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Article by DailyStocks_admin    (02-02-09 08:58 AM)

The Daily Magic Formula Stock for 02/01/2009 is Medicis Pharmaceutical Corp. According to the Magic Formula Investing Web Site, the ebit yield is 20% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Change in Fiscal Year
Effective December 31, 2005, Medicis Pharmaceutical Corporation (“Medicis”, the “Company”, or as used in the context of “we”, “us” or “our”) changed its fiscal year end from June 30 to December 31. This change was made to align our fiscal year end with other companies within our industry. This Form 10-K is intended to cover the audited calendar year January 1, 2007 to December 31, 2007, which we refer to as “2007.” We refer to the audited calendar year January 1, 2006 to December 31, 2006 as “2006”. Comparative financial information to 2006 is provided in this Form 10-K with respect to the calendar year January 1, 2005 to December 31, 2005, which is unaudited and we refer to as “2005.” Additional audited information is provided with respect to the transition period July 1, 2005 through December 31, 2005, which we refer to as the “Transition Period.” We refer to the period beginning July 1, 2004 and ending June 30, 2005 as “fiscal 2005”.
The Company
We, together with our wholly owned subsidiaries, are a leading independent specialty pharmaceutical company focusing primarily on helping patients attain a healthy and youthful appearance and self-image through the development and marketing in the U.S. of products for the treatment of dermatological, aesthetic and podiatric conditions. We believe that the U.S. market for dermatological pharmaceutical sales exceeds $6 billion annually. According to the American Society for Aesthetic Plastic Surgery, a national not-for-profit organization for education and research in cosmetic plastic surgery, nearly 11.7 million cosmetic surgical and non-surgical procedures were performed in the United States during 2007, including approximately 9.6 million non-surgical cosmetic procedures. We also market products in Canada for the treatment of dermatological and aesthetic conditions.
We have built our business by executing a four-part growth strategy: promoting existing brands, developing new products and important product line extensions, entering into strategic collaborations, and acquiring complementary products, technologies and businesses. Our core philosophy is to cultivate high integrity relationships of trust and confidence with the foremost dermatologists and podiatrists and the leading plastic surgeons in the United States.
We offer a broad range of products addressing various conditions or aesthetic improvements, including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, skin and skin-structure infections, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin). We currently offer 18 branded products. Our primary brands are PERLANE ® (hyaluronic acid), RESTYLANE ® (hyaluronic acid), SOLODYN ® (minocycline HCl, USP), TRIAZ ® (benzoyl peroxide), VANOS ® (fluocinonide) Cream 0.1%, and ZIANA ® (clindamycin phosphate 1.2% and tretinoin 0.025%) Gel. Many of our primary brands currently enjoy branded market leadership in the segments in which they compete. Because of the significance of these brands to our business, we concentrate our sales and marketing efforts in promoting them to physicians in our target markets. We also sell a number of other products that we consider less critical to our business.
We develop and obtain marketing and distribution rights to pharmaceutical agents in various stages of development. We have a variety of products under development, ranging from new products to existing product line extensions and reformulations of existing products. Our product development strategy involves the rapid evaluation and formulation of new therapeutics by obtaining preclinical safety and efficacy data, when possible, followed by rapid safety and efficacy testing in humans. As a result of our increasing financial strength, we have begun adding long-term projects to our development pipeline. Historically, we have supplemented our research and development efforts by entering into research and development agreements with other pharmaceutical and biotechnology companies.
Currently, we outsource all of our product manufacturing needs. The underlying cost to us for manufacturing our products is established in our agreements with outside manufacturers. Because of the short-term nature of these agreements, our expenses for manufacturing are not fixed and could change from contract to contract.
Our Products
We currently market 18 branded products. Our sales and marketing efforts are currently focused on our primary brands. The following chart details certain important features of our primary brands:

Dermal Restorative Products
Our principal branded dermal restorative products are described below (see also Item 1A. Risk Factors):
RESTYLANE ® , PERLANE ® , RESTYLANE FINE LINES TM and SubQ TM are injectable, transparent, stabilized hyaluronic acid gels, which require no patient sensitivity tests in advance of product administration. These products are the leading particle-based hyaluronic acid dermal fillers and offer patients a “tissue tailored” result based on their particular skin type volume augmentation needs. In the United States, the FDA regulates these products as medical devices. Medicis offers all four of these products in Canada, and began offering RESTYLANE ® and PERLANE ® in the United States on January 6, 2004 and May 2, 2007, respectively. RESTYLANE FINE LINES TM and SubQ TM have not yet been approved by the FDA for use in the United States. We acquired the exclusive U.S. and Canadian rights to these dermal restorative products from Q-Med AB, a Swedish biotechnology and medical device company and its affiliates (collectively “Q-Med”) through license agreements.

Prescription Pharmaceuticals
Our principal branded prescription pharmaceutical products are described below (see also Item 1A. Risk Factors):
SOLODYN ® , launched to dermatologists in July 2006 after approval by the FDA on May 8, 2006, is the only oral minocycline approved for once daily dosage in the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older. SOLODYN ® is also the only approved minocycline in extended release tablet form. SOLODYN ® is lipid soluble, and its mode of action occurs in the skin and sebum. SOLODYN ® is not bioequivalent to any other minocycline products, and is in no way interchangeable with other forms of minocycline. SOLODYN ® is patented until 2018 by a U.S. patent which covers SOLODYN ® ‘s unique dissolution rate (see also Item 1A. Risk Factors). Other patent applications covering SOLODYN ® are to be filed or are pending (see also Item 1A. Risk Factors). SOLODYN ® is available by prescription in 45mg, 90mg and 135mg extended release tablet dosages.
TRIAZ ® , a topical therapy prescribed for the treatment of numerous forms and varying degrees of acne, is available as a patented gel or cleanser or in a patent-pending pad in three concentrations. TRIAZ ® products are manufactured using the active ingredient benzoyl peroxide in a patented vehicle containing glycolic acid and zinc lactate. Studies conducted by third parties have shown that benzoyl peroxide is the most efficacious agent available for eradicating the bacteria that cause acne with no reported resistance. We introduced the TRIAZ ® brand in fiscal 1996. In July 2003, we launched TRIAZ ® Pads, the first benzoyl peroxide pad available in the U.S. indicated for the topical treatment of acne vulgaris. TRIAZ ® is protected by a U.S. patent that expires in 2015.
VANOS ® Cream, launched to dermatologists in April 2005 after approval by the FDA on February 11, 2005, is a super-high potency (Class I) topical corticosteroid indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses in patients 12 years of age or older. The active ingredient in VANOS ® is fluocinonide 0.1%, and is the only fluocinonide available in the Class I category of topical corticosteroids. Physicians may already be familiar with the fluocinonide 0.05%, the active ingredient in another of our products, the Class II corticosteroid LIDEX ® . Two double blind clinical studies have demonstrated the efficacy, safety and tolerability of VANOS ® . Its base was formulated to have the cosmetic elegance of a cream, yet behave like an ointment on the skin. In addition, physicians have the flexibility of prescribing VANOS ® either for once or twice daily application. VANOS ® Cream is protected by three U.S. patents that expire in 2021.
ZIANA ® Gel, which contains clindamycin phosphate 1.2% and tretinoin 0.025%, was approved by the FDA on November 7, 2006. Initial shipments of ZIANA ® to wholesalers began in December 2006, with formal promotional launch to dermatologists occurring in January 2007. ZIANA ® is the first and only combination of clindamycin and tretinoin approved for once daily use for the topical treatment of acne vulgaris in patients 12 years and older. ZIANA ® is also the first and only approved acne product to combine an antibiotic and a retinoid. ZIANA ® is protected by a U.S. patent for both composition of matter on the aqueous-based vehicle and method that expires in 2020. An additional patent covering composition of matter has been placed before the U.S. Patent and Trademark Office to be reissued. Each of these patents cover aspects of the unique vehicle which are used to deliver the active ingredients in ZIANA ® . ZIANA ® is available by prescription in 30 gram and 60 gram tubes.
Research and Development
We develop and obtain rights to pharmaceutical agents in various stages of development. Currently, we have a variety of products under development, ranging from new products to existing product line extensions and reformulations of existing products. Our product development strategy involves the rapid evaluation and formulation of new therapeutics by obtaining preclinical safety and efficacy data, when possible, followed by rapid safety and efficacy testing in humans. As a result of our increasing financial strength, we have begun adding long-term projects to our development pipeline. Historically, we have supplemented our research and development efforts by entering into research and development agreements with other pharmaceutical and biotechnology companies.

We incurred total research and development costs for all of our sponsored and unreimbursed co-sponsored pharmaceutical projects for 2007, 2006, the Transition Period, the corresponding six-month period of 2004 and fiscal 2005 of $39.4 million, $161.8 million, $22.4 million, $45.1 million, and $65.7 million, respectively. Research and development costs for 2007 includes $8.0 million related to our option to acquire Revance Therapeutics, Inc. (“Revance”) or to license Revance’s product currently under development. Research and development costs for 2006 include $125.2 million paid to Ipsen Ltd., a wholly-owned subsidiary of Ipsen, S.A. (“Ipsen”) pursuant to the RELOXIN ® development agreements. Research and development costs for the Transition Period include $11.9 million paid to Dow Pharmaceutical Sciences, Inc. (“Dow”) pursuant to a development agreement. Research and development costs for the corresponding six-month period of 2004 include $30.0 million related to our license agreement with Q-Med related to the SubQ TM product, and $5.0 million related to our development and license agreement with Ansata Therapeutics, Inc. (“Ansata”). Research and development costs for fiscal 2005 include $30.0 million related to our license agreement with Q-Med related to the SubQ TM product, $5.0 million related to our development and license agreement with Ansata, and $8.3 million related to our research and development collaboration with AAIPharma, Inc. (“AAIPharma”).
On December 11, 2007, we announced a strategic collaboration with Revance whereby we made an equity investment in Revance and purchased an option to acquire Revance or to license exclusively in North America Revance’s novel topical botulinum toxin type A product currently under clinical development. The consideration to be paid to Revance upon our exercise of the option will be at an amount that will approximate the then fair value of Revance or the license of the product under development, as determined by an independent appraisal. The option period will extend through the end of Phase 2 testing in the United States. In consideration for our $20.0 million payment, we received preferred stock representing an approximate 13.7 percent ownership in Revance, or approximately 11.7 percent on a fully diluted basis and the option to acquire Revance or to license the product under development. The $20.0 million is expected to be used by Revance primarily for the development of the new product. $12.0 million of the $20.0 million payment represents the fair value of the investment in Revance at the time of the investment and is included in other long-term assets in our consolidated balance sheets as of December 31, 2007. The remaining $8.0 million, which is non-refundable and is expected to be utilized in the development of the new product, represents the residual value of the option to acquire Revance or to license the product under development and is included in research and development expense for the three months ended December 31, 2007. Additionally, we have committed to make further equity investments in Revance of up to $5.0 million under certain terms, subject to certain conditions and prior to the exercise of the option to acquire Revance or to license exclusively Revance’s topical botulinum toxin type A product in North America.
Prior to the exercise of the option, Revance will remain primarily responsible for the worldwide development of Revance’s topical botulinum toxin type A product in consultation with us in North America. We will assume primary responsibility for the development of the product should consummation of either a merger or a license for topically delivered botulinum toxin type A in North America be completed under the terms of the option. Revance will have sole responsibility for manufacturing the development product and manufacturing the product during commercialization worldwide. Our right to exercise the option is triggered upon Revance’s successful completion of certain regulatory milestones through the end of Phase 2 testing in the United States. A license would contain a payment upon exercise of the license option, milestone payments related to clinical, regulatory and commercial achievements, and royalties based on sales, as defined in the license. If we elect to exercise the option, the financial terms for the acquisition or license will be determined through an independent valuation in accordance with specified methodologies.
On October 9, 2007, we entered into a development and license agreement with a company for the development of a dermatologic product. Under terms of the agreement, we made an initial payment of $1.5 million upon execution of the agreement. In addition, we are required to pay $18.0 million upon successful completion of certain clinical milestones and $5.2 million upon the first commercial sales of the product in the U.S. We will also make royalty payments based on net sales as defined in the license. The $1.5 million payment was recognized as a charge to research and development expense during 2007.
On June 19, 2006, we entered into an exclusive start-up development agreement with a company for the development of a dermatologic product. Under terms of the agreement, we made an initial payment of $1.0 million upon execution of the agreement, and are required to pay a milestone payment of $3.0 million upon execution of a development and license agreement between the parties. In addition, we will pay approximately $16.0 million upon successful completion of certain clinical milestones and approximately $12.0 million upon the first commercial sales of the product in the U.S. We also will make additional milestone payments upon the achievement of certain commercial milestones. The $1.0 million payment was recognized as a charge to research and development expense during 2006.
On March 17, 2006, we entered into a development and distribution agreement with Ipsen, whereby Ipsen granted Aesthetica Ltd., our wholly-owned subsidiary, rights to develop, distribute and commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan for aesthetic use by physicians. The product is commonly referred to as RELOXIN ® in the U.S. aesthetic market and DYSPORT ® in medical and aesthetic markets outside the U.S. The product is not currently approved for use in the U.S., Canada or Japan. Upon execution of the development and distribution agreement, we made an initial payment to Ipsen in the amount of $90.1 million in consideration for the exclusive distribution rights in the U.S., Canada and Japan. We will pay Ipsen an additional $26.5 million upon successful completion of various clinical and regulatory milestones (including $25.0 million upon the FDA’s acceptance of our Biologics License Application (“BLA”) for RELOXIN ® ), $75.0 million upon the product’s approval by the FDA and $2.0 million upon regulatory approval of the product in Japan. Ipsen will manufacture and provide the product to us for the term of the agreement, which extends to December 2036. Ipsen will receive a royalty based on sales and a supply price, the total of which is equivalent to approximately 30% of net sales as defined under the agreement. Under the terms of the agreement, we are responsible for all remaining research and development costs associated with obtaining the product’s approval in the U.S., Canada and Japan.
On January 30, 2008, we received a letter from the FDA stating that, upon a preliminary review of our BLA for RELOXIN ® , the FDA has determined not to accept the BLA for filing because it is not sufficiently complete to permit a substantive review. While we are uncertain of the impact at this time, the FDA’s determination not to accept the BLA may result in delays in the FDA’s substantive response to the BLA.
Additionally, on March 17, 2006, Medicis and Ipsen agreed to negotiate and enter into an agreement relating to the exclusive distribution and development rights of the product for the aesthetic market in Europe, and subsequently in certain other markets. Under the terms of the U.S., Canada and Japan agreement, as amended, we were obligated to make an additional $35.1 million payment to Ipsen if this agreement was not entered into by April 15, 2006. On April 13, 2006, Medicis and Ipsen agreed to extend this deadline to July 15, 2006. In connection with this extension, we paid Ipsen approximately $12.9 million in April 2006, which would be applied against the total obligation, in the event an agreement was not entered into by the extended deadline. On July 17, 2006, Medicis and Ipsen agreed that the two companies would not pursue an agreement for the commercialization of the product outside of the U.S., Canada and Japan. On July 17, 2006, we made the additional $22.2 million payment to Ipsen, representing the remaining portion of the $35.1 million total obligation, resulting from the discontinuance of negotiations for other territories.
The initial $90.1 million payment and the $35.1 million obligation were recognized as charges to research and development expense during 2006.
On January 28, 2005, we amended our strategic alliance with AAIPharma, previously initiated in June 2002, for the development, commercialization and license of a dermatologic product, SOLODYN ® . The consummation of the amendment did not affect the timing of the development project. The amendment allowed for the immediate transfer of the work product as defined under the agreement, as well as the product’s management and development, to us, and provided that AAIPharma would continue to assist us with the development of SOLODYN ® on a fee for services basis. We had no financial obligations to pay AAIPharma on the attainment of additional clinical milestones, but we incurred approximately $8.3 million as a charge to research and development expense during the third quarter of fiscal 2005, as part of the amendment and the assumption of all liabilities associated with the project. SOLODYN ® was approved by the FDA on May 8, 2006. In addition to the amendment, we entered into a supply agreement with AAIPharma for the manufacture of the product by AAIPharma. We have the right to qualify an alternate manufacturing facility, and AAIPharma agreed to assist us in obtaining these qualifications. Upon the approval of the alternate facility and approval of the product, we will pay AAIPharma approximately $1.0 million.
On December 13, 2004, we entered into an exclusive development and license agreement and other ancillary agreements with Ansata. The development and license agreement granted us the exclusive, worldwide rights to Ansata’s early stage, proprietary antimicrobial peptide technology. In accordance with the development and license agreement, we paid $5.0 million upon signing of the contract, and would have been required to make additional payments for the achievement of certain developmental milestones. In June 2006, the development project was terminated. We have no current or future obligations related to this project. The initial $5.0 million payment was recorded as a charge to research and development expense during the second quarter of fiscal 2005.
On July 15, 2004, we entered into an exclusive license agreement and other ancillary documents with Q-Med to market, distribute and commercialize in the United States and Canada Q-Med’s product currently known as SubQ TM . Q-Med has the exclusive right to manufacture SubQ TM for Medicis. SubQ TM is currently not approved for use in the United States. Under the terms of the license agreement, Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of Medicis, licenses SubQ TM for approximately $80.0 million, due as follows: approximately $30.0 million paid on July 15, 2004, which was recorded as research and development expense during the first quarter of fiscal 2005; approximately $10.0 million upon successful completion of certain clinical milestones; approximately $20.0 million upon the satisfaction of certain defined regulatory milestones; and approximately $20.0 million upon U.S. launch of SubQ TM . We also will make additional milestone payments to Q-Med upon the achievement of certain commercial milestones. SubQ TM is comprised of the same NASHA TM substance as RESTYLANE ® , PERLANE ® and RESTYLANE FINE LINES TM with a larger gel particle size and has patent protection until at least 2015 in the United States.
On September 26, 2002, we entered into an exclusive license and development agreement with Dow for the development and commercialization of ZIANA ® . Under terms of the agreement, as amended, we made an initial payment of $5.4 million and a development milestone payment of $8.8 million to Dow during fiscal 2003, a development milestone payment of $2.4 million to Dow during fiscal 2004 and development milestone payments totaling $11.9 million to Dow during the Transition Period. These payments were recorded as charges to research and development expense in the periods in which the milestones were achieved. During the quarter ended December 31, 2006, ZIANA ® was approved by the FDA and, in accordance with the agreement between the parties, we made an additional payment of $1.0 million to Dow for the achievement of this milestone. The $1.0 million payment was recorded as an intangible asset in our consolidated balance sheets. The agreement also included a one-time milestone payment of $1.0 million payable to Dow the first time ZIANA ® achieved a specific commercialization milestone during a 12-month period ending on the anniversary of ZIANA ® ‘s launch date. This milestone was achieved during the three months ended June 30, 2007, and the $1.0 million milestone payment was accrued for as of June 30, 2007 and recorded as an addition to intangible assets in our consolidated balance sheets. In accordance with the agreement, the milestone is payable during the three months ended March 31, 2008.
Sales and Marketing
Our combined dedicated sales force, consisting of 200 employees as of December 31, 2007, focuses on high patient volume dermatologists and plastic surgeons. Since a relatively small number of physicians are responsible for writing a majority of dermatological prescriptions and performing dermal aesthetic procedures, we believe that the size of our sales force, including its currently ongoing expansion, is appropriate to reach our target physicians. Our therapeutic dermatology sales forces consist of 109 employees who regularly call on approximately 12,000 dermatologists. Our dermal aesthetic sales force consists of 91 employees who regularly call on leading plastic surgeons, facial plastic surgeons, dermatologists and dermatologic surgeons. We also have eight national account managers who regularly call on major drug wholesalers, managed care organizations, large retail chains, formularies and related organizations.
Our strategy is to cultivate relationships of trust and confidence with the high prescribing dermatologists and the leading plastic surgeons in the United States. We use a variety of marketing techniques to promote our products including sampling, journal advertising, promotional materials, specialty publications, coupons, money-back or product replacement guarantees, educational conferences and informational websites. We also promote our dermal aesthetic products through television and radio advertising.
We believe we have created an attractive incentive program for our sales force that is based upon goals in prescription growth, market share achievement and customer service.

Warehousing and Distribution
We utilize an independent national warehousing corporation to store and distribute our products from primarily two regional warehouses in Nevada and Georgia, as well as additional warehouses in Maryland and North Carolina. Upon the receipt of a purchase order through electronic data input (“EDI”), phone, mail or facsimile, the order is processed through our inventory management systems and is transmitted electronically to the appropriate warehouse for picking and packing. Upon shipment, the warehouse sends back to us via EDI the necessary information to automatically process the invoice in a timely manner.

Third-Party Reimbursement
Our operating results and business success depend in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities such as Medicaid, private health insurers and managed care organizations. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve many of these organizations has become important to our business.
The trend toward managed healthcare in the United States and the growth of managed care organizations could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Managed care organizations and other third party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians.
Some of our products are not of a type generally eligible for reimbursement. It is possible that products manufactured by others could address the same effects as our products and be subject to reimbursement. If this were the case, some of our products may be unable to compete on a price basis. In addition, decisions by state regulatory agencies, including state pharmacy boards, and/or retail pharmacies may require substitution of generic for branded products, may prefer competitors’ products over our own, and may impair our pricing and thereby constrain our market share and growth.

Seasonality
Our business, taken as a whole, is not materially affected by seasonal factors, although a substantial portion of our prescription product revenues has been recognized in the last month of each quarter and we schedule our inventory purchases to meet anticipated customer demand. As a result, relatively small delays in the receipt of manufactured products by us could result in revenues being deferred or lost.
Manufacturing
We currently outsource all of our manufacturing needs, and we are required by the FDA to contract only with manufacturers who comply with current Good Manufacturing Practices (“cGMP”) regulations and other applicable laws and regulations. Typically our manufacturing contracts are short-term. We review our manufacturing arrangements on a regular basis and assess the viability of alternative manufacturers if our current manufacturers are unable to fulfill our needs. If any of our manufacturing partners are unable to perform their obligations under our manufacturing agreements or if any of our manufacturing agreements are terminated, we may experience a disruption in the manufacturing of the applicable product that would adversely affect our results of operations.
Under several exclusive supply agreements, with certain exceptions, we must purchase most of our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier relationships were terminated, we would be forced to find a replacement manufacturer or supplier. The FDA requires that all manufacturers used by pharmaceutical companies comply with the FDA’s regulations, including the cGMP regulations applicable to manufacturing processes. The cGMP validation of a new facility and the approval of that manufacturer for a new drug product may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA validation of a replacement manufacturing facility could cause an interruption in the supply of our products. Although we have business interruption insurance to assist in covering the loss of income for products where we do not have a secondary manufacturer, which may mitigate the harm to us from the interruption of the manufacturing of our largest selling products caused by certain events, the loss of a manufacturer could still cause a reduction in our sales, margins and market share, as well as harm our overall business and financial results.
We and the manufacturers of our products rely on suppliers of raw materials used in the production of our products. Some of these materials are available from only one source and others may become available from only one source. We try to maintain inventory levels that are no greater than necessary to meet our current projections, which could have the affect of exacerbating supply problems. Any interruption in the supply of finished products could hinder our ability to timely distribute finished products. If we are unable to obtain adequate product supplies to satisfy our customers’ orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products. This, in turn, could cause a loss of our market share and reduce our revenues. In addition, any disruption in the supply of raw materials or an increase in the cost of raw materials to our manufacturers could have a significant effect on their ability to supply us with our products, which would adversely affect our financial condition and results of operations.
Our TRIAZ ® , VANOS ® and ZIANA ® branded products are manufactured by Contract Pharmaceuticals Limited pursuant to a manufacturing agreement that automatically renews on an annual basis, unless terminated by either party.
Our RESTYLANE ® and PERLANE ® branded products in the U.S. and Canada are manufactured by Q-Med pursuant to a long-term supply agreement that expires no earlier than 2013.
Our SOLODYN ® branded product is manufactured by AAIPharma pursuant to a long-term supply agreement that expires in 2010, unless extended by mutual agreement. We are also in the process of qualifying an alternative manufacturing facility for SOLODYN ® . Upon the approval of the alternate facility and approval of the product, we will pay AAIPharma approximately $1.0 million.
Raw Materials
We and the manufacturers of our products rely on suppliers of raw materials used in the production of our products. Some of these materials are available from only one source and others may become available from only one source. Any disruption in the supply of raw materials or an increase in the cost of raw materials to our manufacturers could have a significant effect on their ability to supply us with our products.
License and Royalty Agreements
Pursuant to license agreements with third parties, we have acquired rights to manufacture, use or market certain of our existing products, as well as many of our development products and technologies. Such agreements typically contain provisions requiring us to use our best efforts or otherwise exercise diligence in pursuing market development for such products in order to maintain the rights granted under the agreements and may be canceled upon our failure to perform our payment or other obligations. In addition, we have licensed certain rights to manufacture, use and sell certain of our technologies outside the United States and Canada to various licensees.
Trademarks, Patents and Proprietary Rights
We believe that trademark protection is an important part of establishing product and brand recognition. We own a number of registered trademarks and trademark applications. U.S. federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce. OMNICEF ® is a trademark of Fujisawa Pharmaceutical Co. Ltd. and is used under a license from Abbott Laboratories, Inc. (“Abbott”). On April 1, 2005, Fujisawa Pharmaceutical Co. Ltd. merged with Yamanouchi Pharmaceutical Co. Ltd., creating Astelles Pharma, Inc.
We have obtained and licensed a number of patents covering key aspects of our products, including a U.S. patent expiring in October of 2015 covering various formulations of TRIAZ ® , a U.S. patent expiring in October of 2015 covering RESTYLANE ® , a U.S. patent expiring in February of 2018 covering SOLODYN ® Tablets, two U.S. patents expiring in February of 2015 and August of 2020 covering ZIANA ® Gel, and three U.S. patents expiring in December 2021 covering VANOS ® Cream. We have patent applications pending relating to SOLODYN ® Tablets, and ZIANA ® Gel. We are also pursuing several other U.S. and foreign patent applications.
We rely and expect to continue to rely upon unpatented proprietary know-how and technological innovation in the development and manufacture of many of our principal products. Our policy is to require all our employees, consultants and advisors to enter into confidentiality agreements with us.
Our success with our products will depend, in part, on our ability to obtain, and successfully defend if challenged, patent or other proprietary protection. However, the issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. Accordingly, our patents may not prevent other companies from developing similar or functionally equivalent products or from successfully challenging the validity of our patents. As a result, if our patent applications are not approved or, even if approved, such patents are circumvented or not upheld in a legal proceeding, our ability to competitively exploit our patented products and technologies may be significantly reduced. Also, such patents may or may not provide competitive advantages for their respective products or they may be challenged or circumvented by competitors, in which case our ability to commercially exploit these products may be diminished.
Third parties may challenge and seek to invalidate or circumvent our patents and patent applications relating to our products, product candidates and technologies. Challenges may result in potentially significant harm to our business. The cost of responding to these challenges and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, can require a substantial commitment of our management’s time, be costly and can preclude or delay the commercialization of products. For example, on January 15, 2008, IMPAX Laboratories, Inc. filed a lawsuit against us in the United States District Court for the Northern District of California seeking a declaratory judgment that our U.S. Patent No. 5,908,838 related to SOLODYN ® is invalid and is not infringed by IMPAX’s October 2007 filing of an Abbreviated New Drug Application for a generic version of SOLODYN ® . See Item 3 of Part I of this report, “Legal Proceedings” and Note 15, “Commitments and Contingencies,” in the notes to the consolidated financial statements listed under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules,” for information concerning our current intellectual property litigation.
From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented.

CEO BACKGROUND


Director
Term
Name
Age
Position
Since Expires

Jonah Shacknai(1)
51 Chairman, Chief Executive Officer 1988 2010
Arthur G. Altschul, Jr.(2)(3)(4)
43 Director 1992 2009
Spencer Davidson(1)(3)(4)
65 Director 1999 2008
Stuart Diamond(2)(6)
47 Director 2002 2008
Peter S. Knight, Esq.(5)
57 Director 1997 2008
Michael A. Pietrangelo(1)(3)(6)
65 Director 1990 2010
Philip S. Schein, M.D.(2)
68 Director 1990 2009
Lottie H. Shackelford(4)(5)(6)
66 Director 1993 2010

MANAGEMENT DISCUSSION FROM LATEST 10K

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations, as well as discusses our critical accounting policies and estimates. You should read the following discussion and analysis together with our consolidated financial statements, including the related notes, which are included in this report on Form 10-K. Certain information contained in the discussion and analysis set forth below and elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See “Risk Factors” in Item 1A of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements in this report. Our MD&A is composed of four major sections; Executive Summary, Results of Operations, Liquidity and Capital Resources and Critical Accounting Policies and Estimates.
Change in Fiscal Year
Effective December 31, 2005, we changed our fiscal year end from June 30 to December 31. This change was made to align our fiscal year end with other companies within our industry. This MD&A is intended to cover the audited calendar years January 1, 2007 to December 31, 2007, and January 1, 2006 to December 31, 2006, which we refer to as “2007” and “2006,” respectively. Comparative financial information to 2006 is provided in this Form 10-K with respect to the calendar year January 1, 2005 to December 31, 2005, which is unaudited and we refer to as “2005.”
Executive Summary
We are a leading independent specialty pharmaceutical company focused primarily on helping patients attain a healthy and youthful appearance and self-image through the development and marketing in the U.S. of products for the treatment of dermatological, aesthetic and podiatric conditions. We also market products in Canada for the treatment of dermatological and aesthetic conditions. We offer a broad range of products addressing various conditions or aesthetics improvements, including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, skin and skin-structure infections, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin).
Our current product lines are divided between the dermatological and non-dermatological fields. The dermatological field represents products for the treatment of acne and acne-related dermatological conditions and non-acne dermatological conditions. The non-dermatological field represents products for the treatment of urea cycle disorder and contract revenue. Our acne and acne-related dermatological product lines include DYNACIN ® , PLEXION ® , SOLODYN ® , TRIAZ ® and ZIANA ® . Our non-acne dermatological product lines include LOPROX ® , OMNICEF ® , PERLANE ® , RESTYLANE ® and VANOS ® . Our non-dermatological product lines include AMMONUL ® and BUPHENYL ® . Our non-dermatological field also includes contract revenues associated with licensing agreements and authorized generic agreements.
Financial Information About Segments
We operate in one significant business segment: Pharmaceuticals. Our current pharmaceutical franchises are divided between the dermatological and non-dermatological fields. Information on revenues, operating income, identifiable assets and supplemental revenue of our business franchises appears in the consolidated financial statements included in Item 8 hereof.
Key Aspects of Our Business
We derive a majority of our revenue from our primary products: PERLANE ® , RESTYLANE ® , SOLODYN ® , TRIAZ ® , VANOS ® and ZIANA ® . We believe that sales of our primary products will constitute a significant portion of our sales for the foreseeable future.

We have built our business by executing a four-part growth strategy: promoting existing brands, developing new products and important product line extensions, entering into strategic collaborations and acquiring complementary products, technologies and businesses. Our core philosophy is to cultivate high integrity relationships of trust and confidence with the foremost dermatologists and podiatrists and the leading plastic surgeons in the United States. We rely on third parties to manufacture our products.

We estimate customer demand for our prescription products primarily through use of third party syndicated data sources which track prescriptions written by health care providers and dispensed by licensed pharmacies. The data represents extrapolations from information provided only by certain pharmacies and are estimates of historical demand levels. We estimate customer demand for our non-prescription products primarily through internal data that we compile. We observe trends from these data and, coupled with certain proprietary information, prepare demand forecasts that are the basis for our purchase orders for finished and component inventory from our third party manufacturers and suppliers. Our forecasts may fail to accurately anticipate ultimate customer demand for our products. Overestimates of demand may result in excessive inventory production and underestimates may result in inadequate supply of our products in channels of distribution.
We schedule our inventory purchases to meet anticipated customer demand. As a result, miscalculation of customer demand or relatively small delays in our receipt of manufactured products could result in revenues being deferred or lost. Our operating expenses are based upon anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in the short term.
We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately 65%-75% of our gross revenues are typically derived from two major drug wholesale concerns. Depending on the customer, we recognize revenue at the time of shipment to the customer, or at the time of receipt by the customer, net of estimated provisions. Consequently, variations in the timing of revenue recognition could cause significant fluctuations in operating results from period to period and may result in unanticipated periodic earnings shortfalls or losses. While we attempt to estimate inventory levels of our products at our major wholesale customers by using written and oral information obtained from certain wholesalers, historical prescription information and historical purchase patterns, this process is inherently imprecise. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation of substantially all of our products. Based upon historically consistent purchasing patterns of our major wholesale customers, we believe our estimates of trade inventory levels of our products are reasonable. We further believe that inventories of our products among wholesale customers, taken as a whole, are similar to those of other specialty pharmaceutical companies, and that our trade practices, which periodically involve volume discounts and early payment discounts, are typical of the industry.
We periodically offer promotions to wholesale and chain drugstore customers to encourage dispensing of our prescription products, consistent with prescriptions written by licensed health care providers. Because many of our prescription products compete in multi-source markets, it is important for us to ensure the licensed health care providers’ dispensing instructions are fulfilled with our branded products and are not substituted with a generic product or another therapeutic alternative product which may be contrary to the licensed health care providers’ recommended and prescribed Medicis brand. We believe that a critical component of our brand protection program is maintenance of full product availability at drugstore and wholesale customers. We believe such availability reduces the probability of local and regional product substitutions, shortages and backorders, which could result in lost sales. We expect to continue providing favorable terms to wholesale and retail drug chain customers as may be necessary to ensure the fullest possible distribution of our branded products within the pharmaceutical chain of commerce.
We cannot control or significantly influence the purchasing patterns of our wholesale and retail drug chain customers. They are highly sophisticated customers that purchase products in a manner consistent with their industry practices and, presumably, based upon their projected demand levels. Purchases by any given customer, during any given period, may be above or below actual prescription volumes of any of our products during the same period, resulting in fluctuations of product inventory in the distribution channel.

As described in more detail below, the following significant events and transactions occurred during 2007, and affected our results of operations, our cash flows and our financial condition:
- FDA approval of PERLANE ® ;

- Write-down of intangible asset related to OMNICEF ® due to impairment;

- Strategic collaboration with Hyperion; and

- Strategic collaboration with Revance.
FDA approval of PERLANE ®
On May 2, 2007, the FDA approved PERLANE ® for implantation into the deep dermis to superficial subcutis for the correction of moderate to severe facial folds and wrinkles, such as nasolabial folds. In accordance with our agreements with Q-Med, we paid $29.1 million to Q-Med during the three months ended June 30, 2007 as a result of this milestone. The $29.1 million payment is included in intangible assets in our consolidated balance sheets as of December 31, 2007. The first commercial sales of PERLANE ® occurred during May 2007.
Write-down of intangible asset related to OMNICEF ® due to impairment
During the quarter ended June 30, 2007, an intangible asset related to OMNICEF ® was determined to be impaired based on our analysis of the intangible asset’s carrying value and projected future cash flows. As a result of the impairment analysis, we recorded a write-down of approximately $4.1 million related to this intangible asset. Factors affecting the future cash flows of the OMNICEF ® intangible asset included an early termination letter received during May 2007 from Abbott, which, in accordance with our agreement with Abbott, transitions our co-promotion agreement into a two-year residual period, and competitive pressures in the marketplace, including generic competition. In addition, as a result of the impairment analysis, the remaining amortizable life of the intangible asset related to OMNICEF ® was reduced to two years. The intangible asset related to OMNICEF ® will become fully amortized by June 30, 2009. The net impact on amortization expense as a result of the write-down of the carrying value of the intangible asset and the reduction of its amortizable life is a decrease in quarterly amortization expense of approximately $126,000.
Strategic Collaboration with Hyperion
On August 28, 2007, we, through our wholly-owned subsidiary Ucyclyd Pharma, Inc. (“Ucyclyd”), announced a strategic collaboration with Hyperion Therapeutics, Inc. (“Hyperion”) whereby Hyperion will be responsible for the ongoing research and development of a compound referred to as GT4P for the treatment of Urea Cycle Disorder, Hepatic Encephalopathies and other indications, and additional indications for AMMONUL ® . Under terms of the Collaboration Agreement between Ucyclyd and Hyperion, dated as of August 23, 2007, Hyperion made an initial non-refundable payment of $10.0 million to Ucyclyd for the rights and licenses granted to Hyperion in the agreement. In accordance with EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” and SAB 104, “ Revenue Recognition in Financial Statements, ” this $10.0 million payment was recorded as deferred revenue and is being recognized on a straight-line basis over a period of four years. In addition, if certain specified conditions are satisfied relating to the Ucyclyd development projects, then Hyperion will have certain purchase rights with respect to the Ucyclyd development products as well as Ucyclyd’s existing on-market products, AMMONUL ® and BUPHENYL ® , and will pay Ucyclyd royalties and regulatory and sales milestone payments in connection with certain licenses that would be granted to Hyperion upon exercise of the purchase rights.
Additionally, Hyperion will be funding all research and development costs for the Ucyclyd research projects, and will undertake certain sales and marketing efforts for Ucyclyd’s existing on-market products. Hyperion will receive a commission from Ucyclyd equal to a certain percentage of any increase in unit sales. Ucyclyd will continue to record product sales for the existing on-market Ucyclyd products until such time as Hyperion exercises its purchase rights.

Professional fees of approximately $2.2 million were incurred related to the completion of the agreement with Hyperion. These costs were recognized as general and administrative expenses during the three months ended September 30, 2007.
Strategic Collaboration with Revance
On December 11, 2007, we announced a strategic collaboration with Revance Therapeutics, Inc. (“Revance”), a privately-held, venture-backed development-stage company, whereby we made an equity investment in Revance and purchased an option to acquire Revance or to license exclusively in North America Revance’s novel topical botulinum toxin type A product currently under clinical development. The consideration to be paid to Revance upon our exercise of the option will be at an amount that will approximate the then fair value of Revance or the license of the product under development, as determined by an independent appraisal. The option period will extend through the end of Phase 2 testing in the United States. In consideration for our $20.0 million payment, we received preferred stock representing an approximate 13.7 percent ownership in Revance, or approximately 11.7 percent on a fully diluted basis and the option to acquire Revance or to license the product under development. The $20.0 million is expected to be used by Revance primarily for the development of the new product. $12.0 million of the $20.0 million payment represents the fair value of the investment in Revance at the time of the investment and is included in other long-term assets in our consolidated balance sheets as of December 31, 2007. The remaining $8.0 million, which is non-refundable and is expected to be utilized in the development of the new product, represents the residual value of the option to acquire Revance or to license the product under development and is included in research and development expense for the three months ended December 31, 2007.
Additionally, we have committed to make further equity investments in Revance of up to $5.0 million under certain terms and prior to the exercise of the option to acquire Revance or to license exclusively Revance’s topical botulinum toxin type A product in North America.
Prior to the exercise of the option, Revance will remain primarily responsible for the worldwide development of Revance’s topical botulinum toxin type A product in consultation with us in North America. We will assume primary responsibility for the development of the product should consummation of either a merger or a license for topically delivered botulinum toxin type A in North America be completed under the terms of the option. Revance will have sole responsibility for manufacturing the development product and manufacturing the product during commercialization worldwide. Our right to exercise the option is triggered upon Revance’s successful completion of certain regulatory milestones through the end of Phase 2 testing in the United States. A license would contain a payment upon exercise of the license option, milestone payments related to clinical, regulatory and commercial achievements, and royalties based on sales defined in the license. If we elect to exercise the option, the financial terms for the acquisition or license will be determined through an independent valuation in accordance with specified methodologies.
Professional fees of approximately $1.3 million were incurred related to the completion of the agreement with Revance. These costs were recognized as general and administrative expenses during the three months ended December 31, 2007.
On a going-forward basis, in the absence of quantitative valuation metrics, such as a recent financing round, we will estimate the impairment and/or the net realizable value of the investment, based on a hypothetical liquidation at book value approach as of the reporting date. The amount that will be expensed periodically is uncertain due to the timing of expenditures for research and development, and the charges will not be immediately, if ever, deductible for income tax purposes and will increase our effective tax rate. Further equity investments, if any, will also be subject to the same accounting treatment as our original equity investment.

(a) Included in operating expense is $21.1 million (4.6% of net revenues) of share-based compensation expense, $9.3 million (2.0% of net revenues) related to our option to acquire Revance or to license Revance’s product currently under development (including $1.3 million of professional fees incurred related to the agreement), $4.1 million (0.9% of net revenues) for the write-down of an intangible asset related to OMNICEF ® and $2.2 million (0.5% of net revenues) of professional fees related to a strategic collaboration with Hyperion.

(b) Included in operating expenses is $125.2 million (35.8% of net revenues) related to our development and distribution agreement with Ipsen for the development of RELOXIN ® , $52.6 million (15.1% of net revenues) for the write-down of intangible assets, $26.1 million (7.5% of net revenues) of share-based compensation expense, $10.2 million (2.9% of net revenues) related to a loss contingency for a legal matter and $1.8 million (0.5% of net revenues) related to a settlement of a dispute related to our merger with Ascent.

(c) Included in operating expenses is $11.9 million (3.3% of net revenues) related to a research and development collaboration with Dow, $8.3 million (2.3% of net revenues) related to a research and development collaboration with AAIPharma, $15.2 million (4.2% of net revenues) of share-based compensation expense, $9.2 million (2.5% of net revenues) for the write-down of an intangible asset and $6.0 million (1.7% of net revenues) of business integration planning costs related to the proposed (and subsequently terminated) merger with Inamed incurred during the three months ended June 30, 2005 and three months ended September 30, 2005. Included in other income, net, is $59.8 million (16.6% of net revenue) related to a termination fee of $90.5 million received from Inamed upon the termination of the proposed merger with Inamed, net of a fee paid to an investment banker and the expensing of accumulated transaction costs of $27.0 million, and integration planning costs incurred during the three months ended December 31, 2005 of $3.7 million.

(d) Gross profit does not include amortization of the related intangibles as such expense is included in operating expenses.

Total net revenues
100.0 % 100.0 % —


Our total net revenues increased during 2007 primarily as a result of an increase in sales of SOLODYN ® , which was approved by the FDA during the second quarter of 2006, ZIANA ® , which was approved by the FDA during the fourth quarter of 2006, and PERLANE ® , which was approved by the FDA during the second quarter of 2007. Net revenues associated with our acne and acne-related dermatological products increased by $88.2 million, or 55.7%, and by 7.7 percentage points as a percentage of net revenues during 2007 as compared to 2006 as a result of the increased sales of SOLODYN ® and ZIANA ® . Net revenues associated with our non-acne dermatological products decreased as a percentage of net revenues by 6.7 percentage points, but increased in net dollars by $20.6 million, or 13.0% during 2007. Net revenues associated with our non-dermatological products decreased as a percentage of net revenues, but increased in net dollars by $6.7 million, or 20.2% during 2007 as compared to 2006.

Gross Profit
Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue includes our acquisition cost for the products we purchase from our third party manufacturers and royalty payments made to third parties. Amortization of intangible assets related to products sold is not included in gross profit. Amortization expense related to these intangible assets for 2007 and 2006 was approximately $21.6 million and $20.0 million, respectively. Product mix plays a significant role in our quarterly and annual gross profit as a percentage of net revenues. Different products generate different gross profit margins, and the relative sales mix of higher gross profit products and lower gross profit products can affect our total gross profit.

The increase in gross profit during 2007, compared to 2006, was due to the increase in our net revenues and the increase in gross profit as a percentage of net revenues was primarily due to the different mix of high gross margin products sold during 2007 as compared to 2006. The launch of SOLODYN ® , a higher margin product, during the second quarter of 2006, was the primary change in the mix of products sold during the comparable periods that affected gross profit as a percentage of net revenues. The impact of the mix of higher margin products being sold during 2007 as compared to 2006 was partially offset by the write-off of $6.1 million of certain inventories that, during the third quarter of 2007, were determined to be unsalable, and a $2.5 million increase in our inventory valuation reserve recorded during 2007, as compared to a $0.1 million increase in our inventory valuation reserve during 2006. The change in the inventory valuation reserve was due to an increase in inventory during 2007 projected to not be sold by expiry dates.

The increase in selling, general and administrative expenses during 2007 from 2006 was attributable to approximately $16.3 million of increased personnel costs, primarily related to an increase in the number of employees (increasing from 407 as of December 31, 2006 to 472 as of December 31, 2007) and the effect of the annual salary increase that occurred during February 2007, $11.5 million of increased promotion expense, primarily related to the promotion of RESTYLANE ® and our new products SOLODYN ® , ZIANA ® and PERLANE ® , $14.7 million of increased professional and consulting expenses, including $2.2 million and $1.3 million of professional fees related to our strategic collaboration with Hyperion and equity investment in Revance, respectively, and costs related to our new enterprise resource planning (ERP) system, and $11.6 million of other additional selling, general and administrative expenses incurred during 2007. These increases were partially offset by certain costs incurred during 2006 that were not incurred during 2007, including $10.2 million related to a loss contingency for a legal matter related to our marketing of LOPROX ® to pediatricians, $1.8 million related to a settlement of a dispute related to our merger with Ascent and approximately $1.0 million of professional and other expenses related to our development and distribution agreement with Ipsen for the development of RELOXIN ® . We expect to incur increased legal and other professional fees during 2008 as a result of patent litigation related to our SOLODYN ® product.

Impairment of Intangible Assets
During the second quarter of 2007, an intangible asset related to OMNICEF ® was determined to be impaired based on our analysis of the intangible asset’s carrying value and projected future cash flows. As a result of the impairment analysis, we recorded a write-down of approximately $4.1 million related to this intangible asset.
Factors affecting the future cash flows of the OMNICEF ® intangible asset included an early termination letter received during May 2007 from Abbott, which transitions our co-promotion agreement with Abbott into a two-year residual period, and competitive pressures in the marketplace, including generic competition.
During the third quarter of 2006, intangible assets related to certain of our products were determined to be impaired based on our analysis of the intangible assets’ carrying value and projected future cash flows. As a result of the impairment analysis, we recorded a write-down of approximately $52.6 million related to these intangible assets. This write-down included the following (in thousands):

Included in research and development expense for 2007 was $8.0 million related to our option to acquire Revance or to license Revance’s product currently under development and $0.1 million of share-based compensation, which included a reversal of previously recognized share-based compensation expense of approximately $0.3 million due to the cancellation of share-based awards during the third quarter of 2007. Included in research and development expense for 2006 was $125.2 million related to the development and distribution agreement with Ipsen for the development of RELOXIN ® and approximately $1.6 million of share-based compensation expense. The primary product under development during 2007 and 2006 was RELOXIN ® . We expect research and development expenses to continue to fluctuate from quarter to quarter based on the timing of the achievement of development milestones under license and development agreements, as well as the timing of other development projects and the funds available to support these projects. We expect to incur significant research and development expenses related to the development of RELOXIN ® each quarter throughout the development process.

Depreciation and Amortization Expenses
Depreciation and amortization expenses during 2007 increased $1.5 million, or 6.5%, to $24.5 million from $23.0 million during 2006. This increase included amortization related to a $29.1 million milestone payment made to Q-Med related to the FDA approval of PERLANE ® capitalized during the second quarter of 2007. This increase in amortization was partially offset by a decrease in amortization due to the write-down of intangible assets due to impairment during the third quarter of 2006. The remaining amortizable lives of these intangible assets were also shortened. These intangible assets had an aggregate cost basis of approximately $76.6 million and were being amortized at a rate of approximately $0.4 million per quarter. These intangible assets were written-down to an aggregate new cost basis of approximately $3.6 million, and are being amortized at an aggregate rate of approximately $0.1 million per quarter.
Interest and Investment Income
Interest and investment income during 2007 increased $7.6 million, or 24.7%, to $38.4 million from $30.8 million during 2006, due to an increase in the funds available for investment and an increase in the interest rates achieved by our invested funds during 2007.
Interest Expense
Interest expense during 2007 decreased $0.6 million, to $10.0 million in 2007 from $10.6 million in 2006. Our interest expense in 2007 and 2006 consisted of interest expense on our Old Notes, which accrue interest at 2.5% per annum, our New Notes, which accrue interest at 1.5% per annum, and amortization of fees and other origination costs related to the issuance of the Old Notes and New Notes. The decrease in interest expense during 2007 as compared to 2006 was due to the fees and origination costs related to the issuance of the Old Notes becoming fully amortized during the second quarter of 2007. See Liquidity and Capital Resources for further discussion on the Old Notes and New Notes.

Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, charitable contribution deductions, tax credits available in the U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to normally result in tax deductions, various expenses that are non-deductible for tax purposes, and differences in tax rates in certain non-U.S. jurisdictions. Our effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pre-tax earnings in the various tax jurisdictions in which we operate, changes in valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws in jurisdictions where we conduct operations. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating losses and credit carryforwards. We record valuation allowances against our deferred tax assets to reduce the net carrying values to amounts that management believes is more likely than not to be realized.
Income tax expense during 2007 was $51.0 million compared to an income tax benefit during 2006 of $40.8 million. The income tax benefit recorded in 2006 is primarily due to our pre-tax loss recognized during 2006. The effective tax rate for 2007 of 40.5% includes a $3.3 million tax charge recorded during the fourth quarter of 2007 relating to a valuation allowance recorded against the deferred tax asset associated with the expensing of the option to acquire Revance or license Revance’s product that is under development. The expense is currently an unrealized loss for tax purposes. The Company will not be able to determine the character of the loss until the Company exercises or fails to exercise its option. A realized loss characterized as a capital loss can only be utilized to offset capital gains. The Company recorded a valuation allowance to the deferred tax asset associated with this unrealized tax loss to reduce the carrying values to $0, or the amount that management believes is more likely than not to be realized. The effective tax rate for 2007 absent this $3.2 million charge is 38%.
Year Ended December 31, 2006 Compared to the Unaudited Year Ended December 31, 2005

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Executive Summary
We are a leading independent specialty pharmaceutical company focused primarily on helping patients attain a healthy and youthful appearance and self-image through the development and marketing in the U.S. of products for the treatment of dermatological, aesthetic and podiatric conditions. We also market products in Canada for the treatment of dermatological and aesthetic conditions. We offer a broad range of products addressing various conditions or aesthetics improvements, including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin).
Our current product lines are divided between the dermatological and non-dermatological fields. The dermatological field represents products for the treatment of acne and acne-related dermatological conditions and non-acne dermatological conditions. The non-dermatological field represents products for the treatment of urea cycle disorder and contract revenue. Our acne and acne-related dermatological product lines include DYNACIN ® , PLEXION ® , SOLODYN ® , TRIAZ ® and ZIANA ® . Our non-acne dermatological product lines include LOPROX ® , PERLANE ® , RESTYLANE ® and VANOS ® . Our non-dermatological product lines include AMMONUL ® and BUPHENYL ® . Our non-dermatological field also includes contract revenues associated with licensing agreements and authorized generic agreements.
Key Aspects of Our Business
We derive a majority of our revenue from our primary products: PERLANE ® , RESTYLANE ® , SOLODYN ® , TRIAZ ® , VANOS ® and ZIANA ® . We believe that sales of our primary products will constitute a significant portion of our sales for the foreseeable future.
We have built our business by executing a four-part growth strategy: promoting existing brands, developing new products and important product line extensions, entering into strategic collaborations and acquiring complementary products, technologies and businesses. Our core philosophy is to cultivate high integrity relationships of trust and confidence with the foremost dermatologists and podiatrists and the leading plastic surgeons in the U.S. We rely on third parties to manufacture our products.

We estimate customer demand for our prescription products primarily through use of third party syndicated data sources which track prescriptions written by health care providers and dispensed by licensed pharmacies. The data represents extrapolations from information provided only by certain pharmacies and are estimates of historical demand levels. We estimate customer demand for our non-prescription products primarily through internal data that we compile. We observe trends from these data and, coupled with certain proprietary information, prepare demand forecasts that are the basis for purchase orders for finished and component inventory from our third party manufacturers and suppliers. Our forecasts may fail to accurately anticipate ultimate customer demand for our products. Overestimates of demand may result in excessive inventory production and underestimates may result in inadequate supply of our products in channels of distribution.
We schedule our inventory purchases to meet anticipated customer demand. As a result, miscalculation of customer demand or relatively small delays in our receipt of manufactured products could result in revenues being deferred or lost. Our operating expenses are based upon anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in the short term.
We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately 65%-75% of our gross revenues are typically derived from two major drug wholesale concerns. Depending on the customer, we recognize revenue at the time of shipment to the customer, or at the time of receipt by the customer, net of estimated provisions. Consequently, variations in the timing of revenue recognition could cause significant fluctuations in operating results from period to period and may result in unanticipated periodic earnings shortfalls or losses. We have recently entered into distribution services agreements with our two largest wholesale customers. We review the supply levels of our significant products sold to major wholesalers by reviewing periodic inventory reports supplied by our major wholesalers. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation of substantially all of our products. We believe the trade inventory levels of our products, based on our review of the periodic inventory reports supplied by our major wholesalers and the estimated demand for our products based on prescription and other data, are reasonable. We further believe that inventories of our products among wholesale customers, taken as a whole, are similar to those of other specialty pharmaceutical companies, and that our trade practices, which periodically involve volume discounts and early payment discounts, are typical of the industry.
We periodically offer promotions to wholesale and chain drugstore customers to encourage dispensing of our prescription products, consistent with prescriptions written by licensed health care providers. Because many of our prescription products compete in multi-source markets, it is important for us to ensure the licensed health care providers’ dispensing instructions are fulfilled with our branded products and are not substituted with a generic product or another therapeutic alternative product which may be contrary to the licensed health care providers’ recommended and prescribed Medicis brand. We believe that a critical component of our brand protection program is maintenance of full product availability at drugstore and wholesale customers. We believe such availability reduces the probability of local and regional product substitutions, shortages and backorders, which could result in lost sales. We expect to continue providing favorable terms to wholesale and retail drug chain customers as may be necessary to ensure the fullest possible distribution of our branded products within the pharmaceutical chain of commerce.
Purchases by any given customer, during any given period, may be above or below actual prescription volumes of any of our products during the same period, resulting in fluctuations of product inventory in the distribution channel.
Recent Developments
The following significant events and transactions occurred during the three months ended March 31, 2008 and affected our results of operations, our cash flows and our financial condition:
Reduction in the carrying value of our investment in Revance
On December 11, 2007, we announced a strategic collaboration with Revance Therapeutics, Inc. (“Revance”), a privately-held, venture-backed development-stage company, whereby we made an equity investment in Revance and purchased an option to acquire Revance or to license exclusively in North America Revance’s novel topical botulinum toxin type A product currently under clinical development. The consideration to be paid to Revance upon our exercise of the option will be at an amount that will approximate the then fair value of Revance or the license of the product under development, as determined by an independent appraisal. The option period will extend through the end of Phase 2 testing in the United States. In consideration for our $20.0 million payment, we received preferred stock representing an approximate 13.7 percent ownership in Revance, or approximately 11.7 percent on a fully diluted basis, and the option to acquire Revance or to license the product under development. The $20.0 million is expected to be used by Revance primarily for the development of the product. $12.0 million of the $20.0 million payment represents the fair value of the investment in Revance at the time of the investment and was included in other long-term assets in our condensed consolidated balance sheets as of December 31, 2007. The remaining $8.0 million, which is non-refundable and is expected to be utilized in the development of the new product, represents the residual value of the option to acquire Revance or to license the product under development and was recognized as research and development expense during the three months ended December 31, 2007.
We estimate the impairment and/or the net realizable value of the Revance investment based on a hypothetical liquidation at book value approach as of the reporting date, unless a quantitative valuation metric is available for these purposes (such as the completion of an equity financing by Revance). The amount or our investment that will be expensed periodically is uncertain due to the timing of Revance’s expenditures for research and development of the product, and any charges will not be immediately, if ever, deductible for income tax purposes and will increase our effective tax rate. Further equity investments, if any, will also be subject to the same accounting treatment as our original equity investment.

During the three months ended March 31, 2008, we reduced the carrying value of our investment in Revance by approximately $2.9 million as a result of a reduction in the estimated net realizable value of the investment using the hypothetical liquidation at book value approach as of March 31, 2008. We recognized the $2.9 million as other expense in our condensed consolidated statement of operations during the three months ended March 31, 2008.

(a) Included in operating expenses is $4.4 million (3.3% of net revenues) of compensation expense related to stock options and restricted stock.

(b) Included in operating expenses is $5.5 million (5.8% of net revenues) of compensation expense related to stock options and restricted stock.

(c) Gross profit does not include amortization of the related intangibles as such expense is included in operating expenses.

Our total net revenues increased during the first quarter of 2008 primarily as a result of increased sales of SOLODYN ® and ZIANA ® . Net revenues associated with our acne and acne-related dermatological products increased as a percentage of net revenues from 48.3% during the first quarter of 2007 to 63.7% during the first quarter of 2008, and increased in net dollars by 82.2% during the first quarter of 2008 as compared to the first quarter of 2007 as a result of increased sales of SOLODYN ® and ZIANA ® . ZIANA ® was formally launched to the market during the first quarter of 2007. Net revenues associated with our non-acne dermatological products decreased as a percentage of net revenues, and decreased in net dollars by 7.1% during the first quarter of 2008. Net revenues associated with our non-acne dermatological products for the first quarter of 2007 included revenues related to OMNICEF ® , which we are no longer promoting. Net revenues associated with our non-dermatological products decreased as a percentage of net revenues, but increased in net dollars by 15.4% during the first quarter of 2008 as compared to the first quarter of 2007, primarily due to an increase in contract revenue.
Net revenues associated with our non-acne dermatological products decreased $9.1 million, or 19.5%, from the fourth quarter of 2007 primarily due to seasonality of the RESTYLANE ® brands combined with current economic and market conditions in the aesthetic market and decreases in prescription volume related to other products in this category.

Gross Profit
Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue includes our acquisition cost for the products we purchase from our third party manufacturers and royalty payments made to third parties. Amortization of intangible assets related to products sold is not included in gross profit. Amortization expense related to these intangibles for the first quarter of 2008 and 2007 was approximately $5.3 million and $4.8 million, respectively. Product mix plays a significant role in our quarterly and annual gross profit as a percentage of net revenues. Different products generate different gross profit margins, and the relative sales mix of higher gross profit products and lower gross profit products can affect our total gross profit.

The increase in selling, general and administrative expenses during the first quarter of 2008 from the first quarter of 2007 was attributable to approximately $4.5 million of increased personnel costs, primarily related to an increase in the number of employees increasing from 435 as of March 31, 2007 to 496 as of March 31, 2008 and the effect of the annual salary increase that occurred during February 2008, $5.9 million of increased professional and consulting expenses, including costs related to patent litigation associated with our SOLODYN ® product and the implementation of our new enterprise resource planning (ERP) system, partially offset by a net reduction of $0.6 million of other additional selling, general and administrative costs incurred during the first quarter of 2008. We expect to continue to incur increased legal and other professional fees during 2008 as a result of patent protection related to our SOLODYN ® and VANOS ® products.


The primary product under development during the first quarter of 2008 and 2007 was RELOXIN ® . We expect research and development expenses to continue to fluctuate from quarter to quarter based on the timing of the achievement of development milestones under license and development agreements, as well as the timing of other development projects and the funds available to support these projects.
In accordance with our development and distribution agreement with Ipsen for the development of RELOXIN ® , we will pay Ipsen $25.0 million upon the FDA’s acceptance of our Biologics License Application (“BLA”) for RELOXIN ® , which we will recognize as research and development expense when incurred. On March 17, 2008, we announced that the BLA had been re-submitted to the FDA. We will pay Ipsen $75.0 million upon the FDA’s approval of RELOXIN ® .
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the first quarter of 2008 increased $1.2 million, or 23.2%, to $6.7 million from $5.5 million during the first quarter of 2007. This increase was primarily due to amortization related to a $29.1 million milestone payment made to Q-Med related to the FDA approval of PERLANE ® capitalized during the second quarter of 2007.
Other Expense
Other expense of $2.9 million recognized during the first quarter of 2008 represented a reduction in the carrying value of our investment in Revance as a result of a reduction in the estimated net realizable value of the investment using the hypothetical liquidation at book value approach as of March 31, 2008.
Interest and Investment Income
Interest and investment income during the first quarter of 2008 increased $0.2 million, or 2.1%, to $9.2 million from $9.0 million during the first quarter of 2007, primarily due to an increase in the funds available for investment, partially offset by a decrease in the interest rates achieved by our invested funds during the first quarter of 2008.
Interest Expense
Interest expense during the first quarter of 2008 decreased $0.3 million, to $2.4 million during the first quarter of 2008 from $2.7 million during the first quarter of 2007. Our interest expense during the first quarter of 2008 and 2007 consisted of interest expense on our Old Notes, which accrue interest at 2.5% per annum, our New Notes, which accrue interest at 1.5% per annum, and amortization of fees and other origination costs related to the issuance of the Old Notes and New Notes. The decrease in interest expense during the first quarter of 2008 as compared to the first quarter of 2007 was due to the fees and origination costs related to the issuance of the Old Notes becoming fully amortized during the second quarter of 2007. See Note 7 in our accompanying condensed consolidated financial statements for further discussion on the Old Notes and New Notes. If a significant portion of the holders of the New Notes require us to repurchase their New Notes during the second quarter of 2008, we anticipate that our interest expense will decrease materially. The tax-effected net interest expense and issue cost amortization on the Old Notes and New Notes are added back to net income when computing diluted net income per share.

Income Tax Expense
Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, enhanced charitable contribution deductions for inventory, tax credits available in the U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to normally result in tax deductions, various expenses that are not deductible for tax purposes, changes in valuation allowances against deferred tax assets, and differences in tax rates in certain non-U.S. jurisdictions. Our effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pre-tax earnings in the various tax jurisdictions in which we operate, changes in valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws in jurisdictions where we conduct operations. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating losses and credit carryforwards. We record valuation allowances against our deferred tax assets to reduce the net carrying values to amounts that management believes is more likely than not to be realized.
Our effective tax rate for the first quarter of 2008 was 39.0%, which was consistent with the 39.2% effective tax rate for the first quarter of 2007. The provision for income taxes generally reflects management’s estimate of the effective tax rate expected to be applicable for the full fiscal year.

CONF CALL


Jonah Shacknai

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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