Medicis acquisition of GenDerm more than doubles OTC derma business.

MEDICIS' GENDERM ACQUISITION MORE THAN DOUBLES OTC BUSINESS TO ROUGHLY $13 MIL. per year under an agreement announced by the companies Dec. 1. Medicis Pharmaceutical's acquisition of Lincolnshire, Ill.-based GenDerm will add approximately $25 mil. in annual sales, at least 50% of which is generated from over-the-counter products, Medicis said. Phoenix-based dermatological products manufacturer Medicis said it decided to purchase GenDerm to boost its OTC business, which represented 12% of its $41 mil. sales in FY 1996 (ended June 30).

The GenDerm acquisition is a good fit for Medicis, providing the company with an entry into new treatment categories within the dermatology arena. GenDerm's four "principle" OTC products -- SalAc (salicylic acid) acne wash, Pentrax anti-dandruff coal tar shampoo, Occlusal (salicylic acid) topical wart remedy and Zostrix (capsaicin) topical analgesic -- were the major drivers of the purchase, Medicis said.

At present, Medicis markets only a handful of OTC products, which include Esoterica medicated fade cream, Theraplex Z zinc pyrithione shampoo for dandruff and seborrheic dermatitis and Theraplex T coal tar shampoo for psoriasis and seborrheic dermatitis. Dermatologist-dispensed brands include Beta-Liftx salicylic acid peel. The deal also includes GenDerm's prescription Novacet (sodium sulfacetamide 10% and sulfur 5%) rosacea and acne treatment and Zonalon anti-itch medication (doxepin cream 5%). Medicis markets a number of prescription items, including Triaz benzoyl peroxide acne treatment, and the topical steroids Lidex (flucinonide) and Synalar (flucinonide acetonide).

The GenDerm portfolio complements Medicis' current offerings. For example, GenDerm's Zostrix analgesic and Medicis' Esoterica fade cream are both targeted to consumers 50 and older, so the merged company hopes to use the same marketing vehicles for both products, Medicis said. GenDerm's OTC salicylic acid acne wash is a strong counterpart to Medicis' prescription Triaz, the company noted. Pentrax anti-dandruff shampoo will strengthen Medicis' dandruff category, adding to the company's Theraplex, which generates insignificant sales, the company said. Occlusal will be Medicis' first topical wart treatment, the firm added.

In addition to rounding out Medicis' product offerings, the deal will broaden the company's "distribution relationships," Medicis said. The company will take advantage of GenDerm's 66,000 OTC doors in the U.S.; Medicis products are available in 57,000 U.S. stores. Medicis also will use GenDerm's Canadian distribution and marketing capabilities to move the Esoterica and Theraplex businesses into that country. Medicis does not distribute its OTC products outside the U.S.; however, it does market Lidex and Synalar in Canada through a service agreement with Roche's Canadian subsidiary, which is set to expire in February 1998.

In addition, GenDerm has relatively small overseas sales in a few European markets and Israel. Although Medicis said it will continue the operations abroad, it will not dedicate much attention to GenDerm's overseas business. The company has no plans to expand its presence outside the U.S., Medicis said, because to do so would "dilute" its focus.

The acquisition also provides a good fit from a manufacturing perspective. Medicis' Canadian Rx manufacturing is contracted out to Ontario-based Patheon, the same firm GenDerm uses to produce its OTC and prescription products in that country. The two companies also share the same U.S. manufacturer, DPT Labs (San Antonio, Tex.).

The newly acquired GenDerm products will be relaunched to the dermatological community with "Medicis' marketing touch," the company said. Medicis will detail its new OTC products to dermatologists and promote the items via consumer print ads. The products had been "underpromoted" under GenDerm's ownership, Medicis said. The company also may reformulate the products at a later date.

Medicis initially will pay GenDerm $60 mil. in cash in the acquisition deal. If the GenDerm business generates more than a sales threshold of $31 mil. in calendar year 1999, Medicis will pay GenDerm an additional amount, not to exceed $20 mil.

Medicis said it expects to pay a total of roughly 2.4 times GenDerm's annual sales. The company also will assume an "insignificant amount" of GenDerm's debt, totaling a few hundred thousand dollars, Medicis noted. The transaction is subject to final due diligence and other conditions.

The deal will be financed by cash from operations and with Medicis' October 1996 secondary public offering, which raised between $85 mil. and $90 mil. Medicis had $87.5 mil. cash-on-hand as of Sept. 30. GenDerm has working capital of roughly $9.4 mil.

The GenDerm purchase will leave Medicis with "well over" $25 mil. in cash, the company said, and "given the strong gross profit margins and cash flow of the acquired brands [it] will be accretive to earnings." Medicis earnings through Sept. 30 totaled $3.8 mil. Robertson Stephens served as financial advisor to the deal.

The GenDerm agreement is the second move this year for Medicis into expanded product areas. In March, the company entered the "cosmetics dermatology" arena with the development of Tx Systems, a unit designed to market products for in-office dermatologic administration and dispensing. Medicis recently penned an agreement with Advanced Polymer Systems to develop a vitamin K product for under eye circles and spider vein indications under the Tx Systems umbrella.