GlaxoSmithKline and Stiefel Laboratories, Inc. have signed an agreement to create a new specialist dermatology business. Under the terms of the agreement, GSK will acquire Stiefel for $2.9 billion in cash with a potential further $0.3 billion cash payment based on future performance. GSK’s existing prescription dermatological products will be combined with Stiefel’s and the new business will operate under the Stiefel identity within the GSK Group.

Andrew Witty, chief executive officer of GSK, said, “As part of our strategy to grow and diversify GSK’s business, we are continuing to make new investments through targeted acquisitions. This transaction will create a new world-leading, specialist dermatology business and re-energize our existing dermatology products. The addition of Stiefel’s broad portfolio will provide immediate new revenue flows to GSK with significant opportunities to enhance growth through leveraging our existing global commercial infrastructure and manufacturing capability. We look forward to working with Stiefel to develop this exciting opportunity.”

Charles W. Stiefel, chairman and chief executive officer of Stiefel, said, “The combination of Stiefel and GSK will create a leading company in global dermatology with a strong presence in the prescription, consumer and aesthetic skin health markets. Along with adding hundreds of marketed dermatology products, this deal will increase the value of Stiefel’s unparalleled dermatology pipeline by expanding the customer base to which we will be able to offer these products. It also gives GSK access to one of Stiefel’s greatest assets – its valued relationships and shared understanding with dermatologists around the world.”

The new business will include Stiefel’s leading brands: Duac, for acne, Olux E for dermatitis and Soriatane for the treatment of severe psoriasis. GSK’s key dermatology brands include: Bactroban, Cutivate and recently launched Altabax. Combined revenues for 2008 were approximately $1.5 billion, representing an 8% market share of the global prescription dermatology market. Sales of Stiefel’s products for the year were approximately $900 million and GSK’s prescription dermatology sales were approximately $550 million.

Stiefel currently has more than 15 projects in late-stage development across a variety of dermatological conditions, such as acne, dermatoses and fungal infection. Stiefel’s products stand to benefit from GSK’s global distribution and commercial organizations, particularly in markets such as Brazil, Russia, India, China and Japan.

Cost savings for the new business are expected primarily from combining manufacturing and administrative functions. The companies expect to deliver annual pre-tax cost savings of as much as $240 million by 2012, with integration costs of approximately $325 million during the next three years.

Charles Stiefel will continue in the role of chief executive officer and chairman of the board of Stiefel until the transaction closes and he will then lead the new business. The transaction is expected to close 3Q09.