Medicis Beats Zacks Estimates

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Medicis Pharmaceutical Corp.’s (:MRX) posted second quarter 2012 earnings of 52 cents, above management’s guidance range of 37 cents to 47 cents per share, and the Zacks Consensus Estimate of 47 cents.  However, earnings declined 23.5% from the prior-year quarter. Higher-than-expected revenues led to the earnings beat.

Quarterly revenues at Medicis went up 3% to $196.6 million, above the company’s guidance range of $185 million to $195 million and the Zacks Consensus Estimate of $192 million. All three segments contributed to growth.

Quarterly Highlights

Medicis’ acne product sales decreased 24.4% year over year to $93.1 million. The decrease was attributable to wholesale customers stocking their inventory levels due to the previously announced alternate fulfillment initiatives by the company. The initiatives were aimed at increasing the average selling price of Solodyn and Ziana. The decline was also accompanied by loss incurred due to the discontinuation of certain of Medicis’ drugs in early 2011.  This segment primarily comprises Solodyn and Ziana.

Non-acne product sales came in at $81.1 million, up 40.5%, primarily due to increased demand for the Restylane franchise, Zyclara in the U.S. and Aldara in Canada (both acquired in the fourth quarter of 2011). The non-acne group consists of Dysport, Perlane, Restylane, Vanos and Zyclara.

Revenues from other non-dermatological products shot up 123.6% during the quarter to $22.3 million, driven by higher sales of Maxair Autohaler in the U.S. and Qvar in Canada (both acquired in the fourth quarter of 2011). The non-dermatological products franchise at Medicis comprises Ammonul, Buphenyl, Maxair Autohaler and contract revenue.

Gross margin for the reported quarter contracted to 88.9% from 90.4% in the year-ago quarter. Research and development (R&D) expenses were $23.3 million, compared with $15.2 million in the second quarter of 2011. The increase resulted from R&D charges of $8.0 million associated with upfront and milestone payments made to partners.

Selling, general and administrative (SG&A) expenses came in at $101.9 million versus $90.4 million in the year-ago quarter which included $1.2 million of professional fees related to the company’s Federal Trade Commission (FTC) investigation. The increase was due to higher spending on promotional programs and increase in the number of sales representatives.

Guidance Lowered for 2012

For 2012, Medicis now expects earnings in the range of $2.25-$2.65 per share, down from the prior forecast of $2.62 – $2.86 per share. The revenue guidance has likewise been lowered to a band of $800 million to $834 million from the earlier range of $830 million to $862 million.

The Zacks Consensus Estimate for 2012 hints at earnings of $2.65 per share on revenues of $842 million.

Additionally, Medicis expects gross margin of about 89%-91% of revenues in 2012. While SG&A expenses are expected to come in at about 47%-50% of revenues (earlier 47% - 49% of revenues), R&D expenses are expected to be about 6%-8% of revenues.

For the third quarter of 2012, Medicis forecasts earnings of 41 cents to 58 cents per share, down from the prior guidance of 77 cents to 84 cents per share. The company expects revenue to be in the range of $185 million to $200 million (earlier $219 million to $230 million). The Zacks Consensus Estimate for the third quarter hints at earnings of 79 cents per share on revenues of $342 million.

Our Take

We currently have a Neutral recommendation on Medicis. The stock carries a Zacks #3 Rank (Hold rating) in the short run. We believe that the February 2012 Graceway Pharma acquisition has expanded Medicis’ commercial product portfolio and strengthened its pipeline. However, we remain concerned about the genericization of Solodyn and competitive threats to Dysport from Allergan Inc.’s (AGN) Botox.

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