CollaGenex Pharmaceuticals Inc. said it has agreed to be acquired by a U.S. affiliate of Galderma Pharma SA for about $420 million.

Under the merger agreement, Galderma's U.S. holding company, Galderma Laboratories Inc., will acquire all of the outstanding shares of CollaGenex at a price of $16.60 per share in cash, representing about $420 million for the equity of CollaGenex.

News of the deal sent shares of CollaGenex (NASDAQ:CGPI) up $3.53, or 27.6 percent, to close at $16.33.

The $16.60 per share acquisition price represents a 30 percent premium to the current share price, noted Megan Murphy, senior vice president and senior analyst of specialty pharmaceuticals at Lazard Capital Markets. The price is in line with the firm's fair value of $16 per share, Murphy wrote in a company note. "With a lack of quality, late-stage dermatology products available to in-license, a merger into a larger entity certainly makes sense," she added.

The transaction is expected to close before the end of the second quarter. Once completed, Newton, Pa.-based CollaGenex said it will become a wholly owned subsidiary of Fort Worth, Texas-based Galderma. The transaction was approved unanimously by the boards of directors of CollaGenex and Galderma, but still needs regulatory clearance.

Both companies focus on dermatology products. In 2006, CollaGenex launched Oracea, the first FDA-approved systemic product indicated for the treatment of the skin rash rosacea. The company's other approved products include hydrocortisone gels Alcortin and Novacort.

Jeffries & Co. maintained a hold rating, with a target price of $16.50, just under the offer price of $16.60. "Only a strategic buyer could pay this high price," Jefffries analyst David Windley wrote in a report. He stated that, "Collagenex has done a masterful job at building Oracea sales in the rosacea market." But he noted that its other product, incyclinide, failed in development.

CollaGenex also is developing COL-118 to treat erythema (reddening of the skin) associated with rosacea. If approved, COL-118 would be the first treatment for erythema, CollaGenex said. In addition, CollaGenex is developing becocalcidiol as a steroid-free treatment for psoriasis.

CollaGenex recently completed a Phase II trial to evaluate COL-118, a topical compound for the treatment of redness associated with rosacea and other skin disorders. Becocalcidiol, a patented vitamin D analogue, is in Phase II trials for the topical treatment of mild to moderate psoriasis.

Albert Draaijer, president of Galderma's U.S. operations, said in a news release that CollaGenex's oral rosacea therapy would complement Galderma's topical products and provide improved options to treat the condition, which affects more than 14 million Americans.

Galderma, created in 1981 as a joint venture between Nestlé and L'Oréal, is a specialty pharmaceutical company with a presence in 65 countries and more than 1,000 sales representatives. Its leading dermatology brands include Differin, Rozex/Metro, Clobex, Tri-Luma, Loceryl and Cetaphil.

Products recently launched by Galderma include Pliaglis, a topical anesthetic for dermatologic procedures in the U.S.; Epiduo, a combination product for acne, available in Europe and Argentina; and Dysport, an injectable neuromodulator for the correction of wrinkles, available in Brazil and Argentina.

The merger agreement provides for Galderma to acquire CollaGenex in a two-step transaction. The first step will consist of a cash tender offer for all outstanding shares of CollaGenex common stock at the price of $16.60 per share. In the second step, the tender offer will be followed by a merger in which the holders of the outstanding shares of CollaGenex common stock not tendered in the offer will receive the same cash price per share paid in the tender offer.

The tender offer will be conditioned upon the tender of a majority of the outstanding shares of CollaGenex common stock, and will be subject to regulatory clearances and other customary closing conditions, the company said.

Cowen and Co. acted as exclusive financial advisor to CollaGenex, and Milbank Tweed, Hadley & McCloy LLP served as CollaGenex's legal counsel. Credit Suisse acted as financial adviser to Galderma, and Debevoise & Plimpton LLP acted as legal counsel.