Valeant Deal May Create Leader in US Dermatology Market

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As detailed in another article, the wave of mergers and acquisitions in the healthcare sector in recent months continues unabated. The latest deal announced was the $2.6 billion offer made by Valeant Pharmaceuticals International (NYSE: VRX) for Medicis Pharmaceutical (NYSE: MRX). Medicis' best-known products include Solodyn along with Restylane and Dysport, which all compete directly with anti-wrinkle products such as Juvederm and Botox from Allergan (NYSE: AGN). 

Valeant, which has been looking to acquire Medicis for the past 18 months, intends to capitalize on an aging U.S. population by bolstering its rapidly growing skincare and aesthetics business. Its CEO Michael Pearson told the Financial Times that the “market is growing double-digits [annually] because of the aging population and the value that people put on continuing to look and feel young”. 

Not to mention that this sector of the pharmaceutical industry is one of the few not dominated by the giant drug companies, which have left the sector in droves. Another plus about the sector is that patients are more likely to pay out of pocket, cutting exposure to both tight-fisted insurance companies and U.S. healthcare reform. 

This wasn't the company's first move in this area, either. In 2011, Valeant bought Dermik, the dermatology unit of France's Sanofi, for $425 million. Dermik has significant presence in the medical dermatology market in the United States and Canada (where Valeant is based) with several well-known brands including Carac, Benzaclin, and Sculptra. Sanofi unloaded the unit to focus on its core pharmaceutical business. Valeant also bought the skincare of unit of Johnson & Johnson in 2011 for $345 million. The unit, called Janssen Pharmaceuticals, was sold off by JNJ for the same reason as Sanofi – to concentrate more on its core product line. 

The combination of Valeant and Medicis would dominate the U.S. dermatology market. Last year, Medicis led that market in gross sales while Valeant was ranked third. Combined revenues for the companies' dermatology and aesthetics business in the U.S. are expected to be in the range of $1.2-$1.7 billion this year. The deal should generate cost synergies of $225 million within six months of the deal closing.

Its main competitors are the aforementioned Allergan and Stiefel Laboratories, a unit of Britain's GlaxoSmithKline ADR (NYSE: GSK). Stiefel has also been active, acquiring an eczema drug in June from Basilea Pharmaceutica along with a topical agent for psoriasis and dermatitus in July from Welichem Biotech.  

Will this deal be a good one for the shareholders of both Valeant and Medicis? It can be, but that is up to Valeant. The company is a serial acquirer – buying one company, but then quickly moving on to the next acquisition. However, this is one case where management's focus needs to be on fully integrating Medicis into Valeant. 

If Valeant's management takes their time and works hard at combining the two companies, it will create a true powerhouse in the dermatology and aesthetics industry. However, if management quickly moves on to the next acquisition without paying much attention to integrating Medicis, Allergan could likely benefit. Some analysts already see the deal as a panic move ... that Allergan is winning the battle in that sector with Botox and other products. But that call is premature. For now, let's wait and see how Valeant's management integrates the two companies. 

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