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Innovation At OTC Healthcare Companies: What Is It?

|Includes:GSK, Johnson & Johnson (JNJ), MRK, PG, SNY

When was the last time you read about innovation in the OTC healthcare industry? The proxy that comes up most often is the switch of prescription drugs to sale over-the-counter, but arguably that is at best not a common event albeit perhaps the most notable. Are companies investing in innovation or just talking a good game? What does innovation look like anyway?

Innovation is a code word for growth, or at least a hat-tip to intellectual capital that most mysterious of assets. When it comes to the pharmaceutical industry most observers would feel comfortable describing where and how innovation is found and by what means. Rarely is innovation talked of when applied to the over-the-counter healthcare industry. Why is that?

Innovation is most often incremental not saltatory. Incremental innovation is what defines the OTC from the Rx world. Exporting prescription drugs to the OTC market is the rare exception to the rule. The flow of these exceptions will increasingly be limited by fewer entities available in established categories and the lack of categories into which to switch. Rx/OTC switching in the future will be the switching of diseases, indications, claims, and risks - not ingredients.

Innovation is often line extensions. The bread and butter growth in the OTC industry is most often represented by line extensions, or better the addition of new sku's to an established brand. This has the dual effect of adding facings, sales, and giving consumers more choice. These extensions can bring new consumers into the franchise if they offer expanded benefits, extend into other categories or segments, or drive shelf turnover. Yet they can also cannibalize the brand. I call this "brand autophagy", a new use of an old term. Alternatively companies can force annual replacement of sku's when they bomb, so-called "Red Queen marketing", a zero-sum game represented by the sheer act of preserving shelf presence at all costs. Line extensions must bring new consumers into the brand.

Innovation is not an outcome despite the fact technology often looks for a home. Innovation is an asset. Innovation assets can support the following actions among others: 1) extending brands; 2) introducing new technology; 3) laddering benefits; 4) improving product performance; 5) boosting consumer satisfaction; all of which aim to increase sales, profitability and to grow share. Innovation does this by satisfying the consumer, to paraphrase P&G's AG Lafley, at one of two moments of truth: at point of sale or at point of use. Products must be built with this in mind.

Innovation is awareness first, imagination second. Each of these capabilities is often underrepresented in internal R&D and marketing organizations; to wit, awareness of unmet consumer needs and available technology solutions, and management's commitment to rational risk taking and brand building. Awareness also means tracking day to day events in the industry. One way to do this is to sign up for an RSS news feed, for example at OTC Product News.

Areas of "under-innovation" include: drug delivery, drug dispensing, packaging, sensory benefits, merchandising, dosing, and introduction of true first-to-market product concepts, including new products and new brands. Whether these can be supported by 1-3% NOS spending on R&D, conservative managements, and a monograph that regulates parity is the challenge to marketers. Transposing just 1%NOS from advertising & promotion spending to R&D can effectively boost innovation by 30-100%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: No financial interests.

Stocks: JNJ, PG, SNY, GSK, MRK