CollaGenex bought for $420 million; shares surge

Shares of CollaGenex Pharmaceuticals Inc. surged to an eight-year high in heavy trading after the Newtown skin-care company said yesterday that it would be bought for about $420 million by Galderma Laboratories L.P., of Fort Worth, Texas.

The U.S. affiliate of Switzerland's Galderma Pharma S.A. will buy CollaGenex for $16.60 a share - a 30 percent premium to the stock's closing price Monday.

CollaGenex shares gained 27.58 percent, or $3.53, to close at $16.33. Monday's close was $12.80. The drugmaker had not closed above yesterday's price since March 17, 2000. The stock was among the top movers yesterday on the Nasdaq biotechnology index.

Upon completion of the merger, which is expected before the end of the second quarter, CollaGenex will become a wholly owned subsidiary of Galderma.

The subsidiary status, however, is "a legal structure," and CollaGenex will cease to operate as a separate company after the transaction closes, CollaGenex chief financial officer Nancy Broadbent said in an interview.

Galderma is not likely to keep a Bucks County office, Broadbent said, and instead will incorporate CollaGenex's products and an undetermined number of CollaGenex employees, "absorbing them right into the Galderma organization."

CollaGenex has 45 employees in Newtown and about 150 across the country, including a 70-person sales force.

Senior executives of CollaGenex will not have a role in the new company, she said.

"Certainly, some people will be hired by Galderma," Broadbent said. "From what we understand, people in sales and marketing and research and development might have roles."

Galderma has corporate offices in Fort Worth and a research-and-development center in Princeton.

Analyst Corey Davis from Natixis Bleichroeder Inc. said in an update to clients that the deal was "good news" for dermatology companies and could trigger "additional acquisitions or partnerships" in the skin-care market.

Megan Murphy, analyst at Lazard Capital Markets L.L.C., said in a research note that "the transaction makes sense" given the gap between CollaGenex's key product and others still in development.

"With a lack of quality, late-stage dermatology products available to in-license, a merger into a larger entity certainly makes sense," Murphy wrote.

CollaGenex's main product, with $50 million in annual sales, is Oracea, a treatment for the redness and skin lesions of rosacea, a facial-skin disorder. It also markets Novacort, a topical steroid that treats inflammation, and Alcortin, a gel that treats mild skin diseases caused by bacteria and fungus.

CollaGenex's Oracea capsule, the first oral treatment approved by the Food and Drug Administration for rosacea, is a formulation of doxycycline, the same active ingredient in CollaGenex's gum-disease treatment Periostat.

CollaGenex began developing Oracea after getting reports from dermatologists that patients taking Periostat for gum disease found it also improved their skin.

In May 2005, after U.S. regulators approved three generic versions of Periostat, then its primary drug, CollaGenex laid off nearly half its workforce - reducing the staff to 72 employees - and refocused on dermatology.

CollaGenex, founded in 1992, still sells Periostat, with $2.5 million in annual sales, down from $46 million in 2004, before the arrival of lower-cost generic competition.

Galderma, created in 1981 as a joint venture between Nestle S.A. and L'Oreal S.A., is a specialty-pharmaceutical company focused on dermatology. Its topical treatment for rosacea, MetroGel, complements CollaGenex's Oracea.

"We believe that Galderma's offer represents a compelling value for our shareholders," CollaGenex president and chief executive officer Colin W. Stewart said during a conference call with investors.

"The offer price of $16.60 per common share," he said, "represents a 41 percent premium over the previous four-week daily average stock price of CollaGenex."

Dermatology products developed or marketed by CollaGenex:

Oracea

capsules, the first FDA-approved treatment for the skin condition rosacea.

Alcortin

, topical dermatological

antifungal steroid.

Novacort

, a prescription topical steroid and anesthetic.

Col-118, topical skin compound ready to begin late-stage clinical trials to treat redness from rosacea and other skin disorders.

Becocalcidiol

, a Vitamin D compound in midstage trials to treat mild to moderate psoriasis.

SOURCE: CollaGenex Pharmaceuticals Inc.