plant remediation (Also see "Missing CAPA Costs J&J $25 Million In Investigation Sparked By OTC Recalls" - Pink Sheet, 11 Mar, 2015.).

The firm recently said full production resumed at its Lancaster, Pa., and Las Piedras, Puerto Rico, plants and it is waiting for FDA sign off on the closed plant at McNeil’s headquarters in Fort Washington, Pa. Once FDA signs off on the remediation, the decree requires another five years of the agency monitoring the sites (Also see "J&J Remediates Two OTC Facilities To FDA Approval, Waits On Third" - Pink Sheet, 8 Jun, 2015.).

Peterson said “we've fulfilled all the requirements” at the Fort Washington facility. “The FDA has inspected that plant and was satisfied with that inspection, so we're just waiting for that to happen.”

“That means that we can improve the capacity and throughput of those facilities going forward, so that will clearly improve our profitability overall as a consumer business as we do that,” she said.

In addition to remediating the plants with monitoring by third-party auditors as required by FDA, J&J is changing “the total network of our manufacturing, both internal and external” to improve gross profit in the consumer business, she said.

J&J divested several OTC brands after the consumer business stumbled. Peterson said those products represented about 30% of the consumer SKUs.

After Tylenol Arthritis returns to market, the firm will “have one other more substantive product that we will be bringing back in another year,” she said.

Peterson said she sees the U.S. consumer business on track to return to $2.5 billion in annual sales. “The business last year was about $1.4 billion. So we still have a little ways to go in terms of getting back the full revenue that we had in that business. But we are regaining our market share quite significantly.”

“It will probably take us another year as we fully bring back some of these other products to get back to that market share position that we want,” she said.

J&J previously has acknowledged its consumer business recovery is an ongoing process. The firm initially expected it would return all of its recalled brands in 2011 and since then pushed back the date by a year on several occasions; it also underestimated the time needed for the remediation work (Also see "J&J Bit Off More Than McNeil Could Chew In 2006 Pfizer OTC Acquisition" - Pink Sheet, 31 Oct, 2014.).

While J&J has worked on reviving its consumer business, competition has intensified for the market-leading spot it once held. Bayer AG and a joint venture by GlaxoSmithKline PLC and Novartis AG also have their sights on leading the global consumer product market (Also see "Lonely At The Top? Not In OTC Sector As Bayer, GSK/Novartis Challenge J&J" - Pink Sheet, 14 Oct, 2014.).