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Executives

Jonah Shacknai – Chairman and CEO

Mark Prygocki – EVP and COO

Rick Peterson – EVP, CFO and Treasurer

Analysts

Corey Davis – Natixis

Michael Tong – Wachovia Capital Market

David Steinberg – Deutsche Bank

Marc Goodman – Credit Suisse

Ken Trbovich – RBC Capital Markets

Gary Nachman – Leerink Swann

Gregg Gilbert – Merrill Lynch

Scott Henry – Roth Capital

Rich Silver – Barclays Capital

Lei Huang – Summer Street Research

Dave Windley – Jefferies & Company

Medicis Pharmaceutical Corporation (MRX) Q3 2008 Earnings Call Transcript November 10, 2008 5:15 PM ET

Operator

Thank you for calling the Medicis third quarter 2008 financial results conference call. Today’s call is being recorded and is being webcast live on the company’s website at www.medicis.com.

I would like to remind you that all discussions today include forward-looking statements. These statements are based on current assumptions made by Medicis based on historical trends, current conditions, expected future developments, and other factors that believe is appropriate today.

Factors may cause actual results to differ materially from those projected in forward-looking statements. You can find a discussion of these factors and more information about Medicis in Medicis' filings with the Securities and Exchange Commission. The assumptions underlying the forward-looking statements can change and Medicis disclaims any obligation to update those statements.

At this time, I would like to turn the call over to Chairman and Chief Executive Officer of Medicis. Mr. Jonah Shacknai, please go ahead, sir.

Jonah Shacknai

Thank you. And I appreciate that introduction. I want to start off by apologizing we have just filed our forms 10-K/A for 2007; 10-Q/As for the March and June quarter of 2008; and of course, our September 10-Q, which is due as of this date; as well as our press release summarizing our quarterly results.

I think many of you know that we were in the process of completing a restatement for several years. There were a great deal of administrative matters that required our attention and our auditors really told the last moment because of the volume of work that was done, we were pleased to be able to achieve this statutory deadline and feel that our work was conducted in earnest and very appropriately. But again, many apologies that we went till the last minute. It certainly was not anticipated on this end, but we hope to accept your forbearance.

The call today is being webcast live on our corporate website, www.medicis.com in the Investor Relations section and it will be available as always for two business days following this live call. References to non-GAAP figures in this webcast are reconciled to GAAP figures, as noted in the press release just issued, which likewise can be found at www.medicis.com.

Medicis reported net revenues for the third quarter of 2008 of approximately $115.4 million and gross profit margins of approximately 90.6%. The strong prescription growth of SOLODYN is not really reflected in the total revenue number for the third quarter or the 4% growth year-over-year because of the deployment of certain inventory management strategies relating to the SOLODYN franchise during the third quarter. We continue to see the advantages of the SOLODYN patient access card, and we will continue to closely monitor its impact on average selling price.

As has been widely publicized and expected, our aesthetic franchise has been and will foreseeably be impacted by economic conditions well known to all of you in the United States. Non-GAAP earnings per share for the third quarter of 2008 was $0.27 per diluted share. For the nine months ended September 30, 2008, we reported approximately $40.7 million in cash flow from operations. This reflects and contemplates a $26.2 million tax payment related to the deferred tax liability for the 1.5% contingent convertible notes we purchased in June 2008 and the $25 million payment to Ipsen for the RELOXIN BLA acceptance by FDA during the second quarter.

Total cash, cash equivalents, and short and long-term investments were in excess of $400 million at September 30, 2008. We have provided financial guidance in the press release issued just recently. Additionally, we anticipate gross profit margins for the remainder of the year to be approximately 90%. We announced a $0.04 dividend in September payable on October 31 to shareholders of record at the close of business on October 1.

We are very proud of our employees. When faced with the challenge of the economic impact on revenues, they have been able to effectively reduce expenses in order to deliver a non-GAAP earnings per share objective in the third quarter in excess of the current consensus estimates. The budget initiatives during the quarter did not affect our strategic projects or priorities, but rather were expenses that we were able to defer or eliminate on the margin of our business, again without impact to our strategic imperatives.

In my last quarter remark, I updated you on our SOLODYN franchise strategy. Our SOLODYN strategy is highly dependent on the actions of governmental agencies involved, which by their nature of course is unpredictable. The continued growth of SOLODYN is critical to achieving our revenue projections, especially related to the impact the US economy is having on our aesthetic franchise.

There continues to be a lack of clarity on how the timeline unfolds for the SOLODYN franchise, and there are many unknowns, including the timing of patent issuances by the Patent and Trademark Office, the timing of approvals of our additional forms of SOLODYN by the Food and Drug Administration, the timing of the FDA’s review of our citizen’s petition, and the timing of the approval of the generic form, if any, to SOLODYN. We have been diligently pursuing certain strategies to help fortify SOLODYN’s future.

As a reminder, we have one issued patent that we believe protects SOLODYN. In addition as of July 31, 2008, we have filed 12 additional patent applications with the Patent and Trademark Office, including in them more than 200 claims that we believe cover SOLODYN. As these patent applications have entered substantive examination, Medicis is unable to comment further on their status. We cannot predict when or in what form additional patents will issue and we expect that some will be abandoned or otherwise not issued. However, we are focused on securing the strongest claims possible to cover SOLODYN.

We anticipate being on the market with follow-on forms of SOLODYN in 2008. Again, this timeline is subject to FDA approval. The company currently has several additional programs under development relating to the SOLODYN franchise with estimated market introductions at various points over the next five years. The company also is pursuing several separate programs exploring unique and advanced forms and technologies within the SOLODYN franchise.

In aggregate, Medicis has more than ten active development programs. These include new product offerings and product line extensions. In addition, the company has acquired and is evaluating and screening a portfolio of over 200 dermatologically active compounds available for development by Medicis. We are pursuing a number of business development collaborations for esthetic and therapeutic programs to further enhance our product offerings.

In addition, the company is actively pursuing a number of opportunities to improve RESTYLANE’s product offering indications and labels. We believe that these development improvements and new product offerings will enable the RESTYLANE family of products to retain its competitive advantage in the US and Canada, among other dermal filler products currently on the market or that we believe to be under development. We believe the company is well positioned with these opportunities and others that we are not discussing today that we pursue for the growth of the company in the future.

Just to summarize a couple of high points with SOLODYN. We introduced this SPAC-2 [ph] or SOLODYN Patient Access Card in the first week of September. While we are still analyzing the impact on ASP, average selling price, we would anticipate the fourth quarter ASP to be in the range of $300 to $320 per prescription. We’ve achieved 26% total prescription growth from the first full week of quarter to the last full week of quarter three. 5.8% total prescription growth quarter over sequential quarter, that is quarter two ’08 to quarter three ’08.

SOLODYN grew prescriptions from nearly 155,000 total prescriptions in quarter three 2007 to nearly 190,000 in quarter three 2008. This represents growth of approximately 22%. SOLODYN remains the number one branded oral antibiotic in dermatology, and depending on how you calculate the number one or number two product overall by dollars in all of the dermatology market.

We have achieved this with both new prescriptions and total prescriptions, with new prescriptions surpassing the $9,000 and $10,000 marks for the first time, and total prescriptions well exceeding the $15,000 and $16,000 marks during the third quarter and surpassing $17,000 in the fourth quarter. The average refill rates with card usage remained greater than two. There was a 5% increase in quarter three and a 3% price increase in quarter four for SOLODYN.

With RESTYLANE, as you know, the company received FDA approval of a PMA supplement for RESTYLANE in October. The RESTYLANE package insert has been amended to include the study results reflected in the label. The company anticipates using this information in its promotional activities both with physicians and consumers. The study reflected in the label demonstrates RESTYLANE’s effect persisted up to 18 months in duration in patients with one repeat or touchup injection regardless of the retreatment of schedule.

75 patients were enrolled in this studied and had measured the safety and effectiveness of two different retreatment or touchup schedules, including the duration of the correction. One side of the face was randomly corrected with RESTYLANE and then retreated at 4.5 months. The opposite side was retreated at nine months. The vast majority of patients, 97% had at least one grade of improvement on the wrinkle severity rating scale at 18 months when retreated at the 4.5-month interval. And interestingly, this study showed no significant difference between the 4.5-month and the nine-month retreatment schedules for effectiveness and safety.

The FDA General and Plastic Surgery Devices Panel on November 18, next week, in Gaithersburg, Maryland, will receive an update on safety information collected on dermal fillers in the commercial setting. They will discuss current pre-market and post-market approved study designs and make recommendations on general issues concerning the study of various dermal fillers. As a leader in the market, we expect to be a participant in this informative panel.

On November 19, the committee will discuss and make recommendations on general issues relating to the clinical trials of cosmetic devices, including how to quantify the effects of devices with various types of energy sources. We will likewise participate because of our leadership in this category with the recent acquisition of LipoSonix.

As you know, we announced the close of the LipoSonix acquisition in July of this year, and we have been, we believe, successful with its integration into the Medicis corporate structure. Under the terms of this transaction, Medicis paid $150 million in cash for all the outstanding shares of LipoSonix. This amount was reflected in quarter three. This transaction has provided Medicis an immediate opportunity to capitalize on the LipoSonix body contouring technology’s international presence and the platform for continued growth in the global market. We continue to believe – in fact, we believe even more strongly that the market for the potential technology that can safely and non-invasively reduce fat in a meaningful way has the potential to exceed several hundred million dollars annually in sales.

The LipoSonix technology has a CE Mark in Europe and has been introduced in Europe on a very limited basis by the company. We continue to be encouraged by the LipoSonix technology and are looking forward to further supporting the technology with additional clinical data and protocols. Subject to FDA approval, we anticipate entering the potentially lucrative US marketplace for LipoSonix in the 2011 timeframe, if not sooner.

With ZIANA, we are currently seeking label enhancements, which we hope we’ll add value to physicians and patients. There was a 5% price increase in quarter three and a 3% price increase in quarter four. With RELOXIN, we anticipate an FDA decision in the first quarter of 2009 and continue to be encouraged by the strong clinical data, which supports our BLA.

In terms of recent events, the American Academy of Facial Plastic and Reconstructive Surgery Annual Fall Meeting occurred from September 18 to 21 in Chicago; the Fall Clinical Dermatology Conference October 16 to 19 in Las Vegas Nevada; and then last week, the American Society of Plastics Annual Meeting October 31 to November 5 in Chicago, and also last week, the American Society for Dermatologic Surgery Annual Meeting, which occurred November 6 through 9 in Orlando, Florida.

Having attended as many of these meetings, I can tell you that there was great enthusiasm for the full Medicis line of products and tremendous enthusiasm and anticipation for the potential approval of RELOXIN in the first quarter of the year. There were academic presentations conducted on various products in the dermal filler and neurotoxin category, and I think we found them to be very encouraging both in their content and receipt by the audience.

In terms of upcoming events, we have the American Society of Cosmetic Dermatology and Aesthetic Surgery annual meeting December 4 through 7 also in Las Vegas, Nevada; the American Academy of Facial Plastic and Reconstructive Surgery Winter Symposium in mid January in Telluride, Colorado; the Advances in Cosmetic and Medical Dermatology Maui Derm ’09 Conference January 26 through 30 in Maui, Hawaii; the Skin Disease Education Foundation Hawaii Dermatology Seminar, February 7 through 13 in Maui, Hawaii.

And in terms of upcoming investor conferences where we plan to present, this week, the Credit Suisse Annual Healthcare Conference to occur in Phoenix, Arizona on November 13, I will be presenting on behalf of the company; The RBC Capital Markets Healthcare Conference, December 10 in New York City, our colleague Joseph Cooper will be presenting; and the JP Morgan Annual Healthcare Conference, January 12 through 15 in San Francisco, California, and again I expect to be presenting on behalf of the company.

This was obviously a challenging quarter in many respects. I think all of you know that the nation’s economy is under tremendous siege, joining the global economy. And we are doing our best as a company to continue to provide tremendous value to patients and to physicians with various promotional strategies that are really designed to help consumers to say yes to receive treatment, particularly in the aesthetic category, at a time that is economically challenged.

No doubt our entire industry has been affected negatively by these trends, but I think that we’re all hopeful that with the new leadership in Washington, a number of measures that are meant to stimulate the economy, and working through the very chaotic financial situation that the company will rebound. And we believe and hope that the pent-up demand for aesthetic procedures in particular will be robust. And we are pleased to continue to lead that category and are obviously very excited about what we hope will be the approval of RELOXIN with FDA action in the first quarter of ’09.

So we find ourselves maintaining a very strong presence in infrastructure; focusing on those programs that most add value in the marketplace; and obviously as you’ve noted from our financial results, we are watching our expense structure very carefully making adjustments as needed, but compromising the strategies imperatives of the company.

I would also like to point out that I’m joined by several of my colleagues here today who can help to answer any questions that you have. Mark Prygocki, our company’s Chief Operating Officer; Rick Peterson who is our Chief Financial Officer; Jason Hanson who is our General Counsel and Chief Legal Officer; and Seth Rodner who is our Chief Compliance Officer.

So with that said, operator, we’d be pleased to answer any questions that may exist in the audience.

Question-and-Answer Session

Operator

(Operator instructions) Let’s begin with Corey Davis with Natixis.

Corey Davis – Natixis

Thanks very much. Really just one question. That is in terms of your guidance for Q4, the reduction from your previous guidance in terms of revenue, is that coming from roll-forward effect of the restatements from continued inventory work done on SOLODYN, or RESTYLANE weakness, or a little bit of all of the above?

Mark Prygocki

I think it’s a combination of the last two, Corey. This is Mark Prygocki. I think – in that guidance, I think we were conservative in the ongoing trend, what's going on with the economy, as well as being cautious in what happens in the SOLODYN franchise. And as you may recall, it was very difficult first to give guidance in this regard because of all the uncertainties that we’ve mentioned in the press release. So we did our best to give the most conservative guidance we believe at a point in time where there is a lot of moving pieces. So –

Corey Davis – Natixis

Sure. And yet if I’m seeing the numbers correctly, you’re still keeping your EPS guidance. So, the expense savings relative to where you were before, is that going to come from any one particular item?

Mark Prygocki

I think again it’s across the board. Our managers have done a very good job in going back really in cutting non-core, non-strategic expenses in order to achieve objectives that were appropriate for this given year.

Corey Davis – Natixis

And so would you anticipate that some of that might impinge upon what you had budgeted for launch plans for RELOXIN?

Mark Prygocki

No. I think we would consider that a core asset that we will spend as necessary in order to achieve the market share we expect.

Corey Davis – Natixis

Last question. I know that it’s impossible to predict a lot of these things, but assuming you don’t see a devastating impact on SOLODYN, would you expect just directionally ’09 to be an up, flat, or down year?

Jonah Shacknai

I think we’d see it as being an up year. Assuming that the approval of RELOXIN occurs as planned, I think we have fair assumptions that would be very pleasing to shareholders of the market penetration for RELOXIN. SOLODYN continues to grow in part because of the extraordinary recognition it has as a safe and effective agent for the treatment of moderate to severe acne, in part of because of programs we’ve put in place to help consumers to get the drug at the pharmacy on a very reasonable basis, and the facility that that provides dermatologists in prescribing the product. And I think we’re hoping for some stabilization in the dermal filler category. We continue to have a lot of price competition in that category. No doubt this has effect. And nevertheless, we are trying to promote the product directly to consumers creating value for consumers with variation promotional strategies. You’re aware during this quarter that we have had a – up to $100 rebate program for consumers. That’s been very well received. The money goes directly to them. We believe that there were thousands of procedures that occurred because of that program in the United States this quarter. So the things we’re doing are responsive to the economic conditions, but obviously we’re just a little grain of sand in the world economy and we are subject to the vicissitudes of trends as much as or more than any other company. So we do our best. We’re trying to be very micro-focused in our marketing with programs region-by-region, state-by-state, understanding that there are challenges in the local economies as well as the national economy. So we’re doing our best in all respects to stabilize the aesthetic franchise.

Corey Davis – Natixis

Great. Thanks, Jonah.

Operator

Your next question comes from the line of Michael Tong with Wachovia Capital Market.

Michael Tong – Wachovia Capital Market

Hi, good afternoon. Just a follow-up on the expense, the way you are watching expenses, can you talk a little bit about where you aesthetic sales force expansion is right now? And what are your plans behind that in light of the need for expense control?

Jonah Shacknai

Yes. We are expanding our aesthetic sales force. In fact, I personally interviewed several candidates today and have more interviews tomorrow as we have a high volume of candidates passing through headquarters. So, yes, the expansion plans are in progress. We obviously will incur the best preponderance of expenditures around the time of approval of RELOXIN, assuming it is approved on calendar. And our plans for the launch of product in terms of market penetration activities that would be in addition to the sales force really continue at the same pace and scope that we would have anticipated. We are spending heavily now in anticipation of the launch. There are a number of programs being undertaken in all aspects of our business to support the launch. And we expect it to be very successful. We think we have a superb product subject to FDA approval and in accordance on labeling and other issues. We are very good to tell the story. The market is ready for this product. We have tremendous respect for our competitor, but we believe that there is a very sensible place for two products in this market, and we expect to be one of them.

Michael Tong – Wachovia Capital Market

Great. And a follow-up on the expense side, R&D came in quite a bit lower than what we have thought. So, can you talk a little bit about what are some of the expense deferral that has occurred there?

Mark Prygocki

Michael, this is Mark. I think it really has to do with the timing of certain projects. And what you’ll see is, in the fourth quarter, we would anticipate that number to rise. And it really has to, again, to do with the timing of those R&D projects.

Michael Tong – Wachovia Capital Market

And just a couple of quick P&L clarifications. In your guidance and also based on your previous commentary, could I assume that there is some contribution from shipping the new SOLODYN formulation in Q4?

Jonah Shacknai

Well, Michael, we don’t want to make any predictions about that. And obviously in our guidance, that was one of the risk factors associated with that. So I think we’re going to table that question, but I think what you can count on is the fact that we’re working hard through our sales force to maximize the number of prescriptions that are generated. And I think that’s our focus. That’s the sales force focus right now. And I think we hope to have that opportunity to be selling that follow-on form in the very near future.

Michael Tong – Wachovia Capital Market

Okay. One quick final one. The charge for the Revance investment, where is that on the P&L?

Rick Peterson

Michael, this is Rick. Just to answer that, this is a charge that we take for Revance investment, and we did have a charge in Q1 for this as well. We didn’t have a charge in Q2, but then came back with a charge in Q3. And that’s included in our other expenses below operating income.

Michael Tong – Wachovia Capital Market

Okay. Thanks very much.

Operator

Your next question comes from the line of David Steinberg with Deutsche Bank.

David Steinberg – Deutsche Bank

A question on RELOXIN. Ipsen, which has the same molecule, but different indication, received looks like a three-month delay on the FDA with clearly risk communication plan that they need to put in place. Do you – can one read through to your filing? Do you expect to get a similar outcome from the US – from the FDA without any additional clinical studies, or would you look for a different outcome?

Jonah Shacknai

We believe that we have supplied an extremely robust set of clinical data as well as safety information patient labeling. We obviously were informed by our partners even before the three-month extension was formally announced in the public. There are some joint aspects of these filings. So there is some integration between the BLA that they have for cervical dystonia and that we have for the treatment of glabellar wrinkles and folds. So I think you can assume that there is a high degree of coordination in this patient safety programming. And much of the work that is being done by Ipsen has relevant to our BLA. In addition, we have really acted proactively with the dermatology division to supply them all the information that we believe would be necessary and would be consistent with Ipsen’s filing so that we can gain approval hopefully on the most expeditious timetable possible.

David Steinberg – Deutsche Bank

Okay. Good. And then one other question, on the most recent call, Allergan said they had now reached parity with you in the cellular market in terms of market share, Juvaderm versus RESTYLANE. Are you seeing pretty much the same thing in the marketplace from your point of view?

Jonah Shacknai

Not necessarily. We measure the top deciles of the market, which is where we have always concentrated our energy and where we have focused. And we believe that our market share in the top deciles of the market, which really represents the large successful practices in the United States is overwhelming. We don’t believe it to even be close. Now, I don’t know how anyone would know what the relative market share because of course there are significant price difference between the products, ours being the premium or costlier product. And there are no data as there are with audited prescriptions to know where market share is, but I think we feel very comfortable where we live. And we live in the top deciles, the top 30% or 40% in the market. It is where we live in the dermatology sector with our prescription products. And I think it’s where you can expect the most rapid and significant uptake of RELOXIN when we introduce it upon FDA approval hopefully. So we are very much on our game plan. I think anyone can observe that the number of procedures occurring in the United States has diminished. It has declined this year versus last year. And several major societies have put out statistics that reflect surveys of their membership that show that the economy has had a significant effect on this market as it has on the surgical market. And I think that we and our competitors are certainly seeing the effects of that. But we feel very, very comfortable with our market share in the places that we care most about.

David Steinberg – Deutsche Bank

Okay, thanks.

Operator

Your next question comes from the line of Marc Goodman with Credit Suisse.

Marc Goodman – Credit Suisse

I guess I have two questions I guess. One, LipoSonix, can you give us an update of what’s changed versus three months ago as far as the behind the scenes work in Europe and in preparation for the United States? And then second question, Mark, can you tell us what was the impact to revenues from de-stocking of SOLODYN in the quarter?

Jonah Shacknai

Yes. I think with LipoSonix, there has been a great deal of progress. We really have superb colleagues up in Bothell, Washington, both from an engineering standpoint and a design and clinical standpoint. So we have enjoyed working with them. Hopefully they have benefited as well from their collaboration with us. So we’re pretty excited. We believe the integration has gone well from a P&L standpoint as well as a substantive standpoint going forward with the present device, new devices, new applications for the device. We have conducted with the help of a very well known consultant, extraordinary amount of market research in Europe and in the United States that will help us to position the product commercially with the greatest possible prospect for success. We have met in Europe with the major customers and opinion leaders as well as our distributors to really understand how best to penetrate that market and with the right algorithm of use. In addition, we have had several consultations with the Food and Drug Administration. So I think we have a very good understanding of the regulatory requirements for approval of LipoSonix. While we will not update these, certainly we are proceeding with the full and the most rapid development possible of the LipoSonix device in the US and Canada, as well as other international markets. And I think what I’ve reiterated is that we feel very comfortable that the device, if all goes well in the clinic, will be introduced by 2011 or sooner. And again, this was an important dimension of our pre-acquisition diligence. And our views have certainly been confirmed in meetings with the regulatory authorities. I’ll defer to Mark on the revenue question.

Mark Prygocki

Marc, I think we’re not going to give out a precise number, although I can tell you two things. Number one, there were orders that we believe were held in excess of what we wanted to ship, number one. And number two, although we can’t put a precise number of units on it, we believe we are able to reduce what’s out there by several weeks. So it had a meaningful impact on the quarter in the figures that you see before you. We think it was a viable strategy and something that will put us in a great position hopefully coming into the fourth quarter with what we hoped for a new product to come to market. So we think we’re well positioned for the fourth quarter.

Marc Goodman – Credit Suisse

Are we out there at two weeks, three weeks now? How old are we?

Mark Prygocki

We are not giving out – I can tell you that when we finished the quarter, we were below our IMAs. But that’s probably all the information I’m going to give you at this time.

Marc Goodman – Credit Suisse

And since I have you, one other thing. In the non-derm category, $15-odd million, can you just give us a sense of what was the key driver there in the quarter? Seems a little higher than normal.

Rick Peterson

Yes, this is Rick. Really as we look at the non-derm category, primarily driven by BUPHENYL and AMMONUL in that category and then we also have really consistent contract revenue there. So those are the two main pieces. And BUPHENYL and AMMONUL fluctuate between quarters and can really be variable due to timing there with orders.

Marc Goodman – Credit Suisse

Okay.

Operator

Your next question comes from the line of Ken Trbovich with RBC Capital Markets.

Ken Trbovich – RBC Capital Markets

And I guess I wanted to start with the write-down on the investment as that indicates that there is no longer an opportunity for topical botulinum toxin?

Jonah Shacknai

Absolutely not. This was really an accounting requirement, a sort of mark-to-market accounting of these investments. We feel very good about Revance’s prospects. They have advanced significantly in the clinic and in the, I think, development of manufacturing technologies. So, to the contrary, I think we are far more bullish on Revance than we’ve ever been before because the story is unfolding in the clinic. I couldn’t help but notice at the American Society for Dermatologic Surgery meetings, which I attended last week, that there were several very, very promising presentations on Revance, and its topical botulinum technology. So, quite to the contrary. I think there is a danger in looking at some of these arcane accounting issues and jumping to substantive conclusions for what is in essence just ordinary accounting that does not call for a substantive judgment but is rather a process judgment. So we feel very good about Revance. It has been a pleasure to observe their process. So, no, to the contrary.

Ken Trbovich – RBC Capital Markets

Okay. And obviously, hearing that there are some positive developments, perhaps I guess the other question would be, how long following the completion of the Phase IIs do you have before you have to make a determination on whether to exercise your right to in-license or acquire – in-license the products or acquire the company? And would the purchase option be something that is adjustable based on current market conditions?

Jonah Shacknai

Yes. I think our agreement with them specifies that it would be the meeting with the Food and Drug Administration following the completion of Phase II trial. So the pre-NDA type meeting where the Phase III protocol would be designed, where the dose response work would be reviewed by the FDA. So, that’s a sort of go-forward decision with the agency and then understanding of the elements required for approval of the product. But we think very highly of the management team, of the science going on at Revance, and the collaborative capacity of our two organizations as appropriate under our agreement.

Rick Peterson

Ken, I think it’s worth noting, Ken, that according to the accounting rules, if they are spending money, they – we have to write down a corresponding portion. So, as their net assets go down, so will our investment. So I think what you can determine from that is that they are investing in the technology. I think it’s actually a positive sign. The reason why I bring it up is because I would expect that in the future, unless they are raising money, which would increase their net asset value in which case we would not have write-offs. And they continue to keep spend – I would anticipate further write-offs that have no reflection on our anticipation of the technology.

Ken Trbovich – RBC Capital Markets

And in terms of market multiples and whether the purchase option contemplated the adjustment in multiples we’ve seen in the sector over the last, call it, 12 months?

Jonah Shacknai

All that is taken into consideration in the valuation of the technology.

Ken Trbovich – RBC Capital Markets

Okay. And then final question, I apologize, just with regard to sort of market dynamics, obviously we all understand the economy is weak and certainly some of your competitors in the marketplace have given guidance or commentary around sort of what they see is some of their options. Certainly it seems like Allergan’s guidance is suggestive of what could be a very disastrous fourth quarter and normally is a strong one. Smaller competitors suggest that perhaps they can offset those volume decreases by increasing the number of physicians that actually use their products. The fact that you are increasing the size of the sales organization, should we read into that some expectation on your part that you also will benefit from increased physician base as an offset to some of the declining inventory position?

Jonah Shacknai

Sure. Well, the increase in the size of the sales force is really meant to correspond with the anticipated and hoped for approval of RELOXIN. I don’t know that we would be making this tactical decision if we were only selling RESTYLANE and PERLANE. And I think the timing again is meant to correspond with the hoped-for approval. The RELOXIN approval, if it occurs and when it occurs, will be adding a lot of market potential to our organization and to the sales force. So there is a certain potential for dermal fillers. We have certainly not achieved the top of that potential, but the product has been in the market for over four years. We have a leadership position. It’s the gold standard. As we enter into the toxin market, we are going to be exposed to hundreds of millions of dollars of greater opportunity. And our sales force will be pursuing that opportunity along with trying to move the dermal filler market forward. And there are obviously relationships in those markets. So, when we do this, we think it will have a salutary effect on all aspects of our aesthetic franchise, but again, we don’t think in the fourth quarter that the RESTYLANE, PERLANE franchise will benefit particularly from this expansion since most of it occurs later.

Ken Trbovich – RBC Capital Markets

Okay. Thank you.

Jonah Shacknai

Sure.

Operator

Your next question comes from the line of Gary Nachman with Leerink Swann.

Gary Nachman – Leerink Swann

Hi, good afternoon. First question, in terms of the benefits from the removal of the cap for SOLODYN, how long do you think that you will do this for? How do you judge success there? And at what point doesn’t it make sense to do it anymore from I guess a value per Rx standpoint?

Jonah Shacknai

We are constantly examining the return on investment of this program. And it has been extremely satisfactory. So we have enhanced the profitability of the franchise in addition to easing the burden on physicians in prescribing our product. So that’s how we determine it. The product is not covered by the SPAC-2 on an open-ended basis. There are limits in time. It’s only been two months in this program, and again I think we’ve seen very, very positive results to the profitability of the franchise. And we’ll continue to assess that as time goes on. And we will do this till kingdom come so long as it is profitable. If it is not and so long as it is compliant with the appropriate regulatory standards, we’ll keep doing it. And if it ceases to be either of those, we will terminate the program.

Gary Nachman – Leerink Swann

Okay. And are you still feeling the effects from the economy on the pharma business? Or is that primarily in the aesthetics business? I mean, there was some commentary that you had I guess when you withdrew the guidance not too long ago. So, how are things going there in terms of people going to the dermatologists? Have things picked up there?

Jonah Shacknai

Well, visits are down a bit to dermatologists, and the qualitative feedback that we’re getting is that patients are waiting longer to go see a physician, sometimes being concerned about the office visit charge-off-payment. The co-payments have gone up under some plans because of pressure on industrial employers. So I think most dermatologists would share with you that they are busy. They are still seeing a very high number of patients, but they seem to be a little more progressed in their condition by the time they come in for treatment. We have not seen a dramatic effect as measured by prescriptions in the marketplace. They are certainly not flying out the window, but with our own product, SOLODYN in particular, we see meaningful increases in market share as well as meaningful increases in the total and obviously the new prescriptions, which I think foreshadow total prescription growth. This is obviously something to watch. What can affect us obviously are co-payment changes within the plans themselves for office visits as well as potential layoffs or the expiry of COBRA benefits among patients who have been subject to layoffs either themselves or with their provider under the healthcare policy. So I think this is watchful waiting at this point. We’re hopeful that if the economy stabilizes and we don’t see additional massive layoffs, particularly at the top end of the market, which is where we are with our products that we will continue to see stability in the market and growth in our products.

Gary Nachman – Leerink Swann

Regarding ZIANA, would you consider removing the cap for that product, if there is one in terms of co-pay reimbursement? And what’s happening there? What else can you do to try and gain some traction?

Jonah Shacknai

Well, we indicated that we are hopeful of a label change for ZIANA that we think will provide some additional information to physicians that will be helpful to a further acceptance of the brand and further utilization of the product. We have not had a lot of economic resistance on ZIANA, which is to say that we don’t qualitatively get a lot of feedback that the brand is not being written because of patient cost. We have programs that help to offset patient co-payments now. We continue to assess those, and we’re obviously very flexible to incorporate new strategies when and if we think that’s appropriate.

Gary Nachman – Leerink Swann

Okay. And then, last question and it is a tough one to answer, but maybe if you could just speak generally. Is there any visibility at all from the FDA on what’s holding up a decision on the new forms of SOLODYN or the Citizen’s Petition, the generic, and – are there active discussions ongoing with them or is it just radio silence at this point?

Jonah Shacknai

We have regular contact with the FDA on all the matters that you have discussed, but really don’t offer a substantive comment about our probability of success on the Citizen’s Petition. We certainly made our views known. And likewise, on the probability of the generic approval, I think they are obviously interrelated issues. And in terms of the timing of the new dosage forms, we are hopeful that they will be approved imminently. We don’t know of any substantive barrier to their approval, but the agency, I think, works in its own timeframe. And we like all regulated companies are, I think, ready and willing to accept approvals when they come. We do our best to push the process along, but I’m sure the agency has many, many priorities that they may consider of greater moment than our priorities.

Gary Nachman – Leerink Swann

Okay. Thanks, Jonah.

Operator

Your next question comes from the line of Gregg Gilbert with Merrill Lynch.

Gregg Gilbert – Merrill Lynch

Thanks. Mark, a follow-up on the SOLODYN inventory question. Is it fair to assume that the only thing that will push that level lower in 4Q would be a launch of the new dosage forms, given that you are below your IMA?

Mark Prygocki

I think that’s a good assumption.

Gregg Gilbert – Merrill Lynch

And can you comment at all in terms of your finished dosage inventory of that product and whether you are winding down to manufacture the product or whether it is business as usual?

Mark Prygocki

We haven’t wound down the old form of SOLODYN or the existing form, I should say, it’s not gone yet. So until such time that we know what the future of it is and when we get approval, and I would anticipate that prescriptions would still be written for the old forms or the – I keep saying the old forms, but the existing forms. So I would anticipate that there will continue to be future demands to those products so we will continue to produce.

Gregg Gilbert – Merrill Lynch

Thanks for that. And then on ZIANA, did I hear correctly that you raised price both in 3Q and 4Q? And what’s the right ASP to use there going forward?

Mark Prygocki

It’s about 170 that we are guiding to as far as the ASP on that and you did hear that correctly.

Gregg Gilbert – Merrill Lynch

Okay. And then lastly, the use of cash question, to what extent do you view share repurchase of these levels as something that can generate a return that can compete with returns that your acquisitions – your planned acquisitions or licensing deals could generate? Thanks.

Mark Prygocki

Gregg, I think we look at our cash balances at a time where the economy is not great and would look forward to not only preserving cash, but to look to business development transactions that will yield results for years to come. And I think that’s really more of our focus than a one-time event of buying back shares, not that we feel that the shares are undervalued at this point or underappreciated at this point, especially with some of the results that we have been posting as far as profitability, but we see greater opportunity in some of the business development opportunities that we are looking at now. And we would prefer to deploy the cash there.

Gregg Gilbert – Merrill Lynch

Thanks a lot.

Operator

(Operator instructions) Your next question comes from the line of Scott Henry with Roth Capital.

Scott Henry – Roth Capital

Just starting from a macro perspective, could you tell us a little bit about what you are seeing for market growth, perhaps within your debt files for the dermal filler market as well as the Botox market? And even more so, what I’d really like to get a sense is how you see that curve changing kind of in real terms – in real times. Is it getting worse now? I imagine somewhat, but how do you see that curve recognizing that to your opinion?

Jonah Shacknai

It’s pretty flat. I think – again, I spend a lot of time at these meetings with customers directly and I would fairly say that I have interacted with hundreds of major customers over the course of the last eight days. And I think that there is a feeling of grace and gratitude when people are flat in their businesses. A few have reported privately to me that they are up nominally on the year, but very few. And I think, again, those that have stayed even are thanking their stars. In the plastic surgery context, many practices have reported a fairly significant diminution in revenues. That owes mostly to declines in surgical procedures, the bigger the ticket items, facelifts, breast implants, things like that are certainly down. I think that has been reported widely. Many practices are down 20% to 30%. I think some have reported that they have made up some revenue by putting increasing emphasis on their dermal filler or RESTYLANE, PERLANE business, injecting neurotoxin. So, we would hope to increase even further our presence and traction in the plastic surgery market now that there is an even greater appreciation to the economic potential of these procedures, but it’s definitely tough out there right now. And our focus, as I’ve said earlier, has been to stimulate demand among patients, to let patients understand that they can achieve a greater value right now in their injection, to really invest in RESTYLANE and PERLANE as being a treatment that is going to have lasting benefit to them. The 18-month data point now reflected in our label, obviously, underscores the value proposition for consumers. That’s a very, very persistent result. And this is what people need to be focused on in a time where they have limited discretionary spending. Certainly, a RESTYLANE or PERLANE injecting is going to have a much more meaningful impact, a positive one on someone’s life than a new dress, or a new handbag, or a new haircut. So these are the messages that I think consumers need to hear so that they invest in their appearance in a way that has traction and duration. As we move into the neurotoxin market, I think we’re finding much the same situation. I know that both we and our competitor are very focused on market expansion and we will do everything that we can consistent with macroeconomic trends and micro trends in given markets to try to facilitate more treatments as well as patients staying with a protocol for treatment that they are already involved with.

Scott Henry – Roth Capital

Okay. Thank you. I appreciate that color. If I could just ask a question – or a couple of questions of SOLODYN as well, you had mentioned that you’re in constant discussions with the FDA kind of on a different note. Could you comment if you’ve been in discussions at all with IMPAX Labs or any of the other generic manufacturers? And in along those lines, in a bigger, kind of strategically look at it, do you think there is an opportunity for discussion post of generic getting approval as opposed to an immediate at-risk launch?

Jonah Shacknai

Yes. I mean, we really have no comment in the same way that if you ask if we were pursuing any business development opportunity with anyone, whether it was occurring or not, we would offer no comment whatsoever as it would be completely inappropriate. But I understand the thought behind the question, and we never mind that people are trying. We are certainly working very hard to protect the SOLODYN franchise. We are working closely with the Patent and Trademark Office, which of course is really the most significant thing we can do to get an important set of claims issued around SOLODYN. And we work very closely with the FDA to move forward the many additions to the SOLODYN market that we have talked about in the last couple of conference calls.

Scott Henry – Roth Capital

And I guess just a final question. Do you believe your future versions can compete in a market that also has SOLODYN generics? Do you believe that their merits can allow them to gain share against the cheaper competition?

Jonah Shacknai

Subject obviously to FDA approval and the sorts of labels that one gets, those kinds of things. We’re obviously investing in iterations and technologies that we think will have benefit to patients. Just as we believe, SOLODYN was an important advancement in therapy over DYNACIN and other forms of instant-release minocycline. We continue to work hard to improve technology to make the product better tolerated, more efficacious. We don’t add things to the market that don’t have defined patient benefit.

Scott Henry – Roth Capital

Okay, thank you for taking the questions.

Jonah Shacknai

Our pleasure.

Operator

Your next question comes from the line of – from Rich Silver with Barclays Capital.

Rich Silver – Barclays Capital

Yes. I think you partly answered this question earlier about the R&D spend and the timing issue. Can you give us a sense of what the appropriate run rate would be, putting aside the timing issue?

Rick Peterson

Yes, this is Rick. We would still expect that for the year to be in that 8% to 10% of our revenue, and again, depending on how the projects come in and they unfold for the rest of the year.

Rich Silver – Barclays Capital

And going forward beyond this year, do you see that in any projects that would be increasing that percentage or decreasing it, or do you think that that is something you would – the target that you would be looking forward to an ongoing basis?

Rick Peterson

We haven’t given our guidance for 2009 yet. Again, we wouldn’t expect to drastically depart from our strategy that we’ve put into place in the past and use that as kind of a baseline in the future.

Jonah Shacknai

As I indicated, we have at least ten projects under active development here with the potential to be adding more, as we move forward. We continue to believe that research and development is the most critical area of investment for our future. And we may be working hard to rationalize and optimize expenses in other areas of our business. But here, we will not cut to the bone, absolutely not. We are absolutely of the belief that we have promising technologies that they will represent hundreds of millions of dollars of revenue in the future, and we are going to bring them to market as rapidly as we can and as completely as we can.

Rich Silver – Barclays Capital

Okay. And then just coming back to the revenue line, in particular the acne and related where we did see a sequential drop, what kind of – how should we be looking at that in the fourth quarter? Is it some kind of rebound there? You did mention some de-stocking, but you can give us anything in terms of a trend going forward on the acne and related.

Rick Peterson

Well, Rich, I think there is a lot of – as you can read through the uncertainties in the guidance there, we would anticipate SOLODYN scripts to continue to rise as they have been, and it really depends on that ASP. It depends on the approval of the follow-on form. So there is a lot of things that could impact that. Obviously, you see going sequentially our guidance is up from the third quarter to the fourth quarter. And I think a lot of that would be attributable to the acne category. It’s probably in this particular time the fastest growing portion of our business. So we would anticipate, subject to all the uncertainties that are listed in the press release, for most of the growth quarter-over-quarter to come from that category, and in particular, SOLODYN.

Rich Silver – Barclays Capital

Yes. Thanks very much.

Jonah Shacknai

Sure.

Operator

Your next question comes from the line of Lei Huang with Summer Street Research.

Lei Huang – Summer Street Research

Hi, thanks. A few questions. I’m sure you saw the New York Times article sometime last week talking about the filler and the Botox market and some of the specials that are going on both from manufacturers and the physicians’ front. Can you just talk a little bit about that in terms of how it is affecting your business and how you are responding to that demand, because you did mention earlier about stimulating patient demand? So I just want to see how that comes together.

Jonah Shacknai

Sure. Well, of course, we read the article. In fact, I think I was quoted in the article. And there was thoughtful research done in the preparation of the article. The same phenomenon I think has been reported in other publications. There is no question that the market is challenged. I spoke about my own findings, which again are qualitative from the two recent meetings, the plastics meeting and the derm surgery meeting. So I’m sure that what has been reported, in terms of general trend, is accurate. No doubt certain manufacturers have taken very aggressive measures to bargain-price their products to physicians. This is really just a progression of what has been going on in the market in certain quarters anyway. We see syringes of a dermal filler in the market priced now at $100 or below. We have seen our competitors really cutting their prices pretty significantly either directly or through bundling and other ways and all sorts of specials. But again, this has been going on for quite some time. It seems that the pace has quickened a bit particularly among some of the newer entrants into the category. But we continue to be focused on driving patients into the doctors’ office and keeping them there. At the end of the day, discounting products is nothing more than a short-term nostrum for a problem that is much more severe and will benefit no one in the end if it isn’t accompanied by making sure that there were patients to inject these products into. So we drive patients. That’s what we do at Medicis. We have I think maintained our price substantially with customers, but we have given a break to consumers. We will continue to do so in ways that we think are targeted and appropriate, but half of this is getting new patients in, the other half is keeping them there and keeping existing patients there. So we’re supporting offices in their outreach to the patient population both present and prospective in any possible way that we can that is obviously consistent with strong ethical and compliance standards.

Lei Huang – Summer Street Research

Great, thanks. And just on SOLODYN’s ASP, is that reasonable to assume that the ASP that you quoted today that would be in place for the foreseeable future regardless of whether you have a line extension?

Mark Prygocki

Lei, we gave a pretty wide range there. This is Mark, obviously. And I think we did that because there is a lot of uncertainty in a program that’s only about two months old. So we will continue to monitor it and we will continue to give you updates as we know more and more about the program, but something we’re getting reports very, very frequently on.

Lei Huang – Summer Street Research

Okay. But I guess for now we should stay within that range?

Mark Prygocki

That’s the best information we have as of today.

Lei Huang – Summer Street Research

Okay. Fair enough. And then just last question on the – the advisory panels are coming up next week, both of them, for both the filler and the technology. Is the expectation that coming out of these meetings, there will be guidelines from the FDA or I guess the FD panel on how to conduct trials or do testing of different uses of dermal filler and how to design testing for new technologies in the body contouring area? Is that the ultimate purpose of this meeting?

Jonah Shacknai

Well, it’s really for the FDA to define [ph] the ultimate purpose. What they have done is impaneled one of their regular panels. They have solicited commentary from the major medical societies that are involved with the application of these products. And we have certainly asked and have been granted time to speak to the panel. Issues of safety will be paramount as they should be, reviewing the safety record of these products, I think with an expectation of a high margin of safety for products going forward both in clinical development, clinical protocols, and in post market surveillance. So we certainly support that and we will continue to advocate that, patient safety being paramount. We know too that there is a bit of controversy over endpoints. How does one measure clinical endpoints in an aesthetic category where there are not always objective physical measures that can be taken? To what extent is the patient’s own sensibility affected and should that be relevant? To what extent should a physician’s aesthetic impression be relevant to an assessment of success or failure? So these are the kinds of issues that I think will be at least discussed in the body contouring area. Again, what are the endpoints that are relevant? Is it tape measure adequate to look at the destruction of adipocytes, that is to say a reduction in circumference? Are there other physical parameters that are relevant? To what extent is the patient’s perception of success or failure relevant? How this information will ultimately be assimilated by the FDA is obviously completely within their discretion. These presentations, this panel was done not at the request of external parties but really by internal demand at the FDA. And one hopes that they will consider the information as they typically do, very seriously. They will process it in thoughtful ways, I think always protecting public safety first and foremost, and hopefully articulate some further guidance to industry for the development of products. There is very few right and wrongs in this market once we move past the issue of safety. So a lot of these assessments are relevant to patients, but not relevant to clinicians and vice versa. And again, the agency is in the business of approving products that have been determined to be safe and effective. And efficacy in the aesthetic market is rather different to determine from the pharmaceutical market. So this is a very, very fast moving area of technology. There are a lot of new things, new ideas. And I think the FDA, as it should be, is trying to stay conversant with every new technology and every measurement technology.

Lei Huang – Summer Street Research

Great. Thanks a lot.

Operator

And our last question comes from Dave Windley with Jefferies & Company.

Jonah Shacknai

Dave, are you there?

Dave Windley – Jefferies & Company

Hear me?

Jonah Shacknai

You’re really breaking in there. No, we could not hear you. Now we can.

Dave Windley – Jefferies & Company

Now you can. Okay, sorry about that.

Jonah Shacknai

Yes.

Dave Windley – Jefferies & Company

On the SOLODYN scripts and the growth there subsequent to the issuance of the SPAC-2, is it appropriate to attribute that growth as you characterized within the quarter to the impact of SPAC-2? And if so, should we view – to kind of follow on to Lei’s question, should we view that card as being fairly fully implemented or integrated into the pricing in fourth quarter? Or could it continue to net down pricing beyond the fourth quarter?

Jonah Shacknai

Well, what we saw in the third quarter was the sun-setting of, let’s call it, SPAC-1 or the original SOLODYN Patient Access Card and the integration of the next generation of SOLODYN Patient Access Card. So we had redemptions of both in the quarter. Obviously, we’re moving much more toward the second card or SPAC-2, and we have done our best on a daily basis to calculate the impact of redemptions and they’re very significant. We’ve given you an ASP, a range of $300 to $320 for the quarter. We believe that to be true. And we certainly have control over this process. So we have the ability to make adjustments to come up with additional iterations of the program. And we’re very hopeful that it will continue to have the salutary effect on SOLODYN that it obviously has since its introduction. But no, I don’t think it’s fully mature. And again, by all measures, this has been highly profitable for us.

Dave Windley – Jefferies & Company

Okay. And on your follow-ons to SOLODYN, I believe that there was an expectation that you might hear on approvability of those as early as maybe September, and I wondered if the FDA had communicated to you any type of formal delay as they have with so many others because of understaffing and other issues like that?

Jonah Shacknai

Yes. I think I will not comment except to say that we are not aware of any substantive issues. None have been communicated to us in the review process. But again, these are additional forms of a product on market. I think it’s quite reasonable to believe that the FDA, which is overworked, understaffed, probably makes priorities within their PDUFA structure, and they have given this – it would seem a lower priority than other things. We are partners in the process but also supplicants, and I think we’re very respectful of the fact that the agency has lots of priorities; safety being foremost. They are constantly responding to congressional requests. We will now have transition issues into the new administration. The leadership of the FDA may be affected. Meanwhile, we try to do our blocking and tackling at the division level. And historically, that’s been very successful.

Dave Windley – Jefferies & Company

And Jonah, last question – thanks for that. And last question on just kind of quality of the pipeline of deal opportunities that you’re seeing perhaps compared to maybe six months ago, i.e. how is the economy affecting perhaps the number of deals that you’re seeing? And then, could you comment on if you have a preference between aesthetic side or therapeutic side deals? Thanks.

Jonah Shacknai

Thank you. A very thoughtful question. It’s been reported in the Wall Street Journal in other business publications that newer firms that have a technology orientation are struggling to maintain their financial capability to move those products forward. Some of these companies have their very existence imperiled by this paucity of capital. Others are partnering at a much earlier stage than they might have wanted to. Many that had aspired to find an initial public offering as an exit strategy for venture capitalists, obviously, are aware of the reality that there are no IPOs and there may not be for the foreseeable future. So certainly to a buyer in that market, which we are, we find that the environment is very comfortable and very inviting. And we are, without being predatory but as being reasonable and reflecting current market valuations, being very aggressive in pursuing acquisitions of technologies or other assets in a way that takes advantage of our very strong balance sheet and the unavailability of capital to further many of these technologies. Again, I think we do it in a way that is respectful because we’ve been in this position ourselves in the early days of Medicis. And I think we always respected people that were fair and understanding and understood that a good deal requires both parties being satisfied, particularly if there’s an ongoing element of cooperation. So, yes, we like the environment from that point of view, but obviously our overall wish is for the economy to improve, to let a thousand flowers bloom, and to see treatments in the aesthetics category increase significantly so that we can realize the full potential of our current assets, and hopefully to be able to bring to market good products in both the therapeutic and the aesthetics category. We love both those categories, and we are very firmly committed to being the market leader in both of those categories. So we have historically invested in each, and we expect to continue to.

Dave Windley – Jefferies & Company

Very good. Thank you.

Jonah Shacknai

Thank you.

Operator

We do apologize, but we only have time for a limited number of questions. If you would like to ask a question but did not have the opportunity, please contact the Medicis Investor Relations Department directly. Mr. Shacknai, I would now like to turn the call back over to you for any closing remark.

Jonah Shacknai

Very briefly, we appreciate everyone’s time and attention. Again, our profound apologies that the filings occurred only as the conference call began. With modern technology, I’m sure most of you have been able to receive all that information during the call through various wire services, but our apologies. And we look forward to reporting on a very regular basis earlier in quarters and apologize for any inconvenience that the restatement or the timeliness of our filing has caused any of you. We thank you for your continued confidence in our business. It is certainly confidence that we share on this end. So, good day.

Operator

That concludes this evening's teleconference. You may now disconnect your lines.

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Source: Medicis Pharmaceutical Corporation Q3 2008 Earnings Call Transcript
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