A number of costs associated with nonprescription drug manufacturing and marketing have increased over the past two and a half years. Certain material costs for plastic bottles and blister packs have risen by double digits during this time, increasing packaging expenses. Advertising and marketing expenses continue to represent the largest cost components, although the majority of marketers reduced advertising costs in 2009, and in the first half of 2010, according to data from recently published OTC Drugs: U.S. Competitor Cost Structures 2010 by worldwide consulting and research firm Kline & Company.
In 2008 operating margins declined as many marketers increased advertising expenses, in 2009, advertising spending decreases to improve the operating margins for most marketers. The average advertising expenses, excluding Perrigo, are estimated at 25.1% and 21.0% of net sales in 2008 and 2009, respectively.
On average, marketers in the OTC industry spend about 32.7% of net sales on cost of goods (COGS), 41.9% on marketing, and 8.8% on other expenses including R&D and administration, leaving an operating margin of about 16.6% in 2010. The average gross margin for the first half of 2010 is estimated at 67.3% of net sales, with Novartis and Merck registering the highest gross margins in the industry. Taking all line items and costs into account, Pfizer, Novartis, and Procter & Gamble register the highest operating margins of the profiled companies.
"Essentially, over the past few years COGS are up. So companies have reduced marketing expenses as a way to try and offset increased COGS; however, not by enough to maintain margins of the past," notes Laura Mahecha, Industry Manager at Kline's Healthcare Practice. In 2005, COGS was at approximately 28%, and in 2010, COGS are estimated at nearly 33% of net sales and much of this was driven by higher raw material and packaging costs.
Most branded marketers continue to increase promotional spending and the frequency of activities and adopt different promotional techniques such as in-store promotions, in-store radio advertising, and customized displays. Many companies have spent less on advertising and more on promotions as a way to attract cost-conscious consumers. "During the recession, when consumers are so cost conscious, these promotions can help to close the price gap between national brands and private-label OTCs," adds Mahecha.
Prices of oil and other raw materials and packaging components have increased, driving up production and distribution costs for OTC marketers significantly. The decreased availability of resins has caused costs of packaging materials to increase by 10-15% since 2007. There is little room for improvement in cost structures of most branded companies, apart from international sourcing of raw materials from countries including China and India. Marketers are now trying to consolidate the presence of their suppliers outside the United States to realize cost savings.
Over the next five years, market leaders will continue to support their most important brands with line extensions and extensive promotional support. Advertising support through widely accepted Internet media will be required for any new product introductions. Major OTC marketers will focus on the introduction of innovative products, with targeted marketing and advertising, and efficiencies that will lead to reduced costs. Positioning brands globally will maximize efficiency, reduce costs, and increase profit margins.
OTC Drugs: U.S. Competitor Cost Structures 2010 report presents information on the financial performance, profitability, and costs structures of the ten leading OTC companies in the United States for 2008, 2009, and the first half of 2010. It is designed to help OTC pharmaceutical companies benchmark their cost structures with those of their competitors.
Kline is a worldwide consulting and research firm dedicated to providing the kind of insight and knowledge that helps companies find a clear path to success. The firm has served the management consulting and market research needs of organizations in the chemicals, materials, energy, life sciences, and consumer products industries for over 50 years. For more information, visit www.KlineGroup.com.