Valeant bid for Medicis clouded by Solodyn sales

An uncertain sales outlook for acne treatment Solodyn is raising early questions about the $2.6 billion purchase price Valeant Pharmaceuticals International Inc. VRX +0.91% agreed to pay for Medicis Pharmaceutical Corp. MRX -0.16% , the latest and biggest in a string of deals the Canadian company has clinched as part of its unorthodox deals-based growth strategy. 

Montreal-based Valeant announced the Medicis pact Sept. 3, cementing its leadership position in America's fast-growing dermatology-pharmaceuticals business. Since 2010, Valeant has snapped up more than a dozen drug firms, betting it can grow revenue more quickly through deals than with research and development--long the preferred route to growth among Big Pharma. Excluding Medicis, Valeant ranks as the world's 39th-largest pharmaceutical company by revenue, coming from relative obscurity just a few years ago. 

In the latest example of this strategy, Valeant Monday agreed to buy eye treatment Visudyne from Vancouver-based QLT Inc. (QLTI) for an upfront payment of $112.5 million, providing its ophthalmology sales force with another product to help boost revenue. 

The U.S. dermatology-aesthetics industry generates annual sales of about $12 billion, and Valeant would become the largest dermatological player, with annual sales of over $2.5 billion, when the Medicis deal closes, expected in the first half of next year. Medicis, Scottsdale, Ariz., is currently the U.S. industry leader in that market--which includes everything from anti-aging creams to acne treatments. Valeant is currently ranked third, measured by 2011 sales. 

Valeant's share price initially soared close to 15% on the Medicis deal. Analysts said they expect costs savings and a big earnings boost from merging the two businesses. More recently, however, the stock has fallen back amid worry that sales of Medicis's blockbuster drug, Solodyn, may be declining faster than expected. 

The stock was recently at $56.20 in New York, still up 9.6% from the day before the deal was announced. 

Solodyn generates about 40% of Medicis's annual sales, analysts say. Morgan Stanley & Co. estimates the treatment accounts for around 75% of the company's earnings per share. A Medicis representative declined comment. Valeant Chief Executive Michael Pearson, in an interview, said he agreed with the 40% revenue estimate, but declined comment on the profit projection. 

Some analysts are taking issue with the drug's growth prospects, amid signs of flagging sales. Solodyn prescriptions in the U.S. fell 44% during the last week of August from a year earlier, according to data from IMS Health, a healthcare information company. In the first two months of the third quarter, Solodyn prescriptions fell 24% from the first two months of the second quarter, according to Piper Jaffray & Co., based on IMS data. 

On Sept. 14, Morgan Stanley downgraded Valeant to equal weight from overweight, "concerned about Solodyn's growth outlook." 

Valeant, along with some bullish analysts, said declines in Solodyn prescriptions aren't as steep as they appear, because IMS data exclude prescriptions from Wal-Mart Stores Inc. (WMT) and pharmacy mail-order services. 

"We don't have a concern" about the prescription data, Mr. Pearson said. He said since Medicis is still its own company, he can't comment further on the numbers. 

Medicis has been trying to make Solodyn accessible to more patients with insurance coverage by offering rebates and discounted pricing. But those efforts have led to losses on a portion of Solodyn prescriptions. In March, Medicis introduced an "Alternate Fulfillment" plan to redirect unprofitable Solodyn prescriptions through a mail-order pharmacy service to reduce losses on prescriptions. 

The success of that program is still unclear. Morgan Stanley, based on talks with one physician in the Southeast U.S., said it appeared at least some pharmacies, perhaps to guard against customer loss, are "reluctant" to support this initiative. 

"Apparent lack of cooperation from retail pharmacies appears to be the weak link in the AF initiative," Morgan Stanley said. 

Mr. Pearson said Morgan Stanley's sample size is too small to identify a trend. "I don't call that market research," he said. 

Valeant's due diligence shows some doctors aren't as comfortable as others using the AF plan, but a higher percentage are "quite comfortable" with the initiative, he added, declining to be more specific.

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