Medicis Pharmaceutical Corporation

8125 N. Hayden Road
Scottsdale, Arizona 85258-2463
U.S.A.
Telephone: (602) 808-8800
Fax: (602) 808-0822
Web site: http://www.medicis.com

Public Company
Incorporated: 1987 as Innovative Therapeutics Corp.
Employees: 279
Sales: $247.5 million (2003)
Stock Exchanges: New York
Ticker Symbol: MRX
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Medicis Pharmaceutical Corporation is a Scottsdale, Arizona-based company that specializes in the sale of prescription and over-the-counter drugs used to fight acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, eczema, skin and skin structure infections, seborrhea, and dermatitis. The company also sells an asthma drug and recently moved into the dermal aesthetic market. Medicis looks for niche opportunities in the dermatology field, acquiring the rights to drugs developed by major pharmaceuticals but which lack blockbuster potential. The company further divides its area of concentration by focusing on different aspects of a condition, such as acne, thus carving out niches within niches. Because Medicis is able to devote greater attention to the drugs, the major pharmaceuticals find it advantageous to sign over their rights, and because there are a small number of dermatologists to contact, Medicis is able to operate a lean sales force. The company also saves on manufacturing and research and development costs. Core Medicis brands include Dynacin, which treats moderate to severe acne; Loprox, a fungal and yeast infection treatment; Lustra, used to treat ultravioletinduced skin discoloration; Omnicef, used to counteract skin and skin-structure infections; Oraped, used to treat children with acute asthma; Plexion, a treatment for acne rosacea; and Triaz, a prescription benzoyl peroxide skin cleaning product.

Company Founder Starting Career with Congress: 1970s

The driving force in the growth of Medicis was founder Jonah Shacknai. Born and raised in New York, Shacknai grew up planning to become an environmental activist, and as a consequence became interested in politics and civic affairs. While working on his undergraduate degree at Colgate University he received a fellowship with the U.S. Justice Department in 1977. After his six-month stint, he stayed in Washington, D.C., going to work for New York Congressman James Scheuer. In little more than two years he took over the running of the office, becoming the youngest chief of staff on Capitol Hill. At night he studied at Georgetown University, earning a law degree in 1982. Shacknai's legislative focus was his work on a subcommittee of the U.S. House of Representatives Committee on Science Technology, for which he became chief aide, involved in healthcare, consumer protection, and environment issues. As a result of his role in the drafting of all major legislation concerning food and drugs and healthcare research, Shacknai worked with a large number of pharmaceuticals. He put that experience to work in the private sector when in 1982 he became a partner in a Washington law firm, Royer, Shacknai & Mehle, which represented more than 30 pharmaceutical clients. Shacknai devoted most of his attention to Key Pharmaceuticals, eventually becoming an officer. After Key was sold in 1986 to Schering-Plough for $860 million, he became involved in the founding of Ivax Corp., which grew into the largest generic drug manufacturer in the world.

In a 1993 Wall Street Transcript interview, Shacknai revealed, "It occurred to me along the way that dermatology was really the place to be. It was more insulated from healthcare cost containment than any other field and medicine and pharmaceuticals in that the regulatory barriers to the introduction of new products were fewer. Finally, dermatologists are extremely receptive to new products. … The mixture of those factors was alluring to me, a $4 billion marketplace that is growing significantly each year and pleasant people to deal with and real market opportunities. I think that should be enough to attract any sensible business person."

Launching Medicis, Going Public, and Relocating: Late 1980s to Mid-1990s

Legally, Medicis dates back to the July 1987 incorporation of Innovative Therapeutics Corp., a company created to develop and market dermatological conditions. This entity was then merged with Medicis Corporation, established by Shacknai in July 1988 shortly after he quit his law practice. He became the company's chief executive officer and chairman. The company assumed the name Medicis Pharmaceutical Corporation a year later. For the first few years the company was run out of Washington, D.C., then relocated to New York City to be closer to Wall Street. In July 1989 Medicis obtained the rights to its first products, the Theraplex line of shampoos and moisturizers, used in the treatment of acne and eczema. Taking advantage of Shacknai's connections with IVAX, Medicis landed its next major acquisition one year later, acquiring from IVAX a worldwide license for Erythromycin 2% (marketed by Medicis as Terramycin Z) and Benzashave 5%, as well as other products.

As Medicis geared up, it lost more than $2.5 million during the first two years. In order to establish a dermatology sales force and launch a marketing campaign for several new products, pay off short-term debt, fund research and development, and add to its working capital, Medicis made an initial public offering of stock, which was completed in April 1990 and raised close to $7.4 million. Medicis was able to then move beyond the sale of shampoos and conditioners in 1991 with the establishment of its dermatological sales force and the launch of pharmaceutical products. The next major product acquisition came in 1992 when Medicis bought from SmithKline Beecham the Esoterica line of products, which included treatments for dry skin, sun screen protection, and fade creams for liver spots, freckles, and other minor discolorations. By now Medicis settled into a pattern of introducing a new product each year to spur growth. The product launch of 1993 was Dynacin, an acne drug employing the oral antibiotic minocycline. It would soon provide the lion's share of the company's revenues. Also in 1993 Medicis acquired a 75 percent interest in Genetic MediSyn Corp., a biotech that used anti-sense technology to treat acne, male pattern baldness, and excessive hair growth on women. Already at this early stage of its development, Medicis had a wealth of products. The challenge facing the company was how to strategically introduce them into the marketplace.

In the early 1990s, Medicis quickly moved toward profitability. Revenues grew from $7.7 million in fiscal 1992 to more than $17 million in 1994. During this period, the company posted net losses of $11.8 million in 1992 and $11.65 million in 1993 before achieving its first profitable year in 1994, recording more than $650,000. Sales topped $19 million in fiscal 1995 as profits reached $1.6 million. It was also during 1995 that Shacknai decided to relocate the business, this time to Phoenix, Arizona. While the move lowered the company's overhead, it also deprived Medicis of what little notice it had received on Wall Street. For some time Shacknai had been disappointed in the low price of Medicis stock despite the company's impressive record. Concluding that the stock was depressed in large part because there were simply too many shares in circulation, he engineered a 1-for-14 reverse stock split. As a result, the price of Medicis shares rose from the 37 cents range to more than $5, which helped to reposition the stock. It was further helped in early 1996 when Shacknai was able to drum up interest from stock analysts. Over the course of the next several months, Medicis became an investor darling and the price of its stock soon topped the $30 mark, adjusted for a 3-for-2 split in 1997. On the product front, the company launched Triaz in 1996. For the year, Medicis saw its revenues grow by some 30 percent to $25.3 million, while net income soared to more than $7.8 million. Of some concern was the company's dependence on Dynacin products, which contributed 62 percent of the company's sales. Because of the success of Medicis with Dynacin it now faced competition from other minocycline-based treatments.

Medicis conducted another public offering of stock in 1997, this time raising more than $95 million. In 1997 the company acquired the Lidex and Synalar products from Syntex for $28 million in cash, plus subsequent payments that totaled another $3 million. Furthermore, in 1997 (fiscal 1998) Medicis paid $55 million for GenDerm Corporation, gaining its line of dermatological products. Also in 1997 Medicis introduced Dye-Free Dynacin. Despite this addition to the Dynacin line, the company actually reduced its dependence on Dynacin sales, which now accounted for half of fiscal 1997 revenues, totaling $41.2 million. Profits grew to $17.34 million.

Secondary Offering in 1998 Nets $210 Million

Medicis enjoyed a number of positive developments in 1998. In February it completed yet another public offering of stock, raising in excess of $210 million, earmarked to license or acquire new products, launch others, and expand marketing as well as research and development capabilities. In September Medicis reached a new level of prestige when shares began trading on the New York Stock Exchange. During the course of the year, Medicis received a patent for Triaz and introduced Lustra. It forged a collaboration with Abbott Laboratories and also bought the licensing rights to antifungal products from Hoechst Marion Roussel, Inc. The addition of such products as Loprox, Topicort, and A/T/S allowed Medicis to enter the $800 million antifungal market and bolster its position in the topical steroid market.

Company Perspectives:

With a balanced business in North America and an extraordinary track record of revenue, operating income growth and impressive gross profit margins, Medicis is driven to continue its success and assure long-term shareholder value.

Medicis launched three products in fiscal 1999: Ovide, Lustra-AF, and Dynacin 75 mg (a version of the drug aimed at people who weigh 110–175 pounds). It also made an adjustment to its product mix, electing, in conjunction with its partner IMX Pharmaceuticals, to sell The Exorex Company and its line of over-the-counter psoriasis and eczema medications to Bioglan Pharma Plc for $40 million. The divestiture allowed Medicis to focus on other products that were more core to the company's future. Another development in fiscal 1999 was the $14.3 million cash purchase of Ucyclyd Pharma, Inc. The Baltimore, Maryland-based pharmaceutical produced Buphenyl, the only approved drug substance for treatment of Urea Cycle Disorder, a rare genetic condition. Buphenyl had been classified by the Food and Drug Administration as an "orphan drug." Because such medications treated diseases that occur in less than 200,000 cases, the FDA offered financial incentives to drug manufacturers for producing them. The Ucyclyd acquisition gave Medicis a toehold in the specialty niche orphan drug market.

In fiscal 2000 Medicis moved to a new 50,000-square-foot headquarters in Scottsdale, Arizona. It received a patent on Lustra Composition and launched Loprox Gel. In addition, Medicis acquired the Vectrin Product Line from Warner Chilcott. Vectrin is an antibiotic used to treat acne and other bacterial infections. Also in 2000 Medicis launched a skin care web site, www.sunandskin.com to promote skin care awareness. For fiscal 2000 Medicis recorded revenues of nearly $140 million and net income of approximately $43 million.

Medicis launched two new products in fiscal 2001: Plexion, a prescription skin cleanser for use in the treatment of acne rosacea, and Alustra, used in the treatment of ultraviolet-induced dyschromia and discoloration resulting from the use of oral contraceptives, pregnancy, hormone replacement therapy, or skin trauma. In 2001 Medicis also forged a development agreement with Corixa Corp. for the psoriasis drug PVAC, and licensed Omnicef, an antibiotic used to treat moderate skin infections and other conditions. Fiscal 2001 was another strong year for Medicis, which recorded sales of $167.8 million and net profits of more than $40.4 million, and fiscal 2002 would prove to be even stronger, as revenues improved to $212.8 million and net income grew by 25 percent, topping $50 million. Medicis launched Plexion SCT and established a strategic alliance with aaiPharma Inc. to develop and market an unspecified dermatological product. But the most important development of the year was the $60 million acquisition of Ascent Pediatrics Inc., a Massachusetts company that marketed a number of products for children, including asthma medication and antibiotics to treat ear infections. If certain milestones were met, the deal could be worth an additional $50 million over the next five years. Medicis also picked up Ascent's 70-member sales force and was optimistic about selling many of its existing products, such as head-lice treatments, through Ascent's established pediatric sales channels. Another marketing development in 2002 was the hiring of Gerbir Snell/Weisheimer & Associates to create a direct-toconsumer marketing campaign for Lustra, used to treat sundamaged skin. The effort targeted the Sun Belt and Gulf Coast. Direct-to-consumer marketing was a growing trend in the pharmaceutical industry, the result of the FDA easing up on advertising restrictions governing drug makers.

Despite difficult economic conditions, Medicis continued to prosper in fiscal 2003, increasing revenues to $247.5 million and recording net profits of more than $51.2 million. Moreover, the company was sitting on some $600 million in cash, a surprisingly large amount of money which could be used to make further acquisitions of companies and product lines. Shacknai maintained that Medicis was "not the sort of company to make stupid acquisitions because there is money burning a hole in our pocket." A large portion of that money, some $160 million, would be spent on acquiring HA North America Sales AB, a subsidiary of a Swedish biotech, licensing the Restylane, Perlane, and Restylane Fine lines of dermal filler products. The deal was three years in the making. Shacknai called it "the single largest business development opportunity ever presented to Medicis." The acquired products were injectable gels used to treat fine lines and wrinkles, shape facial contours, correct deep facial folds, and plump lips. The potential rewards for this entry in cosmetic dermatology were great. Because of the aging baby-boomer population, this practice was the fastest-growing segment of dermatology. Medicis had both the money and commitment to support a major move into the market, and there was every reason to believe that the company was on the cusp of experiencing even greater prosperity in the future.

Key Dates:

1988:

Jonah Shacknai founds Medicis and folds in Innovative Therapeutics Corp., founded a year earlier.

1990:

Initial public offering is completed.

1993:

Acne drug Dynacin is unveiled.

1995:

Company moves to Phoenix.

1999:

Company is listed on the New York Stock Exchange.

2002:

Ascent Pediatrics is acquired for $60 million.

Principal Subsidiaries

Medicis Dermatologies, Inc.; GenDerm Corporation; Ucyclyd Pharma, Inc.; Ascent Pediatric, Inc.

Principal Competitors

Allergan, Inc.; GlaxoSmithKline plc; Ortho-Neutrogena.

Further Reading

Abrahms, Doug, "D.C. Cosmetic Company to Test Public Markets," Washington Business Journal, January 29, 1990, p. 11.

Elliott, Alan R., "Medicis Pharmaceutical Corp.," Investor's Business Daily, November 14, 2000, p. A12.

Gianturco, Michael, "The Acne Niche," Forbes, September 23, 1996, p. 212.

Gonzales, Angela, "Success Requires Focus," Business Journal—Serving Phoenix & The Valley of the Sun, April 12, 1996, p. 24.

Mandell, Mel, "Small Company Benefits from Corporate Castoffs," D&B Reports, September/October 1993, p. 50.

—Ed Dinger