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Miles
Km80.5

   

Should P&G Sell Its Drug Business?


10/19/2005 5:12:35 PM

By Matthew Herper -- Now that Procter & Gamble is buying Gillette in a $57 billion merger that Gillette shareholder Warren Buffet calls "a dream deal," maybe it's time for P&G to think hard about whether it wants to keep its tiny but fast-growing pharmaceuticals arm. Just a few years ago, pharmaceuticals were one of the smallest parts of P&G (nyse: PG - news - people ), accounting for only one-fortieth of total sales in a company better known for Head & Shoulders, Crest and Tide. That has changed, largely due to a product called Actonel, a pill used to prevent osteoporosis. Actonel hasn't managed to catch up with Fosamax, the $3 billion osteoporosis drug made by Merck (nyse: MRK - news - people ), but it is still a $1 billion seller--one of 16 billion-dollar brands at Procter & Gamble. The addition of Gillette's businesses will bring the total to 21 billion-dollar brands. For companies like P&G, and also for materials giant 3M (nyse: MMM - news - people ), prescription drugs can be an enticing prospect. They are incredibly high-margin products. Because prescription pills are paid for mostly by insurers, not consumers, these drugs are far more expensive than consumer products. When the ulcer pill Prilosec was sold by prescription by AstraZeneca (nyse: AZN - news - people ), it brought in $6 billion a year, making it the biggest-selling medicine in the world. Now Astra and P&G sell it over-the-counter, at a significantly reduced price. But selling pharmaceuticals has risks that consumer products doesn't. Heavy advertising--and quality merchandise--can keep sales of a Head & Shoulders or a Tide at billion-dollar levels for decades. Drugs, by contrast, are heavily reliant on patent protection to keep cheap, copycat generics at bay--and the patent clock starts ticking as soon as a medicine is invented. When the generics come, sales vanish--and even a brand like Claritin or Prilosec loses much of its value. Then there's the toughest part of drugmaking: Inventing new medicines and getting them past regulators. P&G recently went before a U.S. Food and Drug Administration panel with a testosterone patch, Intrinsa, it hoped to sell as a way of increasing women's libidos. But the panel dashed the company's hopes, saying there wasn't enough long-term safety data. More...

Read at Forbes

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