Medicis Has an Earnings Glow

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From Standard & Poor's Equity Research

Manufacturing and R&D

Medicis outsources all of its manufacturing needs. Patheon manufactures the capsule form of Dynacin, and Par Pharmaceutical (PRX) manufactures the tablet form. Plexion and Triaz are manufactured by Contract Pharmaceuticals. Loprox cream and gel are manufactured by Aventis, and Vanos, Loprox TS (topical suspension), and Loprox shampoo are made by Patheon. Omnicef, which is co-promoted with Abbott Laboratories (ABT), is manufactured by Abbott. Restylane is manufactured by Q-Med.

Acne and acne-related dermatological products accounted for 45% of net revenues in 2006; non-acne dermatological products, 45%; and non-dermatological products, 10%. Products are distributed primarily through drug wholesalers such as McKesson (MCK) (57% of net revenues in 2006) and Cardinal Health (CAH) (19%).

Research and development spending totaled about $162 million in 2006, including $125 million related to a development and distribution agreement with Ipsen for the development of Reloxin (a Botox-like product).

Expanding Markets, Product Line

Medicis believes that annual U.S. pharmaceutical sales in the dermatological market exceed $5 billion. According to the American Society for Aesthetic Plastic Surgery, nearly 11.5 million surgical and non-surgical cosmetic procedures were performed in the U.S. during 2006, including approximately 9.3 million non-surgical cosmetic procedures. The overall global aesthetic market is expected to expand at a compound annual rate of 13% over the next five years, according to Medical Insight, an industry trade association.

Some 60 million people in the U.S. are believed to have active acne, with about one-third of that total suffering from more severe scar-forming acne. Yet only about 10% to 12% of the latter total use medicinal treatments.

We estimate global sales of dermal fillers at about $600 million in 2006, doubling to $1.2 billion in 2010, and exceeding $1.5 billion by 2012. Key drivers for this market, in our view, include strong demographic trends in aging baby boomers, greater awareness of the cosmetic benefits of filler products, and technological advances that create safer and more effective therapies. Medicis believes that its Restylane and Perlane products address a market encompassing perhaps as many as 25 to 30 million Americans.

Botulinum treatments such as Botox are also highly popular. We believe that more than 12 million procedures will probably be performed annually within a few years. Botox sales were estimated at more than $1.1 billion in 2007.