The intensifying M&A scene in dermatology may have generated a bidding war. Two weeks after serial acquirer Valeant Pharmaceuticals International agreed to buy the skincare specialist Obagi Medical Products, it has been forced to up its offer by more than 20% following an unsolicited offer from Merz.
Valeant has made its counteroffer from a position of strength – it had a definitive merger offer on the table, and thus should have been ready for a scenario in which a grey knight emerged. The Canadian group has borrowed massively to fund its buying spree of the past three years, but has remained fearless in the face of that mountain of debt (Valeant gears up for another assault on dermatology, September 4, 2012). Merz’s offer to buy Obagi with available cash on hand was a test of its courage.
Merz is a specialty pharma group most notable for owning and parcelling out the rights to memantine hydrochloride, the dementia drug marketed as Namenda in the US and Axura in the European Union. That revenue is slowly drying up and will have declined to a trickle in 2015 after Namenda’s US patent expires. Growth will thus be needed in other product categories.
In terms of fit, the California-based Obagi would be a good one: its line of prescription and non-prescription aesthetic skincare products is almost exclusively dispensed via physicians, with a heavy presence in the US. Merz’s skincare products, which it identifies as key growth drivers, are similarly positioned, with a greater presence in Europe, Asia and Russia; less than half of its sales are in the US.
In its fiscal year ending June 30, 2012, Merz reported that €154.6m ($198.5m) of its €913.1m total revenue had come from its aesthetics unit, growing 36% over the previous 12 months. Obagi reported $120.7m in sales in 2012, representing a significant addition to the Merz dermatology business.
Likewise, Valeant has made a huge foray into dermatology, buying its way up the rankings of skin-drug manufacturers with the Medicis Pharmaceutical acquisition last year. Today it is the fourth-biggest company in dermatology, compared with its 10th-place position in 2011.
Adding about $200m in dermatology sales to its forecast 2013 total of $1.37bn would vault it ahead of Bayer so that it trails only Galderma and GlaxoSmithKline, according to EvaluatePharma data. Merz, likewise, would stand to gain a great deal – it could move from 13th to ninth if the Obagi portfolio were to be brought under its umbrella.
Close to the chest
In making an offer of $22 a share – roughly $385m in total – Merz was being cagey. This was manifestly a better offer than the original $19.75 bid from Valeant, yet at 3.2 times sales it did not appear excessive.
In analysing the original Valeant offer, JP Morgan analyst Chris Schott wrote that the Medicis acquisition was priced at 3.2 times sales. Valeant’s offer was three times sales, which comes in at the low end of a set of derm deals topped by Allergan’s purchase of SkinMedica at 3.5x (Allergan’s SkinMedica deal shows dermatology action more than skin deep, November 20, 2012).
Thus there was some room to escalate in the event of a bidding war, without making the deal too expensive. But with the price now at roughly $420m, approaching 3.5 times sales, Merz will need to exceed the metrics of the SkinMedica deal in order to win Obagi’s heart.
Given the speed with which Merz wanted to press ahead, it should become clear very soon whether it will follow through.