Medicis Has an Earnings Glow

S&P ranks Medicis Pharmaceutical a strong buy, thanks in part to an expanding dermatological product line, including a new treatment to compete with Botox

by Herman Saftlas From Standard & Poor's Equity Research

Medicis Pharmaceutical (MRX; $27.50) is the largest independent dermatological company in the U.S., focusing primarily on the anti-acne and dermal filler sections of the market. We believe that the company, under the leadership of founder, Chairman, and Chief Executive Jonah Shacknai, has been able to reinvent itself with the development of a new portfolio of popular aesthetic dermatological products such as Solodyn and Ziana acne treatments, and Restylane and Perlane hyaluronic acid-based dermal fillers. These products have more than compensated for dwindling sales of its older, off-patent Dynacin, Plexion, and Triaz lines.

During the fourth quarter of this year, we expect Medicis to file a new drug application with the Food & Drug Administration for Reloxin, a botulinum toxin dermal filler that's expected to compete with Allergan's (AGN; S&P ranks hold; $59) $1.1 billion Botox drug.

Strong Performance

During the second quarter of 2007, Medicis generated operating earnings per share (EPS) of 28¢, vs. 24¢ in the same period a year earlier, exceeding our estimate by 3¢. Revenues in the quarter climbed 28%, reflecting growth in key Solodyn and Ziana acne lines and also benefiting from the launch of Perlane dermal filler. We also think Restylane sales have weathered the early 2007 launch of Allergan's competing Juvederm dermal filler.

Medicis' business is highly profitable, with a second-quarter gross margin of 87.1%. The company also raised its full-year 2007 EPS guidance by 7¢, to $1.19.

We have Standard & Poor's highest investment recommendation of 5-STARS, or strong buy, on Medicis. We view the shares as attractively valued vs. peers, with a p-e-to-growth ratio of 1.0 and a price-to-sales ratio of 3.3, based on our 2007 projections.

Growth Strategy

Medicis' growth strategy centers on expanding the market share of existing dermatology products, introducing new products, making synergistic acquisitions, and forming collaborative partnerships. Medicis focuses on treating acne, acne-related conditions, fungal infections, skin discoloration, and inflammatory and hyperproliferative skin diseases, such as psoriasis and topical dermatitis.

Principal prescription pharmaceuticals include acne treatments such Solodyn, a once-daily oral form of minocyline antibiotic; Ziana, a once-daily gel acne treatment; Dynacin, an oral antibiotic to treat moderate to severe acne; Triaz, a topical formulation to treat all forms of acne; and Plexion, a topical treatment for rosacea (a chronic skin condition causing inflammation and redness of the face) and acne-related conditions.

Non-acne products include dermal fillers such as Restylane, a hyaluronic acid-based injectable gel for the treatment of fine lines and wrinkles, shaping facial contours and correcting deep facial folds; Perlane, a dermal filler implanted into the skin to correct or moderate severe facial folds and wrinkles; Loprox, a broad-spectrum topical anti-fungal treatment; and Omnicef, an oral antibiotic for skin infections. Prescription lines also include Buphenyl, an adjunctive therapy for hyperammonemia in patients with urea cycle disorder.