Sanofi-Aventis will try its hand at over-the-counter sales in the U.S. with its $1.9 billion offer to buy U.S.-based Chattem. The move, which was announced on Dec. 21, will further diversify the Paris-based pharma before some of its major prescription brands, such as Plavix , face lower-cost generic competition.

The deal also will beef up Sanofi's OTC division, a step in keeping with its strategy to move "away from dependence on blockbuster medicines," and provide a diversified "platform for long-term sustainable growth," chief executive Christopher Viehbacher told analysts during an investor call to announce the acquisition.

Since Chattem is an established player in the US OTC market, the acquisition would enable Sanofi to switch its antihistamine Allegra to an OTC product without losing a significant chunk of profits to licensing deals. At the same time, the deal allows Chattem to take advantage of Sanofi's global network and market its products outside the U.S., including in emerging markets that Sanofi is now targeting.

Sanofi, like many Big Pharmas, currently is racing against ticking patent clocks for major brands and struggling to come up with new innovative products. As a clear example of the challenges, on the same day the deal was announced, Sanofi disclosed it would withdraw its marketing application for the insomnia drug Sliwens (eplivanserin) from the EMEA, citing "feedback from regulatory agencies."

Sanofi slowly is building its OTC business around the world with recent acquisitions of Symbion in Australia, OENOBIOL in France, Kernpharm in The Netherlands and Gramon in Argentina, Viehbacher said, adding these contributed to significant double-digit growth in the third quarter (Also see "Sanofi Builds OTC Business Through Organic Growth And Bolt-Ons" - Pink Sheet, 2 November, 2009.). They also bring the company closer to its goal of doubling its OTC business in the next five years.

More broadly, Sanofi has also spread its global footprint by purchasing several generics makers, such as Brazil's Medley, Switzerland's Helvepharm, and Mexico-based Laboratorios Kendrick, as well Shantha Biotechnics, a vaccines maker in India.

But entrance into the U.S. OTC market is particularly attractive. The market was worth a sizable $21 billion in 2008, or 25 percent of the global OTC market. The U.S. market also is a "relatively fragmented" one, making the field more open to new players, and it is growing at a rate of about 4 percent, Viehbacher said.

Sanofi expects Rx-to-OTC switches beyond Allegra

"We had significant interest from all of the major players in the OTC sector to switch this for us," but "could not find a company that had the skills of competency to help us launch Allegra ourselves, and that is when we found Chattem," Viehbacher explained.

He noted Chattem's ability to compete against Johnson & Johnson and Procter & Gamble and its ability to effectively distribute with Wal-Mart and other "big chains" are attributes "you really need for an Rx-to-OTC switch," like Allegra, which has 7.8 million users in the U.S. despite generic alternatives.

If Allegra successfully switches, it will compete against Schering-Plough's well-established Claritin , which sold $74.4 million in the 52 weeks ending Nov. 1, excluding sales at club stores and Wal-Mart, and McNeil Consumer Healthcare's Zyrtec , which sold $69.9 million in the same period, according to Information Resources Inc. The overall cold/allergy/sinus relief category was worth $761.3 million in the period, according to IRI.

Other potential switch candidates include Nasacort (triamcinolone acetonide) nasal spray for allergy relief, Penlac Nail Lacquer (ciclopirox) antifungal topical treatment and BenzaClin Topical Gel (clindamycin-benzoyl peroxide gel) acne medication, Viehbacher said during the analyst call.

But Sanofi only has one Rx-to-OTC switch on tap, for now. And by 2013, even with a successful Allegra switch, Sanofi's OTC business will be "in the range of more than 1 percent of our overall results," said Jerome Contamine, Sanofi's executive VP and chief financial officer.

Without a U.S. presence, Sanofi says it will generate around 1.4 billion Euros ($2 billion) worldwide in OTC sales in 2009. In 2008, Sanofi's total net sales were 27.6 billion Euros ($39.4 billion).

Chattam management holds the reins

Sanofi's cash tender offer of $93.50 a share represents a 34 percent premium over Chattem's closing share price on Dec. 18.

Chattem's board of directors already unanimously approved the acquisition and merger, which the companies expect to close in the first quarter of 2010. Under the arrangement, Chattem would become the foundation of Sanofi's U.S. OTC business, but would retain its current headquarters, corporate culture and top leadership.

Chattem's operating margins are approximately 35 percent, and in fiscal year 2008, Chattem sold $455 million, added Hanspeter Spek, Sanofi's president of global operations. He also noted Chattem sustained an average growth rate of more than 12 percent from 2004 to 2009 (Also see "Chattem To Focus On Ads To Boost Top Line As Consumer Confidence Grows" - Pink Sheet, 12 October, 2009.).

Based in part on these strong numbers, Sanofi will keep the top 11 people at Chattem, including chief executive Zan Guerry, to lead its U.S. consumer health division.

Spek also noted during the call that Sanofi recruited a leading manager from another OTC company to run its European OTC and consumer care business and to supervise worldwide development, with more details on this expected in early January.

-Elizabeth Crawford (e.crawfgord@elsevier.com) and Carlene Olsen (c.olsen@elsevier.com)

Sanofi-Aventis Will Enter U.S. OTC Market By Paying $1.9 Billion For Chattem

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