OTC, Personal Care Are Heating Up Again

With Chattem Deal, Sanofi-Aventis Becomes Latest Pharma Player to Expand Package-Goods Presence

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BATAVIA, Ohio (AdAge.com) -- The surprise elopement of French pharmaceutical giant Sanofi-Aventis with Chattanooga, Tenn.-based orphan-brand rollup Chattem earlier this week is the latest sign of an odd reversal of fortune. Only a few years ago, drug companies were all too anxious to sell off over-the-counter and personal-care brands, but now with growth tapping out in prescription drugs, interest in both sectors is once again hot.

Chattem has built Gold Bond into a $100 million-plus brand.
Chattem has built Gold Bond into a $100 million-plus brand.
Sanofi agreed to pay $1.9 billion in cash -- a rich four times more than 2008 sales -- pending regulatory and shareholder approval for Chattem, a company assembled over the years from a hodgepodge of brands cast off by bigger players. With the buy, Sanofi becomes just one of several pharma players to determine it needs a bigger presence in package goods. Merck paid $41 billion for Schering-Plough earlier this year, in part to gain access to a consumer-brand portfolio that includes Dr. Scholl's and Coppertone. And Pfizer, showing apparent remorse for the divestiture of consumer brands, reacquired a consumer business with Wyeth earlier this year.

The moves show that the pharmaceutical industry increasingly is willing to trade growth for margin as it faces expiring prescription-drug patents not being replaced by new drugs in the pipeline and increased competition from generics. Essentially, they're trading growth they could once concoct in labs for growth they hope to concoct in their marketing departments using well-known brands.

It's a sign of how bad prospects look for pharmaceuticals that over the counter and personal care look good in comparison. (Package-goods titan Procter & Gamble, for example, earlier this year gave up on its dream of more than two decades to build a prescription-drug business when it divested a portfolio that included Actonel and Enablex to Warner Chilcott.) Categories once seen as recession resistant have slowed below that even of a sputtering economy, with the H1N1 virus responsible for most of their growth late this year. And OTC drug brands have been particularly hard hit by a private-label surge.

Pfizer sold its consumer-health portfolio in 2007, with brands that included Listerine, Lubriderm and Rogaine, mainly to Johnson & Johnson, with some antitrust-required spinoffs to Chattem. In an interview with the Financial Times last month, J&J Chairman-CEO Bill Weldon said Pfizer CEO Jeff Kindler has told him several times he regrets his company divesting its consumer brands the last time (the deal was done before Mr. Kindler became CEO).

Betting big
The Chattem deal truly proves one company's trash is another's treasure. Sanofi is betting big on brands abandoned over the years by major players who didn't think they merited continued investment.

The lean, entrepreneurial company quietly proved otherwise. It cut most costs to the bone, operated cheaply in a small Tennessee labor market, relied mainly on in-house and small boutique ad agencies such as Brooklyn's Joey Co. and plowed north of 25% of sales regularly into advertising and promotion, said Donald Kay Riker, a P&G and Chattem veteran, principal of the consulting firm On Point Advisers and publisher of the OTCProductNews blog.

Zan Guerry
Zan Guerry
The result has been building Gold Bond into a $100 million-plus brand, according to Chattem Chairman-CEO Zan Guerry on a Monday conference call. He added that Act mouthwash, one of the brands divested by Pfizer in 2007, is the only brand in the category that's grown in the past four or 52 weeks -- a substantial feat given a costly shootout among titans at J&J's Listerine and P&G's Crest.

Sanofi-Aventis needs to tap Chattem's record for scrappy success against long odds to succeed in the U.S. as it looks to make a prescription to OTC conversion for its Allegra allergy drug, which is still awaiting Food and Drug Administration approval. When approval comes, Allegra will be the third player into a market that already includes Claritin and J&J's Zyrtec at a time when retailers are trying to pare many category assortments to two national brands, plus private label.

In explaining the deal, Sanofi-Aventis executives noted that Chattem's sales force, which could be used as a conduit for Allegra and some other possible future Rx to OTC conversions for Nasacort and BenzaClin, was a big draw.

Royalties possibly a factor
That has some, such as Deutsche Bank analyst Bill Schmitz, scratching their heads, wondering why someone would pay a princely 13 times cash flow for a welterweight sales force and a stable of castoff brands. But he noted that the royalties demanded by such players as P&G or J&J to handle the Allegra switch might have been so high as to sweeten the deal for Sanofi.

Pharma companies are cash-rich, yet getting price-earnings multiples considerably below those of package-goods players, Mr. Schmitz said, because of their impending loss of revenue from patent expirations. So it makes sense to spend the cash to help soften the blow and seek growth. The drug companies "are up against a whole lot of secular trends that are not favorable," Mr. Riker said. "Suddenly they've rediscovered OTC."

The challenge, he said, at least for Sanofi and Chattem, will be blending two very different cultures and maintaining the edge which Sanofi paid for handsomely.

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