Obagi Medical Products Inc. was telling would-be buyers to “just go away,” its critics complained. But last week the company told a suitor: “I’m all yours.”
Executives at the Long Beach maker of skin care products announced last week that the company will be sold to Valeant Pharmaceuticals International Inc. in Montreal.
The sale gives Obagi investors $19.75 per share, a 28 percent premium to the price of $15.39 the day before the announcement. The stock was up 41 percent for the week ended March 20, the biggest gainer on the LABJ Stock Index. (See page 32.)
It also puts to bed a yearlong proxy battle and gives the company resources to go head to head in the marketplace with a competitor that recently merged with a bigger corporation.
Irina Rivkind, an analyst at New York’s Cantor Fitzgerald & Co. who follows Obagi, said the sale was likely spurred by the recent acquisition of competing firm SkinMedica Inc. That company, headquartered in Carlsbad, was purchased in December by Irvine pharmaceutical giant Allergan Inc., the maker of Botox and the Lap-Band.
“Management became concerned about competition from Allergan,” Rivkind said. “SkinMedica has products that compete directly with Obagi.”
Obagi executives did not return calls for comment for this article.
Obagi, founded in 1988, makes prescription-strength skin care products, such as anti-aging creams, that are sold through doctors’ offices. SkinMedica distributes products the same way.
Rivkind estimated the market for skin care products sold by doctors is growing at upwards of 7 percent annually, and it’s a market Valeant wants a bigger piece of. The company has purchased a handful of dermatology companies over the past year, including Medicis Pharmaceuticals Corp. of Scottsdale, Ariz., which had reportedly been interested in acquiring Obagi.
Now that it’s buying Obagi, Rivkind said Valeant will inherit relationships with thousands of doctors who will continue to sell Obagi products and might adopt skin care products in the Valeant catalog.
“Valeant may see the opportunity to penetrate over 6,000 physician accounts,” she said. “It also allows Valeant to more effectively compete with Allergan.”
In a statement announcing the deal, Valeant said Obagi will be accretive to earnings immediately. Valeant also said it can save $40 million a year by combining the two companies.
It’s not clear what the acquisition, expected to close in the second quarter, will mean for Obagi’s 203 employees, most in sales and marketing and based in Long Beach.
Rivkind said that to save $40 million a year, Valeant would likely look to cut Obagi’s sales force.
Valeant spokeswoman Laurie Little said some jobs will be cut but nothing has been decided. Valeant has an office in Irvine and might move those operations to Obagi’s Long Beach headquarters, which is under a long-term lease.
Deal teased
The acquisition was announced March 20, but management had hinted the week before that a sale could be forthcoming. In the fourth quarter conference call March 14, Preston Romm, Obagi’s chief financial officer, mentioned that the company had spent $79,000 to retain advisers but would not offer additional details.
In a March 15 research note, Rivkind predicted the company was looking to sell, both because of competition from Allergan and because of a yearlong proxy battle.
In December, activist investor Voce Capital Management of San Francisco wrote a letter to Obagi’s managers, informing them of its intent to replace most of the company’s board. In the letter, which repeated similar grievances aired earlier last year, Voce Managing Partner J. Daniel Plants alleges that the company has been mismanaged and that the board has repeatedly turned down acquisition offers at shareholders’ expense.
“We have repeatedly insisted that the Obagi board stop squelching inbound acquisition interest in the company,” Plants wrote in December. “This interest has been substantial and ongoing for many years. … The message from the Obagi board and CEO has been the same each and every time: ‘Just. Go. Away.’”
Analysts, too, had chided Obagi management for failing to seriously consider buyout offers. Annabel Samimy, who follows the company’s stock at Stifel Nicolaus in New York, told the Business Journal in June that management had promised to entertain buyout offers but instead proposed a shareholder rights plan, or poison pill, that would discourage or prevent hostile takeovers.
The proxy fight was the most recent in a string of bad news for the company over the past few years. In 2011, regulators in Texas banned several Obagi products, forcing the company temporarily to cease sales there and offer customer refunds. And a year ago, the company agreed to pay $5 million to settle a lawsuit filed by founder and namesake Zein Obagi. He left the company in 2007 to found a competing firm, ZO Skin Health Inc. of Irvine. He sued his old company in 2010, saying it had engaged in anti-competitive practices to hurt his new company.
Now that Valeant is taking over, Obagi took one last shot.
“I wish Valeant the best of luck,” he said. “But my philosophy is what made them well-known. I opened physician offices to them. It’s going to be a ship moving on the ocean without a captain.”
