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How Pharmaceutical Companies Profit From OTC Products

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Most people don't realize that Big Pharma makes most of the over the counter products at the drug store.

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You've probably walked into CVS (CVS) a thousand times over the years to pick up Band-Aids for your kids or to buy some Nicorette to help you quit that nasty smoking habit. But have you ever taken the time to notice who makes all of these over-the-counter products that we use on a daily basis?

In light of Johnson & Johnson's (JNJ) recent recalls for most of its children's consumer products -- Children's Tylenol and Motrin are both made by J&J's consumer division McNeil Healthcare -- it's important to take a look at who's actually producing these products. As an investor, it's even more important to know who's making money from the sales of the OTC world. While the consumer names you've always thought of -- like Procter & Gamble (PG) and Colgate-Palmolive (CL) -- still exist and remain major competitors in the space, Big Pharma has been quietly taking over.

J&J is one of the world's largest consumer brands; the company touts itself as a "health-care company" and not a pharmaceutical or medical device company, despite its major presence in both of these areas. It makes everything from Band-Aids to Listerine to Purell, and even Stayfree sanitary products. The company also has its hand in products like Splenda, and skin-care products like Aveeno and Neutrogena. The company has 6,825 square feet of its manufacturing facilities devoted to making these products (Although it devotes more manufacturing space to its medical-device production.) The consumer-products division makes up $15.8 billion in sales for the company annually.

While J&J is dominating most of the aisles in the drug store, GlaxoSmithKline (GSK) has been making its niche elsewhere. The British pharmaceutical company has a major consumer division -- dominating the market with its quit-smoking products like Nicorette gum and The NicoDerm Patch. The company's consumer division grew 7% in 2009 to $6.8 billion. If you aren't using one of the company's smoking cessation drugs, you're probably using one of the toothpastes it makes, like Aquafresh or Sensodyne.

Pfizer
(PFE) is the world's fifth largest over-the-counter health-care products company. The Big Pharma inherited the business when it bought Wyeth last year for $68 billion. In the 2.5 months between the closing of the deal and the end of the year, the division brought in $494 million in 2009. The company makes products like Advil, Centrum, Robitussin, and ChapStick.

You don't often hear about the consumer sides of companies like Pfizer and Glaxo, but they rely on these products to bring in revenue when their pharmaceutical pipelines are facing patent expirations or are having regulatory issues. Aside from the challenges that all three of these Big Pharmas are facing with patent expirations and pipeline problems, these companies face other unique challenges that might not affect their competitors in the pharmaceutical space -- namely, problems with consumer spending. The global recession took its toll on all of these companies as people switched over to generic labels instead of forking over the big dough for brand names; many people also gave up buying these discretionary products completely.

Now that you know Pfizer makes products like Advil, does it help you to trust the brand more or will the Big Pharma's bad reputation in the pharmaceutical world make you think twice before you pop another brown pill?

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