While the news of the acquisition of Barrier Therapeutics, Inc. (BTRX) by Stiefel Laboratories, Inc. came as a major surprise, the deal makes sense for both the parties. We expect the deal to close in the third quarter of 2008.

Stiefel specializes in the field of dermatology and should be able to extract more value from Barrier's product portfolio. From Barrier's perspective, the deal is a boon as the company was struggling to cut costs and find development partners for its pipeline candidates.

Barrier lost investor credibility in 2005 when its lead pipeline candidate, Hyphanox, failed to achieve the primary endpoints in a phase III trial. Since then, Barrier received approval for and launched two new products. However, revenues from these products will not be sufficient to help the company achieve profitability in the near future.

Moreover, the company's cash position is a matter of concern. Although Barrier announced certain cost-cutting and strategic initiatives to help reduce cash burn, we believe the company will have to resort to tapping the financial markets as early as next year to fund operations in the absence of any partnership agreements for its pipeline candidates.

We believe that Hyphanox represents the main potential at Barrier and is a major reason for Stiefel's acquisition offer. Hyphanox is currently in phase III trials for the treatment of onychomycosis. Positive results and approval by the U.S. Food and Drug Administration could open up significant commercial opportunity for the product. We rate Barrier shares a Hold with a $4.15 price target.