Margins in the traditionally lucrative US market have been squeezed by the bulk healthcare providers, which have negotiated large discounts and turned to cheaper, unbranded rivals. Further cutbacks are likely when Hillary Clinton's task force reports. In Britain and Europe, pricing is also under pressure, with the trend to transfer part of the burden for medical care to the private sector.
One result of this hostile regulatory and economic climate is the growing importance of the over-the-counter (OTC) or non-prescription business. Currently worth about pounds 20bn worldwide, it is now the fastest-growing area of drug sales and expected to double its share of the market to 30 per cent by the end of the decade.
Ironically, many of the big drug companies spent most of the 1980s pulling out of OTC products, where volumes may be steady but margins are low. Glaxo did so and so did Zeneca, the drugs and agro-chemicals company that split off from ICI in May and is due to report its interims on Thursday. Over the past two or three years it has disposed of Savlon, its antiseptic cream, and Mylanta, its US indigestion remedy.
Medeva, the drugs company that expanded through a series of quickfire acquisitions, took the same tack, shedding the OTC interests it bought along with Evans Healthcare, for pounds 18.5m in 1990.
Only SmithKline Beecham, the Anglo-American healthcare group, has retained and developed its OTC business. At the time the two companies merged, in 1989, most people thought they were making a virtue of necessity. But last week, SKB defied the sceptics with an 18 per cent rise in profits for the three months to 30 June. Operating profits on its consumer brands, which include Tums antacid tablets and Contac for colds, rose 4 per cent, to pounds 36m, on turnover up 20 per cent to pounds 320m.
SKB has carefully built up its OTC brands with re-packaging and heavy promotions. It has, for example, repositioned Lucozade, one of its several drinks products, from an invalid pick-me-up to a booster for sports and fitness enthusiasts. At the start of July, it also won conditional approval to market its best-selling anti-ulcer drug, Tagamet, without a prescription, when the patent expires next May.
SKB's results were in stark contrast to the news from Merck, the US drugs giant, which announced the same day that it was taking a pre-tax dollars 775m ( pounds 516m) second-quarter charge to pay for redundancies and cost-cutting measures. Earlier this month, the company announced it would also be going the OTC route, joining up with Johnson & Johnson to move into the OTC market.
Medeva, by contrast, has chosen to concentrate on niche areas in prescription drugs, a strategy which, until last week, served it very well. However, news of problems at two US subsidiaries sent its share price plunging.
Medeva's share price halved by mid-week, after more than 60 million shares - nearly 23 per cent of its equity - had changed hands. A letter to shareholders from Bernard Taylor, the chairman, did little to assuage unease, despite the company's pledge that it would make no big acquisitions until investor confidence had been restored.
'Medeva is an unconventional stock. For years the detractors haven't been able to say anything, and now we've given it to them in spades,' said a rueful company spokesman. But Mr Taylor said the market reaction had surprised him.
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