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Shares of Allergen(AGN) rose some 0.9% in Friday's trading session. The multi-specialty health care company announced the acquisition of SkinMedica before the market open.

The Deal

Allergen announced on Friday that it will acquire SkinMedica, a privately held aesthetics skin care business. Allergen will pay $350 million in an up-front payment for the business. The deal allows for an additional contingency payment of $25 million depending on certain sales targets.

SkinMedica's business includes a variety of physician dispensed non-prescription aesthetic skin care and prescription products. Allergen pointed out that the deal excludes SkinMedica's Colorescience aesthetic make-up line, the business will be spun-off as a separate unit. SkinMedica's primary prescription drug is Vaniqa cream, a US approved drug for reducing unwanted facial hair for women.

CEO and Chairman David E.I. Pyott commented on the deal, "Allergen is widely recognized for our leadership in the facial aesthetics area. The acquisition of SkinMedica will nicely complement our existing facial aesthetics business, which includes product such as BOTOX Cosmetics, JUVEDERM and LATISSE. Most importantly, the acquisition will allow us to expand our product portfolio to better meet the needs of our existing base of physician customers and their patents."

Allergen plans to operate SkinMedica as a separate global business and aims to leverage the products within Allergen's existing preferred customer programs. Following the completion of the acquisition, the larger SkinMedica sales force will assume the responsibility of the distribution of its products.

The companies did not release any financial details regarding the transactions.

Valuation

Allergen ended the third quarter of its fiscal 2012 with $2.9 billion in cash, equivalents and short term investments. The company operates with $1.5 billion in short and long term debt, for a net cash position of $1.4 billion. Financing of the SkinMedica deal should therefore not result in any problems.

For the first nine months of 2012, Allergen generated $4.3 billion in revenues. The company net earned $774.6 million, or $2.52 per diluted share. For the full year, Allergen guides for sales of $5.7 billion on which the company guides for non-GAAP earnings of $4.17-$4.19 per share. GAAP earnings could come in around $1 billion with earning per share coming in around $3 per share.

The market values Allergen at $26.7 billion at the moment, which implies a valuation of operating assets at $25.3 billion. Based on 2012s annual outlook, this values the firm's operating assets at 4.4 times annual revenues and roughly 25 times annual earnings.

Allergen currently pays a quarterly dividend of $0.05 per share, for an annual dividend yield of just 0.2%.

Investment Thesis

Year to date, shares of Allergen are trading roughly unchanged. Shares traded between $85 and $95 per share for most of 2012, currently exchanging hands at $89 per share.

Shares have more than doubled from lows of $35 in 2008 to all time highs of $95 earlier this year. The success of Botox boosted annual revenues from $4.3 billion in 2008 to an estimated $5.7 billion in 2012. Net income almost doubled from $563 million to an estimated $1 billion over the time period.

The deal of SkinMedica is rather small for Allergen. The initial acquisition sum represents just 1.3% of Allergen's market capitalization. Analyzing the deal gets rather complicated given the lack of financial details regarding the transaction.

I remain on the sidelines despite the popularity of Botox. The impact of the deal will be limited. I think Allergen's valuation is a bit rich, amidst the low dividend payout and high earnings multiple, despite the continued growth potential and strong balance sheet.

Source: Allergen Announces The Bolt-On Acquisition Of SkinMedica