For Healthcare Bankers: Rx v OTC
For Healthcare bankers, I was looking through comparable companies and noticed something a bit strange - it seems that generic OTC drug manufacturers trade at a higher multiple than generic Rx drug manufacturers. I know that there is tough competition in the generics Rx space, but why not the same discount to OTC? Is there something about OTC that protects them from that steep competition? Thank you!
Without getting too technical here, it comes down to product access. Anything you can get OTC is essentially manufactured the same way the Rx equivalent is. The FDA requires drug monographs to prove that the drug in question is the same as the drug it's based on. From a product standpoint, the only difference between the prouct is the amount of active ingredient available in the OTC version vs the Rx version. From a consumer standpoint, the big issue is whether the drug is safe for self-administration, as minimal addictive potential, and it can be shown that the consumer can follow the label. From there, once a drug is OTC, it's all the standard differentiation issues. So why are they trading at higher multiples? They are dealing in drugs that don't have the same strict restrictions as their Rx counterparts have..
In terms of brands that are white labeled, the cost of a pill is dirt cheap. I won't be surprised if the OTC manufacturers produce extra pills and white label them for resale through places like CVS, and WGA. In order to make it viable to exclusively retail a white OTC, you need to be able to sell a ton of pills at wholesale. What you need to understand is that the cst producing these pills works out to something like a penny a pill. Running a manufacturing plant that produces small molecule pills is extremely capital intensive and has significant regulatory oversight. If you're making the API (active pharmaceutical ingredient) for a small molecule, the cost of production is relatively cheap, so increasing the volume and white labeling becomes a cost effective way to increase revenue.
IF a drug is OTC, you can, in theory, buy as much of it as you want. For an Rx, drugs are subject to tons of restrictions, from reporting requirements with Narcotics, to quantity limits with certain product types, to how often Rxs can be refilled. Plus, there's the fact that an Rx is a response to medical treatment, which means there's a higher standard of care involved over self-diagnosis and administration. If you have a headache, take a tylenol. If you have blood clotting issues, you talk to your doctor about getting a prescription for Eliquis and accept that it comes with a shit ton of patient monitoring and testing requirements. All of these added restrictions directly impact a drug manufacturer's ability to get a product out to consumers. So even though you have a 30 day script for Warfarin with a 2x refill built in, there are restrictions in place as to when you can get the prescription.
As an added point, you also have to look who generics are competing with. Using Warfarin as an example, it's the generic that's competing againt Eliquis and Xarelto. Warfarin has half a dozen manufacturers. Not every CVS or Walgreens is going to stock the same generic medications. By the way, if you take generics and raelize that one particular pill works better or worse than the other, it may not be a bad idea to ask if your pharmacy has that particular generic manufacturer in stock.
To oyur question on what the relationship for generic OTC is for a company like CVS is, I honestly don't know. I'd assume it's a standard wholesale model. Now, if you were talking on the Rx side, that's a far more interesting discussion.
It's my pleasure man. A lot of this nuianced thinking is not something that happens overnight. Same with policy and understanding the differences within subset of markets. Pharma, in particular, has a great deal of information that you learn over time relative to other sectors. Understanding regulation (ex. with a biosimilar product, something like Inflectra, Renflexflexis, or Avsola all must be clinically equivalent - they have no meaningful differences - in terms of safety, purity, and potency to the reference product, in this case Remicade... or a generic drug which goes through a similar process), the approval process in general (how does a drug go from being one of thousands being tested to treat a disease to getting FDA approval), how products work (ex. looking at a drug class like Autoimmune, there are Anti-TNF, JAK Inhibitors, Corticosteroids, and NSAIDs, all of which have different methods of action or small molecule versus biologic), cost implications in production and treatment (on the production side, a biologic costs significantly more to produce than a small molecule, and on the treatment side, how does uptake of a biologic affect the bottom line versus a small molecule), the infamous patent cliff, CMS Pricing, or how different therapy classes affect your revenue mix come over time. Unlike other areas, where there is a stronger consumer bent for a product or where ad revenue drives sales, Healthcare in general takes a very long time to master.
To tie this back to generic vs OTC, generics haveto consider all of these factors at all times. Once a drug goes OTC, the majority of these issues (such as the patent cliff, CMS Pricing, MoA, and most regulation) are left to the wayside if a drug can be proven safe for self-regulated diagnosis and administration. Again, understanding this stuff just comes with time.