CEPH Cephalon (MM)

Canadian drug maker 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. This time around Valeant intends to acquire the assets of Ortho Dermatologics, a dermatology unit of pharma giant Johnson & Johnson (JNJ), for $345 million in cash. The transaction is expected to close by year end.

Ortho Dermatologics’ product portfolio, which comprises prescription brands Retin-A Micro, Ertaczo, and Renova, generated revenue of approximately $150 million in 2010. These products will synergize well with Valeant’s dermatology products namely Zorivax cream and ointment (herpes), Acanya and Atralin (acne) among others.

The deal with Johnson & Johnson follows on the heel of last week’s $425 million agreement to acquire another large pharmaceutical company, Sanofi Aventis’ (SNY) dermatology unit Dermik. These acquisitions satisfy Valeant’s aim to become a leading player in the skincare market. Valeant is keen on pursuing deals and acquisitions in an effort to compensate for lost revenues from the genericization of its neurology product Diastat and dermatology cream Efudex.

Our Recommendation

We have a Neutral recommendation on Valeant Pharmaceuticals. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Valeant in its current form emerged from the merger of Biovail and Valeant in September 2010.  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. However, the company’s failure to clinch the Cephalon (CEPH) acquisition was a disappointment. We therefore prefer to remain on the sidelines.

 
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