Medicis Droops on Inamed Deal

Investors see a few wrinkles they don't like in an aesthetic surgery pairing.
By Melissa Davis ,

Two leaders in the aesthetics business hope to become more attractive themselves.

By uniting,

Medicis

(MRX)

and

Inamed

(IMDC)

seek to appeal even more to the specialty physicians -- such as plastic and cosmetic surgeons -- they currently serve. The two companies cater to the growing baby boomer market with such products as wrinkle removers and breast implants. Medicis on Monday laid out plans to buy Inamed for $75 a share, a 13% premium to Friday's closing price, in a cash-and-stock deal valued at $2.8 billion.

Shares of Medicis tumbled 7.5% to $29.30 on news of the big-ticket purchase. Inamed, while up 4.2% to $69.01, remained below the offering price.

Still, analysts praised the pending transaction.

"We believe this merger will create a powerhouse in the aesthetics industry," wrote Hibernia Southcoast Capital analyst Bennett Weintraub, who has a hold rating on Inamed shares. "The combined company will be a 'one-stop shop' for plastic surgeons."

Medicis is best known for Restylane, an injection that smoothes out wrinkles but sells in a highly competitive market. Inamed specializes in breast implants, including the silicone type that -- due to safety concerns -- have yet to regain their former popularity in the U.S.

Nevertheless, both companies sounded upbeat despite the challenges they face. Together, they see fresh opportunities to grow.

"The transaction will create a company with a strong financial position and greater resources to enhance our strong research and development pipeline," said Medicis CEO Jonah Shacknai, who will lead the combined company. "With the large number of aging baby boomers and the focus, by all age groups, on maintaining a healthy and youthful appearance and self image, we will be poised to continue delivering value and revenue growth to our stockholders."

Bad Deal

Of course, Medicis has already seen one transaction go sour.

Last May, Medicis agreed to sell the rights to Orapred -- an asthma drug for children -- to

BioMarin

(BMRN) - Get Report

for $175 million. But Medicis soon wound up accused of overstating the value of the medication. Faced with a lawsuit, Medicis recently inked a deal that lowers the amount it will receive for the medicine.

Meanwhile, BioMarin continues to field questions about that transaction. In a February conference call, BioMarin tried to claim that new formulations of Orapred would significantly enhance its value. But at least one skeptical analyst refused to buy that argument.

Sam Collin of First Manhattan pointed out that, "at the end of the day," Orapred remains an old drug that faces stiff competition.

"Maybe the new formulation creates the economic value added that you hope, and maybe it doesn't," Collin said. "But as we know it today, the profit stream and the cash-flow stream from the existing product has been almost entirely diminished at this point."

Future Hurdles

Thus, Medicis seemed to shed the medication just in time. Going forward, it can now focus more on its core aesthetics business with help from the pending merger.

Still, Medicis' new partner faces some hurdles of its own. Last week, Inamed disclosed that it has become the target of a formal probe by the

Securities and Exchange Commission

. Specifically, the company said it has been questioned by regulators about disclosures related to one style of its silicone gel-filled breast implants.

"This particular style accounted for approximately $3.4 million

less than 1% of our total revenues in 2004," Inamed stated in its latest annual report. "There can be no assurance, however, that the scope of the SEC's investigation will not change or expand."

Meanwhile, Inamed is still battling to gain widespread approval for silicon implants in general. The Food and Drug Administration banned silicon implants -- except for reconstructive surgery -- in 1992. It maintained that ban, despite appeals from silicone implant makers like Inamed, early last year. It wants additional proof of the implants' safety before they can return to more general use.

In the meantime, however, Inamed has still managed to grow. Revenues have jumped 21% -- and profits have rocketed 61% -- over the past year.

Like Medicis, Inamed sees even better days ahead.

"I believe this merger is a tremendous opportunity for our customers, employees and shareholders," said Inamed CEO Nick Teti, who will serve as vice chairman of the new company. "As our industry continues to evolve, the combined entity will put us in a strong strategic position to continue to deliver outstanding service and innovative products to our customers. I share Jonah's excitement about this merger."

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