CEPH Cephalon (MM)

Valeant Pharmaceuticals International, Inc. (VRX) announced that it has entered into yet another deal that would entrench its already strong presence in the dermatology market in the US and Canada. This time Valeant intends to acquire Dermik, a dermatology unit of Sanofi Aventis (SNY), in the US and Canada.

Dermik’s product portfolio comprises of popular aesthetic as well therapeutic dermatological brands like Benzaclin for the treatment of acne, Carac for the treatment of keratoses and Sculptra, a facial injectable for the correction of facial wrinkles and folds. Under the deal, Valeant has also acquired the worldwide rights to Sculptra. These products will synergize well with Valeant’s dermatology products like Zorivax cream and ointment (herpes), Acanya and Atralin (acne) among others.

The purchase consideration is approximately $425 million for all Dermik assets, which includes available inventories of approximately $18 million. Dermik’s inventories include an aesthetic and therapeutic business in the US and Canada as well as a global aesthetic business. Dermik’s 2010 revenues (including contract revenues) were approximately $240 million. The deal is expected to boost earnings right away in 2011.

The Dermik deal satisfies Valeant’s aim to capitalize on smaller international opportunities. Valeant is keen on pursuing deals and acquisitions in an effort to compensate for the loss of revenues resulting from the genericization of neurology product Diastat and dermatology cream Efudex.

Our Recommendation

We have a Neutral recommendation on Valeant Pharmaceuticals. Our long-term stance is supported by the Zacks #3 Rank (Hold rating) carried by the company in the short run.

Overall, we believe the combined Biovail/Valeant entity is a unique company as it offers global reach, a diversified revenue base, a favorable tax structure and limited patent exposure. Moreover, accretive acquisitions add to the company’s investment thesis. Albeit, the company’s failure to clinch the Cephalon (CEPH) acquisition disappointed us. We therefore prefer to remain on the sidelines.

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