Valeant Leaps to No. 1 in Dermatology With Medicis Buy

Valeant Pharmaceuticals (NYS: VRX) announced plans on Monday to acquire Medicis Pharmaceutical (NYS: MRX) for $2.6 billion. The deal values Medicis at a 39% premium to Friday's closing price. Valeant expects to close the transaction in the first half of 2013.

What it means
With the Medicis acquisition, Valeant becomes the largest player in the dermatology pharmaceutical market. The two companies sell largely complementary product lines.

The addition of Medicis' Dysport injection provides Valeant a product to compete against Botox, sold by rival Allergan (NYS: AGN) . Botox currently claims a 78% market share in the worldwide aesthetics market, but its share is decreasing.

The dermatology market is attractive to Valeant for several reasons. Although annual sales exceed $12 billion, dermatology hasn't attracted many larger pharmaceutical companies. The market is largely insulated from government reimbursement pressures because of the high level of self-pay for dermatology medications.

Valeant expects to achieve more than $225 million per year in cost synergies within six months after the transaction closes. Management points to the acquisitions of Ortho and Dermik as examples of its good track record on this front.

Ortho Dermatologics was purchased from Janssen Pharmaceuticals, and Dermik was bought from Sanofi (NYS: SNY) . Both were picked up by Valeant in late 2011. According to the company, more than $110 million of synergies were attained by the first quarter of 2012.

Valeant plans to assume additional debt to finance the Medicis deal. However, management plans to reduce its leverage to less than four times pro-forma adjusted EBITDA within 12 months.

Looking ahead
Valeant has steadily improved its positioning within the dermatology market. The acquisition of Medicis should enable it to achieve economies of scale while improving market share.

While the Medicis acquisition will catapult Valeant into the No. 1 spot in dermatology, 77% of its 2011 revenue came from other segments. The company has expanded through acquisitions over the past few years; however, it failed to land its biggest deal, Cephalon, after Teva Pharmaceuticals (NYS: TEVA) swept in with a higher bid.

Expect Valeant to make some more strategic acquisitions, probably outside of dermatology. Valeant CEO Michael Pearson stated that additional smaller deals were likely later this year, particularly in Southeast Asia.

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