Medicis Pharmaceutical Corp. Q4 2007 Earnings Call Transcript

Mar.10.08 | About: Valeant Pharmaceuticals (VRX)

Medicis Pharmaceutical Corp. (MRX) Q4 2007 Earnings Call February 27, 2008 5:15 PM ET

Executives

Jonah Shacknai- Chairman and CEO

Mark Prygocki - EVP and CFO

Rick Peterson - SVP for Finance

Jason Hanson - General Counsel

Analysts

Donald Ellis - Thomas Weisel Partners

Corey Davis - Natixis

Edmond Kim - JPMorgan

David Steinberg - Deutsche Bank

Greg Fraser - Merrill Lynch

Gary Nachman - Leerink Swann

Dave Windley - Jefferies & Co

Lei Huang - Summer Street Research

Anant Padmanabhan - Cowen and Company

Tim Chang - FTN Midwest

Operator

Thank you for calling the Medicis 2007 fourth quarter and year-end 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 certain assumptions made by Medicis, based on historical trends, current conditions, expected future developments and other factors it believes appropriate in the circumstances. Factors may cause actual results to differ materially from those projected in the forward-looking statement. You can find a discussion of these factors and more information about Medicis in Medicis' filings with the Security and Exchange Commission.

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

Jonah Shacknai

Thank you and thanks everyone for joining us for our fourth quarter and year-end 2007 financial results. Joining me today for this call are Mark Prygocki, our Executive Vice President and Chief Financial Officer, [Rick Peterson], our Senior Vice President for Finance and Jason Hanson, our General Counsel. The call, as you know is being webcast like on our corporate website www.medicis.com in the investor relations section and it will available for two business days following this live call.

To get now to 2007 financial highlights; our references to non-GAAP figures in this webcast are reconciled to GAAP figures as noted in today's press release, which can also be found at our website www.medicis.com.

Medicis reported record revenue for the fourth quarter of 2007, of approximately $114 million. Total revenue increased 42% approximately versus the same quarter last year and in this is due primarily to the strength of our SOLODYN and ZIANA perhaps.

Non-GAAP earnings per share for the fourth quarter of 2007 was $0.54 per diluted share; the guidance we had offered previously was $0.43 per diluted share. This represents an increase in excess of 50% sequentially and 97% as compared with the previous year.

Non-GAAP selling, general and administration expenses as a percentage of non-GAAP revenue declined sequentially approximately three percentage points and five percentage points as compared to the same quarter in the previous year. The decline in non-GAAP SG&A, as a percentage of revenue is primarily attributable to the substantial growth in revenue and effective cost controls.

For the twelve months ending December 31, 2007 we had record sales of $465 million for the year, a 33% increase over the prior year, with 2008 having the goal, of course, of exceeding $0.5 billion in sales or approximately 15% or greater growth rate.

Our non-GAAP earnings per share increased 56% to $1.33. Our most recent guidance was $1.22 per share and we began the year with guidance at $1.12 per share.

The company’s cash flow from operations for the year of 2007 was nearly $159 million. This includes cash payments to Revance in the quarter and approximately $9 million to Revance. The additional $12 million paid to Revance under the strategic collaboration agreement we entered in to was reflected in cash used in our investing activities. The company has over $800 million in cash, cash equivalents and short-term and long-term investments.

To move now to primary brand performance and 2007 product highlights. With our RESTYLANE family we continue to be very, very pleased with our degree of market share and market penetration with watchful waiting, to really understand that where the economy is in 2008. Obviously some concerns on a regional basis and I think we're all looking forward to more data from our customers and general macro economic conditions to give us sense of where the year is, but given where we perceive the economy to have been in the fourth quarter, we are very pleased with our RESTYLANE performance.

Of course PERLANE was approved and launched in May of 207 and we’ve been pleased with the progression of that brand and its proportion of share of the total RESTYLANE business. We launched our RESTYLANE television campaign in July of '07 and our print campaign in the fall of 2007.

We have had in the year nearly 2 billion media impressions for the brand family, and that's more than double our nearest competitor. We had nearly 100,000 unique visits to find a doctor in 2007 and this is nearly a three-fold increase for the second half of the year versus the first half of the year, again, another very strong indicator that our direct to consumer campaign is creating interest and enthusiasm in the category.

Our first week of February 2008 yielded the highest number of hits on the doctor locator portion of our website, and this exceeded 5000 unique visitors again looking for a doctor to get a treatment.

Unique hits on restylaneusa.com website were the highest in the last five months that they have ever been, again I think a further reflection of the success of both our electronic and printed media efforts on behalf of the brand.

Importantly in the face of price-driven competitors, RESTYLANE's average selling price was consistent with the fourth quarter of 2006. So we really have not succumbed to really is, what one would call the superficial temptation of price competition. We value and I think our customers do, the extraordinary performance characteristics, the predictability, the safety of RESTYLANE, and certainly the market agrees with us.

The RESTYLANE family continues to demonstrate leadership. We are continuing with others to expand the market but we think mostly ourselves, and we continue to overwhelmingly lead in doctor acceptance. Our focus as a business with RESTYLANE continues to be on market expansion.

We continue to believe that a relatively small number of men and women that could participate in this market actually do, that is to say they have the interest in the category and the financial capability to be receiving RESTYLANE and PERLANE treatments.

And our messaging is really designed to get new customers into the market, making them aware of the very significant potential to improve their appearance with the use of RESTYLANE and PERLANE. Our focus will be the same, when our RELOXIN brand is introduced.

So, it's a matter of getting more customers into the market. I think we've been lucky in a way that whatever macroeconomic trends, have been reduced to this market, have been offset by a market expansion.

So, while we believe that the rate of market growth has undoubtedly been slower than it might have been in a more robust economy, we've been fortunate in so far as a rising tide lifts all ships. And we are very, very interested and I think trying to be conservative, looking forward and understanding what these economic trends will do to this and related markets. We simply don't know yet.

With our SOLODYN brand, we are maintaining very significant leadership in the branded oral antibiotic market in dermatology.

Prescriptions for the fourth quarter exceeded our internal projections. We have had 9% sequential growth in prescriptions from December '07 to January '08, so the trend continues very, very nicely and importantly. And we have had greater than a 33% increase in total prescriptions in December '07 versus December '06, a 43% increase in the fourth quarter of '07 versus the fourth quarter of '06. So again, we are continuing to see very, very nice brand growth by any important measurement.

Our patient access card, which we think has made a big, big difference in the success positively of SOLODYN, has had over 135,000 utilizations since launch, and this certainly is very successful, and that has encountered almost 80,000 unique patients, so again very pleased by what we consider to be the additive component of the patient access card to our overall business. And I think in many cases, this has empowered us to get prescriptions filled by patients because of the way we're able to help them.

The introduction of our new SOLODYN scientific campaign showcasing innovation behind SOLODYN has also been very important and very well received by physicians. We have 11 additional patents pending on dosing, pharmacokinetics and carrier composition. Some of those filed as early as April 2005 and others filed much more recently.

Four patents as we noted in the last conference have received letters of non-final rejection, so we are in active discussion with the US Patent and Trademark Office, trying to overcome objections, delimit claims, as appropriate, to get patents issued with a notice of allowance coming first.

Our average selling price per prescription is estimated in $340 to $350 range, as we go forward in 2008. So we've been able I think to accommodate the patient access card very nicely, without a dramatic and negative effects on our average selling price, importantly.

ZIANA was launched just about a year ago. The efficacy of the product over an extended period of time per prescription has given us the ability to increase the price of ZIANA over 20% in 2007. The product has been well received. I guess if there is one thing we didn't understand fully is the longevity associated with each 60 gram tube that we sell.

So as we model our share of the market, we really do it in a rather different way because we understand that our product really last substantially longer than competitive products in the market. And we try to bring the pricing up to reflect the tremendous utility and duration of utility of each tube that we sell.

Other 2007 highlights, of course we closed the transaction with Hyperion Therapeutics. This was a strategic collaboration announced in August for the existing Ucyclyd products and pipeline products. We announced the Revance transaction, again a strategic collaboration that we talked about in December and that involves Revance's topical botulinum toxin, which is under very aggressive development by that company located in the bay area of California.

In terms of RELOXIN's status update, as you know we submitted a BLA for RELOXIN in the fourth quarter. This was to the derm and dental division seeking an aesthetics indication for the product. As many of you know that we received a refusal to file a notice in January from the agency. We have been communicating very aggressively and actively with the agency, with the purpose of gaining more clarity over the scope of objection.

We've noted previously, that these objections really relate to ownership, manufacturing type issues. They do not appear in any way to have clinical considerations or manufacturing quality considerations, but rather relate to supervision of manufacturing responsibility for quality assurance. And we are doing our very best, working closely with our partner Ibsen to give the agency appropriate assurances on the subject and we will provide more information, I think in a timely fashion on how that progresses. I think we're very optimistic about the outcome. We are still very much in the launch planning process for this product.

Interestingly, a poster board with data about the product will appear during the meetings of the 2008 winter clinical dermatology meeting, which will be held next month in Hawaii, a very well attended prestigious meeting. And I think it will really be a very nice cut of data that represents the important safety and efficacy considerations of the product.

The company has always had several important projects under development, and is concentrating its business development efforts to enhancing the company's pipeline and this is in the area of both aesthetic medicine and of course, medical dermatology.

Our recent events; the American Academy of Dermatology meetings in San Antonio, Texas, a reasonably well attended academy, we were there obviously in full force. I think, we had a very strong response and a positive one to our product line, and we continue to really cultivate relationships and scientific exchange with our customers very effectively.

There is an upcoming in Advances in Cosmetic & Medical Dermatology annual meeting that takes place of February 25 through March 1, so it is taking place currently.

Our upcoming events; we will be exhibiting at The Winter Clinical Dermatology Conference, which I just spoke about, March 12 through March 18, where there will be some very nice cuts of RELOXIN data. The AAFPRS, The American Academy of Facial, Plastic and Reconstructive Surgery, The Rejuvenation of The Ageing Face Symposium, April 6 through April 9 in San Francisco, California. The Foundation for Cosmetic Surgery, Advances in Cosmetic Surgery of the Face and Body, that’s May 3 through May 5 in Newport Beach, California. The Annual ASAPS or American Society for Aesthetic Plastic Surgery, 2008 meeting. That takes place May 3 through May 6 in San Diego, California.

And we have intention to present at the following investor conferences. The Kelvin Health Care Conference, March 17 through March 20 in Boston, Massachusetts. The Deutsche Bank Health Care Conference, May 5 through May 7 in Boston and we hope be at other conferences. Right now we are trying to clear some scheduling conflicts.

We have provided 2008 guidance in today’s press release and we will add additional color to the guidance based on your questions. That being said, we very much appreciate everyone’s support and interest over the course of 2007. We are eagerly participating in a growth cycle in 2008 and we would be delighted to take your questions any of us at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Let’s begin with Donald Ellis with Thomas Weisel Partners.

Donald Ellis - Thomas Weisel Partners

Good morning, good afternoon. I might have just three questions. First one for Jonah and the second two for Mark. What milestones can we look forward to in ’08 and ’09 regarding your topical botulism toxin programs?

Jonah Shacknai

The work going on at Revance, our partner right now includes a lot of formulation work, a lot of dose ranging work and of course many of these activities take place in the clinic in human subjects. So I am not sure that we are prepared or they are to identify specific milestones for 2008 but suffice it to say that the projects at Revance are been very actively and well managed.

We are collaborating very closely on clinical planning and development and we look forward to demonstrating, now just, for the efficacy of the product in even larger patient populations that have been a given the drug previously but also having a real fine dosing work done. So that we understand exactly the right number of botulism type A units that should be used to create the right clinical effect safely in each patient.

Donald Ellis - Thomas Weisel Partners

Thanks Jonah. And the question is for Mark. First one is regarding your EPS guidance for 2008, $43 to $56. It seems like a pretty broad range. Can you tell us what is driving or rather increasing that EPS?

Mark Prygocki

There’s really two things, Don. The first is the $12 million between the spread of the revenue. Pretty much we have a fixed cost budget for the most part and I think the benefit in the EPS will really drive to the bottom, if we were to get to the higher ranges of the revenue scale. So I think that's where the first benefit is, if we achieve that higher end of the revenue scale, it will flow through to the bottom line.

The second is really the variable behind the weighted shares outstanding. And that is really dependent on the stock price. In the guidance, in the press release we put a range of anywhere from $71 million, if the stock price were to remain low, or if the stock price were to move up, it would go depending on how high it went up to around the $73 million share range. So it's really the combination and the variables of those two that create the EPS range.

Donald Ellis - Thomas Weisel Partners

Okay. Last question is just; can you give us your current thoughts regarding your stock buyback program?

Mark Prygocki

Sure. We have $200 million authorized, as you may know. We are not obviously have thought a great deal about the buyback or we have purchased over the last five or six years over $300 million worth of stock back. So we don't have a fundamental problem with buying back stock.

I think at this point in time, we would like to compare the $800 million we have in cash right now, the approximately $300 million that's earmarked for a put period that comes to this June and we have to be cognizant of that as well the book of business development opportunities that we have available to the company right now. And I think we will look at all of them with our Board and decide what is the best use of our cash right now.

Donald Ellis - Thomas Weisel Partners

Great. Thanks a lot.

Mark Prygocki

At this time we have not bought back any of the shares related to the $200 million.

Donald Ellis - Thomas Weisel Partners

All right. Thank you.

Operator

Our next question comes from the line of Corey Davis with Natixis.

Corey Davis - Natixis

Thank you very much. I think SOLODYN has some unique characteristics you've talked about in the past regarding its PK profile and dosage forms that may be difficult for generics to replicate. So beyond the patents, are things like a citizen' petition a possibility?

Jonah Shacknai

It is a thoughtful question, Corey. I think we have identified that there is really a three-part strategy around the protection of SOLODYN. The first is obviously an intellectual property strategy. We have an issued patent that we believe covers SOLODYN and will cover it appropriately and of course that's a question that's in litigation right now.

But we also know that there are many, many other patents that have been filed and literally hundreds of claims that when issued we believe will provide very meaningful protection for SOLODYN.

The second piece of this is a regulatory piece, and this is indicated by your question. We have I think been very vocal with the Food and Drug Administration in identifying specific characteristics, which might make bioequivalents to our product challenging. We have discussed these as a regulatory matter and as a scientific matter with the agency. We have filed documents with the agency. We have communicated with the Office of Generic Drugs and there may be further discourse in terms of potential submissions to the agency, such as you have identified in your question.

And then of course the last component is really a commercial strategy. We obviously continue research and work on SOLODYN, looking at other generations of SOLODYN that we think will be important commercially and also add the important safety and efficacy benefits for patients.

So when we look at these three elements, they are really part of an interrelated and fairly complex strategy to defend the brand to the utmost of our ability. You have identified one component of three.

Corey Davis - Natixis

Thanks Jonah.

Operator

Our next question comes from the line of Edmond Kim with JPMorgan.

Edmond Kim - JPMorgan

Hi. Thanks for taking the questions. I have a couple of questions. Firstly, the 2007 ASEP procedure numbers came out this week and overall procedures for soft tissue fillers were down as well as the hyaluronic acid procedures. Just wanted to get your comments on any correlation that you are seeing in terms of the macroeconomic development and sort of your comments in the introductory remarks about sort of market expansion?

Jonah Shacknai

That would not necessarily correspond with our own view and of course that is a survey only of plastic surgeons. And as we know, the entire filler and even the toxin market is very actively pursued by dermatologists, plastic surgeons who are ophthalmologists with plastic surgery training, and facial plastic surgeon who are otolaryngologists with plastic surgery training.

We also know that there's been a proliferation among other specialists and even those involved in general medicine of these procedures. So I think like many surveys that are some times done by financial firms going to just one specialty and imaging that to be representative of the total market is really a fool's errand.

So our belief is that the market has expanded, but I think that in plastics, we are certainly receiving reports of a decrement in overall procedures. Since the ASEP survey is really more a matter of impression than precise quantization, a lot of plastic surgeons who I think are seeing a reduction in general plastic surgery procedures maybe perceiving that this piece of their business is down as well. But gosh, the market absorbed two new competitors in 2007.

We've done very well with RESTYLANE they have reported their results in one form or another. So it’s really counterintuitive to believe that the overall market has done anything but grown. We believe and really have measured that our direct-to-consumer efforts have had an appropriate return on our investment and that too would suggest that there has been a market expansion.

So we have the ASAPS data. They are interesting but reflective only of one cut of the market and by far not the largest cut. And then we have the economic results of several products in the market and it seems like everyone’s been able to make a living and one of our competitors has stated that their neurotoxin grew importantly in 2007. So again I think we have some contradictory information.

All that having been said we remain watchfully, concerned, about the overall economy in 2008. We don’t know how it’s all going to turn out. It’s hard not to read the newspapers, it’s hard not speak to economists and understand that the United States. is under a lot of economic pressure in every stratum of our society and there is a counterintuitive element to believe that this will have no effect on the market. It likely will, but the timing of the recession and the way that it effects people with household income above $75,000, all important variables that we're trying to explore. We have certainly heard reports of slowing business in some important regions of the country. There are others that reportedly are unaffected.

Edmond Kim - JPMorgan

Great. You gave the dollar per Rx value only for SOLODYN and you commented that the ZIANA price increases were greater than 20% in ’07. So is the dollar per Rx value, should we think about it still kind of the $140 range?

Mark Prygocki

I think it’s gone up especially with the mix of the product I think you can assume that $160 to $170 range for ZIANA scripts in 2008.

Edmond Kim - JPMorgan

And can you comment on the RESTYLANE franchise in terms of just maybe directionality that, versus quarter-to-quarter or any comment on PERLANE?

Jonah Shacknai

Yeah, there was sequential growth in the RESTYLANE franchise.

Edmond Kim - JPMorgan

Great, thank you.

Mark Prygocki

Thank you.

Jonah Shacknai

And I think we've guided that we are at around 30% of the franchise being associated with PERLANE. That's the number that we expect to take up in 2008.

Operator

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

David Steinberg - Deutsche Bank

Thanks, first question on your SG&A, I know that in the past forums you have mentioned that prior to the launch of RELOXIN you are going to beef up your sales force and I was wondering if the SG&A guidance for this year includes initial or significant hiring in anticipation of that?

Mark Prygocki

David, it doesn't include the hiring first day but it does include the ramping up of launch cost associated with RELOXIN. So we are starting the weekly RELOXIN launch meeting for now and those costs associated with the RELOXIN launch are included but not that of hiring a sales force. And I think that will more come towards as we get more certainty around that the filing toward the end of the year or more likely '09.

David Steinberg - Deutsche Bank

Okay. And then I just looking at your quarterly guidance. It's a fairly tight range on the revenue side with the low of $130 million and a high of $137 million. And traditionally you are sort of back-loaded or had escalating run rate in revenues I was just wondering why such a flattish quarterly sequential revenue outlook?

Mark Prygocki

Sure. If you going off of the fourth quarter going forward there is a couple of thing that impact the quarter. We will lose over the fourth quarter going forward, we lost out $6 million in the other category, that's some of our contract revenue going away and assuming some of the flatness in our [RESTYLANE] franchise, as well as going forward in the second quarter, we're assuming but have no knowledge of what we're assuming in the numbers, the introduction of a LOPROX gel generic in that second quarter, and then some of the other products that are moving down as far PLEXION, TRIAZ and some of the older brands that were making up with some of the growth brands.

We are also making a very -- I said, I meant LOPROX shampoo, if I didn't clarify that and my apologies, my colleague have reminded me of that, as well as, we're been very conservative with the economy as far as the RESTYLANE franchise.

David Steinberg - Deutsche Bank

Okay, and just a couple of more related questions, does this not, does this include or not include any new potential introductions?

Mark Prygocki

It does not include any new introduction, but it doesn't mean that, if a SOLODYN form were launched that the market wouldn't be switched, but no incremental revenue associated with that.

David Steinberg - Deutsche Bank

Okay and then just moving a step forward, if in 2009, given this kind of revenue ramp you have here, if you don't get an approval of RELOXIN, does that mean, we should expect a similar revenue ramp or flattish revenue outlook for '09?

Mark Prygocki

I think, if the SOLODYN continues to grow, as it has been growing, I think we would anticipate growth in 2009.I think we're still very hopeful on the RELOXIN franchise, so I would not count that out. But I think more towards the end of the year, we would give better guidance on '09.

Mark Prygocki

Yes. I might just amplify that to say, I am enthusiastic about 2009 as it relates to RELOXIN and other opportunities. So while your question is an interesting one, I think that it is far more likely than not that we will have a robust RELOXIN launch by or in 2009 and it will be a very successful one. We are certainly expecting that and counting on it.

David Steinberg - Deutsche Bank

Okay. Just one follow-up question. I guess yesterday there was an acquisition of CollaGenex by Galderma, then last year Stiefel bought Connetics. Do you think there are too many companies still in the dermatology and cosmetic derm space? And do you expect continuation of this consolidation going forward?

Jonah Shacknai

Our philosophy of course is to let a thousand flowers bloom. The competition is healthy, that innovation is nurtured by more companies, more competition. We obviously have looked at every strategic acquisition that has occurred in the dermatology sector. We have had an opportunity to participate in bidding process, if we were interested.

We declined to participate in either of the processes that you mentioned, either Connetics or CollaGenex, both are very good companies. We wish Galderma with their acquisition. CollaGenex is and was a well-managed company of very dedicated employees and hopefully we will present for Galderma the opportunity that it sees in the acquisition price that it paid.

David Steinberg - Deutsche Bank

Okay. Thanks.

Jonah Shacknai

Sure.

Operator

Our next question comes from the line of Greg Fraser with Merrill Lynch.

Greg Fraser - Merrill Lynch

This is Greg Fraser for Greg Gilbert. Sorry if I missed this, but did you give the ASPs for SOLODYN and ZIANA in 4Q?

Mark Prygocki

In 4Q, we didn't, but you can imagine they are in that $340 to $350 range for SOLODYN and ZIANA, again in that about a $160 range for ZIANA.

Greg Fraser - Merrill Lynch

Okay. Can you make any qualitative comments on what your revenue guidance contemplates in terms of share growth for both products?

Jonah Shacknai

We haven't given that information out.

Greg Fraser - Merrill Lynch

Okay. And I think you expected that inventory management agreements in place by early '08. Can you give us an update there and whether we should expect any impact on sales as a result of the agreements?

Mark Prygocki

We would not anticipate any impact on sales and we're working through them now with the major wholesalers. So, they are under development and they should be shortly.

Greg Fraser - Merrill Lynch

Okay. Thanks.

Operator

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

Gary Nachman - Leerink Swann

Hi, good afternoon. Jonah, on the RELOXIN refiling, what's the likelihood that you will keep the same PDUFA, or do you think the time line will probably get pushed out at this point?

Jonah Shacknai

I think we're not yet prepared to offer guidance in that regard.

Gary Nachman - Leerink Swann

Okay.

Jonah Shacknai

I think there are strong arguments to be made for maintenance of our original PDUFA date and there has not been final agency action in that regard and when we have some more information, I think we will be very happy to share it.

Gary Nachman - Leerink Swann

Okay. And how long do you think it will be before you have more visibility and you could update us on this time line. Do you have any sense of that? Is it weeks, months?

Jonah Shacknai

No, I think in the relatively near future, we will be able to provide hopefully declarative and clear information about the status of the filing and to the extent that we can know it that is to say that it has been fully resolved that the PDUFA timing with some degree of approximation.

As you know, we hadn't disclosed the date that we filed our BLA for RELOXIN. We noted a general time period and we will probably approach it the same way as to the expected PDUFA outcome. But again, we were not trying to be evasive in any way. But I think we would rather have absolutely complete and final information before making a public statement.

Gary Nachman - Leerink Swann

Okay, fair enough. And just sticking with this topic, what is your view on the additional scrutiny that we are going to see now on the safety of Botox and how that might affect botulinum toxin in development, specifically like RELOXIN?

Jonah Shacknai

I am sure that you and many others have read FDA pronouncements on the subject of the safety of Botox and Myobloc. Many of us have the opportunity to listen in as well on a press briefing that occurred where members of the press were able to ask questions of responsible FDA officials.

The FDA's concerns have centered principally, as Allergan has pointed out, around patients largely pediatric patients that have been treated for movement disorders that were not necessarily patients that were contemplated in the labeling of Botox as it is approved today.

So there are questions about dosing and dose proportionality relative to weight of these patients. There are questions about their overall health, potential immune responses to botulinum toxin type A to Botox. So I think a lot of issues were raised with the FDA, at the same time that they pointed out that the reactions that occurred were extremely, in frequent. They were rare reactions and they were reactions that were typically not associated with a local site response but rather some sort of systemic effect of the botulinum. So we have young patients largely in significantly compromised health. They were brittle because of their underlying disease entity and we had a relative infrequency of events.

As has been pointed out, tens of millions of patients have been treated around the world with Botox and I am happy to say that a like number of patients have been treated with RELOXIN sold under the brand name of DYSPORT in 77 countries around the world. DYSPORT was actually the first product approved, the first neurotoxin approved for therapeutic use. It has been on the market longer than Botox in many places and it has a safety profile that I think is in no way inferior to Botox, in some ways there may be some advantages. So this is something that obviously clinicians will have to judge on the basis of data that had been presented internationally and will be presented in the United States.

So I think we feel that the FDA has identified an issue that clinicians need to think about. Patients always have to be given a thoughtful presentation of risk, when contemplating any treatment, especially those that involve an esthetic endpoint, but by the same token I think there is tremendous comfort in the safety of Botox and in RELOXIN and perhaps uniquely in those two products because they share a massive exposure to the general population. We’ve had millions of patients treated with these products. I think we have a pretty good understanding of the safety, so I'd want to be in the position of either Allergan or Medicis, as I approach the FDA in this situation, because there is so much information know about these products and the safety can be judged, not just on the basis of the clinical trial involving a few thousand patient, but rather on the basis of years of use and million of patient exposures.

Gary Nachman - Leerink Swann

Okay that’s helpful. Mark, the tax rate in the quarter was it 45%?? Did I get that right? Why is it so high and it seems like it is going come down in 2008?

Mark Prygocki

It is and we have guided a 38% to 39% for 2008. The reason for the fourth quarter increase is we don’t get the deduction on the $9.2 million of the Revance transaction expenses. So that’s not tax deductible, so therefore increases are effective tax rate just for the quarter.

Gary Nachman - Leerink Swann

Okay and then lastly just following up on the quarterly guidance question from before, the revenue guidance seems pretty flattish throughout the year but EPS goes up substantially. So aside from the share count, is there going to be more spending in the early part of the year? Is there anything unusual about that ramp? Thanks.

Mark Prygocki

It really isn’t unusual one. It has happened in almost every year in the past and what you will see is more spending in the beginning of year than the later. As you may know we have ended the year at about 45% SG&A, in the 45% to 46% range for the fourth quarter and typically that’s what happened. We will probably start the year in the mid 50s as far as SG&A percentage and end the year in the high 40s, averaging out to 51% - 52% for the year. So that’s traditionally what happens and the rest flows through to the EPS line.

Gary Nachman - Leerink Swann

Okay, thanks.

Mark Prygocki

Sure.

Operator

Our next question comes from the line of Dave Windley with Jefferies & Co

Dave Windley - Jefferies & Co

Thanks for taking the question and good afternoon. I wanted to ask a question around the revenue in the acne related products category. Your SOLODYN prescriptions grew pretty nicely from 3Q to 4Q, certainly not as much as the growth and your reported revenue in your other products in that category were down. So I was hoping you could help me to reconcile a little bit the increase in sales. Was that pricing mechanism? Was that increase in channel inventories or perhaps lower swipe card authorization or something like that or couponing, discounting utilization?

Mark Prygocki

Sure I can absolutely help you in that regards. First there was really no change in the inventory level from the wholesalers. It solely had to do with the fact that average prescriptions for SOLODYN on a weekly basis from Q3 to Q4 increased over a thousand scripts per week and in October we took an 8% price increase on SOLODYN. So that was pretty much the majority of it. We also had an 8% increase on ZIANA. So between the combination of the two that pretty much affected the difference between the third and the fourth quarter. So it’s primary price also of the substantial increase on a weekly basis on average of the SOLODYN prescriptions.

Dave Windley - Jefferies & Co

Okay. And so the declines in the other products are much slower in the mix the declines there didn’t have an offsetting negative effect I suppose?

Mark Prygocki

Not quarter-over-quarter. ZIANA and etcetera, It's not quarter-over-quarter.

Dave Windley - Jefferies & Co

Okay. I think you commented earlier, Mark that this year's SG&A expense includes, what we might be called launch cost for RELOXIN short of expansion of the sales force. Did I understand that correctly?

Mark Prygocki

That's correct. Obviously, there is no DTC in there. Some of the larger ticket items that you traditionally figure into a launch aren't included in there. But we are gearing up towards the launch of this product late this year, early next year.

Dave Windley - Jefferies & Co

Okay. So on that to the earlier question that was asked, are you working under the assumption that the RELOXIN PDUFA will not move and then if does you change your plans at that point?

Jonah Shacknai

We as I indicated earlier are not prepared to comment on the PDUFA date today. We think that there are as I said compelling arguments to be made that the PDUFA date should remain that where the BLA was original filed in the fourth quarter of 2007.

I suppose the agency could take a different view now or over time. We would hope not, but again I think there isn't enough information available now for us to give you a definitive answer to that question. We are unchanged in our commercial preparations.

So exactly the same people are doing, exactly the same thing today, as they did in December and January. They are working hard to launch the product to do so with very complete scientific information and an appealing commercial platform for our customers. Our medical affairs area is working vigorously to prepare for a launch, to make sure that there is appropriate scientific information available to customers.

So there is really nothing that is different and we obviously reserve the right to amend our projections or guidance to contemplate greater spend levels, should we think that that's appropriate, both in expansion of the sales force and conceivably in direct-to-consumer promotion. But this is a cut of where we see it today and we will as I indicated provide more information as soon as we can do so reliably.

Dave Windley - Jefferies & Co

Okay, thank you. And then finally Mark you mentioned also to an earlier question about the contract revenue winding off at some point during 2008, being a contributor to the flattish revenue through the year. Is that something that happens pretty quickly? Or is that more of a second half '08?

Mark Prygocki

It'll happen in the first quarter. We're anticipating that other line to go down to about $8 million a quarter.

Dave Windley - Jefferies & Co

Okay, thank you.

Mark Prygocki

Sure.

Operator

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

Lei Huang - Summer Street Research

Hi, thanks. I have a couple of questions. Just back on RELOXIN, can you clarify what stage you are at right now? Are you working with Ipsen, trying to understand exactly what the FDA is looking for? Or do you have that understanding now and you're working towards providing that information?

Jonah Shacknai

I'm not sure that Ipsen, though they are an extraordinarily talented and thoughtful company, has any greater insight into this situation than we might. We of course consult with them on a regular basis, they are our partner. Decisions that are taken are always joint decisions and we respect their perspective and point of view.

Nevertheless, we have been communicating directly with the Food and Drug Administration, because at the end to the day, they are the only body that can tell us what they have in mind, how, what they perceive as lack of clarity can be ameliorated, so that’s where we have been in communication and we continue to be.

Lei Huang - Summer Street Research

Okay. So you are still trying to get a better understanding from the FDA as far as exactly what needs to be done?

Jonah Shacknai

I think we are attempting to refine how to respond to their concerns.

Lei Huang - Summer Street Research

Okay.

Jonah Shacknai

And what the consequence of that response would be to our PDUFA timing.

Lei Huang - Summer Street Research

Got it. And at what point would you be providing update and would you be updating when you have that clarity or would you be updating when you actually refile or amend your application?

Jonah Shacknai

Yeah, it is a decision that will be driven by our thirst to provide accurate information on the subject hampered by the enthusiasm of our lawyers. So, at the right moment, we will provide what information we can. We would probably have talked about this much more than we already have, but we’ve been given advice that, that probably wouldn’t be a sensible thing to do.

So, we are feeling some frustration too. We would like to be able to provide more discourse on the subject. We will at the earliest possible opportunity and we are eager to, because again we put in superb filing in the fourth quarter of 2007 and we feel really good about its substance.

Lei Huang - Summer Street Research

Okay. And then just two questions on the 2008 guidance. I know you said that you are assuming conservatively about the economy and the impact on demand for RESTYLANE and PERLANE. What assumptions are you making about on the entry of new derma filler products this year in your guidance?

Jonah Shacknai

We are assuming that there may be some new entrants into the market and we, I guess have made some qualitative assessment as to what they will offer physicians and patients. Again, a word about quality and safety and predictability and we think that, that continues to offer us very distinct advantages in the market that are unlikely to be interrupted by the introduction of other products.

Lei Huang - Summer Street Research

Okay. So you are assuming that the derma market overall maintains some sort of growth rate in ‘08 versus '07?

Jonah Shacknai

We are hopeful of that. I think we feel good about our position as the leader in that market. But obviously, we are spending a lot of time and money to expand the market as at least one of our competitors is, and we hope that, that has an effect, the only conceivable reason that it wouldn’t have a salutary effect. It would be even further contraction of the economy, disposable income or at least the perception of disposable income by our target population and that’s a big variable. But, we’d love to provide a clear insight there and if we had it, we would.

We see reports in some regions of the country of a slowdown in these procedures. We see overall that plastic surgery procedures, big-ticket surgeries are down in most major centers. And we're trying to figure out where this all goes and there may not be a precise predictability to it because I think that even the economist or the Fed testifying before Congress today, could offer a little in the way of substantial clarity as to where the economy is going, when it will be there, are we growing, are we contracting or what's the interest rate environment? No one was comforted by decreasing home value that was reported yesterday.

So, all these things are elements and as much as the reality of how much disposable income is sucked out of the market, is the perception of how much patients can thoughtfully spend on procedures like RESTYLANE and like neurotoxins. And it’s something that we are testing very, very extensively. But even the test takes a picture at a moment-in-time and the economy may get better or worse six months from now.

Lei Huang - Summer Street Research

Great. If I can ask, just sneak in one more question. We seem to be hearing some physicians talking about patients trending down from big-ticket surgical procedures to do more affordable procedures like the fillers, Botox, lasers or combination thereof. What kind of, what kind of feedback are you getting from your customers that might show there is some sort of trending down from surgical to non-surgical procedures recently?

Jonah Shacknai

There is some evidence of that again, reported by customers and we see that some surgical practices are actually increasing their uptake of fillers. A part of it may just be surgeons that are wanting to fill their unit of time. If they are not booked in the operatory or they maybe taking advantage of the scheduling window to inject patients themselves, whereas others might have done so in the practice previously, nurse practitioners or physicians’ assistants. So preferentially they’ll perform these treatments themselves if there is -- they can time on the schedule.

Again, we just don't know. There are reports of weakness in Southern California, in Southern Florida, a bit in the Midwest. But there are other markets that would seem to be growing nicely and how it all plays out when it is a mixed together and projects over 2008 is something that we are going to have to really watch carefully and try to adjust to.

We are right now spending on direct-to-consumer advertising. The purpose of that is to expand the market to appeal to potential customers rather than actual customers. It wouldn’t make sense to be doing that too extensively if we didn’t have a real perception that the market can still expand.

Lei Huang - Summer Street Research

Great. Thank you very much.

Jonah Shacknai

Sure.

Operator

Our next question comes from the line of Anant Padmanabhan with Cowen and Company.

Anant Padmanabhan - Cowen and Company

Yes, thank you. Just a couple of clarifications, you made a reference to the SOLODYN patent in litigation, I was wondering if you could provide an update on that litigation? has it progressed beyond impact with initial filing?

And the second is have you already filed for a franchise extension for SOLODYN or will you be filing one in the coming month? Thank you.

Jonah Shacknai

You’ve asked two distinct questions. There is no legal update. Jason Hanson our General Counsel, joins us at this session and he is certainly signaling in every way that the process is working its way through the Federal courts in the northern district of California and we, as in response to your second question, we have not and do not comment on the existence or status of regulatory filings, as it relates to SOLODYN and most of our other products.

Anant Padmanabhan - Cowen and Company

Thank you.

Operator

Our last question comes from the line of Tim Chang with FTN Midwest.

Tim Chang - FTN Midwest

I have a question for Mark. Mark given your sizeable cash balance have you had any sort of issues recently with option rate securities? I notice that there have been some companies that had issues with liquidity there. Have you experienced anything there recently?

Mark Prygocki

We have a minimal amount, less than $50 million worth of, and I hate even calling it exposure when it is such a minimal amount because there are earning such high rates and they are all backed by the US government. So it is not a default issue but a liquidity issue that we hope to have resolved by mid year. So, very minimal amount that we don't see any issue as far as default risk. We continue to receive interest payments on them at again a very favorable rate.

Tim Chang - FTN Midwest

And I guess just a follow-up to that. Jonah, you guys have a decent hoard of cash here. What sort of uses of cash, someone has asked about stock buybacks and you've noticed some consolidation in the industry recently. Are you still interested in making a purchase at this point? Or would you say the prices are too high? Could you make some comments there?

Jonah Shacknai

Well, they were high yesterday. The question really relates to our overall corporate development strategy. We are exceedingly active. We have a Board meeting coming up and I'll be reporting to the Board with my colleague Joe Cooper that we have literally looked at hundreds of business development opportunities over the course of 2007. We expect the number to increase in 2008.

Among those are technology acquisition opportunities, we completed several of those in 2007. One prominently being the Revance transaction but certainly others occurred at a smaller level or at less material level. And we continue to have interest in corporate acquisitions to the extent that they would give us access to innovative technology or a place strategically in the market that we want to be in.

So, we are very active. We are very interested. We communicate as a matter of course with lots of other companies and discuss all kinds of possibilities with them. I don't know that there is a consolidation wave hitting the industry, maybe there is, but something will have a better picture of in about a year. But I don't think that we view ourselves as people that will participate in a consolidation just for the sake of doing it. The mass justifies a core business decision or one that is unstrategic for Medicis.

So, we're mindful of the fact that we do have a strong cash position. We are also mindful of the fact that we have a very good reputation with our customers. We have a reputation for standing behind every product that we sell, for offering innovation and scientific integrity behind every product and of course there is a great deal of interest in intellectual property protection. I don't think that anyone could go through this experience with SOLODYN and not want to be in a position where there isn't even discussion, let alone the possibility of a generic substitute.

So the integrity of IP is an important element. It has actually kept us out of the transactions, because we did not feel that the existing IP platform was particularly sustainable for us. So, we're obviously watching what goes on around us. There are very good companies that we compete with. The company that made the acquisition yesterday Galderma is an estimable company. We respect them. We respect its management. We respect the parent companies. So all good stuff and we wish them well. But it doesn't necessarily mean that it's right for us for a variety of reasons.

Tim Chang - FTN Midwest

Jonah, I think I might have asked you this on the last call. But would you say that Allergan, one of your competitors in the dermal filler market, would you say they are good competitor, or have they sort of toned down their price discounting since last year? Where do you expect prices to go in '08? Do you think prices will remain pretty stable here?

Jonah Shacknai

Well, they are wonderful competitor and they motivate us everyday to work harder and to do more for our customers. They have established with their Juvederm brand, a price platform. It is as it is and I think that there has been more of a focus on economic competitions and on product competition. But we have great respect for them and we admire them as a competitor because like us their activity is substantially focused on market expansion.

It may not seem that way and there may be a misperception of some internecine warfare, but at the end of the day neither company can grow importantly without significant market expansion and that relates to the filler market and of course when we introduced RELOXIN, I would think that they would be very interested in market expansion, because the opposite of that would be market retraction or simply one brand taking share from another.

So, we are all motivated to see the market expand. Most of the advertising that goes on is attempting to gain entry into new patients and to bring them into practices with the hope that they will essentially become annuities for one or both companies as we go forward and continue to enjoy the benefits of these kinds of procedures.

Tim Chang - FTN Midwest

Okay, great. Thanks a lot.

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 like to turn the call back over to you for any closing remarks.

Jonah Shacknai

As always, we thank everyone for their time and attention. We feel very, very good about where we were in 2007, both in the subsidiary progression of our products and our future business. We are obviously very pleased with our financial results on both the revenue and the profit side. And we hope to continue to impress you in 2008. So thank you very much again for your continued interest.

Operator

This concludes today's conference call. You may now disconnect.

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