GlaxoSmithKline Buys Back Into Dermatology With $2.9 Billion Stiefel Deal

Acquisition more than doubles GSK’s dermatology sales to $1.5 billion, creating a global specialist business across prescription and OTC drugs.

In the latest move to diversify its revenue base, GlaxoSmithKline on April 20 confirmed rumors that it will acquire Stiefel Laboratories, a privately-held maker of dermatology products, for $2.9 billion in cash.

The deal also calls for GSK to pay another $300 million contingent on future performance, and assume about $400 million of Stiefel debt.

GSK will combine its existing prescription dermatology business with Stiefel's to create a new, specialist global business operating within GSK but under the Stiefel name. The combined operations would have about $1.5 billion in sales ($900 million of which come from Stiefel) and 8 percent of the global market for prescription dermatology products.

The new business was announced less than a week after GSK carved out another of its therapeutic areas, HIV, into a joint venture with Pfizer (¹ (Also see "Glaxo and Pfizer Form HIV Venture, But A Spin-Off Could Be In The Wings" - Pink Sheet, 20 Apr, 2009.), p. 3).

It will be run by Charles Stiefel, current chairman and chief executive, who will report to Deirdre Connelly, president of North American Pharmaceuticals at GSK.

GSK hopes to achieve relatively rapid revenue synergies by using its global infrastructure to launch Stiefel's drugs into emerging markets. At the same time, Stiefel's specialist sales force and relationships would presumably boost GSK's own dermatology products.

Dermatology U-Turn?

Stiefel's sale comes as no surprise, since the company - which is partly owned the Blackstone private equity group - put itself on the block earlier this year. (² (Also see "Dermatology Space Waits For Skinny On Stiefel Buyout" - Pink Sheet, 20 Mar, 2009.)) According to reports at the time, the company attracted several suitors looking to buy back into a market they had previously abandoned. In 2002, for instance, Johnson & Johnson spun off Barrier Therapeutics, which Stiefel acquired last year for $146 million in cash (³ (Also see "Steifel Rides Ailing Barrier Into Pediatrics Market" - Pink Sheet, 30 Jun, 2008.), p. 17). In 2005, GSK sold its prescription dermatology business to Altana, which is now part of Nycomed Holdings.

But a lot has changed since then. Dermatology may have once been seen by Big Pharma as a niche backwater with relatively small products, but these days it represents a secure, stable revenue stream in a world where relationships with specialists is an advantage not a distraction.

And GSK is not alone in needing to secure additional sources of revenue as key products lose patent protection, and as R&D output proves woefully insufficient to fuel growth. That's what's driven a host of recent, far larger deals in the industry including Pfizer's $68 billion Wyeth acquisition and Merck's $41 billion tie-up with Schering Plough.

Not The Mega-Merger, But Diversifies Nevertheless

This deal is tiny in comparison. GSK CEO Andrew Witty has said several times he's steering clear of mega-mergers, but the drug maker is big in dermatology, where Stiefel, which was founded in Germany more than 160 years ago, claims to be the leading independent company.

The business adds hundreds of marketed drugs to GSK's small existing portfolio, including Duac for acne, dermatitis treatment Olux E and Soriatane for severe psoriasis. It also has more than 15 projects in late-stage development, with annual R&D investment of over $100 million. Stiefel also acquired a drug delivery technology, Versafoam , through its 2006 acquisition of Genentech spin-out Connetics.

The Stiefel deal doesn't diversify GSK in the way that Sanofi-Aventis is diversifying into generics and branded generics, for example, through a host of acquisitions including most recently Mexico's Laboratorios Kendrick and Brazilian firm Medley (⁴ (Also see "Sanofi Is Composing Emerging Markets Strategy: Latest Acquisition Is Brazilian Medley For $686M" - Pink Sheet, 9 Apr, 2009.)). But it does bring about $300 million of consumer sales, now seen as a valued source of reliable income, rather than a low-margin distraction.

Stiefel's push to grow its U.S. consumer health business included the launch, in early March this year of Impruv , a line of dry skin treatments to be sold at Walgreens. The company also provides GSK with a foothold in the aesthetic skin health market, where Stiefel sells the Revaleskin anti-wrinkle product line, formulated from the coffee berry. In 2008, Stiefel acquired French groups ABR Invent and ABR Development for Atlean , a dermal filler product used for facial sculpting and remodeling.

Moreover, the aesthetic market is characterized by consumer payments, which allows GSK to further hedge its exposure to government- and payor-driven reimbursement policies. Indeed, this deal "is yet another example of CEO Witty pursuing his strategy of de-risking and reducing the cyclicality of the business through focusing on growth through consumer and emerging markets rather than the traditional pharma R&D model," writes Citigroup analyst Kevin Wilson in an April 20 note.

Stiefel itself doesn't take GSK into new territories; although it has subsidiaries in over 30 countries, most of its sales are in the U.S. But it does provide assets to feed into GSK's own expanding global infrastructure, including in emerging markets such as Brazil, Russia, India and China, as well as in Japan. GSK expects to deliver annual pre-tax cost savings from manufacturing and administrative functions of up to $240 million by 2012, and the deal will be mildly accretive to EPS by next year, according to management.

This deal, which is about 3.5 times Stiefel's 2008 revenues, is likely to represent healthy returns for Blackstone Group, which acquired a minority stake in the group for $500 million in August 2007.

Indeed, the next acquisition targets in the consolidating drug industry may well include private-equity owned Nycomed, in which DLJ Merchant Banking and Blackstone sold their ownership to Nordic Capital in 2005. Last month, Nycomed hired Goldman Sachs to explore a sale that could be worth over $13 billion, according to the Wall Street Journal. That's perhaps a bit big for GSK.

- Melanie Senior (m.senior @elsevier.com)