In the health-care product arena, almost everyone recognizes the names of major players like Procter & Gamble
These products have earned more than 70% gross margins in each of the past three years. Chattem's Goliath-sized competitors, P&G and Bayer, have gross margins below 50%. In the battle of products, Chattem's Selsun Blue goes up against P&G's Head & Shoulders. Bayer's Muscle & Joint Cream is an alternative to Chattem's Aspercreme, and Pfizer's
Chattem has performed well among these giants, and its products continue to be competitive and profitable. The company reported second-quarter results last week, and most of its brands showed healthy sales growth. Overall revenues were up 8% for the quarter, partially aided by the company's brand-leveraging new-product releases. The Icy Hot Sleeve helped boost the Icy Hot brand's overall sales by 23%, while a new back-and-body patch contributed to Aspercreme's 102% sales jump. Selsun Blue and Garlique (the company's garlic supplement) also saw sales increases of 7% and 27%, respectively.
On the downside, though, the company's BullFrog brand sales dropped 13%, while litigation-challenged Dexatrim showed a sales decline of 16%. Investors should keep an eye on these weaker brands, and on the company's debt levels and periodic acquisitions.
Chattem currently has $183 million in debt, mainly due to acquiring other over-the-counter brands, as it did in 2002 with Selsun Blue. If management can acquire a brand like this for a fair price, applaud them. And if it creates more products like the Icy Hot Sleeve to leverage current brands' pricing power, give them a standing ovation.
Fool contributor Matt Thurmond has no financial interest in any company mentioned in this article.