Innovation as a Growth Driver in OTC PharmaceuticalsStephan Wiet, Ph.D.Director R&D Consumer SciencesMcNeil Consumer & Specialty Pharmaceuticals

AgendaThe Need For Innovation - Signs, Signals, and RealityOrganizing for Strategic GrowthGoals, Structure, and Managing Risk Sustaining an Innovative R&D OrganizationInnovation Audits & Critical Enablers Leveraging Consumer KnowledgeDefining Product DevelopmentUncovering & Building Product BenefitsHealthcare Trends & Implications for New Growth Methods & Examples

OTC Pharmaceutical Arm of J&JCurrent Annual OTC Sales: $1.35B

We Live in Interesting TimesMarkets are generally well segmented and stagnant.Power retailers have gained enormous market leverage. Consumers are increasingly pro-active, educated, and demanding.Cost effectiveness activities have been fruitful but are reaching points of diminishing returns.Technology rarely leads to sustainable advantages.

The Need for OTC InnovationUS Prescription Market($ Billions)US OTC Market($ Billions)

The Net ResultMost CPG/OTC companies are having difficulty achieving sustainable volume driven profit growth..

BUT

How are they innovating?

Breakdown of Package Goods LaunchesSource: Information Resources Inc. 2004

Avg. 1995-2004%

% Package Goods Launches Hitting $7.5 M Year 1 SalesSource: Information Resources Inc. 2004

Avg. 1995-2004%

The Attraction of Line ExtensionsPackage GoodsSource: Deutsche Bank, McKinsey

Structuring For InnovationCompany-LevelIt Starts With Clear Growth Goals!

8 Year OTC Growth StrategyGrow Base BrandsMinimize erosion of current OTC productsEnhance base brands through incremental innovations (line extensions)Strengthen adjacency areas Invest in New White Space OpportunitiesNew healthcare solutionsNew disease statesNew technology platforms

Innovation Landscape

Strategic MarketingBase BrandsR&D

Structuring for Innovation

Structuring for InnovationStrategic MarketingBase BrandsGrowthBoardOTCBoardCompany BoardWell-understood business modelsStandard financial assessmentFollows NPD processLittle ambiguityUnclear business modelsVenture capital funding approachMuch ambiguityManages riskManages portfolioIdea Mining

Idea MiningJobs-Based Consumer ResearchTrend Analysis & Market SegmentationExisting IdeasExpert PanelsEmerging TechnologiesTechnology BrokeringInternal BrainstormingFallen Angels

Trends in Healthcare% health care spendingToday - Primarily Disease Treatment FocusedPreventionEarly DetectionManagementEmergencies

Trends in Healthcare% health care spendingTomorrow - Trend from After-the-Fact Treatment to Before Onset CarePreventionEarly DetectionManagementEmergencies

Scenario PlanningAging PopulationIncreased AffluenceBuying Back HealthDisease PreventionRemote MonitoringHome Exercise EquipmentHome DiagnosticsNutritional SupplementsVanity Products / Services

Evaluating OpportunitiesNPD vs. Growth Board ProcessIdeasHigh-level screenBase vs. NewEarly Opportunity GenerationOpportunity Evaluation & DevelopmentBrand GrowthNew BusinessProjected ProfitabilityPattern RecognitionConceptFeasibilityDevelopmentOpportunityInitialAssessmentRefinedAssessmentLearnDevelopment

LearnExecution Complete Bus. PlanMkt. Research &Prelim. FinancialsBusiness ConceptPitch

Structuring For InnovationIn R&DAssessing the Climate

2004 Credo Results

The Innovation System

Research & Development 2004 Credo Results

Key TakeawaysR&D Is Seeking Innovative Solutions Difficulty Moving Big Ideas ForwardOur Current Culture and Processes Limit our Ability to Create a High Performance Company Capable of Unleashing Breakthrough Innovations

*

*

R&D Innovation Steering Committee

Cross Functional Includes Key Business PartnersCreates R&D Innovation CaptainsProvides Focus & Direction For Hunting GroundsImproves CollaborationIdentifies Idea Champions

*

*

Mission: Create sustainable connections that drive innovation at all levels of R&D

R&D Innovation Steering Committee

Getting to the heart of the matter!R&D Innovation Audit3 Areas of Focus (Leadership, Culture, Process)3 Functional R&D Groups117 Respondents (62% response rate)

R&D Focus Groups3 Functional R&D Groups20 Respondents

*

*

Avg. Dont Know = 7.8%

Leadership Category ResultsPercent Agree

*

*

Avg. Dont Know = 4.5%

Cultural Category ResultsPercent Agree

*

*

Avg. Dont Know = 20.2%

Process Category ResultsPercent Agree

*

*

R&D Innovation Team6 Point Action PlanEstablish Clear Innovation DefinitionEstablish Robust Communications ProgramEstablish R&D Collaborative Innovation Forums & Activities Develop Idea Transfer ProcessImplement Idea Cataloging SystemImprove Reward and Recognition Program

*

*

*

R&D Innovation Captain

R&D Innovation Steering Committee

OTC Science Board

Rx Board POC

Pharma Pipeline Development Board

OTC Board

R&D

INNOVATION

E

Room

Innovation Captain

No-GO

GO

Ou t pu t

Marketing Innovation Captains

Business development/L&A

input

Sources

Individual

Teams

R&D Forums

Product IDEA

R&D Innovation Coordinator

Management board

The Role of Consumers in Product Development & Design

Product Development

Creating a Relationship Between a Product and a Consumer using Technology, Psychology, and Art.

*

*

*

Why This??

Is it the Shuffle?

Sell the Emotion - Coco Chanel

Truly successful products satisfy our emotional needs as much as our functional needs

*

*

*

Product Benefit HierarchyOTC PharmaceuticalsMake It Safe, Effective, & ReliableComfortMeLet Me Know Its WorkingMake It For MeGreater ProductPower

The Power of EthnographyEmerging TrendsUnmet NeedsUnarticulated NeedsTriggers of UseEnvironmental InteractionsCompensatory BehaviorsCustomizationsIntangible Product Attributes

Infant Tylenol Dropper

Improved dosing accuracyNon-spill featureDesign addressed secondary benefit:Dropper prop

PipeLGP11-98:*

Understanding the ConsumerReal Value-Added Benefits

Real value-added benefits offer consumers something meaningfully extra:Faster onsetLonger durationReduced side effectsImproved tasteSecondary symptom reliefReduced contraindicationsEasier open packaging

Evolution of Gel CapsReal Value-Added Benefit

Real Value-Added BenefitEZ Open Cap

Projective ResearchInsights For Clear Aesthetic Direction

Validating With ConsumersGreat Sweet Fruity FlavorSoft, Smooth Chewy TexturesNon-Sticky, Non-Tooth PackingQuick Breakdown and Easy to Swallow

ChildrensTylenol1992Chewable Tablets

PipeLGP11-98:*

Incremental Evolution of Childrens Chewables

1998

2004

Softer& Smoother

PipeLGP11-98:*

Understanding the ConsumerPerceived Value-Added Benefits

Perceived value-added benefits are designed into products. They reinforce the product experience and assert a reason to believe:Liquids work faster than tabletsCoating action liquids soothe more quickly Effervescent products are more effectiveListerine & Buckleys (Tastes bad so it must be working)

Selling the SensesVanilla CoatedMinty Menthol Coated

A Matter of IndulgenceCalcium Supplements

*

*

*

Key TakeawaysStrategic Innovation Requires Maintaining a Healthy Balance Between Continuity and New Business Growth.Parameters of Managing Base Business and New Growth Are DifferentInnovation Requires Collaboration and ConnectionCreate Deeper Consumer Knowledge To Drive Business Growth