Medicis Pharmaceutical's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug.10.12 | About: Valeant Pharmaceuticals (VRX)

Medicis Pharmaceutical Corporation (MRX) Q2 2012 Earnings Call August 8, 2012 5:15 PM ET


Jonah Shacknai – Chairman and Chief Executive Officer

Mark A. Prygocki, Sr. – President

Richard D. Peterson – Executive Vice President, Chief Financial Officer and Treasurer


Christopher T. Schott – JP Morgan Securities Inc.

Greg P. Waterman – Goldman Sachs & Co.

Gary Nachman – Susquehanna Financial Group LLP

Rebecca M. Forest – Piper Jaffray, Inc.

Daniel Chang – Stifel Nicolaus & Company, Inc.

Ken Cacciatore – Cowen and Company, LLC

Shibani Malhotra – RBC Capital Markets Equity Research

Ronny Gal – Sanford C. Bernstein & Co.

Catherine Arnold – Credit Suisse

Douglas D. Tsao – Barclays Capital, Inc.

David Risinger – Morgan Stanley

Stephen Barr Willoughby – Cleveland Research Co.


Thank you for joining the Medicis Second Quarter 2012 Financial Results Conference Call. Today's call is being recorded and webcast live on the company's website at in the Investor Relations section. And will be available for replay for 10 business days following this call.

This is a brief reminder 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 the company believes 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 the company's 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. Please note that references to non-GAAP figures in this webcast are reconciled to GAAP figures as noted in today's press release, which also can be found on the company's website at

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

Jonah Shacknai

Thank you very much, everyone, for joining us this afternoon. With me here at Medicis headquarters is the senior management team, and at the end of our narrative, they’ll be happy to join me in answering any questions that financial analysts may have of the company. Again, we appreciate your time this day.

In terms of financial highlights, for the three months ended June 30, 2012, Medicis reported revenues of approximately $196.6 million and non-GAAP cash EPS of $0.52 per diluted share. This compares favorably to our previously published guidance range of $185 million to $195 million in revenues and $0.37 to $0.47 per diluted share, again in non-GAAP cash EPS.

We have been closely monitoring SOLODYN and ZIANA prescription trends since the launch of our alternate fulfillment initiative. While reportable prescriptions for these brands were predicted to decline, the anticipated recovery has happened later than forecasted. Reportable prescription trends continued to decline into the third quarter, until quite recently, when prescriptions began to increase again.

Overall, in-channel inventory on hand was reduced, but not to the levels originally anticipated, which had a corresponding positive effect on our second-quarter results. We expect the reductions in inventory purchases to persist in the third quarter, as wholesale and retail customers continue to adjust inventory levels.

This will have an impact in the third quarter on recorded revenues, and the updated financial guidance for the remainder of 2012 provided in today's press release includes these expectations. The objective of obtaining an improved average selling price per prescription is being achieved, and we believe will continue, both from the alternate fulfillment program and its progeny and the support we are receiving from physicians in working through various types of managed care preventative measures.

We have observed an increase in weekly profitable prescriptions, and the unprofitable prescriptions are now less costly to the company. Again, these were objectives when the program was initiated. We are expecting these trends to continue and our updated financial guidance for the remainder of 2012 provided in today's press release includes these expectations.

Gross profit margins were approximately 89%. Selling, general, and administrative expenses were approximately 5139% of revenues. This includes expenses associated with the previously announced addition of the number of sales representatives, increased promotional expenses, and professional fees related to the previously announced Federal Trade Commission investigation.

In light of the company's revised guidance, we are pursuing necessary cost-cutting measures to streamline our processes and workflow within the company. R&D expenses for the quarter were approximately were $23.3 million. This includes an $8 million purchase of R&D associated with payments to Medicis partners.

We continue to execute on the managed care strategy of securing new multi-year contracts, which we believe is a significant strategic investment and greatly reduces the coverage risk associated with our therapeutic brands. The company remains well-positioned with total coverage and access to SOLODYN for approximately 65% of the insurable commercial lives in the United States.

Revenues from the acne products category were approximately $93.1 million. Average selling prices during the second quarter for SOLODYN and ZIANA on a prescription basis were approximately $330 and $215 respectively. This compares favorably with our previously announced ASP expectations.

During the third quarter, we expected adjusted ASPs based on reportable prescriptions of approximately $320 to $340 for SOLODYN and approximately $200 to $220 for ZIANA. The company is forecasting growth in profitable SOLODYN and ZIANA prescriptions and growth in ZYCLARA prescriptions to achieve our updated guidance objectives.

The non-acne products category showed a strong increase of approximately 40.5% compared to the second quarter 2011, and increased sequentially approximately 9.6%. These increases are due primarily to increased sales of DYSPORT and the RESTYLANE family.

Our total facial aesthetics franchise experienced high single-digit growth in the second quarter, again, both sequentially and year-over-year. The average selling price during the second quarter for ZYCLARA in the U.S. on a prescription basis was approximately $410, again, which compares favorably to our previously announced ASP expectations.

We expect an average selling price of approximately $440 to $450 for ZYCLARA during the third quarter in the United States. Revenues from other non-dermatologic products were approximately $22.3 million. The company achieved cash flows from continuing operations of approximately $107.1 million during the first half 2012.

This includes the impact of upfront and milestone payments to Medicis partners totaling $42 million. In terms of brand highlights, beginning with SOLODYN, it remains the number one branded dermatology product in the United States. We continue to work on several next generation programs for SOLODYN and related compounds, some of which we expect to bring to market well prior to 2008. We implemented a 1% price increase on July 6 for SOLODYN.

With ZIANA, it remains among the top 10 branded dermatology products by dollars in the United States. Here too, we implemented a 1% price increase on July 6. With ZYCLARA, on July 17, the U.S. Patent and Trademark Office issued the 270 patent, which covers a method of daily administration of ZYCLARA 2.5% and expires in 2029. The 270 patent was listed in the FDA's orange book on July 23.

On August 7, again, the United States Patent and Trademark Office issued the so called 816 patent, which covers a method of daily administration of ZYCLARA 3.75% and also expires in 2029. The 816 patent was actually listed today in FDA's orange book. The company currently anticipates issue of a third patent, the 155 patent on August 14. The 155 patent will also cover a method of daily administration of ZYCLARA 3.75% and again will expire in 2029.

The company intends to submit the 155 patent for listing in the FDA's orange book immediately following its issuance. We believe that these patents will fortify the ZYCLARA brand and will solidify our presence in the actinic keratosis market for many years.

Feedback from physicians has been positive, and we continue to believe that ZYCLARA offers several features, which will be competitive advantages in the marketplace, among them; ease of use in dosing convenience of the first and only Imiquimod pump again, in a metered dose. And this is particularly important when treating on labeled indication in the full face or the balding scalp.

The 3.75% pump currently represents approximately 74% of ZYCLARA's total prescriptions. We also believe we offer flexibility in dosing. And in that regard, we anticipate launching ZYCLARA 2.3% in the third. The ability of the physician to manage the patient's tolerance and reaction to therapy is also an important feature of ZYCLARA. This cycle-based approach, a period of no treatment between cycles of treatment has demonstrated patient tolerability and has been deemed to be highly unique and novel by the U.S. Patent and Trademark Office.

As we move to DYSPORT, DYSPORT had its strongest quarterly demand since the launch, and we continue to receive positive feedback from physicians and patients regarding their experience with the biologic agents. DYSPORT enjoyed an approximately 5% increase in units sold, compared to the second quarter of 2011.

With RESTYLANE, the family also continued to experience strong demand in the second quarter in drawing its strongest second quarter since 2007. In terms of milliliters sold, the RESTYLANE family enjoyed an approximately 7% increase compared to the second quarter of last year.

Since the launch of the PERLANE L 2.0 milliliter syringe in March, our RESTYLANE L and PERLANE L 2 milliliter syringes represent approximately 18% of the milliliter sales in the second quarter. This suggests that physicians and patients value the greater therapeutic effect and economic value of the 2.5 milliliter syringe for full correction of appropriate lines and wrinkles.

On July 30th, the company launched a national partnership with Gilt City, a luxury online shopping destination following a remarkably successful pilot promotion. Through this partnership, consumers can purchase discounts on either a 1 or 2 milliliter treatment of the RESTYLANE family products. During the pilot, consumers purchased more discounts on the 2-milliliter treatments, again suggesting patients' growing appreciation for full correction.

As we move to research and development, we continue to work on more than 18 active development projects. The company hopes and expects to file an NDA for a therapeutic dermatology product in the first quarter of 2013.

In terms of business development, the company holds approximately $852 million in cash and cash equivalents in short and long-term investments and is actively pursuing numerous opportunities to strengthen our R&D pipeline and enhance the breadth of our on-market product offering through research and development and potentially acquisition transactions.

Importantly on August 2, we received from the Office of the Inspector General, the final closeout confirmation regarding our corporate integrity agreement having completed the term and discharged all obligations under the agreement.

Importantly, the company's Board of Directors has extended the termination date of the previously announced stock repurchase plan. The plan is now scheduled to terminate on February 7, 2013 or when the purchase limit of $200 million in the aggregate is reached, which ever is earlier. As of June 30, the remaining authorized amount under the plan is approximately $15 million.

At this point having covered the highlights, I'd be pleased to turn the call back to the operator, and again we will be happy to answer any questions that you have.

Question-and-Answer Session


(Operator Instructions) Let’s begin with Chris Schott of JPMorgan Securities.

Christopher T. Schott – JP Morgan Securities Inc.

Great, thanks very much. Just I had a couple of questions on the SOLODYN. First, and sorry if I missed this in the prepared remarks. Can you just talk about overall volume trends you saw for SOLODYN when you look at the IMS scripts that we see plus the prescriptions that are going through the AF program?

Jonah Shacknai

I think when all are combined, there has been a slight decrement, but we would have expected that. In fact, in the last quarter's call we predicted it. So in essence, what we have done is isolated to the IMS reported prescriptions those SOLODYN and ZIANA prescriptions, which are profitable, where the company is making money. This represents the majority, well the majority of prescriptions for those brands. Patients take their prescription to the pharmacy.

The pharmacist processes the insurance information, adjudicates the claim, the patient is given the medication on the spot. We are unwilling, however, to do what we’ve been doing historically, and that is to, in essence, buy Solodyn prescriptions, so that they’re available at every pharmacy at an expense that exceeds that which we sell the product to wholesalers for.

So there was a significant load in our system of prescriptions where we’re actually losing money; they were highly unprofitable. We did this to create in an essence universal access to the product. We instead I think thoughtfully, but with inadequate anticipation of demand, implemented a system whereby those prescriptions which working for us at the pharmacy, would not be profitable.

And in essence we have created a mail order system where those prescriptions are now given to a mail order pharmacy, which processes them, adjudicates them, when there is appropriate insurance coverage, and when there isn’t charges the patient a co-pay and ships the prescription in a timely way by mail.

I think our error in this, and it was a significant one, was really failing to anticipate the load of prescriptions that would come in. We’re dealing with a very established vendor that’s a Fortune 50 company that has up till now a superb reputation in handling these kinds of transactions. And I think we and they underestimated the demand that would come through the system and their preparedness to deal with the volume of prescriptions and their complexity. But the idea from a financial standpoint has been validated.

We’ve raised our average selling price of Solodyn and Ziana by removing or reducing the cost of the unprofitable prescriptions, while still maintaining a theoretical access for all patients to the drug. And I think physicians have taken time to get comfortable with this new regime. It is different, just as it took them time to get comfortable with the Medisafe card when we originally introduced that. We think that that is happening, and I think the more recent prescription trends would corroborate that view.

And we expect over the weeks and months ahead to see continued improvement as there was adjustment to this system. It is noteworthy that we have I think improvements on this system to come. It was necessary to go through this pain. It was necessary to recondition expectations a little bit on the part of physicians and patients, and there is a follow-on program which I think will eliminate any glitches that we have and should have a very salutary effect on our brands.

But no question that we took it on the chin a little bit. It has nothing to do with enthusiasm for the products or the quality of the products. To the contrary, I think there is still overwhelming preference for our products in the market where they’re medically indicated. So that’s sort of the story with Solodyn. But I think we highlighted both in the press release and in the narrative that our average selling price for both of these products has moved up, even though we have taken on the exposure dramatically of a number of managed care contracts.

So we’ve in essence reduced our gross profit margins on one side by taking on this business, but trying to have a corresponding offset by incorporating the alternate fulfillment program.


Our next question comes from the Greg Waterman with Goldman Sachs.

Greg P. Waterman – Goldman Sachs & Co.

Thank you for taking the question. Another one on Solodyn, if I understand correctly, the ASPs provided for 3Q are depressed by assumptions around further wholesaler to stocking. I was hoping you might help us think about what a normalized ASP might be once wholesaler activity and prescriptions are moving in the same direction. And then also, as we look at prescriptions that are currently running through IMS, can we now assume that all of those are profitable prescriptions?

In other words, if the Rxs visible to us, accelerate or decelerate more than expected, should we assume ASPs would be relatively constant?

Jonah Shacknai

We have forecast ASPs for the remaining period of the year, and I think that represents our best view of where they will be. That was both in the press release and the narrative. And yes, you may assume or you may take it as an article of faith in fact, that prescriptions that are moving through the IMS system, as the system is set up now, R&D profitable prescriptions.

So as I answered Chris’s question, I think the point I was trying to make is that we’ve essentially shunted the less profitable or non-profitable prescriptions to assist in that is significantly reduced cost feature for the company, so that we’re able to still adjudicate and fill those less or unprofitable prescriptions, but to do it with a cost basis that is outside the retail pharmacy regime. So the things that reported in IMS are prescriptions that are passing through the retail pharmacy trade, and those are profitable prescriptions. So you would in essence multiply those by the ASP to get, I think a fairly indicative view of where the business is at a given point in time.

Mark A. Prygocki, Sr.

Greg, just to supplement Jonah's answer, I think directly to your question, we include the destocking in the ASP. So as Jonah mentioned, you can multiply the ASP times scripts to get clarity on where current revenue is trending. I think to answer your question directly, we don't have a number that it would have been absent the destocking, but it would have been higher than the $340 that we reported in, I’m sorry $330 that we reported in SOLODYN and $215 in ZIANA, that would have been higher as well as our prediction of where that ASP will go in the future absent any destocking.


And our next question comes from Gary Nachman with Susquehanna.

Gary Nachman – Susquehanna Financial Group LLP

Hi Jonah. Could you talk about the launch of the 2.5% form of ZYCLARA and how you think that could help accelerate the franchise, and will you shift anymore reps on that sort of the launch? How much of a splash are you guys going to make? And then also what’s driving the ZYCLARA ASP to go up that much? It was a pretty robust number that you gave for Q3? Thanks.

Jonah Shacknai

Sure. Well, I think we are going to launch the 2.5% appropriately, which is to say that we are having a sales meeting. We will, I think educate our reps as to the features and benefits of this dosage strength where it fits into the continuum of therapy. We're obviously going to put resources behind it promotionally, including an appropriate number of sales reps, and we think it could have a pretty tonic influence on the ZYCLARA franchise.

I think it gives us a very competitive play with some other products in the market that perhaps are not known for their efficacy particularly, but are known to be highly tolerable. We believe the 2.5% as the label indicates, is highly efficacious. It’s a fact that it has an extremely low rate of pain and discontinuation, and we think that again those are important features of the product that really confer actual benefits to patients.

So yes, we have been waiting for this. I think you appreciate that we wanted to resolve the intellectual property issues in a thoughtful way. We promised some quarters ago that we would get patents issued, they are strong, they are long in duration to 2029. And I think we want to thoughtfully introduce additional elements of the ZYCLARA franchise and follow-on products with recognition of Orange Book listings and patents to make sure that we maximize our lawful protection for the franchise. I’m going to turn the financial question, on ASP over to Mark.

Mark A. Prygocki, Sr.

So as far as the ASP growth in that you see in not only in Q2, but Q3 and most likely beyond, really that represents launch costs that were included in gross to net in previous quarters and the decrease of them going forward. So I think as you look towards our guidance of $440 to $450, in ZYCLARA going forward, I think that represents a better estimate and actually could go higher, but a better estimate of we are thinking ASPs will be in Q3 and beyond.


And our next question comes from David Amsellem with Piper Jaffray.

Rebecca M. Forest – Piper Jaffray Inc.

Hi, this is Rebecca Forrest for David. What are your thoughts surrounding the competitive dynamics of ZYCLARA versus Picato? And do you plan to discontinue selling the sachet version of ZYCLARA at some point in the future? Thanks.

Jonah Shacknai

Well, we think it’s a thoughtful question. We have spoken of this before. These are two different products that very distinct mechanisms of action. Picato is a destructive product. It essentially creates an injury to the area that is significant. It’s obviously an effective product. It has a very short duration of application, but potentially a longer effect of consequences. But it’s a product that is difficult to manage in the sense that it’s applied for a couple of days, and then the reaction occurs some days later. And there’s really nothing to be done to get the train back in the station if it should be going in a direction which was not intended.

But obviously, it’s been deemed to be a safe and effective product by the FDA, and we respect it and respect that people will use it when it’s appropriate. ZYCLARA is a little bit different, as we’ve talked about. It is a product that can really be metered, not just in the literal sense with the pump, but also in the sense of measuring its side effects.

So if a patient is unduly reactive, a physician can dial down the frequency of application. Now, they will be able to dial down even the dosage strength. And really customize the treatment to the needs of the patient, both from a therapeutic and tolerability standpoint. So we think this has a lot of advantages. Imiquimod, the underlying molecule, is written overwhelmingly in this class. It’s been on market. It’s been used successfully in millions of patients around the world. We think there’s an appropriate level of confidence in such a well understood product.

And I think ZYCLARA represents an improvement of tolerability certainly over the historical of 5% in Imiquimod or Aldara, which is also our product. And in terms of selling it in the sachet or not, I indicated that 74% of our business is now in the pump. I suppose when there is a tipping point that is significant enough, one has to wonder if it’s worth going through the trouble of manufacturing a product that no one is using. So time will tell, but if commercial conditions really indicate that there is little or no demand for the sachet, it would really be wasteful for us to go through the process of producing it.


And our next question comes from Annabel Samimy with Stifel Nicolaus.

Daniel Chang – Stifel Nicolaus and Company, Inc.

Yes, hi. This is Daniel Chang in for Annabel. Thanks for taking the call. I had a couple and I think you touched on it earlier, the first one was just to clarify, I think you’ve been getting some success with alternative fulfillment. But I wanted to understand the progress being made on getting reimbursement on the prescriptions that were actually well covered but somehow ended up going through alternative fulfillment, and being able to bring those back to the regular channels?

Jonah Shacknai

I’m not certain that I understand your question, so let me try to repeat it, and if I get this right, I’ll be glad to answer it. If not, maybe you could help us out. So you’re asking if some of the prescriptions that are passing through alternative fulfillment are in fact are good and profitable prescriptions.

Daniel Chang – Stifel Nicolaus and Company, Inc.


Jonah Shacknai

And could be adjudicated profitably.

Daniel Chang – Stifel Nicolaus and Company, Inc.


Jonah Shacknai

So yeah, go ahead. Please clarify any way that you want to.

Daniel Chang – Stifel Nicolaus and Company, Inc.

Yeah, so from what I was understanding earlier, some of the prescriptions that were actually profitable like you’re saying were actually going through alternative fulfillment. And was there progress being made in really separating the unprofitable ones, purely towards alternative fulfillment and the profitable ones through the regular channel?

Jonah Shacknai

We try to do that with guidance to the physician. There is a Slim Jim or a flyer that goes to patients that has an envelope that gives them information about how to take their prescription to the pharmacy and what to do if the prescription is processed and the co-payment is over a certain amount of money. Basically, if they are told that the prescription is going to cost them more than $20. We encourage them to put the prescription in an envelope, which we’ve provided with postage and to just mail it directly to our fulfillment center.

There are some instances, indeed, where good prescriptions that would have been profitable at community pharmacy find their way in to an envelope, and that’s either because of some misprocessing at the pharmacy or because the patient might find it easier to do this on a mail order basis. And we actually collect full revenue and profit at the alternate fulfillment center. So we’re going through the process of adjudicating these prescriptions, and when they are profitable, and there are some of them that are, we’re collecting the appropriate revenue through the pharmacy and its relationship with third party intermediaries.


And our next question s from Ken Cacciatore with Cowen and Company.

Ken Cacciatore Cowen and Company, LLC,

Hi, thanks. Jon I was just wondering on expenses first, if you can carry what seems to be a real deduction come Q4, what’s the run rate going forward? And then a second question, and I ask this question with humility, because very rarely do we speak with the actual founder of a company when we were talking to the CEO, but just trying to understand here as we look at the business, it just feels like we're holding on here for something. And I'm for a re-articulation of the vision. Are we holding on for the NDA in the pipeline? Are we holding on to kind of see what you buy? Are we holding on to see who buys you? Can you just pull us all back here and give us a little bit of a restatement of where you see the business going. So sorry, first question kind of micro, and the second question, a little bit macro. Thank you.

Jonah Shacknai

Yeah let me, Ken, there is no disrespect taken from your question and I’ll answer it thoughtfully. In the meantime, I think Rick Peterson could answer your financial question, and then I’ll be right back to you.

Richard D. Peterson

Sure, just a quick answer on your financial question. On the SG&A, we’d expect that to continue in the third and fourth quarter at about the same level that we saw in Q2. So that is a pretty good run rate as we look out for the rest of the year.

Jonah Shacknai

So Ken, in terms of your question, we are in a difficult business environment. And I think that we have done better than most company’s that is staying independent and remaining highly profitable, which we are. There's no question that we've had to navigate a transition from being a very sales and marketing focused company to one that has had to develop a very sophisticated research and development and regulatory structure, because the kinds of products that we used to be able to sell, although superb products, really are not products that would particularly command the respect and attention of increasingly powerful managed care organizations.

So we have had to develop products that really have a more sophisticated therapeutic rationale. We've also had to manage in a world where frankly, the deck is stacked profoundly against branded companies, where governmental policies as well as the overlying economics of the healthcare economy are really stacked to favor those companies that are thought to provide low cost products, generic products. And this is obviously a short-term strategy to try to improve healthcare economics, but it’ is horribly misguided in the long-term, because no one is going to develop new products, new therapies if they can’t have a reasonable expectation of a return on their investment and a profit.

So we've had to navigate a patent office that is, I think, more skeptical of patents that are submitted, and here we have been very successful. We have to manage against extremely predatory generic companies who often have no respect and often contempt for intellectual property position. So we had to negotiate with them, we had to see many of them. We continue to, so we have a sort of massive legal budget just to defend what we have and what we own. And again, we do this in an environment where the managed care influence is not only greater, but where those companies themselves are under intense financial pressure.

So as we move toward a more federally regulated healthcare economy, I'm not calling it socialistic because we are not there yet, but there is increasing intervention by the federal government into casualty loss elements of these plans. They have to be investing a certain kind of money, not for the benefit of their shareholders, but to patient benefits. And again I am not, there is no editorial comment, but it is just a reality. They are squeezing down their cost structure as effectively as they can, and there are really only two places that they can find money. One is, on the backs of physicians, and they've certainly done that and I think you can talk to any physician and any specialty to appreciate their level of anxiety right now. And they've also done it with pharmaceutical companies.

Often demanding very significant rebates to include products on a formulary, or excluding products altogether in favor of generic compounds or drugs which are less advanced in their therapeutic benefit. So are we hanging on? I think we are fighting a tough business environment. I think we have thought it more effectively than most companies out there, including the major brand named pharmaceutical companies. I think there is obviously frustration from time-to-time that we can’t move as quickly as we want to. But I think we’ve been very thoughtful about investing our money in a way that really endures to the long-term benefit of shareholders rather than those that are on a short time.

We have a very strong R&D pipeline. I would argue the strongest in the dermatology industry worldwide. We have not shrunken from investing in that pipeline. Going back to the first piece of this, we had to develop a really strong research and development infrastructure, a strong regulatory infrastructure. We’ve got more products approved than any company in the world operating in United States in dermatology. So the pipeline is really good. We have a lot of cash, $852 million that we can deploy for an appropriate transaction.

So could we buy something, absolutely? Are we looking? Every day and looking hard for the right thing. And we have a lot of confidence in the future because at the end of the day, this is so hard that not many companies are going to be able to do it. And we think that we can, we think that we will, and with appropriate adjustments in our cost structure, which we are making, we think that we are going to be even more competitive as we go forward and we ask for your patience.


Your next question comes from Shibani Malhotra with RBC Capital.

Shibani Malhotra – RBC Capital Markets Equity Research

Thanks guys. I just have a couple. First, Jonah just a follow-on on Ken’s question. Can you talk about, I mean we’ve had some of your peers talk about M&A recently, and one of the things that has come out pretty clearly is that while everyone is looking for acquisitions and products. It doesn’t seem to be that much that’s attractive on the market, so can you comment on that?

And then given the difficulties you articulated right now facing the industry and the size of Medicis, do you see the company staying independent over the near or long-term? And how are you thinking about consolidation across the industry going forward? And then the final question and it relates to M&A again, but if you could just talk about why you raised cash last quarter, but there’s been no deal and what sort of things you are looking for?

Jonah Shacknai

Sure, well, all thoughtful questions is always from you. The M&A environment is a sort of tale of two cities, in a way. In dermatology, I think it’s true that for on-market assets, there are relatively limited opportunities, other than those that would involve significant consolidation. I mean, undoubtedly, there are efficiencies that could be enjoyed if a couple of major companies in derm could lawfully consolidate their interests, but that doesn’t seem very likely does it.

So we look instead to products that are well advanced in research and development, and we have actually closed many of those deals, even this year, probably as many as six or so just in the first half of 2012. So that is sort of on the smaller side of things, but important because it fuels a pipeline that is in the end, the mother’s milk of success here. So that’s one piece of it.

As we look to other areas of the pharmacology world, it may be that there are opportunities. The challenge for us is really being appropriate in our own assessment of capabilities. Can we buy something and manage it effectively? Is it in our wheelhouse of expertise, or is it something that’s so far field that we wouldn’t manage it effectively. So where we would have an edge and where we think that the skills we have developed as an organization could benefit a business, we are willing to look at it, and potentially willing to buy it.

And I don’t say this as a departure of strategy. I’ve said the same thing for quite some time, but obviously, we are looking at these things more seriously. In terms of whether we remain independent, I hope so, but at the end of the day, we are here to serve the interests of our shareholders. So we, like any other company has an absolute obligation to consider offers from legitimate and credible parties. It isn't my dream personally that that would happen, but I can assure you that my personal wishes would never interfere with a thoughtful consideration of something that came along again from a legitimate party.

So I can’t predict our independence. I’ve given you the same answer that I give our sales representatives if they ask me that same question at every sales meeting. And that is that as a public company, we have an absolute obligation to consider legitimate offers from credible parties, and we will do that if it should be appropriate and occasioned. And certainly our Board is committed to that, but I think we have to operate with an expectation that we are an independent company and that we will remain so and really make those important investments that will pay off in the long-term, not in the next quarter or two, however, tempting that may be for some companies, and even for some of our shareholders.

We can’t do that. And that’s in terms of cash, we raised money that essentially replaced funds that we used to purchase the assets of Graceway. The funds that we used to buy Graceway were actually on our books for several years. We waited for the right opportunity. We deployed the capital, and in essence in a very favorable interest rate environment with very favorable terms. We essentially reloaded the war chest. And I think we’re ready in placed if the transaction should present itself that’s appropriate and sensible for us.


Your next question comes from Ronny Gal with Sanford C. Bernstein.

Ronny Gal – Sanford C. Bernstein & Co.

Good afternoon and thank you for taking my questions. I have two. First regarding ZYCLARA given your first patent was listed in the Orange Book on July 17. If somebody had filed on ZYCLARA before that date, would you know by now? I know the generic companies have a limited amount of time to inform you that they had a power three challenge transition to power four. And second, regarding the managed care strategy, most plans if they add accounts, usually do it in the beginning of the year, in the middle of the year. Were there any additional coverage granted to SOLODYN and ZIANA in July? And do you still expect, or do you expect additional coverage for those products before the end of this year?

Jonah Shacknai

Yeah. Let me take the second question, and then I’m going to turn it over to Jason Hanson, who is sort of the architect with Seth Rodner of our intellectual property protection strategies. So yes, we did pickup additional coverage I think on July 1. We were listed as a preferred product on the Humana formulary, and that was very important. It is a large organization with many patient lives.

And I think there is a high probability that some other plans will be including us. It’s likely on a quarterly basis, Ronny, rather than annually. Some companies operate annually, but it really depends on the review characteristics of each plan. So Humana was July 1. We think that there are likely to be other major plans that may occur yet in this 2012 year, and we’ve had some pretty big Part D Medicare wins that especially affect ZYCLARA. So yes and yes. And now I’d ask Jason to answer your question about the Orange Book listing.

Jason Hanson

Sure Ronny. So the short answer to your question is we wouldn’t necessarily know by now, if an ANDA was already on file. The 270 patent that was listed back in July related to the 2.5% ZYCLARA product which we haven’t commercially launched. So the 816 patent that actually applies to 3.75, that patent was listed in the Orange Book today. So as we sit here today, we wouldn’t definitively know if anyone had filed an ANDA.


Your next question comes from Catherine Arnold with Credit Suisse.

Catherine Arnold – Credit Suisse

Hi. This is (inaudible) on for Catherine. Thank you for taking my questions. First, given the face of transition for the company, would you consider revealing incremental information in pipeline? And my second question on SOLODYN, what could ASP for the third quarter hypothetically look like, if you take out unprofitable prescriptions from your assumptions? Thank you.

Jonah Shacknai

I think there are no present plans to be more revelatory about our pipeline. I think we’ve put a great deal of information out in the public domain as we reported on 2011 in our sort of March call. So we would be glad to follow up with you privately just to reiterate the 18 programs that we have. I think we talked about the categories that those programs were in, and we gave a fair amount of information about the staging of those programs.

So again, I think it’s an impressive pipeline that has a nice balance between short and long-term programs. But there no, there is no plan to do anything other than the sorts of updates that we provided in this call today. In terms of ASP, obviously if we eliminated prescriptions which were negative in their financial impact, the ASP would increase importantly. I think what we’ve done, however, is reflect a reduced exposure to the unprofitable prescriptions, which has resulted in a pretty nice increase in the ASP in the second quarter, and we forecasted the same for the third quarter.

But there's no question that we are still absorbing economic exposure of these prescriptions that are not adjudicated and filled at the pharmacy for the most part. As I said earlier, there are some prescriptions which do come through our alternate fulfillment system that could have been filled profitably at the pharmacy, but for one reason or another were not.

Catherine Arnold – Credit Suisse

So would you say that number could be much higher than $340, which is the high end of your guidance for 3Q?

Jonah Shacknai

Yes, they would be importantly higher, I am not offering a calculation on the fly here, and I don't know we will offer one at all. But I think it’s clear that if we assume that we are losing a bit of money on each one of the prescriptions that's moving through the AF system, and there are thousands of them, then obviously it has an erosive impact on the total average selling price although for a less so then would have been the case had we not engineered and began the alternate fulfillment system. So we are certainly losing a lot less money on those prescriptions than we did then they were adjudicated and processed at community pharmacies.


And you next question comes from Douglas Tsao with Barclays Capital.

Douglas D. Tsao – Barclays Capital, Inc.

Hi, good evening.

Jonah Shacknai


Douglas Tsao – Barclays Capital

I think I missed it Jonah, but did you indicate that you expect scripts to recover in the second half of the year? And I was hoping you could clarify that and why we would see that?

Jonah Shacknai

We do, and again, we are really speaking of reportable scripts, which is to say those that are captured in the IMS data because they are adjudicated and processed at the community pharmacies, so yes, we do. I spoke earlier of the fact that it’s been important for physicians to accommodate themselves and patients to a different paradigm.

Again just to take you back a little bit, before we introduced the alternate fulfillment program, we had a Medisafe card, which basically gave all comers a prescription for SOLODYN and ZIANA at the pharmacy at the same co-payment. And on those prescriptions, we lost a lot of money when the prescriptions we are not covered adequately by the patient's prescription drug benefit under their health insurance program.

So we have taken those unprofitable prescriptions moved them to a place where they are far less unprofitable. But again, there was definite dislocation in the market. And I said earlier that I think we bear responsibility for that to some measure, because we were slow to process many prescriptions that came into the alternate fulfillment system, because it was not staffed up and it was not processed correctly to be able to move through all the prescriptions that were coming in.

So we got a bullish of prescriptions, unexpected in terms of the rapidity of demand and we didn’t have enough people there to staff them. And some of the adjudicatory processes there really were in adequate to meet the demand. So there was a process engineering issue, where we’d relied on a very established vendor and we have to work with them I think to come up with a better system.

We had to increase the staffing of both at the pharmacy level and the customer service level. We did all those things. But we had to win back the confidence of physicians that they could reliably put prescriptions through that system. I believe we’ve done that the system is up and working and reportedly very well. We monitor the statistics on a daily basis, and I think we’re convinced of that and we have slowly, but truly gotten back not confidence in the brand that had always existed, not confidence in Medicis that had always existed, but confidence in the alternate fulfillment program.

And I think, we see that in recent perception trends and we expect to establish that confidence even further, more over we’re coming to a time of the year, which is historically a Zenith in the acne market. As kids go back to school, they are sort of done with their summer activities; they are much more available to go to physician appointments. There is some degree of social consciousness. Co-payments, deductibles or a matter of urgency as the year runs out. So all of these things have historically meant for an important increase because of the so-called acne season.


So your next question comes from David Risinger with Morgan Stanley.

David Risinger – Morgan Stanley

Yes, sorry. Thanks very much for taking the question. My first question is with respect to your comment in the press release about the sales being in the last month of the third quarter, is that because you expect inventory to be worked down in July and August? Or does that really relate to the back-to-school seasonality in September? And then separately, I’m hoping that you could walk through any changes in reserves this quarter and versus the year-ago quarter, so that we can have a sense or whether reserve swings are impacting your reported sales?

Jonah Shacknai

Sure. Both good questions, I’ll take the first one. So, yes, I think it’s exactly the case that inventory is bleeding down from the system. There was some disequilibrium in the sense that retail prescriptions were declining as AF prescriptions picked up. The wholesalers are not supplying the AF prescriptions, so that doesn’t really show up as a wholesale sale from the company.

So yes, we talked in the last call about in essence reduction in inventory levels, destocking to the appropriate level of prescription demand. That happened significantly in the second quarter, but not entirely. So we see a little bit of that in July and August and we expect particularly as volume increases because of the acne season and this regaining of confidence that I talked about, that prescriptions go up and that inventory levels adjust as they always must to the actual demand for prescriptions. So I think your paradigm is exactly correct. Rick, do you want to, Rick Peterson comment on the reserve structure?

Richard D. Peterson

You bet. So, on the reserve question, we have not seen, even in comparison over the last few quarters or until last year. Any material changes in our overall reserve structure. We have forecasted and contemplated as the alternative fulfillment program was rolled out that we would see decrease in the patient rebates. And a corresponding increase in managed care rebates as we signed these contracts that we discuss. So I think those are all consistent with what we have forecasted. No large reversals or changes in those areas and in regards to returns, those have all been at a consistently low level over the last year.

David Risinger – Morgan Stanley

Thanks very much.


And our last question comes from Steve Willoughby with Cleveland Research.

Stephen Barr Willoughby – Cleveland Research Co.

Hi, thanks for taking the call. I was just wondering if you could comment regarding the guidance. It looks like you commented that you benefit here in the second quarter by the inventory draw down not being as significant as you had expected, but then it looks like you took down the back-half guidance by roughly $30 million at the mid-point. So I'm just wondering, the guidance coming down for the back half on the top line, how much of that is, the continuation of inventory draw down and how much of that is possibly some other items that maybe ZYCLARA or other products?

Mark A. Prygocki, Sr.

So this is Mark Prygocki. I think the thing to keep in mind that we’ve been talking about is really the timing of the rebound. And our anticipated rebound from the AF effect is specifically on ZIANA and SOLODYN and really when we anticipate that timing. So part of it has to do with when the wholesalers reduce their inventory levels and the significance of it not happening in the second quarter as we anticipated and it continuing to the third quarter. But it also has to do with the fact that that timing of the rebound happened later in timing. We can never get those scripts back. So it’s a mixture of both.


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

Jonah Shacknai

Thanks very much. We appreciate, as always you’re taking the time to share your afternoon, your evening with us and learn of events of the quarter. We as always are ready to follow up with you with questions that you may have, and we look forward to hearing from you. So again, thanks so much for being with us.


Thank you, Mr. Shacknai. Please note that full prescribing information for any Medicis prescription product is available by contacting the company and may also be found on the company’s website at Listeners should be aware of the following information with respect to discussions of DYSPORT efficacy during today’s presentation and Q&A.

DYSPORT is approved for the temporary improvement in the appearance of moderate to severe glabellar lines, or frown lines, in adult less than 65 years of age. What is the most important information you should know about DYSPORT, spread of toxin effects. In some cases, the effects of DYSPORT and all botulinum toxin products may affect the areas of the body away from the injection site. These affects can cause symptoms of a serious condition called botulism.

Symptoms of botulism can happen hours to weeks after injection and may include swallowing and breathing problems, loss of strength and muscle weakness all over the body, double vision, blurred vision, and drooping eye lids, hoarseness or change or loss of voice, trouble saying words clearly, or loss of bladder control. Swallowing and breathing problems can be life threatening and there have been reports of death.

The risk of symptoms is probably greatest in children and adults treated for muscle spasms, particularly in those patients who have underlying medical conditions that could make these symptoms more likely. The toxic effects have been reported at doses similar to those used to treat muscle spasms in the neck. Lower doses, in both approved and unapproved uses, have also caused toxic effects. This includes treatment of children and adults for muscle spasms. These effects could make it unsafe for you to drive a car, operate machinery, or do other dangerous activities.

The dose of DYSPORT is not the same as the dose of any other botulinum toxin products. The dose of DYSPORT cannot be compared to the dose of any other botchulism toxin products you may have used. Complete information about the risks of DYSPORT is available from products full prescribing information available at

This concludes today’s call. Thank you for your participation. You may now disconnect.

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