Chattem Counts On Extensions Across Core Brands For 2007 Growth

Chattem will continue to launch line extensions to core brands as its primary revenue growth strategy in 2007 in the wake of the launch of the Icy Hot Pro-Therapy brace/therapeutic insert system, which so far has not met expectations.

Extensions planned for 2007 may not stray as far from their franchises as Pro-Therapy, which combines back or knee braces with therapeutic hot or cold inserts.

The firm plans to introduce extensions to the Gold Bond skin care, Dexatrim dietary supplement, Bullfrog sunscreen, Icy Hot topical analgesic and Selsun dandruff shampoo lines during 2007, the firm said during an Oct. 10 third-quarter analysts call.

Revenues for the third quarter ended Aug. 31 were $72 mil., up 6% over the year-ago period, or 9% excluding sales of pHisoderm , which was divested in November 2005, Chattem reported.

Third-quarter topical pain product net sales increased only 4% over the prior-year period, to $21.7 mil., while medicated dandruff shampoos were flat at $7.8 mil.

Pro-Therapy launched in February. Chattem touted the brace product and Selsun Salon as leaders in the firm's "best new product lineup...ever" (¹ (Also see "Chattem Banks On “Best New Product Lineup” To Fuel 2006 Sales" - Pink Sheet, 26 Sep, 2005.), p. 8).

Gold Bond, Dexatrim and Bullfrog were the primary sales drivers during the quarter, and Chattem is looking to those brands for growth in the next fiscal year.

A 17% increase in dietary supplement net sales reflected strong performance by Dexatrim Max2O . Medicated skin care sales increased 24% led by Gold Bond lotion, powder and foot-care offerings, the firm reported. BullFrog's Mosquito Coast helped the brand grow 9%, Chattem said.

Pro-Therapy has "not met our expectations and that has been the single largest challenge to our earnings per share this year," Chairman and CEO Zan Guerry said.

Chattem plans to tweak its approach to marketing Pro-Therapy, said Guerry, adding that it is too soon to label Pro-Therapy a failure.

"I think we are getting our arms around it. We do have to remember we're not even a full year into it," he said. "We haven't even been through the winter season, so I think it's early to put any concrete perspective" on the product's performance.

Guerry said Pro-Therapy ads this winter will focus on relief for backs. "If you track a brand like Thermacare and look at the importance of the winter season, you'll see cold backs hurt a lot more and warmth and heat is more important," he said.

Pro-Therapy was launched with "big, big expectations backed by outstanding market research," Guerry said. "Our focus groups, our home-use test, our media test, everything we had pointed to a big, big success."

Chattem has returned to that research to rework the brand. The firm has "reanalyzed every piece of market research, and we've done some more" to learn how to "unleash some of the potential of Pro-Therapy," Guerry said. "We've moved the advertising message around, we've brought more real people into it and we've focused things more individually on the back and the knee separately."

To date, Chattem has made an $8 mil. after-tax investment in Pro-Therapy, the firm said. Guerry projected the product would build in the next few years to be a $10 mil. to $15 mil. business "focused on 5 or 6 SKUs."

Chattem is planning four new extensions in the Icy Hot line in 2007, with a focus on "turning it into a growth machine again." The new products will not be as far-reaching as Pro-Therapy, Guerry implied but "more like a back patch or a sleeve type of introduction," alluding to Icy Hot launches in 2001 and 2004, respectively.

Chattem also looks to build on the "big surprise of the year," the "phenomenal" success of Dexatrim Max 2O effervescent diet supplement; in 2007, Chattem will introduce Dexatrim Max Evening Control , intended to control evening food cravings, as well as two new flavors of Max 2O, the firm said.

The firm will extend the Bullfrog line with Marathon Mist, a continuous-spray delivery product to provide an uninterrupted spray.

A Selsun extension is likely during 2007 as well, and Gold Bond Ultimate Softening lotion has already begun shipping, Guerry said.

The firm did not discuss specific plans for five brands it plans to purchase from Johnson & Johnson and Pfizer consumer (² (Also see "Chattem Acquires “Great Brands” In Wake Of J&J’s Pfizer Purchase" - Pink Sheet, 9 Oct, 2006.), p. 6).

- Christopher Walker