Sanofi-Aventis Going OTC with Chattem Buy

Includes: CHTT, GSK, JNJ, NVS, SNY
by: EP Vantage

Sanofi-Aventis’ (NYSE:SNY) new diversification strategy continues to gather momentum with Monday’s $1.9 billion acquisition of over-the-counter (OTC) specialist Chattem (CHTT), for $93.50 per share at a 34% premium. The deal enables the French pharma giant to become the fifth biggest global OTC player, challenging the likes of Johnson & Johnson (NYSE:JNJ) and Novartis (NYSE:NVS) for market share (see table below).

The fact that Chattem now represents Sanofi’s biggest acquisition since the current spending spree started this year in the wake of Christopher Viehbacher's appointment as chief executive underscores the increasing attractiveness of sustainable revenues and profits to some big pharma companies as they grapple with the patent cliff affecting their core prescription business. According to Mr. Viehbacher, the two main drivers for this latest deal are, access to the US OTC market and the capability to switch some key products from prescription to OTC, starting with anti-histamine drug Allegra.

Switching power

This ability to convert a drug from prescription only to being available OTC, successfully achieved for other anti-histamines like Claritin and Zyrtec and antacids such as Zantac and Prilosec, appears to have been the trigger which eventually led to the Chattem acquisition today.

Speaking on a conference call today, Mr. Viehbacher claimed Sanofi had a lot of enquiries from other companies, with experience of this switching process, about striking a deal to switch Allegra into an OTC product.

Whilst considering these offers Sanofi assessed its options for making the switch itself, but having no direct presence in the US OTC market it started to look at regional players who could provide a platform to achieve this. Chattem appears to have fitted Sanofi’s bill.

Already available generically since 2005, albeit just as authorised generic versions sold by Teva, the branded product still represents about 20% of total prescriptions filled for Allegra in the US. Sanofi has already filed to switch Allegra to OTC status and therefore hopes that this can be approved and commercialised shortly.

All important US presence

As well as the ability to switch Allegra and potentially other Sanofi products like Nasacort, Chattem also provides the French pharma giant with presence in the US market which the company estimates represents 25% of the global OTC market.

As the table below shows, Sanofi will become the fifth biggest seller of pharmaceutical related OTC products, with sales of $2.7 billion by 2014, only just behind J&J and Novartis.

Indeed, should the switch of Allegra and other products be successful, Sanofi’s ranking over the next few years could leapfrog these rivals. Although, to challenge the dominant players, GlaxoSmithKline (NYSE:GSK) or Bayer, it seems another major acquisition will be required.

In the meantime, Sanofi’s preference for so-called “bolt-on” acquisitions, very much the buzz word for M&A strategy for European big pharma this year, over the mega-mergers of some of its US peers continues to evolve (Vantage Point - Is big pharma spending its way out of trouble?, October 2, 2009).

WW Pharmaceutical OTC Market - top companies
WW annual sales ($m) Market Share Market Rank
Rank 2008 2014 CAGR (08-14) 2008 2014 2008 2014
1 GlaxoSmithKline 3,582 4,378 3% 12.5% 12.5% 1 1
2 Bayer 3,053 4,082 5% 10.6% 11.7% 2 2
3 Novartis 3,012 3,466 2% 10.5% 9.9% 3 3
4 Johnson & Johnson 2,162 2,700 4% 7.5% 7.7% 5 4
5 Sanofi-Aventis * 2,402 2,694 2% 8.4% 7.7% 4 5
6 Reckitt Benckiser 1,842 2,532 5% 6.4% 7.2% 6 6
7 Boehringer Ingelheim 1,749 2,270 4% 6.1% 6.5% 7 7
8 Perrigo 1,639 2,223 5% 5.7% 6.4% 8 8
9 Omega Pharma 1,192 1,498 4% 4.2% 4.3% 10 9
10 Pfizer ** 1,393 1,462 1% 4.9% 4.2% 9 10
17 Chattem 322 424 5% 1.1% 1.2% 17 17
* includes Chattem OTC revenues
** includes Wyeth OTC sales in 2008