As the Global Gains guys said on twitter yesterday, "You can say many things about sanofi-aventis (NYSE: SNY ) buying Chattem (Nasdaq: CHTT ) , but you can't say sanofi is getting a great price."
At $93.50 per share, sanofi is paying a hefty 34% premium on Friday's closing price. The $1.9 billion price tag works out to a P/E of about 18.5-times 2010 estimated earnings. The transaction may add to the company's earnings as early as next year, but that likely has to do with the paltry return it would have gotten keeping the cash in the bank. Buying back its own shares would have also been accretive to earnings per share.
An icy price tag notwithstanding, the acquisition is still a good move for the company. The addition of Chattem's U.S. over-the-counter presence will help sanofi convert its prescription allergy medication, Allegra, into an over-the-counter product. Similar moves have helped keep sales of Merck's (NYSE: MRK ) Claritin and Pfizer (NYSE: PFE ) and Johnson & Johnson's (NYSE: JNJ ) Zyrtec going after patents expired. Sanofi could have launched on its own, but buying a company with marketing channels -- Chattem sells Gold Bond, Icy Hot, and Cortizone-10, among many others -- will give the late comer a fighting chance.
With the acquisition, sanofi joins other big pharma in using acquisitions to (further) diversify away from prescription drugs. Merck got health-care products, including Coppertone sunscreen, in its acquisition of Schering-Plough. Pfizer has been a little more spastic, having sold its consumer health division to Johnson & Johnson a few years ago, and then gotten one back in the recent acquisition of Wyeth.
Not everyone is shunning drugs though. Bristol-Myers Squibb (NYSE: BMY ) has sold or spun off most of its non-drug assets and Eli Lilly (NYSE: LLY ) says diversification isn't its style.
Only time will tell which of the two strategies will be the best at relieving the pain from expiring patents.
Tim Hanson, part of the Global Gains team, says the top markets may not be underneath your feet.