Allergan to Buy SkinMedica

Allergan, Inc. ( AGN - Analyst Report ) recently announced that it has entered into an agreement with a privately held company, SkinMedica, Inc. to acquire the latter’s topical aesthetics skin care business. Allergan will make an upfront payment of $350 million to SkinMedica and additional milestone payments of $25 million on the achievement of certain sales targets by the acquired products. The deal is expected to close by year end.

SkinMedica’s product portfolio includes several products for skin care benefit (including enhancing skin appearance and reducing signs of aging). SkinMedica's key product, Vaniqa (eflornithine hydrochloride) cream 13.9%, is the only prescription product for the reduction of unwanted facial hair in women approved by the US Food and Drug Administration (FDA). We note that the deal will not include SkinMedica Colorescience aesthetic make-up line, which would be spun-off by SkinMedica.

SkinMedica’s products should complement Allergan’s facial aesthetics portfolio, which currently includes Botox, Juvederm and Latisse.

During the year a lot interested has been generated by the dermatology business. In September 2012, Valeant Pharmaceuticals International, Inc. ( VRX - Snapshot Report ) entered into an agreement with to acquire Medicis Pharmaceutical Corp. ( ) , a specialty pharmaceutical company engaged in the development and marketing of products for dermatological and aesthetic conditions. In July 2012, Novartis ( NVS - Snapshot Report ) acquired Melville, New York-based specialty dermatology generics company, Fougera Pharmaceuticals.

Our Recommendation

While we believe that the Allergan–SkinMedica deal makes strategic sense, we remain concerned about Botox’s sales post re-entry of Merz Pharmaceuticals’ Xeomin in the market. The March 2012 injunction against Merz Pharma is only valid till January 9, 2013.

We also note that the obesity intervention segment of Allergan has performed disappointingly for the past few quarters. The company is considering a potential sale of the obesity intervention segment as an option in its efforts to maximize the returns from this business.

We currently have a Neutral recommendation on Allergan, which carries a Zacks #2 Rank (short-term Buy rating).