Spotting the opportunities in the dermatology market

Analysis

Following its latest deal to buy the skincare assets of Johnson & Johnson’s Ortho Dermatologics for $345m, after barely pausing for breath from its last $425m dermatology deal last week to secure Sanofi’s Dermik, it might be reasonable to ask why Valeant Pharmaceuticals seems to have its heart set on hoovering up derma assets at a seemingly indecent pace.

Dermatology certainly lacks the wow factor of other therapy areas and has traditionally been considered a small, dull space, predominantly inhabited by specialty pharma companies trying to serve niches in skin care. What Valeant appears to have noticed and appreciated is that this is both a relatively stable and certainly lucrative market. EvaluatePharma data shows that the market for branded and mostly prescription dermatological products is set to report decent 5% compound annual growth over the next five years, increasing sales from $12.6bn last year to $16.6bn by 2016 (see table below).

Dermatology - WW Rx & OTC sales ($bn)
Subcategory 2010 2016 CAGR (10 - 16)
 Anti-acne preparations 2.1 2.6 3%
 Topical anti-infectives 1.4 1.8 5%
 Emollients & wound healing agents 0.7 1.4 12%
 Topical corticosteroids 0.8 0.7 (2%)
 Anti-psoriasis agents 0.5 0.6 4%
 Other dermatologicals 6.9 9.4 5%
Total Dermatologicals 12.4 16.6 5%

With its latest deal under its belt Valeant is set to catapult itself up the rankings of sales of derma products from 10th to 6th by 2016. But even with its new products Valeant still considerably lags the market leader, Galderma, which is forecast to have sales exceeding $2bn by 2016, thanks in part to Restylane, a hyaluronic acid filler, used to plump up lips and smooth out wrinkle lines. 

However, with its new acquisitions Valeant is also set to achieve some of the fastest growth in the sector, and fast growth in volume is what the group is counting on to make its mark.

Being able to increase volumes is important in dermatology due to the difficulties in imposing price hikes on a sector that is largely self paying. As such, scaling up its offering through acquisitions will make this task easier, if it can integrate the number of companies and products it has bought.

The derma market is also primarily driven by branded products that are recognised and loved by consumers, as can be seen by the success of nappy rash cream Bepanthen and acne treatment Clearasil; both are forecast to have sales of over $300m by 2016. As such, the other advantage to being one of the bigger players is having the marketing muscle needed to keep your brand quite literally in the face of the consumer.

Top 10 Dermatology Companies WW annual sales ($m) Market Rank
Rank (mostly Rx sales) 2010 2016 CAGR (10 - 16) 2010 2016
1  Galderma 1,597 2,509 8% 1 1
2  GlaxoSmithKline 1,446 2,303 8% 2 2
3  Bayer 1,127 1,286 2% 3 3
4  Leo Pharma 820 1,151 6% 4 4
5  Medicis Pharmaceutical 652 885 5% 6 5
6  Valeant Pharmaceuticals International * 304 787 17% 10 6
7  Allergan 513 646 4% 7 7
8  Advanced BioHealing (Shire) 147 584 26% 19 8
9  Taro Pharmaceutical Industries 393 545 6% 9 9
10  Merck & Co 798 510 (7%) 5 10
* Valeant sales based on UBS forecasts (15 Jul) to include recent dermatology deals

Spend, spend, spend

Valeant has also made no secret of the fact that it wants to continue its buying spree in dermatology, an ambition that will be helped by the highly fragmented nature of the space. At present no one player holds more than 15% of the total branded market.

The group has already been behind some of the biggest M&A deals in the sector; as can be seen below the group features in three of the top 10 dermatology related deals. And if Michael Pearson, Valeant's chief executive, is to be believed, they will not be the last. He has stated that further deals will be done in the US and Canada to beef up the businesses in these core markets for the company.

Valeant may have grand aspirations in dermatology, but the fact that large players such as GlaxoSmithKline, which tops the table with its $3.2bn acquisition of Stiefel, shows that others in the sector are still committed to the small but money-spinning world of dermatology.

Top 10 Dematology Related M&A Deals
Rank Acquiring Company Target Company or Business Unit M&A Date Deal Value ($m)
1 GlaxoSmithKline Stiefel Laboratories 2009 3,200
2 Johnson & Johnson Mentor 2009 1,070
3 Leo Pharma Warner Chilcott's US rights to Leo's psoriasis products 2009 1,000
4 Stiefel Laboratories Connetics 2006 640
5 Valeant Pharmaceuticals International Dermik (dermatology unit of Sanofi) 2011 425
6 Galderma CollaGenex Pharmaceuticals 2008 420
7 Valeant Pharmaceuticals International Ortho Dermatologics (division of J&J) 2011 345
8 Leo Pharma Peplin 2009 288
9 Valeant Pharmaceuticals International Dow Pharmaceutical Sciences 2008 285
10 Stiefel Laboratories Barrier Therapeutics 2008 148

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