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Merz Pharma Group Makes Superior Proposal To Acquire Obagi Medical Products

We were very surprised by, and disappointed with, Obagi's recently announced merger agreement with Valeant, especially in light of our ongoing discussions with Obagi and its financial adviser and legal counsel immediately prior to the announcement.  Unfortunately, we were not made aware that Obagi was contemplating signing a deal with another party on an accelerated timeframe and were never asked for our best and final bid or provided a bid date by which you were going to collect bids from other parties. Nonetheless, we remain resolute in our objective to acquire Obagi.

In that regard, as you are aware, Merz Pharma Group has been very interested in acquiring Obagi for some time, as evidenced by, among other things: (i) the written proposal that we provided to Obagi on January 18, 2013; (ii) the many conversations between our financial adviser, Deutsche Bank, and your financial adviser, Morgan Stanley; (iii) the many conversations between our outside legal counsel, Weil, Gotshal & Manges LLP, and your legal counsel, Jenner & Block; and (iv) the extensive due diligence investigation that we had been conducting since the management presentation that we attended on February 21, 2013.

We are proposing to acquire all of Obagi's outstanding common stock for $22.00 per share in cash – subject, of course, to the termination of your existing merger agreement with Valeant and the entering into of a new merger agreement with Merz.  This consideration represents:
  • A 58% premium above Obagi's closing share price on Thursday, March 14, 2013 (the last trading day prior to the disclosure on your fourth quarter earnings call that you had engaged a financial advisor to help you explore "all opportunities");
  • A $2.25 per share premium to the offer from Valeant;
  • A revenue multiple of 3.2x – based net sales of $120.7m for FY2012; and
  • An EBITDA multiple of 17.9x – based on adjusted EBITDA of $21.4m for FY2012.[1]

We have the necessary cash on hand to fund the transaction; therefore, there is absolutely no financing risk. We are attaching a copy of the proposed merger agreement that we would be willing to enter into with Obagi, together with a marked version showing changes from your existing merger agreement with Valeant.   As you will note, we contemplate that a transaction with us would be structured in the same way as your transaction with Valeant (that is, as a negotiated two-step cash tender offer) and we would agree to the same terms as those set forth in your existing merger agreement with Valeant, other than minor changes that are appropriate given the circumstances.  Finally, we want to be clear that we are ready to proceed immediately and do not require any additional due diligence.  We would, however, prefer to review the disclosure schedule provided to Valeant and will contact you in due course in that regard.

Our proposal is clearly superior to the Valeant transaction.  We are confident that your stockholders will appreciate the enhanced value that our proposal would deliver to them and will enthusiastically support it.  As we stated before, Merz has great respect for Obagi, including its business, products, operations and employees, and believes that a combination of Merz and Obagi is compelling and will create a leading US aesthetics company.

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