MEDICIS PHARMACEUTICAL CORP, 424B1, 1996-09-30

MEDICIS PHARMACEUTICAL CORP
424B1, 1996-09-30
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
Rule 424(b)(1)
File No. 333-10247
MEDICIS
The Dermatology Company[sm]

1,850,000 SHARES

CLASS A COMMON STOCK

All of the 1,850,000 shares of the Class A Common Stock (unless the context
otherwise requires, "Common Stock") offered hereby are being issued and sold by
Medicis Pharmaceutical Corporation (together with its wholly owned subsidiaries,
"Medicis" or the "Company"). On September 26, the last sale price of the
Company's Common Stock, as reported on the Nasdaq National Market, was $46.00
per share. See "Price Range of Common Stock." The Common Stock of the Company is
traded on the Nasdaq National Market under the symbol "MDRX."

------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------------------
Per Share......................... $45.00 $2.475 $42.525
- --------------------------------------------------------------------------------------------
Total(2).......................... $83,250,000 $4,578,750 $78,671,250
============================================================================================
</TABLE>

(1) Before deducting expenses payable by the Company estimated at $300,000.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 277,500 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $95,737,500, $5,265,563 and $90,471,938,
respectively.

------------------------

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about October 2, 1996.

ROBERTSON, STEPHENS & COMPANY A.G. EDWARDS & SONS, INC.

The date of this Prospectus is September 27, 1996
<PAGE> 2
MEDICIS
The Dermatology Company[sm]

MEDICIS PRODUCTS EMPHASIZE CLINICAL EFFECTIVENESS,
QUALITY, AFFORDABILITY AND COSMETIC ELEGANCE

MEDICIS PRESCRIPTION PRODUCT LINE THE MEDICIS OTC PRODUCT LINE
FEATURES DYNACIN, A LEADING FEATURES ESOTERICA, THE
DOMESTIC BRANDED MINOCYCLINE LEADING DOMESTIC FADE CREAM

------------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------------

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE ACT"). SEE
"UNDERWRITING."

2
<PAGE> 3
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

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PAGE
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Summary....................................................... 4
Risk Factors.................................................. 7
Use of Proceeds............................................... 20
Dividend Policy............................................... 20
Price Range of Common Stock................................... 21
Capitalization................................................ 22
Dilution...................................................... 23
Selected Consolidated Financial Data.......................... 24
Management Discussion and Analysis of Financial
Condition and Results of Operations......................... 25
Business...................................................... 32
Management.................................................... 46
Principal Stockholders........................................ 50
Description of Capital Stock.................................. 52
Underwriting.................................................. 54
Legal Matters................................................. 55
Experts....................................................... 55
Available Information......................................... 56
Information Incorporated by Reference......................... 56
Index to Consolidated Financial Statements.................... F-1
</TABLE>

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MEDICIS(R), MEDICIS THE DERMATOLOGY COMPANYSM, THERAMYCIN Z(TM), TRIAZ(R),
BENZASHAVE(R), DYNACIN(R), ESOTERICA(R), THERAPLEX(R) and THERAPLEX
CLEARLOTION(R) are trademarks or servicemarks used in this Prospectus which are
owned by the Company. All other trademarks and registered trademarks used in
this Prospectus are the property of their respective owners.

3
<PAGE> 4

SUMMARY

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.

THE COMPANY

Medicis Pharmaceutical Corporation is the leading independent
pharmaceutical company in the United States that offers prescription and
non-prescription (over-the-counter) products exclusively to treat dermatological
conditions. Emphasizing the clinical effectiveness, quality, affordability and
cosmetic elegance of its products, the Company has achieved a leading position
in the treatment of acne and acne-related conditions using prescription
pharmaceuticals, while also offering the leading domestic over-the-counter
("OTC") fade cream product line. The Company has built its business through the
successful introduction of DYNACIN and TRIAZ products for the treatment of acne,
and the acquisition of the ESOTERICA fade cream product line.

Since inception, Medicis has focused on providing the highest-quality
customer service to dermatologists, while selectively out-sourcing non-marketing
functions, such as laboratory research, manufacturing and warehousing. The
Company intends to leverage its focused marketing and sales force by offering
additional products that address significant opportunities in the dermatalogy
market.

The dermatology market in the United States was estimated to have annual
sales of approximately $5 billion in 1995. However, due to the large number of
products offered, individual dermatological products typically have total
domestic sales of less than $50 million each. Several factors, including
industry consolidation, pricing pressure and the high cost of investment in new
pharmaceuticals, have caused major pharmaceutical companies to shift their focus
away from fragmented markets into markets that offer the potential for billion
dollar annual sales for single products or product lines. Since most
dermatological products do not have the level of sales potential sought by these
major manufacturers, specialized pharmaceutical companies such as Medicis can
identify and pursue niche markets. The Company believes that the dermatology
market offers a unique opportunity in the pharmaceutical industry because it is
highly fragmented and only approximately 3,200 dermatologists, of the
approximately 6,600 office-based dermatologists and approximately 1,500
university-based or hospital-based dermatologists in the United States, are
responsible for 80% of all prescriptions written by dermatologists.

Prescription pharmaceuticals accounted for 83.2% of the Company's sales for
the fiscal year ended June 30, 1996 and 70.6% of sales for the fiscal year ended
June 30, 1995. Medicis has focused its prescription pharmaceutical efforts
primarily on products that treat acne and acne-related conditions, which
accounted for over 10 million visits to dermatologists in 1995. The Company's
leading product, DYNACIN, introduced in November 1992, is one of the country's
leading systemic antibiotic for the treatment of acne. DYNACIN, which contains
minocycline (a tetracycline derivative), has achieved its current position as
one of the leading branded minocycline products in the United States due to its
convenient once or twice daily dosing, reduced gastric irritation and virtual
absence of bacterial resistance. The TRIAZ product line, introduced in April
1996, consists of a gel available in two concentrations, and a cleanser used for
the topical treatment of acne. TRIAZ products employ benzoyl peroxide as their
active ingredient in a vehicle containing glycolic acid (for exfoliation) and
zinc lactate (to reduce the appearance of inflammation). TRIAZ products offer
several advantages over competing treatments, including improved stability,
greater convenience of use, reduced costs and fewer side effects. The Company
offers two additional prescription products, THERAMYCIN Z, a topical lotion for
the treatment of acne, and BENZASHAVE, a topical treatment for acne and
bacterial inflammation associated with shaving, known as pseudofolliculitis
barbae ("PFB").

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<PAGE> 5

Medicis' OTC products accounted for 16.8% of sales for the fiscal year
ended June 30, 1996 and 28.2% of sales for the fiscal year ended June 30, 1995.
Those OTC products include the ESOTERICA line of topical fade creams, the
leading domestic products used to correct minor skin discoloration problems such
as age spots, dark patches and freckles. The Company also markets a line of
THERAPLEX moisturizers to treat problems of severe dry skin and certain
inflammatory skin conditions.

The Company's offices are located at 4343 East Camelback Road, Suite 250,
Phoenix, Arizona 85018-2700 and its telephone number is (602) 808-8800.

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information presented or referenced herein, the
discussion of risk factors on pages 7 to 19 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
associated with an investment in the Company include the following factors:
Dependence on Sales of DYNACIN Products; Uncertainty of Future Financial
Results, Fluctuations in Operating Results; Intense Competition, Uncertainty of
Technological Change; Dependence on New Product Introductions and Acquisition
Strategy; Uncertainty of Product Development; Managing Changing Business;
Reliance on Third-Party Manufacturers and Sole Source Suppliers; Uncertainty of
Government Regulation; Uncertainty of Trademarks, Patents and Proprietary
Rights; Uncertainties Relating to Pharmaceutical Pricing and Third-Party
Reimbursement, Health Care Reform; Potential Product Liability, Limited
Insurance Coverage; Customer Concentration, Consolidation of Distribution
Network; Risk of Product Recall, Product Returns; Management Discretion Over
Application of Proceeds; Dependence on Key Personnel; Dependence on Licenses
from Others; Risk of Debt Covenant Default; Uncertainty of Access to Capital;
Volatility of Common Stock Price; Control by Directors and Officers; Market Risk
of Shares Eligible For Future Sales; Dilution; Anti-Takeover Effect of Charter
Provisions, Rights Plan, Stock Option Vesting, Employment Agreement and Delaware
Law; and Lack of Cash Dividends. For a discussion of the risks associated with
an investment in the Company, see "Risk Factors."

THE OFFERING

Common Stock Offered by the
Company....................... 1,850,000 shares

Common Stock Outstanding After
the Offering.................... 8,870,615 shares (1)

Use of Proceeds................. For marketing expenses associated with new
product introductions, the licensing or
acquisition of formulations, technologies,
products or businesses, research and
development, expansion of marketing and sales
capabilities and general corporate purposes.
See "Use of Proceeds."

Nasdaq National Market Symbol... MDRX
- ---------------
(1) Based on shares outstanding as of August 5, 1996. Includes (i) 125,322
shares of Class B Common Stock, $0.014 par value ("Class B Common Stock"),
and (ii) 62,660 shares of Series B Automatically Convertible Preferred
Stock, $0.01 par value ("Series B Preferred Stock"), each share of which is
convertible into one share of Class A Common Stock. Excludes 994,057 shares
of Class A Common Stock issuable upon the exercise of outstanding stock
options at a weighted average exercise price of $11.28 per share. See
"Description of Capital Stock."

5
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

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YEAR ENDED JUNE 30,
---------------------------------------------------------
1992 1993(1) 1994(1) 1995(2) 1996
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STATEMENT OF OPERATIONS DATA:
Net sales............................ $ 7,687 $ 11,088 $17,059 $19,132 $25,310
Gross profit......................... 5,450 7,215 11,239 13,282 18,354
Operating expenses................... 11,087 18,694 11,011 11,622 12,379
-------- -------- ------- ------- -------
Operating income(loss)............... (5,637) (11,479) 228 1,660(2) 5,975
Net income (loss).................... $(11,791) $(11,654) $ 656 $ 1,613 $ 7,880
======== ======== ======= ======= =======
Net income(loss) per share before
extraordinary item(3).............. $ (2.17) $ (2.12) $ 0.10 $ 0.24 $ 1.09
Extraordinary loss per share(3)...... (1.04) -- -- -- --
-------- -------- ------- ------- -------
Net income(loss) per share(3)........ $ (3.21) $ (2.12) $ 0.10 $ 0.24 $ 1.09
======== ======== ======= ======= =======
Number of shares used in computing
net income (loss) per share(3)..... 3,668 5,507 6,303 6,593 7,242
</TABLE>

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<CAPTION>
JUNE 30, 1996
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ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 7,956 $ 86,327
Working capital.................................................. 12,401 90,772
Total assets..................................................... 26,313 104,684
Total stockholders' equity....................................... 19,460 97,831
</TABLE>

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(1) The fiscal year ended June 30, 1994 ("fiscal 1994") and the fiscal year
ended June 30, 1993 ("fiscal 1993") include the operations of Dyad
Pharmaceutical Corporation, which were divested by the Company in fiscal
1995.

(2) The fiscal year ended June 30, 1995 ("fiscal 1995") includes approximately
$610,000 of charges associated with headquarters relocation; the Company had
operating income of approximately $2,270,000 before relocation charges in
fiscal 1995.

(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the computation of per share data.

(4) Adjusted to reflect the sale of 1,850,000 shares of Common Stock by the
Company at the public offering price of $45.00 per share, and the receipt of
the estimated net proceeds therefrom.

Except as otherwise specified herein, all information in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option, and (ii) has
been adjusted to give effect to a 3-for-2 stock split in the form of a 50% stock
dividend paid on August 2, 1996 to holders of record on July 22, 1996. See
"Description of Capital Stock."

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<PAGE> 7

RISK FACTORS

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.

The following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.

DEPENDENCE ON SALES OF DYNACIN PRODUCTS

The Company derives a majority of its revenue from sales of DYNACIN
products. The Company believes that sales of DYNACIN products will continue to
constitute the majority of net sales for the foreseeable future. Accordingly,
any factor adversely affecting the sale of DYNACIN products would have a
material adverse effect on the Company's business, financial condition and
results of operations. DYNACIN products could be rendered obsolete or
uneconomical by regulatory or competitive changes. The sale of DYNACIN products
could also be affected adversely by other factors, including manufacturing or
supply interruptions, the development of new competitive pharmaceuticals to
treat the conditions addressed by DYNACIN products, technological advances,
factors affecting the cost of production, marketing or pricing actions by one or
more of the Company's competitors, changes in the prescription writing practices
of dermatologists, changes in the reimbursement policies of third-party payors,
product liability claims or other factors. See "Business -- Products in
Development," "-- Manufacturing," "-- Certain License and Royalty Agreements,"
"-- Competition" and "-- Government Regulation."

UNCERTAINTY OF FUTURE FINANCIAL RESULTS, FLUCTUATIONS IN OPERATING RESULTS

The Company's results of operations may vary from period to period due to a
variety of factors, including expenditures incurred to acquire, license and
promote pharmaceuticals, changes in prescription writing practices of
dermatologists, the Company's level of research and development, the
introduction of new products by the Company or its competitors, cost increases
from third-party manufacturers, supply interruptions, the availability and cost
of raw materials, the mix of products sold by the Company, changes in marketing
and sales expenditures, market acceptance of the Company's products, competitive
pricing pressures, and general economic and industry conditions that affect
customer demand. In addition, the Company's business has historically been
subject to seasonal fluctuations, with lower sales generally being experienced
in the first quarter of each fiscal year. As a result of customer buying
patterns, a substantial portion of the Company's revenues have historically been
received in the last month of each quarter. The Company schedules its inventory
purchases to meet anticipated customer demand. As a result, relatively small
delays in the receipt of manufactured products could result in revenues being
deferred or lost. The Company's operating expenses are based on anticipated
sales levels, and a high percentage of the Company's expenses are relatively
fixed in the short term. Consequently, variations in the timing of recognition
of revenue could cause significant fluctuations in operating results from period
to period and may result in unanticipated periodic earnings shortfalls or
losses. There can be no assurance that the Company will maintain or increase
revenues, maintain profitability or avoid losses in any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

INTENSE COMPETITION, UNCERTAINTY OF TECHNOLOGICAL CHANGE

The manufacture and sale of pharmaceuticals is highly competitive. Most of
the Company's competitors are large, well-established pharmaceutical, chemical,
cosmetic or health care companies with considerably greater financial,
marketing, sales and technical resources than those available to the Company.
Additionally, many of the Company's present and potential competitors have
research and development capabilities that may allow such competitors to develop
new or improved products that

7
<PAGE> 8

may compete with the Company's product lines. The pharmaceutical industry is
characterized by intense competition, and rapid product development and
technological change. The Company's pharmaceuticals could be rendered obsolete
or made uneconomical by the development of new pharmaceuticals to treat the
conditions addressed by the Company's products, technological advances affecting
the cost of production, or marketing or pricing actions by one or more of the
Company's competitors. The Company's business, financial condition or results of
operations could be materially adversely affected by any one or more of such
developments.

DYNACIN competes with Minocin, a branded minocycline product marketed by
American Home Products Corporation ("AHP"), and generic minocycline products
marketed by Schein Pharmaceuticals, Inc. ("Schein"), BioCraft Laboratories, Inc.
("BioCraft") and Warner-Chilcott Laboratories, Inc. ("Warner-Chilcott") Other
oral antibiotics utilized for the treatment of acne include erythromycin,
doxycycline and tetracycline marketed in branded and generic form by a variety
of companies. The Company believes that TRIAZ competes with Cleocin-T and a
generic topical clindamycin, manufactured by Pharmacia & Upjohn, Inc.; Benzac,
manufactured by Galderma, Inc.; and Benzamycin, manufactured by Rhone-Poulenc
Rorer Pharmaceuticals, Inc. ESOTERICA primarily competes with Porcelana,
marketed by Dep Corp. and AMBI, marketed by Kiwi Brands, a division of Sara Lee
Corporation ("Kiwi").

Several of the Company's products compete with generic (non-branded)
pharmaceuticals which claim to offer equivalent therapeutic benefits at a lower
cost. In some cases, insurers and other third-party payors seek to encourage the
use of generic products by paying or reimbursing a user or supplier of a branded
prescription product a lower portion of the purchase price than would be paid or
reimbursed for a generic product, making branded products less attractive, from
a cost perspective, to buyers. The aggressive pricing activities of the
Company's generic competitors and the payment and reimbursement policies of
third-party payors could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"Business -- Competition."

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND ACQUISITION STRATEGY

The Company's strategy for growth is substantially dependent upon its
continued ability to successfully introduce new products and acquire
pharmaceuticals targeted at the dermatology market. The Company engages in
limited proprietary research and development of new products and must rely upon
the willingness of other companies to sell or license product lines. Other
companies, including those with substantially greater financial, marketing and
sales resources, compete with the Company to acquire such products. There can be
no assurance that the Company will be able to develop or acquire rights to
additional products on acceptable terms, or at all. The failure of the Company
to acquire additional products could have a material adverse effect on the
Company's business prospects. Further, the market conditions, distribution
channels and levels and bases of competition with respect to internally
developed or acquired products may be different than those of the Company's
current products, and there can be no assurance that the Company will be able to
compete favorably and attain market acceptance in any newly acquired product
category or successfully integrate any acquired products or business. Failure of
the Company to successfully introduce and market new products, whether
internally developed or acquired from third parties, could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

UNCERTAINTY OF PRODUCT DEVELOPMENT

The Company has developed and obtained rights to certain dermatological
agents in various stages of development. The Company has a variety of products
under development, ranging from existing product line extensions to new products
or reformulations of existing products. All products and technologies under
development will require significant commitment of personnel and financial
resources. Several products will require extensive clinical evaluation and
premarketing clearance by the United States Food and Drug Administration ("FDA")
and comparable agencies in other countries

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<PAGE> 9

prior to commercial sale. Certain of the products and technologies under
development have been licensed from third parties. The failure of the Company to
meet its obligations under one or more of these agreements could result in the
termination of the Company's rights thereunder. In addition, the Company
regularly reevaluates its product development efforts. On the basis of these
reevaluations, the Company has in the past, and may in the future, abandon
development efforts for particular products. No assurance can be given that any
product or technology under development will result in the successful
introduction of any new product. The failure to introduce new products into the
market on a timely basis could have a material adverse effect on the Company's
business, financial condition or results of operation. See "Business -- Products
in Development."

The Company has in the past supplemented, and may in the future supplement,
its research and development efforts by entering into research and development
agreements with other pharmaceutical companies in order to defray the cost of
product development. There can be no assurance that the Company will enter into
additional research and development agreements acceptable to the Company, or at
all. See "Business -- Products in Development" and "-- Certain Licenses and
Royalty Agreements."

MANAGING CHANGING BUSINESS

The Company's business strategy includes potential acquisitions of products
and businesses and introductions of new products. The Company anticipates that
the integration of new businesses or potential products, if any, would require
significant management time and attention. The Company's ability to manage
change will require it to continue to implement and improve its operational,
financial and management information systems and to motivate and effectively
manage an increasing number of employees. Failure to manage such change
effectively would materially adversely affect the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Business
Strategy" and "-- Products in Development."

RELIANCE ON THIRD-PARTY MANUFACTURERS AND SOLE-SOURCE SUPPLIERS

The Company currently contracts for all of its manufacturing needs and is
required by the FDA to contract only with manufacturers that comply with FDA
current Good Manufacturing Practices ("cGMP") regulations and other applicable
laws and regulations. The Company typically does not enter into long-term
manufacturing contracts with third-party manufacturers. Whether or not such
contracts exist, there can be no assurance that the Company will be able to
obtain adequate supplies of such products in a timely fashion, or at all.

The Company's DYNACIN products are manufactured solely by Schein in
compliance with the Company's stringent, internally developed specifications and
quality standards pursuant to a supply agreement that expires in December 1997.
Under the agreement, Schein manufactures minocycline for sale in the branded
market exclusively for the Company, but may manufacture and sell minocycline for
itself or others as a generic product. Schein currently manufactures minocycline
for the generic market under its own label. The Schein supply agreement is
subject to automatic renewal for successive two-year periods if neither party
gives timely notice of termination. Schein may also terminate the exclusivity
portion of the agreement if its profit margin on sales of DYNACIN products fall
below a specified level. Schein may also terminate the agreement upon a material
breach by the Company, in the event that the Company becomes insolvent, or if
any lawsuit is commenced alleging a patent or a proprietary rights violation.
The agreement also provides that the Company will purchase all of its
requirements for minocycline from Schein but may purchase some of its
requirements from another manufacturer if Schein fails to meet certain cost
standards or fails to provide the Company with all of its requirements for two
of four consecutive calendar quarters. In addition, the Company may use
alternative sources if Schein terminates the Company's exclusive rights to
purchase branded minocycline based upon the Company's failure to meet certain
pre-specified profit margins. Either party may terminate the agreement in the
event that the other party cannot perform under the

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<PAGE> 10

agreement for a period of three months or longer for certain reasons beyond its
control, such as war, strike, fire, lockout or acts of God. The inability of
Schein to fulfill the Company's supply requirements for DYNACIN, the Company's
largest-selling product, could have a material adverse effect on the Company's
business, financial condition or results of operations.

The Company's ESOTERICA line of products are manufactured by SmithKline
Beecham Consumer Healthcare, L.P. ("SmithKline") pursuant to a manufacturing and
supply agreement which expires in March 1997. SmithKline may terminate its
agreement in the event of a material breach by the Company upon 15 days written
notice. The Company's Canadian distributor currently utilizes Contract
Manufacturing Associates to manufacture its requirements of ESOTERICA for the
Canadian market.

The Company purchases THERAMYCIN Z and BENZASHAVE products exclusively from
a subsidiary of IVAX Corporation ("IVAX"), pursuant to a manufacturing agreement
expiring in July 2000. In the event that IVAX is prevented from completing
performance of its obligations under the Agreement for specified reasons beyond
its control, it is excused from such performance until such time as the event
preventing its performance ceases. If IVAX is unable to supply the Company's
requirements of either product, the Company is permitted to purchase the
unsatisfied requirements from third parties. The remainder of the Company's
products are produced on a purchase order basis only, including its THERAPLEX
EMOLLIENT products, manufactured solely by ViFor, S.A., a Swiss manufacturing
company ("ViFor"); THERAPLEX CLEARLOTION products, manufactured by Accupac,
Inc.; THERAPLEX HYDROLOTION products, manufactured by Beauty Control Cosmetics,
Inc. ("Beauty Control"); TRIAZ products, manufactured by Paco Laboratories, Inc.
("Paco")

The Company's third-party manufacturers rely on certain suppliers of key
raw materials. Certain of those materials are purchased from single sources and
others may be purchased from single sources in the future. Disruptions in
supplies, including delays due to the inability of the Company or its
manufacturers to procure raw materials, would have a material adverse effect on
the Company's business, financial condition and results of operations.

Any interruptions in the supply of any of the Company's products due to
shortages in raw materials, changes in manufacturing sources, regulatory changes
or other causes could delay or eliminate the Company's ability to supply such
products. In addition, the Company faces the risk that, upon expiration of the
term of any third-party manufacturing agreement, it may not be able to renew or
extend the agreement with the third-party manufacturer, to obtain an alternative
manufacturing source from other third parties or to develop internal
manufacturing capabilities on commercially viable terms, or at all. To manage
its resources effectively, the Company attempts to retain inventory levels that
are no greater than necessary to meet the currently projected needs of its
customers.

Manufacture of the Company's THERAMYCIN Z and BENZASHAVE products was
suspended in fiscal 1994 following the acquisition by IVAX of certain assets of
Syosset Laboratories, Inc. ("Syosset"), the original manufacturer of those
products under the agreement, in Syosset's bankruptcy proceeding. Manufacture of
the BENZASHAVE products was subsequently resumed, and the Company resumed
shipping these products during fiscal 1995. During the second quarter of fiscal
1996, manufacturing of the THERAMYCIN Z product also resumed. There can be no
assurance that the Company will not suffer future supply insufficiencies or
interruptions or that it will be able to obtain adequate supplies of

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<PAGE> 11

its products in a timely fashion, or at all. The loss of a manufacturer, the
failure to obtain or validate a replacement manufacturer on a timely basis,
other manufacturing problems or any interruption of supply could have a material
adverse effect on the Company's business, financial condition or results of
operations.

UNCERTAINTY OF GOVERNMENT REGULATION

The manufacture and sale of cosmetics and drugs are subject to regulation
principally by the FDA and state and local authorities in the United States, and
by comparable agencies in certain foreign countries. The Federal Trade
Commission ("FTC") and state and local authorities regulate the advertising of
OTC drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended
(the "Food and Drug Act"), and the regulations promulgated thereunder, and other
federal and state statutes and regulations, govern, among other things, the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. In general,
products falling within the FDA's definition of "new drugs" require
pre-marketing clearance by the FDA. Products falling within the FDA's definition
of "cosmetics" or of "drugs" that are not "new drugs" and that are generally
recognized as "safe and effective" do not require premarketing clearance.

The steps required before a pharmaceutical compound may be marketed in the
United States include (i) preclinical laboratory and animal testing, (ii)
submission to the FDA of an Investigational New Drug ("IND") application, which
must become effective before clinical trials may commence, (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
drug, (iv) submission to the FDA of a New Drug Application ("NDA") and (v) FDA
approval of the NDA prior to any commercial sale or shipment of the drug. In
addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with, and approved by, the FDA.

Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a drug. The results of these
studies are submitted to the FDA as a part of an IND, which must be approved
before clinical trials can begin. Typically, clinical evaluation involves a time
consuming and costly three-phase process. In Phase I, clinical trials are
conducted with a small number of subjects to determine the early safety profile,
the pattern of drug distribution and metabolism. In Phase II, clinical trials
are conducted with groups of patients afflicted with a specific disease in order
to determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large-scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The FDA
closely monitors the progress of each of the three phases of clinical trials and
may, at its discretion, re-evaluate, alter, suspend or terminate the testing
based upon the data which have been accumulated to that point and its assessment
of the risk/benefit ratio to the patient.

In general, FDA approval is required before a new drug product may be
marketed in the United States. However, most OTC drugs are exempt from the FDA's
premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC
Drug Review to evaluate the safety and effectiveness of OTC drugs then on the
market. Through this process, the FDA issues monographs that set forth the
specific active ingredients, dosages, indications and labeling statements for
OTC drugs that the FDA will consider generally recognized as safe and effective
and therefore not subject to premarket approval. OTC drug products are
classified by the FDA in one or more categories: Category I products, which are
deemed "safe and effective for OTC use," Category II products, which are deemed
"not generally recognized as safe and effective for OTC use," and Category III
products, which are deemed "possibly safe and effective with studies ongoing."
For certain categories of OTC drugs not yet subject to a final monograph, the
FDA usually will not take regulatory action against such drugs unless failure to
do so will pose a potential health hazard. Drugs subject to final monographs,
however, are subject to various FDA regulations concerning for example, cGMP,
general and specific OTC labeling require-

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<PAGE> 12

ments (including warning letters), prohibitions against promotion for conditions
other than those stated in the labeling, and requirements that OTC drugs contain
only suitable inactive ingredients. OTC drug manufacturing facilities are
subject to FDA inspection, and failure to comply with applicable regulatory
requirements may lead to administrative or judicially-imposed penalties.

The active ingredient in DYNACIN products, minocycline, has been approved
by the FDA. The active ingredient in TRIAZ and BENZASHAVE products has been
classified as a Category III product under a tentative final FDA monograph for
over-the-counter distribution for use in treatment of labeled conditions. The
FDA has requested, and a task force of the Non-Prescription Drug Manufacturers
Association has undertaken, further studies to confirm that benzoyl peroxide, an
active ingredient in TRIAZ and BENZASHAVE products, is not a tumor promoter when
tested in conjunction with UV light exposure. There can be no assurance these
tests will confirm the status of benzoyl peroxide as generally recognized as
safe and effective, or that adverse test results would not result in withdrawal
of TRIAZ and BENZASHAVE products from marketing. An adverse decision by the FDA
with respect to the safety of benzoyl peroxide could result in the assertion of
product liability claims against the Company and could otherwise have a material
adverse effect upon the Company's business, financial condition or results of
operations.

Four of the five ESOTERICA products contain the active ingredient
hydroquinone, currently a Category I product. Independent expert dermatologists
have formally expressed the view that hydroquinone at a 2% concentration is
generally recognized as safe and effective for its intended use. However, in
1992, with the concurrence of the FDA, the industry initiated dermatological
metabolism and toxicity studies to fully support hydroquinone's continued
Category I status. Notwithstanding the pendency or results of these tests, which
may take up to three years to complete, the FDA may elect to classify
hydroquinone as a Category III OTC drug. The Company, in conjunction with the
Non-Prescription Drug Manufacturers Association and other manufacturers, is
responsible for 50% of the costs associated with these studies. An adverse
decision by the FDA on the safety of hydroquinone could result in the assertion
of product liability claims against the Company. Moreover, if hydroquinone is
not maintained as a Category I or Category III drug, the Company would be
required to cease marketing ESOTERICA products containing hydroquinone, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.

The ESOTERICA, TRIAZ and BENZASHAVE products must meet the composition and
labeling requirements established by the FDA for products containing their
respective basic ingredients. The Company believes that compliance with those
established standards avoids the requirement for premarketing clearance of these
products. There can be no assurance that the FDA will not take a contrary
position.

The Company believes its three THERAPLEX moisturizers, as they are promoted
and intended by the Company for use, fall within the FDA's definition of
"cosmetics" and therefore do not require premarketing clearance. There can be no
assurance that the FDA will not take a contrary position in the future or that
an adverse determination by the FDA would not result in withdrawal of the
THERAPLEX moisturizers from marketing. The Company believes that such products
are subject to regulations governing product safety, use of ingredients,
labeling and promotion, and methods of manufacture.

The Company believes that certain of its products as they are promoted and
intended by the Company for use, are exempt from registration based on the date
of introduction of their active ingredients and therefore do not require
premarketing clearance. There can be no assurance that the FDA will not take a
contrary position. The Company believes that such products are subject to
regulations governing product safety, use of ingredients, labeling and
promotion, methods of manufacture.

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<PAGE> 13

assurance that the Company will be able to obtain the necessary approvals to
conduct clinical trials or for the manufacturing and marketing of products, that
all necessary clearances will be granted to the Company or its licensors for
future products on a timely basis, or at all, or that FDA review or other
actions will not involve delays adversely affecting the marketing and sale of
the Company's products. In addition, the testing and approval process with
respect to certain new products which the Company may develop or seek to
introduce is likely to take a substantial number of years and involve the
expenditure of substantial resources. There can be no assurance that
pharmaceutical products currently in development, or those products acquired or
licensed by the Company, will be cleared for marketing by the FDA. Failure to
obtain any necessary approvals or failure to comply with applicable regulatory
requirements could have a material adverse effect on the Company's business,
financial condition or results of operations. Further, future government
regulation could prevent or delay regulatory approval of the Company's products.

There can be no assurance that any approval will be granted on a timely
basis, or at all; that the FDA will not require post-marketing testing and
surveillance to monitor the product and continued compliance with regulatory
requirements; that the FDA will not require the submission of any lot of any
product for inspection and will not restrict the release of any lot that does
not comply with FDA standards; that the FDA will not otherwise order the
suspension of manufacturing, recall or seizure of products; or that the FDA will
not withdraw its marketing clearance of any product if compliance with
regulatory standards is not maintained or if problems concerning safety or
efficacy of the product are discovered following approval.

From time to time, the FDA has issued correspondence to pharmaceutical
companies, including the Company, alleging that their advertising or promotional
practices are false, misleading or deceptive. There can be no assurance that the
Company will not receive such correspondence from the FDA in the future, or that
if such notices are received, they will not result in substantial cost,
disruption or expense (including fines and penalties), in material changes to
the manner in which the Company promotes its products, or in loss of sales of
the Company's products or in other material adverse effects on the Company's
business, financial condition or results of operations.

For currently marketed and future products, failure to comply with the
applicable regulatory requirements could, among other things, result in fines,
suspensions of regulatory approvals, product recalls, operating restrictions,
criminal prosecution, relabeling costs, delays in product distribution,
marketing and sales or seizure or cessation of manufacture of the products and
the imposition of civil or criminal sanctions. There can be no assurance that
the FDA will not change its position with regard to the safety or effectiveness
of the Company's current or future products or that the FDA will agree with the
Company's position regarding the regulatory status of its products. In the event
that the FDA takes a contrary position regarding any of the Company's current or
future products, the Company may be required to change its labeling or
formulation or possibly cease manufacture and marketing of such products. In
addition, even prior to any formal regulatory action, the Company could decide
voluntarily to cease distribution and sale, or to recall, any of its products if
concern about the safety or efficacy of any of its products were to develop. Any
such action could have a material adverse effect on the Company's business,
financial condition or results of operations.

The Company also will be subject to foreign regulatory authorities
governing clinical trials and pharmaceutical sales if it seeks to market its
products outside the United States. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing the
product in those countries. The approval process varies from country to country
and the time required may be longer or shorter than that required for FDA
approval. There can be no assurance that any foreign regulatory agency will
approve any product submitted for review by the Company. See
"Business -- Government Regulation."

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<PAGE> 14

UNCERTAINTY OF TRADEMARKS, PATENTS AND PROPRIETARY RIGHTS

The Company believes that trademark protection is an important factor in
establishing product recognition. The inability of the Company to protect its
trademarks from infringement could result in injury to any goodwill which may be
developed in such trademarks. Moreover, the Company's inability to use one or
more of its trademarks because of successful third-party claims could have a
material adverse effect on the Company's business, financial condition or
results of operations.

An opposition to registration of the mark "THERAMYCIN Z" has been filed and
is currently pending in the United States Patent and Trademark Office. The
Company has been advised by the opposing party that the opposition will be
withdrawn without prejudice, allowing for the Company's trademark application to
proceed for examination. While no assurance can be given as to the Company's
ability to obtain the registration of the mark "THERAMYCIN Z", the Company does
not currently foresee any further opposition to its registration.

The Company is pursuing several United States patent applications. No
assurance can be given that patents will be issued with respect to any of these
applications. The Company has acquired rights under certain patents and patent
applications from third-party licensors. The Company has also acquired from
certain of its consultants and principals an assignment of their rights to
certain United States patents or patent applications. Certain of such patents
and patent applications may be subject to claims of rights by third parties, by
reason of existing relationships with the party who filed such patents or patent
applications. No assurance can be given that the Company will be able to obtain
any rights under such patents or patent applications, as a result of any such
conflicting claims, or that any rights which the Company may obtain will be
sufficient for the Company to market products that may be the subject of such
patents or patent applications. The Company may be required to obtain licenses
and/or pay royalties to obtain the rights it acquires under such patents or
patent applications, and no assurance can be given that the Company will be able
to obtain rights under such patents or patent applications on terms acceptable
to the Company, or at all.

The Company believes that its success will depend in part on its ability to
obtain and maintain patent protection for its own inventions, and to obtain and
maintain licenses for the use of patents, licensed or sublicensed by third
parties. No assurance can be given that any patent issued to, or licensed by,
the Company will provide protection that has commercial significance. In this
regard, the patent position of pharmaceutical compounds is particularly
uncertain. There can be no assurance that challenges will be not be instituted
against the validity or enforceability of any patent owned by or licensed to the
Company or, if instituted, that such challenges will not be successful. The
Company only conducts complete searches to determine whether its products
infringe upon any existing patents as it deems appropriate. The cost of
litigation to uphold the validity and prevent infringement of patents can be
substantial and require a substantial commitment of management time.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate the technology owned by or licensed to
the Company or design around the patented aspects of such technology. There can
be no assurance that the products and technologies the Company currently
markets, or may seek to market in the future, will not infringe patents or other
rights owned by others. In the event of an adverse outcome of any dispute with
respect to patents or other rights, the Company may be required to license such
disputed rights or to cease using such disputed rights. There can be no
assurance that a license would be available on terms acceptable to the Company,
or at all.

The Company relies and expects to continue to rely upon unpatented
proprietary know-how and continuing technological innovation in the development
and manufacture of many of its principal products. The Company's policy is to
require all its employees, consultants, and advisors to enter into
confidentiality agreements with the Company. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or proprietary know-how in the event of any unauthorized use or
disclosure of such know-how. In addition, there can be no assurance that others
will not obtain access to or independently develop similar or equivalent trade

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<PAGE> 15

secrets or know-how. See "Business -- Certain License and Royalty Agreements,"
"-- Trademarks," "-- Patents and Proprietary Rights" and "Management -- Key
Consultants."

UNCERTAINTIES RELATING TO PHARMACEUTICAL PRICING AND THIRD-PARTY REIMBURSEMENT,
HEALTH CARE REFORM

The operating results of the Company will depend in part on the
availability of adequate reimbursement for the Company's products from
third-party payors, such as government entities, private health insurers and
managed care organizations. Third-party payors are increasingly seeking to
negotiate the pricing of medical services and products and to promote the use of
non-branded (generic) pharmaceuticals through payor-based reimbursement policies
designed to encourage their use. In some cases, third-party payors will pay or
reimburse a user or supplier of a prescription drug product for only a portion
of the purchase price of the product. In the case of the Company's prescription
products, payment or reimbursement by third-party payors of only a portion of
the cost of such products could make such products less attractive, from a cost
perspective, to users, suppliers and prescribing physicians. There can be no
assurance that reimbursement, if available, will be adequate. Moreover, certain
of the Company's products are not of a type generally eligible for third-party
reimbursement. If adequate reimbursement levels are not provided by government
entities or other third-party payors for the Company's products, or if those
reimbursement policies increasingly favor the use of generic products, the
Company's business, financial condition and results of operations would be
materially adversely affected. In addition, managed care initiatives to control
costs have influenced primary care physicians to refer fewer patients to
dermatologists, resulting in a declining target market for the Company. Further
reductions in referrals to dermatologists would have a material adverse effect
upon the Company's business, financial condition and results of operation. In
addition, a number of legislative and regulatory proposals aimed at changing the
nation's health care system have been proposed in recent years. While the
Company cannot predict whether any such proposals will be adopted, or the effect
that any such proposal may have on its business, such proposals, if enacted,
could have a material adverse effect on the Company's business, financial
condition or results of operations.

POTENTIAL PRODUCT LIABILITY, LIMITED INSURANCE COVERAGE

The Company faces an inherent risk of exposure to product liability claims
in the event that the use of its products is alleged to have resulted in adverse
effects. Such risk exists even with respect to those products that are
manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale. There can be no assurance that the
Company will avoid significant product liability exposure. The Company currently
has product liability insurance in the amount of $1.0 million per claim and $1.0
million in the aggregate on a claims-made basis and umbrella liability
insurance, which can also be used for product liability claims, in the amount of
$4.0 million per claim and $4.0 million in the aggregate. Many of the Company's
customers require the Company to maintain product liability insurance as a
condition to their conducting business with the Company. There can be no
assurance that insurance coverage will be available in the future on
commercially reasonable terms, or at all, that such insurance will be adequate
to cover potential product liability claims or that a loss of insurance coverage
or the assertion of a product liability claim or claims would not materially
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Government Regulation" and "-- Product Liability
Insurance."

CUSTOMER CONCENTRATION, CONSOLIDATION OF DISTRIBUTION NETWORK

The distribution network for pharmaceutical products has in recent years
been subject to increasing consolidation. As a result, a few very large
wholesale distributors control a significant share of the market. In addition,
the number of independent drug stores and small chains has decreased as retail
consolidation has occurred. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses thereby stimulating product returns to the Company.
Further consolidation or financial difficulties could also

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<PAGE> 16

cause customers to reduce their inventory levels, or otherwise reduce purchases
of the Company's products which could result in a material adverse affect on the
Company's business, financial condition or results of operations.

Medicis' customers include McKesson Drug Company ("McKesson"), Bergen
Brunswig Drug Company ("Bergen Brunswig"), Cardinal Health Inc. ("Cardinal"),
Bindley Western Drug Company ("Bindley") and major drug chains. During fiscal
1996, McKesson, Bergen Brunswig and Cardinal accounted for approximately 15.5%,
12.2% and 11.8%, respectively, of the Company's sales. For fiscal 1995, McKesson
and Bergen accounted for approximately 15.9% and 9.6%, respectively, of the
Company's sales. For fiscal 1994, McKesson and Bergen accounted for
approximately 15.1% and 11.2%, respectively, of the Company's sales. The loss of
any of these customer accounts could have a material adverse effect upon the
Company's business, financial condition or results of operations. See
"Business -- Customers."

RISK OF PRODUCT RECALL, PRODUCT RETURNS

Product recalls may be issued at the discretion of the Company, the FDA or
other government agencies having regulatory authority for product sales and may
occur due to disputed labeling claims, manufacturing issues, quality defects or
other reasons. No assurance can be given that product recalls will not occur in
the future. Any product recall could materially adversely affect the Company's
business, financial condition or results of operations. The Company's policy is
to accept for return only damaged or out of date products. However, the
Company's customers have in the past sought, and may in the future seek,
exceptions to that policy. There can be no assurance that the Company will not
grant such exceptions in the future. The Company maintains financial reserves
for the anticipated amount of product returns based upon historical experience.
There can be no assurance that future recalls or returns would not have a
material adverse effect upon the Company's business, financial condition and
results of operations.

MANAGEMENT DISCRETION OVER APPLICATION OF PROCEEDS

Management of the Company has broad discretion to determine the application
of the net proceeds of this offering in order to address circumstances and
opportunities. As a result, the success of the Company will be affected by the
judgment of the management of the Company with respect to the application of the
net proceeds. See "Use of Proceeds."

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on certain management personnel for the operation
and development of its business. The Company has entered into an Employment
Agreement providing for full-time services with Mr. Jonah Shacknai, the founder,
Chairman of the Board and Chief Executive Officer of the Company. The current
term of the Employment Agreement expires on June 30, 2001, subject to automatic
renewal for periods of five years unless either party gives timely notice of an
intention not to renew the Employment Agreement. Mr. Shacknai may also terminate
the Employment Agreement prior to the end of the term. Subject to the control
and oversight of the Company's Board of Directors, Mr. Shacknai exercises
control over substantially all policy making functions of the Company. In
addition, the Company is dependent upon its scientific consultants, particularly
with respect to the commercial development of discoveries and technologies as to
which they have special expertise. Certain of such consultants are employed on a
full-time basis by employers other than the Company, and some have consulting or
other advisory arrangements with other entities which may conflict with their
obligations to the Company. The loss of any key person, or a reduction in the
amount of time Mr. Shacknai devotes to the Company, could have an adverse effect
on the Company's business, financial condition or results of operations.

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<PAGE> 17

DEPENDENCE ON LICENSES FROM OTHERS

The Company has acquired rights to manufacture, use or market certain of
its products, as well as many of its other proposed products and technologies,
pursuant to license agreements with third parties. Such agreements contain
provisions requiring the Company to use its best efforts or otherwise exercise
diligence in pursuing market development for the subject products in order to
maintain the rights granted under the agreements and may be canceled upon the
Company's failure to perform its payment obligations. There can be no assurance
that the Company will fulfill its obligations under one or more of such
agreements due to insufficient resources, lack of successful product
development, lack of product acceptance or other reasons. The failure to satisfy
the requirements of any such agreements may result in the loss of the Company's
rights under that agreement or under related agreements and could have a
material adverse effect on the Company. In addition, the Company's licensing
agreements with Dr. Hans Rudi Suess and H.R. Suess, A.G., (collectively
"Suess"), and Euromerican Trade Resources, Inc. ("Euromerican") for the
exclusive rights to market the THERAPLEX line of products will terminate in
October 1999 with the expiration of the related patent. See
"Business -- Manufacturing," "-- Certain License and Royalty Agreements,"
"-- Trademarks" and "-- Patents and Proprietary Rights."

RISK OF DEBT COVENANT DEFAULT

The Company has a $5.0 million credit facility (the "Credit Facility") from
Norwest Bank Arizona, N.A. ("Norwest") that expires in May 1997. The Credit
Facility is secured by substantially all of the assets of the Company. The
Company is required to comply with certain covenants and restrictions, including
covenants relating to the Company's financial condition or results of
operations. If the Company is unable or fails to comply with the covenants and
restrictions, Norwest would have the right not to make loans under the Credit
Facility and to require early repayment of any outstanding loans. The lack of
availability of loans or the requirement to make early repayment of loans or the
inability of the Company to renew the Credit Facility could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

UNCERTAINTY OF ACCESS TO CAPITAL

During a portion of fiscal 1995 and prior years, the Company's cash flow
from operations was insufficient to cover its operating expenses, and the
Company relied on external financings to meet its needs for operating cash flow.
As a result of increased sales beginning in the latter half of 1995 associated
with the introduction of DYNACIN, the Company experienced an increase in
accounts receivable. The Company expects that its current cash and cash
equivalents, together with additional cash from operations and cash available
from its Credit Facility and the proceeds of this offering, will be sufficient
to meet its current liquidity requirements at least through the fiscal year
ending June 30, 1998. However, depending upon the Company's acquisition and
licensing activity and results of operations, there can be no assurance that
such resources will be sufficient. If they are not, the Company would need to
obtain additional financing. There is no assurance that such financing would be
on terms advantageous to the Company. Adequate additional funds, whether from
the financial markets or from other sources, may not be available on a timely
basis, on terms acceptable to the Company, or at all. Insufficient funds may
cause the Company to delay, scale back, or abandon some or all of its product
acquisition, licensing, marketing or research and development programs or
opportunities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

VOLATILITY OF COMMON STOCK PRICE

The market price for the stocks of many publicly traded pharmaceutical
companies and marketers of dermatological products, including the Company, is
highly volatile. A variety of events, both concerning and unrelated to the
Company and the markets in which it participates, may have a

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<PAGE> 18

significant negative impact on the market price of the Common Stock. These
factors include regulatory developments in the health care field generally, the
performance of and product announcements by other pharmaceutical companies,
manufacturing or supply disruptions, product recalls, the loss of key personnel,
and other matters affecting the Company's products, acquisitions and financial
performance. Although the Common Stock trades on the Nasdaq National Market,
trading volume, size of institutional holdings and the number of marketmakers
has fluctuated and at times has been quite low. Both the price and volume of
trading has been sensitive to the number of analysts reporting on the Company
and such analysts' comments concerning the Company and the industry in which it
participates. The realization of any of the risks described in these "Risk
Factors" could have a material and adverse effect on the price of the Company's
Common Stock. See "Price Range of Common Stock."

CONTROL BY DIRECTORS AND OFFICERS

On August 5, 1996, the Company's current directors and officers
beneficially owned 695,359 shares of Class A Common Stock, which have one vote
per share, and 112,301 shares of Class B Common Stock, and 56,150 shares of
Series B Preferred Stock, each of which have 10 votes per share, representing
approximately 11.87% of the Company's outstanding capital stock and
approximately 26.47% of the total voting power. Accordingly, such individuals,
if they vote together, are able to exercise substantial power in the election of
directors and thereby influence the policies of the Company. See "Principal
Stockholders" and "Description of Capital Stock."

MARKET RISK OF SHARES ELIGIBLE FOR FUTURE SALES

Subject to certain specified exceptions relating to charitable gifts,
estate planning transfers and sales relating to the exercise of expiring
options, current directors, executive officers and senior staff officers of the
Company, holding in the aggregate, as of August 5, 1996, 740,890 shares of
Common Stock representing approximately 9.9% of the outstanding shares to be
outstanding upon completion of the offering, have agreed with the Underwriters
not to sell or dispose of any shares of Common Stock for a period of 90 days
following commencement of this offering without the written consent of
Robertson, Stephens & Company LLC. Sales by such officers and directors are
generally subject to the provisions of Rule 144 under the Securities Act. See
"Underwriting."

The sale of a significant number of restricted securities, the exercise of
a significant number of options, or the offer or sale of a significant number of
shares of Common Stock acquired upon exercise of options at any one time could
materially adversely affect the market price of the Company's Common Stock.

DILUTION

The market price of the Common Stock offered hereby significantly exceeds
the current tangible book value per share of the Common Stock. As a result of
these factors, purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution between the offering price and the
resulting net tangible book value per share. The book value of the Company's
assets also includes a significant value attributable to intangible assets,
substantially all of which is attributable to acquisitions of product lines and
related assets. These intangible assets are subject to amortization and will be
charged against earnings in future years. In the event that proceeds from the
offering are utilized in the acquisition of one or more additional product lines
it is likely that such proceeds will be used to acquire trademarks and other
intangible assets which will result in increased dilution to the tangible net
worth of such purchasers and increase the amount of amortization that will be
charged against earnings. See "Dilution."

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ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS, RIGHTS PLAN, STOCK OPTION VESTING,
EMPLOYMENT AGREEMENT AND DELAWARE LAW

The Company's Certificate of Incorporation and Bylaws authorize the Board
of Directors to designate and issue, without stockholder approval, Preferred
Stock with voting, conversion and other rights and preferences that could
differentially and adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited acquisition
proposal. Moreover, the Company has granted a dividend of one Preference Stock
Purchase Right ("Rights") on each outstanding share of Class A Common Stock,
Class B Common Stock and Series B Preferred Stock. Under certain circumstances,
after a person has acquired beneficial ownership of a certain percentage of the
Common Stock, each Right will entitle the holder to purchase, at the Right's
then-current exercise price, stock of the Company or its successor at a
discount. In addition, certain provisions of Delaware law applicable to the
Company and certain provisions of the Company's Certificate of Incorporation and
Bylaws could also delay or make more difficult a merger, tender offer or proxy
contest involving the Company, including Section 203 of the Delaware Business
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
unless certain conditions are met. All of the Company's stock option plans
provide for the acceleration of vesting of outstanding options in the event of a
change in control in the Company, and Mr. Shacknai's Employment Agreement
provides for certain payments upon a change in control, as well as an
acceleration of vesting of options previously granted to him. The possible
issuance of Preferred Stock, the rights granted to stockholders under the Rights
Plan, Delaware law, provisions of the Certificate of Incorporation and Bylaws,
the Company's stock option plans and Mr. Shacknai's Employment Agreement could
each have the effect of delaying, deferring or preventing a change in control of
the Company including, without limitation, discouraging a proxy contest, making
more difficult the acquisition of a substantial block of the Company's Common
Stock or limiting the price that investors might in the future be willing to pay
for shares of the Common Stock. Under certain circumstances, Mr. Shacknai's
Employment Agreement requires the Company to make payments that would constitute
excess parachute payments under the Internal Revenue Code of 1986, as amended.
In the event that the Company was required to make payments constituting excess
parachute payments, payments to Mr. Shacknai would not be deductible by the
Company, and Mr. Shacknai would be required to pay an excise tax. See
"Description of Capital Stock," and "Management -- Employment Agreements."

LACK OF CASH DIVIDENDS

The Company has never paid any cash dividends on its capital stock and does
not anticipate that any cash dividends will be declared or paid in the
foreseeable future. See "Dividend Policy."

19
<PAGE> 20

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,850,000 shares of
Common Stock offered by the Company hereby are estimated to be $78.4 million
($90.2 million if the Underwriters' over-allotment option is exercised in full)
at the public offering price of $45.00 per share, after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company.

The Company intends to use some of the proceeds of this offering for
marketing expenses associated with new product introductions and for the
licensing and acquisition of formulations, technologies, products or businesses
that would complement or expand the Company's business. The Company intends to
use the balance of the net proceeds of this offering to continue research and
development of its pharmaceutical products, for the expansion of its marketing
and sales capabilities and for other general corporate purposes. The Company can
give no assurance that its research and development will provide technologies or
products that will be patentable, commercially feasible or acceptable to
government agencies whose approval is necessary. In the normal course of
business, the Company evaluates the licensing or acquisition of formulations,
technologies, products or business that should complement or expand the
Company's business operations and the Company has in place several license
agreements pertaining to potential new products currently under evaluation and
development. Other than these existing license agreements, as of the date of
this Prospectus, the Company has no present agreements to acquire formulations,
technologies, products or businesses. There can be no assurance that any future
transaction will be completed or, if completed, that the Company will realize
the same level of historical sales achieved by a licensor or a seller or that
such transaction will prove successful for the Company.

While the Company presently intends to use the proceeds of this offering as
described in this section, management of the Company has broad discretion to
adjust the application and allocation of the net proceeds of this offering in
order to address circumstances and opportunities. As a result of the foregoing,
the success of the Company will be affected by the discretion and judgment of
the management of the Company with respect to the application and allocation of
the net proceeds hereof. Pending use of such proceeds, the net proceeds of this
offering will be invested by the Company in short-term, interest-bearing,
investment-grade marketable securities.

DIVIDEND POLICY

The Company declared a 3-for-2 stock split in the form of a 50% stock
dividend paid on August 2, 1996 to holders of record on July 22, 1996. The
Company has never declared a cash dividend. The Company intends to retain any
earnings to fund future growth and the operation of its business and, therefore,
does not anticipate paying any cash dividends in the foreseeable future.

20
<PAGE> 21

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MDRX." The following table sets forth for the fiscal periods
indicated, the range of high and low sales prices for the Common Stock of the
Company on the Nasdaq National Market, as adjusted to reflect the 1-for-14
reverse stock split of the Company's Common Stock effected on October 23, 1995,
and as adjusted to the nearest 1/16 to reflect the 3-for-2 stock split in the
form of a 50% stock dividend paid on August 2, 1996 to holders of record as of
July 22, 1996.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1994
First Quarter.................................... $ 8 3/16 $ 4 11/16
Second Quarter................................... 8 3/16 3 1/2
Third Quarter.................................... 7 1/2 3 1/2
Fourth Quarter................................... 4 3/8 2 1/16
FISCAL YEAR ENDED JUNE 30, 1995
First Quarter.................................... 4 15/16 2 1/16
Second Quarter................................... 5 1/4 2 15/16
Third Quarter.................................... 3 13/16 2 1/16
Fourth Quarter................................... 3 13/16 1 3/4
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter.................................... 5 1/4 2 5/16
Second Quarter................................... 10 9/16 4 1/2
Third Quarter.................................... 21 1/16 9 1/16
Fourth Quarter................................... 31 1/2 15 1/16
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter (through September 26, 1996)....... 47 24 13/16
</TABLE>

On September 26, 1996, the last reported sale price on the Nasdaq National
Market for the Company's Common Stock was $46.00 per share. As of such date,
there were approximately 700 holders of record of Common Stock.

21
<PAGE> 22

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1996, and as adjusted to reflect the receipt of the estimated net proceeds
from the sale of the 1,850,000 shares of Common Stock offered hereby at the
public offering price of $45.00 per share and the application of the estimated
net proceeds therefrom:

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Long-term debt (including current portion)(1)........................ $ 127 127
-------- --------
Stockholders' equity(2)..............................................
Preferred Stock, $0.01 par value; 5,000,000 shares authorized;
62,660 outstanding, actual and as adjusted(3)................... 1 1
Class A Common Stock, $0.014 par value; 10,000,000 shares
authorized; 6,816,318 shares outstanding, actual; 8,666,318
shares outstanding, as adjusted................................. 95 121
Class B Common Stock, $0.014 par value, 125,322 shares authorized;
125,322 shares outstanding, actual and as adjusted(4)........... 2 2
Additional paid-in capital......................................... 44,252 122,597
Accumulated deficit................................................ (24,890) (24,890)
-------- --------
Total stockholders' equity...................................... 19,460 97,831
-------- --------
Total capitalization....................................... $ 19,587 $ 97,958
======== ========
</TABLE>

- ---------------
(1) Consists of $126,580 due the Commerce and Economic Development Commission of
Arizona for a loan associated with the Company's relocation to Arizona.

(2) Based on shares outstanding at June 30, 1996. Does not include options
outstanding as of June 30, 1996, to purchase an aggregate of 865,900 shares
of Class A Common Stock at a weighted average exercise price of $6.93 per
share. As a result of option exercises and grants subsequent to June 30,
1996, there were outstanding as of August 5, 1996 options to purchase an
aggregate of 994,057 shares of Common Stock at a weighted average exercise
price of $11.28 per share. See "Description of Capital Stock."

(3) The Preferred Stock is issuable in classes with preferences as designated by
the Board of Directors of the Company. In connection with the stock dividend
paid on August 2, 1996, to stockholders of record on July 22, 1996, a new
class of Preferred Stock designated as Series B Automatically Convertible
Preferred Stock, consisting of 62,660 authorized and issued shares, was
created and paid to holders of the Company's Class B Common Stock. Such
shares have rights, preferences and privileges that are identical to the
Company's Class B Common Stock and are automatically convertible into shares
of Class B Common Stock upon an amendment to the Company's Certificate of
Incorporation creating a sufficient number of shares of Class B Common Stock
in order to effect such conversion. The Company plans to submit such an
amendment for approval at its 1996 Annual Meeting of Stockholders
anticipated to occur in October 1996. See "Description of Capital Stock."

(4) Each share of Class B Common Stock is convertible into one share of Class A
Common Stock.

22
<PAGE> 23
DILUTION

The net tangible book value of the Company at June 30, 1996 was $12.5
million, or $1.79 per share of Common Stock. After giving effect to the sale by
the Company of 1,850,000 shares of Common Stock in this offering at the public
offering price of $45.00 per share (calculated after deduction of underwriting
discount and commissions and estimated expenses associated with the offering to
be paid by the Company), the net tangible book value of the Company at June 30,
1996 would have been $90.9 million or $10.25 per share of Common Stock. This
represents an immediate increase in net tangible book value of $8.46 per share
to existing stockholders and an immediate dilution in net tangible book value of
$34.75 per share to new investors purchasing shares in this offering. The
following table illustrates the calculation of the per share dilution described
above:

<TABLE>
<S> <C> <C>
Public offering price(1)............................... $45.00
Net tangible book value before offering(2)(3)........ $1.79
Increase attributable to new investors............... 8.46
------
-
Net tangible book value after offering(2)(3)........... 10.25
-------
Dilution to new investors.............................. $34.75
=======
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses associated with the offering to be paid by the Company.

(2) Net tangible book value per share represents the amount of total tangible
assets less total liabilities of the Company, divided by the number of
shares of Common Stock outstanding.

(3) Based on shares outstanding as of June 30, 1996. Includes (i) 125,322 shares
of Class B Common Stock and (ii) 62,660 shares of Series B Preferred Stock,
each share of which is convertible into one share of Common Stock. Excludes
865,900 shares of Common Stock issuable upon the exercise of outstanding
stock options at a weighted average exercise price of $6.93 per share. As a
result of option exercises and grants subsequent to June 30, 1996, there
were outstanding as of August 5, 1996, options to purchase an aggregate of
994,057 shares of Common Stock at a weighted average exercise price of
$11.28 per share.

23
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA

The statement of operations data set forth below for the years ended June
30, 1996, 1995 and 1994 and the balance sheet data at June 30, 1996 and 1995,
are derived from the consolidated financial statements of the Company that have
been audited by Ernst & Young LLP incorporated elsewhere in this Prospectus. The
statement of operations data for the years ending June 30, 1993 and 1992 and the
balance sheet data at June 30, 1994, 1993 and 1992 are derived from other
audited consolidated financial statements of the Company not appearing in this
Prospectus which have been audited by Ernst & Young LLP. The selected financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" "Consolidated
Financial Statements" and Notes thereto and other financial information included
elsewhere in this Prospectus or incorporated herein by reference.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1992 1993(1) 1994(1) 1995(2) 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................................. $ 7,687 $ 11,088 $ 17,059 $ 19,132 $ 25,310
Gross profit.......................................................... 5,450 7,215 11,239 13,282 18,354
Operating expenses:
Selling, general and administrative................................. 9,033 14,237(3) 8,786 10,330 10,868
Research and development expenses................................... 823 3,841(4) 1,572 770 952
Depreciation and amortization....................................... 1,231(5) 616 653 522 559
-------- -------- ------- ------- -------
Total operating expenses.............................................. 11,087 18,694 11,011 11,622 12,379
-------- -------- ------- ------- -------
Operating income (loss)............................................... (5,637) (11,479) 228 1,660 5,975
Other:
Minority share of losses of Dyad.................................... -- -- 677 -- --
Gains on disposition of Dyad........................................ -- -- -- 107 --
Net interest income (expense)....................................... (2,330) (175) (249) (94) 79
Extraordinary loss on extinguishment of debt........................ (3,824) -- -- -- --
Income tax benefit (expense)........................................ -- -- -- (60) 1,826
-------- -------- ------- ------- -------
Net income (loss)..................................................... $(11,791) $(11,654) $ 656 $ 1,613 $ 7,880
======== ======== ======= ======= =======
Net income (loss) per share before extraordinary item................. $ (2.17) $ (2.12) $ 0.10 $ 0.24 $ 1.09
Extraordinary loss per share.......................................... (1.04) -- -- -- --
-------- -------- ------- ------- -------
Net income (loss) per share........................................... $ (3.21) $ (2.12) $ 0.10 $ 0.24 $ 1.09
======== ======== ======= ======= =======
Number of shares used in computing net income (loss) per share........ 3,668 5,507 6,303 6,593 7,242

JUNE 30,
-----------------------------------------------------
1992 1993(1) 1994(1) 1995 1996
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 6,136 $ 233 $ 775 $ 953 $ 7,956
Working capital (deficiency)........................................... (3,528) (4,541) (1,978) 619 12,401
Total assets........................................................... 17,709 11,993 12,726 13,850 26,313
Long-term debt......................................................... 2,320 1,264 899 694 117
Stockholders' equity................................................... 10,325 2,937 5,263 7,387 19,460
</TABLE>

- ---------------
(1) Fiscal 1993 and fiscal 1994 include the operations of Dyad Pharmaceutical
Corporation ("Dyad"), which were divested in fiscal 1995.

(2) Fiscal 1995 includes approximately $610,000 of charges associated with
headquarters relocation; the Company had operating income of $2,270,000
before relocation charges in fiscal 1995.

(3) The increase in selling, general and administrative, was primarily
attributable to advertising costs, most of which were related to the launch
of DYNACIN products in November 1992.

(4) The increase in research and development costs is primarily attributable to
the inclusion of the allocation of the purchase price of Dyad to research
and development and the addition of Dyad's research and development expenses
in fiscal 1993.

(5) Fiscal 1992 depreciation and amortization included the write-off of the
remaining value of a license agreement previously capitalized.

24
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve risk
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.

OVERVIEW

Medicis was founded in 1987 to develop and market prescription and
over-the-counter products to treat dermatological conditions. Innovative
Therapeutics, Inc. (the predecessor of the Company) was incorporated under the
laws of the District of Columbia on July 1, 1987, subsequently changed its name
to Medicis Corporation and was merged with and into Medicis Corporation, which
was incorporated in July 29, 1988 under the laws of Delaware, pursuant to an
Agreement of Merger dated July 29, 1988. Medicis Corporation subsequently
changed its name to Medicis Pharmaceutical Corporation.

The Company has acquired rights to manufacture and sell certain of its
dermatological products pursuant to several license and asset purchase
agreements. The Company sells these products for use in various segments of the
dermatological market, including the acne segment, the therapeutic emollient and
moisturizer segment and the fade cream segment. The Company has achieved
increases in net sales and net income both through the acquisition of products
sold by others and the launch of new products. The Company's primary
prescription products, DYNACIN products and TRIAZ products, were launched in
fiscal 1993 and fiscal 1996, respectively, and the Company's primary OTC
products, the ESOTERICA products, were acquired in fiscal 1991. Prescription
pharmaceuticals accounted for 83.2% of fiscal 1996 net sales and net sales of
70.6% and 70.7% in fiscal 1995 and fiscal 1994, respectively. DYNACIN products
accounted for a majority of the Company's total sales in fiscal 1996 and 1995.

The Company believes that sales of DYNACIN products will continue to
constitute the majority of net sales for the foreseeable future. Accordingly,
any factor adversely affecting the sale of DYNACIN products would have a
material adverse effect on the Company's business, financial condition and
results of operations. DYNACIN products could be rendered obsolete or
uneconomical by regulatory or competitive changes. The sale of DYNACIN products
could also be affected adversely by other factors, including manufacturing or
supply interruptions, the development of new competitive pharmaceuticals to
treat the conditions addressed by DYNACIN products, technological advances,
factors affecting the cost of production, marketing or pricing actions by one or
more of the Company's competitors, changes in the prescription writing practices
of dermatologists, changes in the reimbursement policies of third-party payors,
product liability claims or other factors. See "Business -- Products in
Development," "-- Manufacturing," "-- Certain License and Royalty Agreements,"
"-- Competition" and "-- Government Regulation."

25
<PAGE> 26

products could result in revenues being deferred or lost. The Company's
operating expenses are based on anticipated sales levels, and a high percentage
of the Company's expenses are relatively fixed in the short-term, variations in
the timing of recognition of revenue could cause significant fluctuations from
period to period and may result in unanticipated periodic earnings shortfalls or
losses. There can be no assurance that the Company will maintain or increase
revenues, maintain profitability or avoid losses in any future period.

The Company recognizes revenues from sales upon shipment to its customers.
At the time of sale, the Company records reserves for returns based on estimates
using historical experience. Sales are reported net of actual and estimated
product returns and net of pricing adjustments. The Company applies royalty
obligations to the cost of sales in the period the corresponding sales are
recognized.

Medicis' customers include the nation's leading wholesale pharmaceutical
distributors, such as McKesson, Bergen Brunswig, Cardinal, Bindley and major
drug chains. During fiscal 1996, McKesson, Bergen Brunswig and Cardinal,
accounted for 15.5%, 12.2% and 11.8%, respectively, of the Company's sales.
During fiscal 1995, McKesson and Bergen Brunswig accounted for 15.9% and 9.6%,
respectively, of the Company's sales. During fiscal 1994, McKesson and Bergen
Brunswig accounted for 15.1% and 11.2%, respectively, of the Company's sales.
The loss of any of these customer accounts could have a material adverse effect
upon the Company's business, financial condition or results of operations. See
"Business -- Customers."

To enable Medicis to focus on its core marketing and sales activities, the
Company selectively out-sources certain non-marketing functions, such as
laboratory research, manufacturing and warehousing. As the Company expands its
activities in these areas, additional financial resources are expected to be
utilized in these areas. The Company typically does not enter into long-term
manufacturing contracts with third-party manufacturers. Whether or not such
contracts exist, there can be no assurance that the Company will be able to
obtain adequate supplies of such products in a timely fashion, or at all.

The Company plans to spend substantial amounts of capital to continue the
research and development of its pharmaceutical products. Actual expenditures
will depend on the Company's financial position, as well as the results of
clinical testing, delays or changes in government-required testing and approval
procedures, technological and competitive developments and strategic marketing
decisions. The Company may increase total expenditures for research and
development and expects that research and development expenditures as a
percentage of net sales will fluctuate from period to period. The Company can
give no assurance that the research and development projects will provide
technologies or products that will be patentable, commercially feasible or
acceptable to government agencies whose approval may be necessary.

The Company intends to seek additional acquisitions of product lines of
niche-market pharmaceuticals to leverage its existing distribution channels and
marketing infrastructure and to market aggressively formulations of existing
products. The success of the Company's efforts is subject to a number of risks
and uncertainties including its dependence upon key pharmaceuticals and
integration of new product acquisitions, its reliance upon third-party
manufacturers to produce certain key products, its ability to effectively manage
a changing business, uncertainties related to pharmaceutical pricing and
reimbursement and on the uncertainty of competitive forces within the
pharmaceutical industry which affect both the market for its products and the
availability of suitable product lines for acquisition which meet the Company's
acquisition criteria. The future results of operations, both annually and from
quarter to quarter, are subject to a variety of factors applicable to the
Company and to the industries and markets in which it operates.

26
<PAGE> 27

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere herein. The following table sets forth certain
data as a percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
PERCENTAGE OF SALES
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Gross profit................................................ 65.9 69.4 72.5
Operating expenses.......................................... 64.6 60.8 48.9
Operating income............................................ 1.3 8.6 23.6
Net interest income (expense)............................... (1.5) (0.5) 0.3
Minority share of losses of Dyad............................ 4.0 -- --
Gains on disposition of Dyad................................ -- 0.6 --
Income tax benefit (expense)................................ -- (0.3) 7.2
----- ----- -----
Net income.................................................. 3.8% 8.4% 31.1%
===== ===== =====
</TABLE>

FISCAL 1995 AND 1996 QUARTERLY ANALYSIS

<TABLE>
<CAPTION>
1995 1996
--------------------------------------- ---------------------------------------
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE
------ ------ ------ ------ ------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......... $3,690 $4,725 $5,033 $5,684 $4,574 $6,449 $7,016 $7,271
Gross profit...... 2,519 3,024 3,659 4,080 3,257 4,667 5,040 5,390
Operating
expenses........ 2,444 2,793 3,335 3,050 2,608 3,260 3,305 3,206
Operating income.. 75 231 324 1,030 649 1,407 1,735 2,184
Net income........ $ 26 $ 308 $ 312 $ 967 $ 646 $1,404 $1,759 $4,071
====== ====== ====== ====== ====== ====== ====== ======
Net income per
share........... $ -- $ 0.05 $ 0.05 $ 0.14 $ 0.10 $ 0.21 $ 0.24 $ 0.54
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

Years Ended June 30, 1996 and 1995

Net Sales

Net sales for fiscal 1996 increased 32.3%, or $6.2 million, to $25.3
million from $19.1 million for fiscal 1995. The Company's net sales increased in
fiscal 1996 primarily as a result of both unit and dollar sales growth
associated with an increase in market share of the existing prescription
products and the launch of a new prescription product. The Company's
prescription products accounted for 83.2% of net sales in fiscal 1996 and 70.6%
in fiscal 1995. Net sales of the Company's prescription products grew 56.0%, or
$7.6 million, to $21.1 million in 1996 from $13.5 million in fiscal 1995,
primarily due to the Company's launch of TRIAZ products in October 1995, coupled
with an increase in market penetration of DYNACIN products. The increase in
sales of prescription products in fiscal 1996 was partially offset by a decrease
in unit sales of OTC products, primarily the ESOTERICA product line. OTC
products accounted for 16.8% of net sales in fiscal 1996 and 28.2% in fiscal
1995. The Company continues to invest a majority of its marketing funds in the
Company's prescription products.

Gross Profit

Gross profit during fiscal 1996 increased 38.2%, or $5.1 million, to $18.4
million from $13.3 million in fiscal 1995. As a percentage of net sales, gross
margin grew to 72.5% in fiscal 1996 from 69.4% in fiscal

27
<PAGE> 28

1995 primarily as a result of manufacturing cost reductions for DYNACIN products
and a change in sales mix toward the Company's prescription products, which have
higher gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in fiscal 1996 increased 5.2%,
or $0.5 million, to $10.9 million from $10.3 million in fiscal 1995, primarily
due to a 22.2%, or $1.4 million, increase in selling expenses in fiscal 1996.
This increase was primarily attributable to an increase in personnel costs
commensurate with increased sales volume, yearly salary escalations and an
increase in promotional costs attributable to the launch of TRIAZ products.
Selling, general and administrative expenses in fiscal 1995 included $0.6
million in nonrecurring expenses associated with the Company's headquarters
relocation to Phoenix, Arizona in fiscal 1995.

Research and Development Expenses

Research and development expenses in fiscal 1996 increased 23.7%, or $0.2
million, to $1.0 million from $0.8 million in fiscal 1995, primarily due to
development efforts relating to the introduction in October 1995 of the
Company's TRIAZ products.

Depreciation and Amortization Expenses

Depreciation and amortization expenses remained materially unchanged, at
$0.6 million in fiscal 1996 and $0.5 million in fiscal 1995.

Operating Income

Operating income during fiscal 1996 increased 260.0%, or $4.3 million, to
$6.0 million from $1.7 million in fiscal 1995 and increased as a percentage of
net sales to 23.6% from 8.6% in fiscal 1995. This increase was primarily a
result of higher sales volume, coupled with an increase in the Company's gross
profit margin and the absence of nonrecurring relocation expenses which were
incurred in fiscal 1995.

Gains on Disposition and Minority Share of Losses of Dyad

The Company had no related gains or losses in fiscal 1996. During fiscal
1995, the Company completed the sale of all of its interest in Dyad to Corporate
Trinity. The sale of the Company's interest in Dyad resulted in a gain of
$107,000. The Company had previously consolidated Dyad's operations. As a result
of the divestiture of Dyad, the Company's and Dyad's financial statements are no
longer consolidated, subsequent to June 30, 1994. Minority share of losses of
Dyad in fiscal 1994 is based on the losses of Dyad included in operating income.

Net Interest Income (Expense)

Interest income in fiscal 1996 increased 167.7%, or $96,000, to $154,000
from $58,000 in fiscal 1995, primarily due to higher cash and cash equivalent
balances in 1996. Interest expense in fiscal 1996 decreased 49.9%, or $75,000,
to $76,000, from $151,000 in fiscal 1995, primarily due to the repayment of a
substantial portion of the Company's debt.

Income Tax Benefit (Expense)

Income tax benefit (expense) during fiscal 1996 increased $1.9 million to a
benefit of $1.8 million from an expense of $0.1 million in fiscal 1995. During
the fourth quarter of fiscal 1996, the Company reevaluated the estimated amount
of valuation allowance required to reduce deferred tax assets in accordance with
Statement of Financial Accounting Standard No. 109, Accounting For Income Taxes
("SFAS No. 109") to an amount the Company believed appropriate. Accordingly, a
credit to income tax benefit of $1.9 million was reflected in the consolidated
income statement. The amount of net deferred tax assets estimated to be
recoverable was based upon the Company's assessment of the

28
<PAGE> 29

likelihood of near term operating income coupled with uncertainties with respect
to the impact of future competitive and market conditions. No such income tax
benefit was recorded in fiscal 1995.

Net Income

Net income during fiscal 1996 increased approximately 388.5%, or $6.3
million, to $7.9 million from $1.6 million in fiscal 1995. The increase was
primarily attributable to an increase in sales volume, an increase in gross
margin as a percentage of net sales and the recording of the income tax benefit
in fiscal 1996.

Years Ended June 30, 1995 and 1994

Net Sales

Net sales for fiscal 1995 increased 12.2%, or $2.0 million, to $19.1
million from $17.1 million for fiscal 1994. Net sales increased in fiscal 1995
primarily as a result of unit sales growth attributable to an increase in market
share of existing prescription products. The Company's prescription products
accounted for approximately 70.6% of net sales in fiscal 1995 and 70.7% in
fiscal 1994. Net sales of prescription products grew 12.0%, or $1.4 million, to
$13.5 million in fiscal 1995 from $12.1 million in fiscal 1994, primarily due to
an increase in market penetration of DYNACIN products. Net sales of OTC products
grew 12.6%, or $0.7 million, to $5.6 million in fiscal 1995 from $4.9 million in
fiscal 1994 primarily due to the Company's increased distribution in the food
and drug class of trade and an increased number of store openings by one of the
Company's major customers.

Gross Profit

Gross profit during fiscal 1995 increased 18.2%, or $2.1 million, to $13.3
million from $11.2 million in fiscal 1994. As a percentage of net sales, margins
grew to 69.4% in fiscal 1995 from 65.9% in fiscal 1994, primarily as a result of
manufacturing and royalty cost reductions for DYNACIN products coupled with a
mid-year price increase.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in fiscal 1995 increased
17.6%, or $1.5 million, to $10.3 million from $8.8 million in fiscal 1994,
primarily due to an increase in sales bonuses and other variable personnel costs
of $0.6 million and $0.6 million of nonrecurring costs associated with the
Company's relocation to Phoenix, Arizona. The Company's decision to relocate was
made in anticipation of lower operational expenses relating especially to office
lease space, personnel costs and other operating expenses. The Company also
received incentives from the State of Arizona in the form of low-interest
financing, employee training grants and travel vouchers. In addition, selling,
general and administrative expenses increased in fiscal 1995, primarily due to
the increased sampling of DYNACIN products.

Research and Development Expenses

Research and development expenses decreased 51.0%, or $0.8 million, to $0.8
million in fiscal 1995 from $1.6 million in fiscal 1994, primarily due to the
exclusion of research and development expenses incurred by Dyad included in
research and development expenses in fiscal 1994. The Company divested its
entire interest in Dyad during the first quarter of fiscal 1995.

Depreciation and Amortization Expenses

Depreciation and amortization expenses in fiscal 1995 decreased 20.1%, or
$0.1 million, to $0.5 million from $0.6 million in fiscal 1994, primarily as a
result of the exclusion of depreciation and amortization expenses incurred by
Dyad coupled with a decrease in the weighted average balance of property and
equipment attributable to the write-off of fully-depreciated assets in fiscal
1995 as

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compared to fiscal 1994. Depreciation and amortization expenses incurred by Dyad
in fiscal 1995 are not included in the Company's fiscal 1995 operating results.

Operating Income

Operating income during fiscal 1995 increased 627.7%, or $1.5 million, to
$1.7 million from $0.2 million in fiscal 1994, and increased as a percentage of
sales to 8.6% from 1.3% in fiscal 1994. This increase was primarily a result of
higher sales volume, an increase in the Company's gross profit margin and the
exclusion of research and development expenditures associated with Dyad in
fiscal 1995.

Gains on Disposition and Minority Share of Losses of Dyad

During fiscal 1995, the Company completed the sale of all of its interest
in Dyad to Corporate Trinity, resulting in a gain of approximately $107,000.
Minority share of losses of Dyad in fiscal 1994 is based on the losses of Dyad
included in operating income.

Net Interest Income (Expense)

Interest income in fiscal 1995 increased 96.5%, or $28,000, to $58,000 from
$30,000 in fiscal 1994 primarily due to higher cash and cash equivalent balances
in 1995. Interest expense in fiscal 1995 decreased 45.8%, or $128,000, to
$151,000 from $279,000 in fiscal 1994, primarily due to the repayment of a
substantial portion of the Company's debt.

Income Taxes

Income taxes for fiscal 1995 were less than the federal statutory rate due
to the utilization of net operating loss carryforwards. The Company did not
incur income tax expenses for fiscal 1994.

Net Income

Net income during fiscal 1995 increased 146.0%, or $1.0 million, to $1.6
million from $0.6 million in fiscal 1994, primarily due to an increase in sales
volume, coupled with an increase in the Company's gross margins.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996 and June 30, 1995, the Company had cash and cash
equivalents of approximately $8.0 million and $1.0 million, respectively. The
Company's working capital was $12.4 million and $0.6 million at June 30, 1996
and June 30, 1995, respectively.

In fiscal 1996, the Company financed its operations through $4.9 million
cash provided by operations and $3.1 million generated from the exercise of
stock options and warrants. In fiscal 1995, the Company financed operations
through cash from operations. During fiscal 1996, the Company retired two notes
with payments aggregating $750,000. During, fiscal 1995, the Company made
payments aggregating $2.0 million to reduce outstanding debt and to partially
retire a note incurred in connection with a license agreement. During fiscal
1994, the Company completed a sale of shares of its Common Stock outside of the
United States, resulting in net proceeds of approximately $1.6 million.

In May 1996, the Company obtained a $5.0 million Credit Facility from
Norwest that expires in May 1997. This Credit Facility replaced a $2.0 million
credit facility obtained from Norwest Business Credit, Inc., an affiliate of
Norwest, in August 1995. The Credit Facility is secured by substantially all of
the assets of the Company. The Company is required to comply with certain
covenants and restrictions, including covenants relating to the Company's
financial condition and results of operations. If the Company is unable or fails
to comply with the covenants and restrictions, the lender would have the right
not to make loans under the Credit Facility and to require early repayment of
any outstanding loans. The Credit Facility, as amended, is no longer subject to
a 0.5% per annum fee on the unused portion of the Credit Facility. Although the
Company has yet to draw down on the Credit

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Facility, the lack of availability of loans or the requirement to make early
repayment of loans or the inability of the Company to renew the Credit Facility
could have a material adverse effect on the Company, depending on its liquidity
and working capital at such time.

At June 30, 1996 and June 30, 1995, the Company had inventories of $2.1
million and $0.8 million, respectively. The increase in inventory related to
increased sales levels and the introduction of the TRIAZ product line in October
1995. Inventories also include finished goods held at manufacturers. The
Company's inventory balances are subject to the manufacturers' scheduling of
production in order to meet future demand as conveyed to the manufacturer by the
Company. Inventories at manufacturers recorded on the consolidated balance
sheets of the Company have no effect on working capital.

During the fourth quarter of 1996, the Company reevaluated the estimated
amount of valuation allowance required or necessary to reduce deferred tax
assets available in accordance with SFAS No. 109 to an amount the Company
believed appropriate. Accordingly, a deferred tax asset of $3.0 million was
reflected in the consolidated balance sheet with a corresponding credit to
equity of $1.1 million for 1996 tax deductions related to stock option and
warrant exercises and a credit to deferred tax benefit of $1.9 million in the
consolidated income statement. The Company has deferred tax assets available at
June 30, 1996 of $11.6 million, which are comprised principally of the tax
effect of the Company's $26.0 million net operating loss carryforward. Deferred
tax assets available at June 30, 1996 were reduced by an $8.6 million valuation
allowance. The amount of net deferred tax assets available that are estimated to
be recoverable was based upon the Company's assessment of the likelihood of
near-term operating income coupled with the uncertainties with respect to the
impact of future competitive and market conditions. The amount of deferred tax
asset available that ultimately will be realized will depend upon future events
which are uncertain.

In accordance with various manufacturing agreements, the Company is
required to provide manufacturers with pro forma estimated production
requirements by stock keeping units (SKUs) and in accordance with minimum
production runs. From time to time, the Company may not take possession of all
merchandise which has been produced by the manufacturer. The Company records its
obligation to the manufacturer at the time production is completed.

During a portion of fiscal 1995 and prior years, the Company's cash flow
from operations was insufficient to cover its operating expenses, and the
Company relied on external financings to meet its needs for operating cash flow.
As a result of increased sales beginning in the latter half of 1995 associated
with the introduction of DYNACIN, the Company experienced an increase in
accounts receivable. The Company expects that its current cash and cash
equivalents, together with additional cash from operations and cash available
from its Credit Facility and the proceeds of this offering, will be sufficient
to meet its current liquidity requirements at least through the fiscal year
ending June 30, 1998. However, depending upon the Company's acquisition and
licensing activity, and results of operations, there can be no assurance that
such resources will be sufficient. If they are not, the Company would need to
obtain additional financing. There is no assurance that such financing would be
on terms advantageous to the Company. Adequate additional funds, whether from
the financial markets or from other sources, may not be available on a timely
basis, on terms acceptable to the Company, or at all. Insufficient funds may
cause the Company to delay, scale back, or abandon some or all of its product
acquisition, licensing, marketing or research and development programs or
opportunities.

OTHER MATTERS

Inflation did not have a significant impact upon the results of the Company
during fiscal 1996, 1995 or 1994.

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BUSINESS

The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

THE COMPANY

Medicis is the leading independent pharmaceutical company in the United
States that offers prescription and non-prescription (over-the-counter) products
exclusively to treat dermatological conditions. Emphasizing the clinical
effectiveness, quality, affordability and cosmetic elegance of its products, the
Company has achieved a leading position in the treatment of acne and
acne-related conditions using prescription pharmaceuticals, while also offering
the leading domestic OTC fade cream product line. The Company has built its
business through the successful introduction of DYNACIN and TRIAZ products for
the treatment of acne and the acquisition of the ESOTERICA fade cream product
line.

INDUSTRY BACKGROUND

The United States Pharmaceutical Market

The annual domestic market for pharmaceuticals was estimated to be in
excess of $77 billion in 1995. While this market is dominated by large,
multinational pharmaceutical companies that conduct substantial research and
development activities, it is estimated that approximately 35% of all
pharmaceutical sales are derived from several hundred individual products and
product lines, most of which are believed to generate less than $50 million of
revenues annually. Meanwhile, industry consolidation and pricing pressures from
health care cost containment initiatives have raised the threshold level of
sales necessary for any individual product to justify active domestic marketing
and promotion from a major pharmaceutical company. In addition, major
pharmaceutical companies commonly focus their marketing efforts on new
pharmaceuticals in order to accelerate recovery of their development costs.
Consequently, the marketing of many established pharmaceuticals has been
de-emphasized, and the major pharmaceutical companies have increasingly sought
to divest smaller product lines as a more immediate and effective means of
deriving revenue from products that are deemed strategically less important.
Although many of these products are no longer subject to patent protection, the
cost of establishing manufacturing may be excessive, certain raw materials may
be difficult to obtain or the market size may be too small to warrant
competition from generic drug suppliers. These prevailing influences on major
pharmaceutical companies allow specialized companies like Medicis to identify
and pursue niche market opportunities.

The United States Market for Dermatological Products

The dermatology market is subject to many of the same influences that
affect the pharmaceutical market generally. Although the dermatology market
accounted for an estimated $5 billion in annual sales in the United States, most
dermatological products have total annual domestic sales of less than $50
million each. Consequently, the Company believes that most individual
dermatological products do not generate sales that would typically interest most
major pharmaceutical companies.

The ability of niche companies to compete effectively in the dermatology
market is further enhanced by the relatively small number of physicians
responsible for the majority of dermatological prescription activity and by the
nature of dermatological diseases. Of the approximately 6,600 office-based
dermatologists and approximately 1,500 university-based or hospital-based
dermatologists in the United States, approximately 3,200 dermatologists are
responsible for 80% of all prescriptions written by dermatologists. Most
dermatological diseases are chronic or of long duration and are typically
treated with drugs over a period of years, resulting in long-term demand for
drugs proven to be clinically effective. In addition, although they are rarely
debilitating or life threatening, the readily

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apparent and sometimes disfiguring nature of dermatological conditions often
causes patients to be intensely motivated to seek and comply with drug therapy.
As many dermatological products are applied to the skin and are readily visible,
the cosmetic elegance and physical characteristics of the product are among the
important determinants of product success.

BUSINESS STRATEGY

In pursuit of its goal to become the leading provider of products for the
treatment of dermatological conditions in the United States, the Company seeks
to:

Increase Penetration in the Dermatology Market. The Company builds strong
relationships and brand loyalty with many high-profile dermatologists and
medical opinion leaders through its highly responsive customer service approach.
Dermatologists typically prefer therapies that have proven effective in clinical
practice. By offering what the Company believes are superior and cosmetically
elegant products supported by favorable results in clinical trials, Medicis is
able to differentiate its products from those of its competitors. The Company
also plans to increase its presence among dermatologists by serving as a leading
sponsor of continuing medical education programs designed for the needs of
practicing dermatologists.

Formulate, License or Acquire Innovative Products That Offer Therapeutic or
Cosmetic Advantages. Through recommendations from dermatologists and its
scientific advisors and general marketing research, Medicis seeks to develop
innovative products from existing pharmaceutical agents with proven
applicability to dermatological diseases. The Company then utilizes its
formulation expertise to optimize the delivery of such agents. In addition, the
Company will seek to strategically license or acquire existing, proven products
when they are consistent with the Company's image for efficacy, quality, cost
and cosmetic elegance.

Capitalize Upon the Company's Focused Marketing and Sales Force. To
maximize the effectiveness of its selling efforts, the Company's sales force
focuses on the approximately 3,200 dermatologists who write 80% of all
prescriptions written by dermatologists. The Company's sales force has forged
close relationships with these dermatologists and maintains a dedicated
responsiveness to their needs. The Company intends to enhance its existing
marketing and sales capabilities in order to expand and increase the penetration
of its existing products as well as market new products.

Minimize Overhead Costs Through Selectively Utilizing Third-Party
Resources. To avoid the high cost of laboratory facilities and related staffing
expenses, Medicis has established relationships with several third-party
research organizations that conduct formulation work on its behalf. In addition,
to avoid the high capital cost of manufacturing facilities and to maximize
production flexibility, the Company has entered into third-party manufacturing
contracts on a product-by-product basis.

PRINCIPAL PRODUCTS AND PRODUCT LINES

Medicis currently offers products in the following areas of dermatology:
acne, hyperpigmentation, inflammatory skin diseases, dry skin and cosmetic
dermatology. The Company addresses these areas with a range of prescription and
OTC products.

Prescription Pharmaceuticals

Prescription pharmaceuticals accounted for 83.2% of the Company's net sales
in fiscal 1996. Medicis currently focuses its prescription pharmaceutical
efforts primarily on treating acne and related conditions. The Company's
principal branded pharmaceuticals are as follows:

DYNACIN is an oral, systemic antibiotic prescribed for the treatment of
moderate to severe acne vulgaris, the most common form of acne, a condition that
resulted in over 10 million visits to dermatologists in 1995. The most commonly
prescribed systemic acne treatments are tetracycline and its derivatives,
doxycycline and minocycline. Minocycline, the active ingredient in DYNACIN
products, is widely prescribed for the treatment of acne for several reasons. It
has a more convenient

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schedule of one or two doses per day as compared to other forms of tetracycline,
which can require up to four doses per day. Other forms of tetracycline require
ingestion on an empty stomach and often increase patient sensitivity to
sunlight, creating a greater risk of sunburn. Moreover, the other forms of
tetracycline, including doxycycline, often cause gastric irritation. In
addition, resistance to several commonly used antibiotics, including
erythromycin, clindamycin, doxycycline and tetracycline, by the primary
bacterial organism responsible for acne has been documented. Studies suggest
that bacterial resistance to erythromycin exceeds 60%, and resistance to
doxycycline and tetracycline exceeds 40%, while the primary bacteria responsible
for acne showed virtually no resistance to minocycline. Thus, although more
expensive than other forms of branded tetracycline and many times more expensive
than generic tetracycline, minocycline is documented to have clinical
performance that is superior to other forms of tetracycline, while avoiding many
of its disadvantages. However, DYNACIN's retail price is approximately 30% lower
than the average reported retail price of the other leading branded minocycline
product, Minocin, while selling at approximately 25% to 30% higher than the
average reported retail price of generic minocycline. DYNACIN is at least
comparable in performance to Minocin and is believed by the Company to enjoy
certain performance characteristics that favorably distinguish it from generic
minocycline. DYNACIN was launched in the second quarter of fiscal 1993. There
can be no assurance that DYNACIN will not lose significant market share in the
future, that it will remain a competitive product, or that the Company will be
able to compete successfully in the acne treatment market through the sale of
DYNACIN or any other product. The Company has entered into a manufacturing and
supply agreement with Schein for the supply of DYNACIN products. See
"-- Manufacturing."

TRIAZ is a topical therapy prescribed for the treatment of all forms and
varying degrees of acne, and is available as a gel in two concentrations, and as
a cleanser. The combined domestic sales of topically applied prescription acne
products were in excess of $400 million in 1995. The most frequently prescribed
topical acne treatments include Cleocin-T, generic topical clindamycin and
Benzamycin. While these therapies are generally effective, TRIAZ offers
advantages over each product, including improved stability, greater convenience
of use, reduced cost and fewer side effects. Benzamycin requires refrigeration
and mixing by a pharmacist and has a relatively short shelf life of three
months. TRIAZ comes in a ready-mixed gel that does not require refrigeration and
has a two-year shelf life. In addition, TRIAZ is aesthetically pleasing and
minimizes the extreme drying and scaling of skin often caused by competing
brands. The average reported retail price of TRIAZ is less than that of either
Cleocin-T or Benzamycin. In addition, bacterial resistance has been demonstrated
with both Cleocin-T and erythromycin, an active ingredient in Benzamycin. TRIAZ
products are manufactured using the active ingredient benzoyl peroxide in a
vehicle containing glycolic acid and zinc lactate. Benzoyl peroxide is the most
efficacious agent available for clearing the bacteria that cause acne. Glycolic
acid enhances the effectiveness of benzoyl peroxide by exfoliating the outer
layer of the skin (thereby providing direct access to the bacteria), and zinc
lactate which acts to reduce the appearance of inflammation and irritation often
associated with acne. TRIAZ was developed internally by the Company's
formulation scientists and introduced in the second quarter of fiscal 1996.
There can be no assurance that the Company will be able to successfully market
the TRIAZ product line or that the TRIAZ product line will achieve or retain
market acceptance. The Company has a patent application and has certain licensed
patent rights covering varying aspects of TRIAZ. TRIAZ products are manufactured
to the Company's specifications on a purchase order basis by Paco Laboratories,
Inc. See "-- Manufacturing," "-- Trademarks" and "-- Patents and Proprietary
Rights."

THERAMYCIN Z is a topical therapy available as a lotion prescribed for the
treatment of acne. THERAMYCIN Z is erythromycin in a solution containing zinc
acetate, which acts to reduce the appearance of inflammation and irritation
often associated with acne. THERAMYCIN Z competes with other topical acne
treatments, including Cleocin-T, Erycette, ATS, Emgel and other topical
antibiotics. The Company has an exclusive worldwide license to market this
product from IVAX. The Company purchases THERAMYCIN Z from IVAX pursuant to a
manufacturing and supply agreement. See "-- Manufacturing" and "-- Certain
License and Royalty Agreements."

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BENZASHAVE products are shave creams marketed by the Company as topical
therapies for the treatment of PFB and acne associated with shaving. PFB,
commonly called "razor bumps," is a painful irritation aggravated by shaving.
This condition affects millions of men in the United States, particularly
African Americans and others with relatively coarse facial hair. However,
medical treatment is often not sought, as many men afflicted with PFB grow
facial hair to avoid shaving, or use a variety of nonprescription shaving
products which claim to alleviate the condition. The Company believes that
BENZASHAVE products are the only prescription shaving products available for
treatment of PFB and acne associated with shaving. There can be no assurance
that the Company will be able to successfully market BENZASHAVE products or that
BENZASHAVE will achieve or maintain market acceptance. The Company entered into
an exclusive worldwide license to market BENZASHAVE with IVAX in fiscal 1991,
which includes a license of patent rights relating to the use of benzoyl
peroxide in the treatment of PFB. The Company purchases BENZASHAVE pursuant to a
manufacturing and supply agreement. See "-- Manufacturing," "-- Certain License
and Royalty Agreements," "-- Trademarks" and "-- Patents and Proprietary
Rights."

Over-The-Counter Products

OTC pharmaceutical products accounted for 16.8% of the Company's net sales
in fiscal 1996. Medicis markets a variety of OTC skin care products to treat
pigmentation, dry skin and certain inflammatory skin conditions. The Company's
principal OTC products are as follows:

ESOTERICA is a line of topical creams used to treat minor skin
discoloration problems such as age spots, uneven skin tones, dark patches,
blotches and freckles. ESOTERICA is the leading line of fade creams in the
United States. ESOTERICA product line marketed in five formulations, consisting
of four creams containing various concentrations of the active ingredient
hydroquinone and a body lotion. Hydroquinone is the only agent proven to reduce
hyperpigmentation and the only product legally sold in the United States for
this purpose. Other OTC products used to treat minor skin discoloration include
Porcelana and AMBI, which are sold in a variety of creams, gels and lotions.
There can be no assurance that the Company will be able to successfully market
the ESOTERICA product line or that the ESOTERICA product line will maintain
market acceptance. The Company acquired the ESOTERICA product line from
SmithKline in fiscal 1991, and assumed the marketing of these products in the
United States and Canada. The Company's manufacturing agreement with SmithKline
for ESOTERICA expires on March 31, 1997. See "-- Manufacturing."

THERAPLEX is a line of moisturizers that are used for the treatment of dry
skin or certain inflammatory skin conditions, such as are present in psoriasis,
eczema or ichthyosis. The THERAPLEX line consists of three products, THERAPLEX
EMOLLIENT, THERAPLEX CLEARLOTION and THERAPLEX HYDROLOTION, that combine high
molecular weight hydrocarbons, the active component of petrolatum, with certain
silicones. THERAPLEX moisturizers do not contain the normally greasy, sticky and
odoriferous petrolatum components found in competitive products. Skin care
products containing the patented ingredient present in THERAPLEX moisturizers
have been marketed by other companies under other tradenames for several years
in certain European countries, and more recently in Canada. THERAPLEX
moisturizers compete with a variety of other moisturizing products, including
Eucerin, Lubriderm and Keri-Lotion, as well as other mass marketed moisturizers.
The Company acquired a license to the patent underlying the THERAPLEX product
line in 1990. There can be no assurance that the Company will be able to
successfully market the THERAPLEX product line or that the THERAPLEX product
line will achieve or retain market acceptance. The Company has various
agreements for the manufacture of the THERAPLEX product line on a purchase order
basis and is obligated to pay certain royalties on its product sales. See
"-- Manufacturing" and "-- Certain License and Royalty Agreements."

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PRODUCTS IN DEVELOPMENT

The Company has developed and obtained rights to certain dermatological
agents in various stages of development and with potential applications, ranging
from line extensions to new products or reformulations of existing products.
Medicis' 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. While development
periods may vary, the Company generally selects products for development with
the objective of proceeding from formulation to product launch within a two-year
period.

Medicis directs the efforts of contract laboratory research facilities to
perform formulation and research work on active ingredients as well as direct
the third-party conduct of preclinical studies and clinical trials. All products
and technologies under development will require significant commitments of
personnel and financial resources. Several products will require extensive
clinical evaluation and premarketing clearance by the FDA and comparable
agencies in other countries prior to commercial sale. Certain of the products
and technologies under development have been licensed from third parties. The
failure of the Company to meet its obligations under one or more of these
agreements could result in the termination of the Company's rights under such
agreements. In addition, the Company regularly reevaluates its product
development efforts. On the basis of these reevaluations, the Company has in the
past, and may in the future, abandon development efforts for particular
products. No assurance can be given that any product or technology under
development will result in the successful introduction of any new product.
Failure of the Company to introduce and market new products, whether internally
developed or acquired from third parties, could have a material adverse effect
on the Company's business, financial condition or results of operation. See
"-- Government Regulation."

The Company's research and development costs for Company-sponsored and
unreimbursed co-sponsored pharmaceutical projects for fiscal 1996, fiscal 1995
and fiscal 1994 were $952,000, $770,000 and $1,572,000, respectively. The fiscal
1994 amount includes approximately $727,000 of research and development costs
relating to divested operations. The Company has in the past supplemented, and
may in the future supplement, its research and development efforts by entering
into additional research and development agreements with other pharmaceutical
companies in order to defray the cost of product development. There can be no
assurance that the Company will enter into research and development agreements
acceptable to the Company, or at all.

MARKETING AND SALES

Prescription Pharmaceuticals

The Company believes its marketing and sales organization is one of the
most productive in the dermatology sector. The marketing effort is focused on
assessing and meeting the needs of dermatologists. The Company's marketing and
sales team, consisting of 30 members at August 5, 1996, regularly calls on
dermatologists. Those dermatologists who are responsible for a relatively higher
volume of prescriptions are visited more frequently. The Company has created an
incentive program based on aggressive goals in market share growth, and believes
that its highest performing sales representatives are among the best compensated
in the industry. The Company believes that its most effective promotion is
achieved by cultivating a relationship of trust and confidence with
dermatologists themselves. Medicis also uses a variety of marketing tactics to
promote its products, including sampling, journal advertising, promotional
material, specialty publications, rebate coupons, product guarantees, a
leadership position in educational conferences and exposure of its products on
the Internet.

OTC Products

The Company's OTC products are promoted to retailers and wholesalers by
manufacturers' representatives who also support a substantial number of products
of other manufacturers. The

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Company also markets its OTC products through trade promotions, radio
advertising, couponing and consumer awareness programs.

WAREHOUSING AND DISTRIBUTION

The Company utilizes an independent national warehousing corporation to
store and distribute its products from three central warehousing locations in
California, Kansas and Maryland. Upon the receipt of a purchase order through
electronic data input ("EDI"), phone mail or facsimile, the order is processed
into the Company's inventory systems, at which time an inventory picking sheet
is automatically placed via EDI to the most efficient warehouse location for
shipment usually within 24 hours to the customer placing the order. Upon
shipment, the warehouse sends back to the Company via EDI the necessary
information to automatically process the invoice in a timely manner.

CUSTOMERS

Medicis' customers include the nation's leading wholesale pharmaceutical
distributors, such as McKesson, Bergen Brunswig, Cardinal, Bindley and major
drug chains. During fiscal 1996, McKesson, Bergen Brunswig and Cardinal,
accounted for approximately 15.5%, 12.2% and 11.8%, respectively, of the
Company's sales. For fiscal 1995, McKesson and Bergen accounted for
approximately 15.9% and 9.6%, respectively, of the Company's sales. For fiscal
1994, McKesson and Bergen accounted for approximately 15.1% and 11.2%,
respectively, of the Company's sales.

The distribution network for pharmaceutical products has, in recent years,
been subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has decreased as retail
consolidation has occurred. Further consolidation among, or any financial
difficulties of, wholesale distributors or retailers could result in the
combination or elimination of warehouses which may stimulate products returns to
the Company, cause a reduction in their inventory levels, or otherwise result in
reductions in purchases of the Company's products, any of which could result in
a material adverse impact upon the Company's business, financial condition or
results of operations.

MANUFACTURING

The Company currently contracts for all of its manufacturing needs and is
required by the FDA to contract only with manufacturers that comply with cGMP
regulations and other applicable laws and regulations. The Company typically
does not enter into long-term manufacturing contracts with third-party
manufacturers. Whether or not such contracts exist, there can be no assurance
that the Company will be able to obtain adequate supplies of such products in a
timely fashion, or at all.

The Company's DYNACIN products are manufactured solely by Schein in
compliance with the Company's stringent, internally developed specifications and
quality standards pursuant to a supply agreement that expires in December 1997.
Under the agreement, Schein manufactures minocycline for sale in the branded
market exclusively for the Company, but may manufacture and sell minocycline for
itself or others as a generic product. Schein currently manufactures minocycline
for the generic market under its own label. The Schein supply agreement is
subject to automatic renewal for successive two-year periods if neither party
gives timely notice of termination. Schein may also terminate the exclusivity
portion of the agreement if its profit margin on sales of DYNACIN products fall
below a specified level. Schein may terminate the agreement upon a material
breach by the Company, in the event that the Company becomes insolvent, or if
any lawsuit is commenced alleging a patent or a proprietary rights violation.
The agreement also provides that the Company will purchase all of its
requirements for minocycline from Schein but may purchase some of its
requirements from another manufacturer if Schein fails to meet certain cost
standards or fails to provide the Company with all of its requirements for two
of four consecutive calendar quarters. In addition, the Company may use
alternative sources if Schein terminates the Company's exclusive rights to
purchase branded minocycline based upon the Company's failure to meet certain
pre-specified profit margins. Either

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party may terminate the agreement in the event that one party cannot perform
under the agreement for a period of three months or longer for certain reasons
beyond its control, such as war, strike, fire, lockout or acts of God. The
Company believes that it has alternative sources of supply and that it would be
able to use these alternative sources to preserve an adequate supply of DYNACIN.
However, the inability of Schein to fulfill the Company's supply requirements
for DYNACIN, the Company's largest-selling product, could have a material
adverse effect on the Company's business, financial condition or results of
operations.

The Company's ESOTERICA line of products are manufactured by SmithKline
pursuant to a manufacturing and supply agreement which expires in March 1997.
SmithKline may terminate its agreement in the event of a material breach by the
Company upon 15-days written notice. The Company's Canadian distributor
currently utilized Contract Manufacturing Associates to manufacture its
requirements of ESOTERICA for the Canadian market. In the event the Company or
SmithKline declines to renew such manufacturing and supply agreement, the
Company may utilize Contract Manufacturing Associates for its domestic product
requirements or such other manufacturer as it determines appropriate.

The Company purchases THERAMYCIN Z and BENZASHAVE products exclusively from
IVAX, pursuant to a manufacturing agreement expiring in July 2000. In the event
that IVAX is prevented from completing performance of its obligations under the
Agreement for specified reasons beyond its control, it is excused from such
performance until such time as the event preventing its performance ceases. If
IVAX is unable to supply the Company's requirements of either product, the
Company is permitted to purchase the unsatisfied requirements from third
parties. The remainder of the Company's products are produced on a purchase
order basis only, including its THERAPLEX EMOLLIENT products, manufactured
solely by ViFor; THERAPLEX CLEARLOTION products, manufactured by Accupac, Inc.;
THERAPLEX HYDROLOTION products, manufactured by Beauty Control; and TRIAZ
products, manufactured by Paco.

There can be no assurance that the above manufacturers will continue to
meet the FDA's regulations or the Company's product specifications and standards
for the indicated products or that they can continue to meet product demand on a
consistent and timely basis. Schein, IVAX and ViFor are currently the sole
manufacturers of DYNACIN products, THERAMYCIN Z and BENZASHAVE products, and
THERAPLEX EMOLLIENT products, respectively. Because of the FDA requirement for
cGMP validation of manufacturing facilities for particular products, validation
of a new facility to serve as a replacement source of manufacturing requires a
substantial period of time. Any loss of a manufacturer or other manufacturing
difficulties could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company has obtained business
interruption insurance to insure against the loss of sales for the Company's
three principal products which are due to the interruption of manufacturing from
certain limited causes. The coverage provided by such insurance is based on 12
months of projected gross margins for such products. While the Company believes
that the policy provides substantial protection against the covered events,
there can be no assurance that the policy will cover all manufacturing
interruptions or that the amount of such insurance will be adequate to fully
protect the Company for losses associated with such interruptions.

The Company's third-party manufacturers rely on certain suppliers of key
raw materials. Certain of those materials are purchased from single sources and
others may be purchased from single sources in the future. Although the Company
has no reason to believe that it will be unable to procure adequate supplies of
such raw materials on a timely basis, disruptions in supplies, including delays
due to the inability of the Company or its manufacturers to procure raw
materials, would have a material adverse effect on the Company's business,
financial condition and results of operations.

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<PAGE> 39

viable terms, if at all. To manage its resources effectively, the Company
attempts to retain inventory levels that are no greater than necessary to meet
the currently projected needs of its customers.

Manufacture of the Company's THERAMYCIN Z and BENZASHAVE products was
suspended in fiscal 1994 following the acquisition by IVAX of certain assets of
Syosset, the original manufacturer of those products under the agreement, in
Syosset's bankruptcy proceeding. Manufacture of the BENZASHAVE products was
subsequently resumed, and the Company resumed shipping these products during
fiscal 1995. During the second quarter of fiscal 1996, manufacturing of the
THERAMYCIN Z product also resumed. This suspension did not have a material
adverse effect on the Company's results of operations. However, there can be no
assurance that the Company will not suffer future supply insufficiencies or
interruptions or that it will be able to obtain adequate supplies of its
products in a timely fashion, or at all. While the Company believes that its
inventory levels are generally adequate, the loss of a manufacturer, the failure
to obtain a replacement manufacturer on a timely basis, other manufacturing
problems or any interruption of supply could have a material adverse effect on
the Company's business, financial condition or results of operations.

CERTAIN LICENSE AND ROYALTY AGREEMENTS

In July 1990, the Company entered into two separate license agreements
acquired by IVAX, as successor to Syosset, under which the Company acquired a
10-year exclusive, worldwide license to market and sublicense Erythromycin 2%,
which Medicis markets as THERAMYCIN Z, BENZASHAVE 5% and 10% and certain other
products. IVAX also manufactures the licensed products for the Company pursuant
to a manufacturing agreement. The licensing agreements are subject to
termination by IVAX upon a material failure of the Company to perform its
obligations under the agreements for 60 days, or upon the Company's failure to
perform under the payment provisions of the agreements for 30 days, or upon the
filing of a petition in bankruptcy by or against the Company.

In April 1989, the Company sublicensed a United States patent relating to
the THERAPLEX line of products pursuant to a modified license agreement among
the Company, Suess and Euromerican. The Company was granted an exclusive
sublicense to market all products manufactured pursuant to the patent in the
United States, Mexico and Japan, until the patent expires in October 1999. The
agreement further grants the Company the right to otherwise exploit the know-how
embodied in the patent. The agreement requires that the Company make annual
payments of specified minimum royalties. The agreement is subject to termination
by Suess upon Euromerican's failure to perform its obligations under the
agreement for 45 days or by Suess or Euromerican upon the Company's failure to
perform its obligations under the agreement for 45 days or upon the occurrence
of other standard events of default. The Company has also received a separate
assignment from Dr. Gans and Dr. Suess of certain patent rights relating to the
Company's THERAPLEX HYDROLOTION product.

There can be no assurance that the Company will fulfill its obligations
under any of the foregoing agreements. The failure to satisfy the requirements
of any agreement could result in the loss of the Company's rights under the
agreements and in other related agreements which could have a material adverse
affect upon the Company's business, financial condition or results of
operations.

TRADEMARKS

The Company believes that trademark protection is significant in
establishing product recognition. The Company owns 15 federally registered
trademarks. The Company has filed United States applications for registration of
seven additional trademarks and servicemarks. United States 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.
There can be no assurance that any such trademarks or servicemarks will afford
the Company adequate protection, or that the Company will have the financial
resources to enforce its rights under any such trademarks and servicemarks. The
inability of the Company to protect its trademarks or servicemarks from
infringement could result in injury to any goodwill which may be developed in
such trademarks or servicemarks. Moreover, the

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<PAGE> 40

Company's inability to use one or more of its trademarks or servicemarks because
of successful third-party claims to such marks could have a material adverse
effect on the Company's business, financial condition or results of operations.

From time to time, the Company receives communications from parties who
allege that their trademark interests may be damaged either by the Company's use
of a particular trademark or its registration of such trademark. In general, the
Company seeks to resolve such conflicts before an actual opposition to
registration or suit for infringement is filed. There can, however, be no
assurance that such oppositions will not be filed or that, if filed, they will
not have a material adverse effect upon the Company's business, financial
condition or results of operations.

PATENTS AND PROPRIETARY RIGHTS

The Company has licensed rights to products covered by certain United
States patents directed to aspects of the THERAPLEX and BENZASHAVE
compounds/formulations, and the Company has obtained patents directed to aspects
of several other compounds. The Company is also pursuing several United States
patent applications. No assurance can be given that patents will be issued with
respect to any of these applications. The Company has acquired rights under
certain patents and patent applications from third-party licensors. The Company
has also acquired from certain of its consultants and principals an assignment
of their rights to certain United States patents or patent applications. Certain
of such patents and patent applications may be subject to claims of rights by
third parties by reason of existing relationships with the party who filed such
patents or patent applications. No assurance can be given that the Company will
be able to obtain any rights under such patents or patent applications, as a
result of such conflicting claims, or that any rights which the Company may
obtain will be sufficient for the Company to market products which may be the
subject of such patents or patent applications. The Company may be required to
obtain licenses and or pay royalties to obtain the rights it acquires under such
patents or patent applications, and no assurance can be given that the Company
will be able to obtain rights under such patents or patent applications on terms
acceptable to the Company, or at all.

The Company believes that its success will depend in part on its ability to
obtain and maintain patent protection for its own inventions, and to obtain and
maintain licenses for the use of patents, licensed or sublicensed by third
parties. No assurance can be given that any patent issued to, or licensed by,
the Company will provide protection that has commercial significance. In this
regard, the patent position of pharmaceutical compounds is particularly
uncertain. There can be no assurance that challenges will be not be instituted
against the validity or enforceability of any patent owned by or licensed to the
Company or, if instituted, that such challenges will not be successful. The
Company only conducts complete searches to determine whether its products
infringe upon any existing patents as it deems appropriate. The cost of
litigation to uphold the validity and prevent infringement of patents can be
substantial and require a significant commitment of management time.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate the technology owned by or licensed to
the Company or design around the patented aspects of such technology. There can
be no assurance that the products and technologies the Company currently
markets, or may seek to market in the future, will not infringe patents or other
rights owned by others. In the event of an adverse outcome of any dispute with
respect to patents or other rights, the Company may be required to license such
disputed rights or to cease using such disputed rights. There can be no
assurance that a license would be on terms acceptable to the Company, or at all.

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<PAGE> 41

The Company believes that obtaining foreign patents may be more difficult
than obtaining domestic patents because of differences in patent laws, and
recognizes that its patent position therefore may be stronger in the United
States than in Europe. In addition, the protection provided by foreign patents
once they are obtained may be weaker than that provided by domestic patents.

The Company relies and expects to continue to rely upon unpatented
proprietary know-how and continuing technological innovation in the development
and manufacture of many of its principal products. The Company's policy is to
require all its employees, consultants and advisors to enter into
confidentiality agreements with the Company. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or proprietary know-how in the event of any unauthorized use or
disclosure of such know-how. In addition, there can be no assurance that others
will not obtain access to or independently develop these trade secrets or know-
how.

COMPETITION

Competition is intense among manufacturers of prescription pharmaceuticals
for the treatment of dermatological diseases, such as the DYNACIN, TRIAZ,
THERAMYCIN Z, and BENZASHAVE products, and in the OTC market for dermatological
products such as the ESOTERICA and THERAPLEX product lines, as well as other
products which the Company may develop and market in the future. Most of the
Company's competitors are large, well-established pharmaceutical, chemical,
cosmetic or health care companies with considerably greater financial,
marketing, sales and technical resources than available to the Company.
Additionally, many of the Company's present and potential competitors have
research and development capabilities that may allow such competitors to develop
new or improved products that may compete with the Company's product lines. The
pharmaceutical industry is characterized by intense competition and rapid
product development and technological change. The Company's pharmaceuticals
could be rendered obsolete or made uneconomical by the development of new
pharmaceuticals to treat the conditions addressed by the Company's products,
technological advances affecting the cost of production, or marketing or pricing
actions by one or more of the Company's competitors. The Company's business,
financial condition or results of operations could be materially adversely
affected by any one or more of such developments. Each of the Company's products
is in competition for a share of the existing market with numerous products
which have become standard treatments recommended or prescribed by
dermatologists. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competition
will not have a material adverse effect on the Company's business, financial
condition and results of operations.

DYNACIN competes with Minocin, a branded minocycline product marketed by
AHP, and generic minocycline products marketed by Schein, BioCraft, and
Warner-Chilcott. Other oral antibiotics utilized for the treatment of acne
include erythromycin, doxycycline and tetracycline marketed in branded and
generic form by a variety of companies. The Company believes that TRIAZ competes
with Cleocin-T and a generic topical clindamycin, manufactured by Pharmacia &
Upjohn, Inc.; Benzac, manufactured by Galderma, Inc.; and Benzamycin,
manufactured by Rhone-Poulenc Rorer Pharmaceuticals, Inc. ESOTERICA primarily
competes with Porcelana, marketed by Dep Corp. and AMBI, marketed by Kiwi.

Several of the Company's products compete with generic (non-branded)
pharmaceuticals which claim to offer equivalent therapeutic benefits at a lower
cost. In some cases, insurers and other third-party payors seek to encourage the
use of generic products by paying or reimbursing a user or supplier of a branded
prescription product a lower portion of the purchase price then would be paid or
reimbursed for a generic product, making branded products less attractive, from
a cost perspective, to buyers. The aggressive pricing activities of the
Company's generic competitors and the payment and reimbursement policies of
third-party payors could have a material adverse impact on the Company's
business, financial condition or results of operations.

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<PAGE> 42

GOVERNMENT REGULATION

Drug and Cosmetic Regulation

The manufacture and sale of cosmetics and drugs are subject to regulation
principally by the FDA and state and local authorities in the United States, and
by comparable agencies in certain foreign countries. The FTC and state and local
authorities regulate the advertising of OTC drugs and cosmetics. The Food and
Drug Act, the regulations promulgated thereunder, and other federal and state
statutes and regulations, govern, among other things, the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of the Company's products. In general, products falling within the
FDA's definition of "new drugs" require premarketing clearance by the FDA.
Products falling within the FDA's definition of "cosmetics" or of "drugs" that
are not "new drugs" and that are generally recognized as "safe and effective" do
not require premarketing clearance.

The steps required before a pharmaceutical compound may be marketed in the
United States include (i) preclinical laboratory and animal testing, (ii)
submission to the FDA of an IND application, which must become effective before
clinical trials may commence, (iii) adequate and well-controlled clinical trials
to establish the safety and efficacy of the drug, (iv) submission to the FDA of
an NDA and (v) FDA approval of the NDA prior to any commercial sale or shipment
of the drug. In addition to obtaining FDA approval for each product, each
domestic drug manufacturing establishment must be registered with, and approved
by, the FDA.

Preclinical testing is generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a drug. The results of these
studies are submitted to the FDA as a part of an IND, which must be approved
before clinical trials can begin. Typically, clinical evaluation involves a time
consuming and costly three-phase process. In Phase I, clinical trials are
conducted with a small number of subjects to determine the early safety profile,
the pattern of drug distribution and metabolism. In Phase II, clinical trials
are conducted with groups of patients afflicted with a specific disease in order
to determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large-scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The FDA
closely monitors the progress of each of the three phases of clinical trials and
may, at its discretion, reevaluate, alter, suspend or terminate the testing
based upon the data which have been accumulated to that point and its assessment
of the risk/benefit ratio to the patient.

In general, FDA approval is required before a new drug product may be
marketed in the United States. However, most OTC drugs are exempt from the FDA's
premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC
Drug Review to evaluate the safety and effectiveness of OTC drugs then in the
market. Through this process, the FDA issues monographs that set forth the
specific active ingredients, dosages, indications and labeling statements for
OTC drugs that the FDA will consider generally recognized as safe and effective
and therefore not subject to premarket approval. OTC drug products are
classified by the FDA in one or more categories: Category I products, which are
deemed "safe and effective for OTC use," Category II products, which are deemed
"not generally recognized as safe and effective for OTC use," and Category III
products, which are deemed "possibly safe and effective with studies ongoing."
For certain categories of OTC drugs not yet subject to a final monograph, the
FDA usually will not take regulatory action against such drugs unless failure to
do so will pose a potential health hazard. Drugs subject to final monographs,
however, are subject to various FDA regulations concerning for example, cGMP,
general and specific OTC labeling requirements (including warning letters),
prohibitions against promotion for conditions other than those stated in the
labeling, and requirements that OTC drugs contain only suitable inactive
ingredients. OTC drug manufacturing facilities are subject to FDA inspection,
and failure to comply with applicable regulatory requirements may lead to
administrative or judicially-imposed penalties.

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labeled conditions. The FDA has requested, and a task force of the
Non-Prescription Drug Manufacturers Association has undertaken, further studies
to confirm that benzoyl peroxide, an active ingredient in TRIAZ and BENZASHAVE
products, is not a tumor promoter when tested in conjunction with UV light
exposure. TRIAZ and BENZASHAVE products, which the Company also sells on a
prescription basis, have the same ingredients at the same dosage levels as the
over-the-counter products. In the Company's opinion, TRIAZ and BENZASHAVE
products would also be considered to be generally recognized as safe and
effective for their intended uses under the Food and Drug Act. There can be no
assurance these tests will confirm the status of benzoyl peroxide as generally
recognized as safe and effective or that adverse test results would not result
in withdrawal of TRIAZ and BENZASHAVE products from marketing. An adverse
decision by the FDA with respect to the safety of benzoyl peroxide could result
in the assertion of product liability claims against the Company and could
otherwise have a material adverse effect upon the Company's business, financial
condition or results of operations.

Four of the five ESOTERICA products contain the active ingredient
hydroquinone, currently a Category I product. Independent expert dermatologists
have formally expressed the view that hydroquinone at a 2% concentration is
generally recognized as safe and effective for its intended use. However, in
1992, with the concurrence of the FDA, the industry initiated dermatological
metabolism and toxicity studies to fully support hydroquinone's continued
Category I status. Notwithstanding the pendency or results of these tests, which
may take up to three years to complete, the FDA may elect to classify
hydroquinone as a Category III OTC drug. The Company, in conjunction with the
Non-Prescription Drug Manufacturers Association and other manufacturers, is
responsible for 50% of the costs associated with these studies. An adverse
decision by the FDA on the safety of hydroquinone could result in the assertions
of product liability claims against the Company. Moreover, if hydroquinone is
not maintained as a Category I or Category III drug, the Company would be
required to cease marketing ESOTERICA products containing hydroquinone, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.

Certain Factors Affecting the Company's Products

Clinical trials and the marketing and manufacturing of pharmaceutical
products are subject to the rigorous testing and approval processes of the FDA
and foreign regulatory authorities. The process of obtaining FDA and other
required regulatory approvals is lengthy and expensive. There can be no
assurance that the Company will be able to obtain the necessary approvals to
conduct clinical trials or for the manufacturing and marketing of products, that
all necessary clearances will be granted to the Company or its licensors for
future products on a timely basis or at all or that FDA review or other

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<PAGE> 44

actions will not involve delays adversely affecting the marketing and sale of
the Company's products. In addition, the testing and approval process with
respect to certain new products which the Company may develop or seek to
introduce is likely to take a substantial number of years and involve the
expenditure of substantial resources. There can be no assurance that
pharmaceutical products currently in development, or those products acquired or
licensed by the Company, will be cleared for marketing by the FDA. Failure to
obtain any necessary approvals or failure to comply with applicable regulatory
requirements could have a material adverse effect on the Company's business,
financial condition or results of operations. Further, future government
regulation could prevent or delay regulatory approval of the Company's products.

There can be no assurance that any approval will be granted on a timely
basis, or at all, that the FDA will not require post-marketing testing and
surveillance to monitor the product and continued compliance with regulatory
requirements; that the FDA will not require the submission of any lot of any
product for inspection and will not restrict the release of any lot that does
not comply with FDA standards; that the FDA will not otherwise order the
suspension of manufacturing, recall or seizure of products; or that the FDA will
not withdraw its marketing clearance of any product if compliance with
regulatory standards is not maintained or if problems concerning safety or
efficacy of the product are discovered following approval.

From time to time, the FDA has issued correspondence to pharmaceutical
companies, including the Company alleging that their advertising or promotional
practices are false, misleading or deceptive. The Company has resolved all such
complaints without any adverse findings by the FDA and without incurring
substantial expense. However, there can be no assurance that the Company will
not receive such correspondence from the FDA in the future or that, if such
notices are received, they will not result in substantial cost, disruption or
expense (including fines and penalties), in material changes to the manner in
which the Company promotes its products, in loss of sales of the Company's
products or in other material adverse effects on the Company's business,
financial condition or results of operations.

The Company also will be subject to foreign regulatory authorities
governing clinical trials and pharmaceutical sales if it seeks to market its
products outside the United States. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries. The approval process varies from country to country
and the time required may be longer or shorter than that required for FDA
approval. There can be no assurance that any foreign regulatory agency will
approve any product submitted for review by the Company.

THIRD-PARTY REIMBURSEMENT

The operating results of the Company will depend in part on the
availability of adequate reimbursement for the Company's products from
third-party payors, such as government entities,

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private health insurers and managed care organizations. Third-party payors are
increasingly seeking to negotiate the pricing of medical services and products
and to promote the use of non-branded (generic) pharmaceuticals through
payor-based reimbursement policies designed to encourage their use. In some
cases, third-party payors will pay or reimburse a user or supplier of a
prescription drug product only a portion of the purchase price of the product.
In the case of the Company's prescription products, payment or reimbursement by
third-party payors of only a portion of the cost of such products could make
such products less attractive, from a cost perspective, to users, suppliers and
prescribing physicians. There can be no assurance that reimbursement, if
available, will be adequate. Moreover, certain of the Company's products are not
of a type generally eligible for third-party reimbursement. If adequate
reimbursement levels are not provided by government entities or other
third-party payors for the Company's products, or if those reimbursement
policies increasingly favor the use of generic products, the Company's business,
financial condition and results of operations would be materially adversely
affected. In addition, managed care initiatives to control costs have influenced
primary care physicians to refer fewer patients to dermatologists, resulting in
a declining target market for the Company. Further reductions in referrals to
dermatologists could have a material adverse impact upon the Company's business,
financial condition or results of operations.

In addition, a number of legislative and regulatory proposals aimed at
changing the nation's health care system have been proposed in recent years.
While the Company cannot predict whether any such proposals will be adopted, or
the effect that any such proposal may have on its business, such proposals, if
enacted, could have a material adverse effect on the Company's business,
financial condition or results of operations.

PRODUCT LIABILITY INSURANCE

The Company faces an inherent risk of exposure to product liability claims
in the event that the use of its products is alleged to have resulted in adverse
effects. Such risk exists even with respect to those products that are
manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale. There can be no assurance that the
Company will avoid significant product liability exposure. The Company currently
has product liability insurance in the amount of $1.0 million per claim and $1.0
million in the aggregate on a claims-made basis and umbrella liability
insurance, which can also be used for product liability claims, in the amount of
$4.0 million per claim and $4.0 million in the aggregate. Many of the Company's
customers require the Company to maintain product liability insurance coverage
as a condition to their conducting business with the Company. As the loss of
such insurance coverage could result in a loss of such customers, the Company
intends to take all reasonable steps necessary to maintain such insurance
coverage, although there can be no assurance that insurance coverage will be
available in the future on commercially reasonable terms, or at all, or that
such insurance will be adequate to cover potential product liability claims, or
that the loss of insurance coverage or the assertion of a product liability
claim or claims would not materially adversely affect the Company's business,
financial condition and results of operations.

EMPLOYEES

As of August 5, 1996, the Company had 58 full-time employees. The Company
believes its relationship with its employees is good. The Company intends to
hire personnel as needed during the next 12 months.

FACILITIES

The Company presently leases approximately 12,000 square feet of office
space for its headquarters in Phoenix, Arizona, under a Lease Agreement which
expires in May 2005. The Company believes that these facilities will be adequate
to meet its needs for the foreseeable future.

CERTAIN LEGAL MATTERS

The Company and certain of its subsidiaries are parties to certain actions
and proceedings incident to their business. Liability in the event of final
adverse determinations in any of these matters is either covered by insurance
and/or established reserves, or, the Company believes, will not, in the
aggregate, have a material adverse effect on the business, financial position or
results of operations of the Company.

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MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR STAFF OFFICERS

The following table sets forth certain information as of August 5, 1996
with respect to the current directors, executive officers and other senior staff
officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jonah Shacknai(1)................ 39 Chairman of the Board, Chief Executive Officer
Mark A. Prygocki, Sr. ........... 30 Chief Financial Officer, Assistant Treasurer and
Secretary
Ralph T. Bohrer.................. 35 Vice President, Sales
Pamela J. Doyle.................. 43 Vice President, Marketing and New Product Development
Fred F. Carr..................... 49 Vice President, National Business Programs
Joseph P. Cooper................. 38 Vice President, Manufacturing and Distribution
Arthur G. Altschul, Jr.(2)....... 32 Director
Richard L. Dobson, M.D. ......... 68 Director
Michael A. Pietrangelo(1)(3)..... 54 Director
Joseph Salvani(1)(3)............. 40 Director
Philip S. Schein, M.D. .......... 57 Director
Lottie H. Shackelford(2)......... 55 Director
</TABLE>

- ---------------
(1) Member of the Executive Committee.

(2) Member of the Audit Committee.

(3) Member of the Stock Option Committee and Compensation Committee.

Jonah Shacknai is a founder of the Company and has served as Chairman of
its Board of Directors and as its Chief Executive Officer since July 1988. From
1982 to June 1988, Mr. Shacknai was a member of the Washington, D.C. law firm of
Royer, Shacknai & Mehle, specializing in business, regulatory and legislative
matters relating to pharmaceutical, cosmetic and food products. From January
1981 to October 1982, Mr. Shacknai served as counsel to the United States House
of Representatives Committee on Science and Technology. From 1977 to 1981, Mr.
Shacknai served as chief of staff of the Chairman of the Subcommittee on
Consumer Protection and Finance of the House Energy and Commerce Committee. Mr.
Shacknai currently serves as director of U. S. Bioscience, Inc., a publicly held
pharmaceutical company involved in the development and marketing of
chemotherapeutic agents, and served as a founding director of IVAX Corporation
from 1986 to 1988. In addition, Mr. Shacknai served as a member of the
Commission on the Federal Drug Approval Process and presently serves as a
trustee and a member of the Executive Committee of the National Public Radio
Foundation, a member of the National Arthritis and Muscular Skeletal and Skin
Disease Advisory Council of the National Institutes of Health and a member of
the Joint High Level Advisory Panel of the United States-Israel Science and
Technology Commission.

Mark A. Prygocki, Sr. has served as Chief Financial Officer and Assistant
Treasurer and Secretary since May 1995 and served as Controller of the Company
from October 1992 until May 1995. From July 1990 through October 1992, Mr.
Prygocki was employed by Salomon Brothers Inc, an investment banking firm, as an
Accountant in the Regulatory Reporting Division.

Ralph T. Bohrer has been Vice President, Sales of the Company since July
1994, prior to which he served as a regional sales manager for the Company from
1990 to 1994. Mr. Bohrer previously worked in various sales positions at
Schering Plough, a pharmaceutical company.

Pamela J. Doyle has been Vice President, Marketing and New Product
Development for the Company since June 1995. Prior to joining the Company, Ms.
Doyle was a senior marketing executive

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in the pharmaceutical industry, first with the Ortho Pharmaceutical Division, a
subsidiary of Johnson & Johnson from 1977 to 1992 and with the NeoStrata
Corporation, a dermatology product supplier, from 1993 to 1995.

Fred E. Carr has been Vice President, National Business Programs of the
Company since September 1991. Prior to joining the Company, Mr. Carr was
National Field Sales Manager for ICN Pharmaceuticals, a pharmaceutical and
research chemical company, from 1987 to 1990, Director of Sales Training at
Ayerst Laboratories, a pharmaceuticals manufacturer, from 1984 to 1987, and most
recently, National Sales Manager for Stiefel Laboratories, a dermatological
pharmaceuticals manufacturer, from 1990 to 1991.

Joseph P. Cooper has been Vice President, Manufacturing and Distribution,
of the Company since February, 1996. Mr. Cooper previously was Director of
Materials Management with Schein Pharmaceutical-Steris Laboratories, a
subsidiary of Schein Pharmaceuticals, Inc., from August 1989 to February 1996.

Arthur G. Altschul, Jr. has been a director of the Company since December
1992. From December 1991 until May, 1996, Mr. Altschul was Senior Director of
Corporate Affairs for Sugen, Inc., a biotechnology company. Mr. Altschul remains
a consultant to Sugen. From September 1990 to December 1991 he was employed as a
research assistant in the equity research department of Morgan Stanley & Co.
Incorporated, an investment banking firm. Since May 1988, Mr. Altschul has been
a general partner of Altschul Investment Group L.P., a private investment
partnership. Mr. Altschul serves as a director of General American Investors,
Inc., an investment company.

Richard L. Dobson, M.D. has been a director of the Company since September
1991. He has been Professor of Dermatology at the Medical University of South
Carolina since January 1980. He is a past President of the American Board of
Dermatology and a past President of the American Academy of Dermatology. Dr.
Dobson also serves as the Editor-in-Chief of the Journal of the American Academy
of Dermatology.

Michael A. Pietrangelo has been a director of the Company since October
1990. He has served as the President of Johnson Products Company, a division of
IVAX Corporation, a pharmaceutical corporation, since July 1994. From June 1990
to March 1994, Mr. Pietrangelo was the President and Chief Executive Officer at
CLEO, Inc., a Memphis-based subsidiary of Gibson Greetings, Inc., a manufacturer
of specialized paper products. Mr. Pietrangelo is a director of Universal
Heights, Inc. a company that markets novelty and souvenir products.

Joseph Salvani has been a director of the Company since September 1989.
Since June 1990, Mr. Salvani has been President of Salvani Investments, Inc., an
investment banking firm. Mr. Salvani serves as a director of Direct Connect
International, a holding company, and Glassyl Communications, Inc., a network
integration company.

Philip S. Schein, M.D. has been a director of the Company since October
1990. Dr. Schein is the Chairman and Chief Executive Officer of U.S. Bioscience,
Inc., a pharmaceutical company, and has served in that capacity since April
1987. He has served as President of the American Society of Clinical Oncology
and has chaired the Food and Drug Administration Oncology Drugs Advisory
Committee. Dr. Schein presently serves as Adjunct Professor of Medicine and
Pharmacology at the University of Pennsylvania School of Medicine, and as a
director of Oncor, Inc., a cancer-focused molecular biology company.

Lottie H. Shackelford has been a director of the Company since July 1993.
Ms. Shackelford has been Executive Vice President of Global USA, Inc., a
government relations firm, since April 1994 and has been Vice Chair of the
Democratic National Committee since February 1989. Ms. Shackelford was Executive
Vice President of U.S. Strategies, Inc., a government relations firm, from April
1993 to April 1994. She was also Co-Director of Intergovernmental Affairs, of
the Clinton/Gore presidential transition team between November 1992 and March
1993, Deputy Campaign Manager of Clinton for President from February 1992 to
November 1992 and Executive Director, Arkansas Regional Minority Purchasing
Council from February 1982 to January 1992. In addition, Ms. Shackelford has
served in various local government positions including Mayor of Little Rock,
Arkansas. In addition, she is a

47
<PAGE> 48

director of Philander Smith College, the Chapman Funds in Baltimore, Maryland
and the Overseas Private Investment Corporation.

KEY CONSULTANT

Dr. Eugene Gans, Ph.D. has been Chairman of the Company's Central Research
Committee since 1988. Dr. Gans has been appointed to several industry task
groups and advisory committees and is a member of numerous professional
societies. He has 18 United States patents either issued to him or pending.

Dr. Gans serves as a consultant to the Company pursuant to an agreement
between the Company, Dr. Gans and Hastings Associates, a company owned by Dr.
Gans. That agreement has an indefinite term and may be terminated at any time by
either the Company or Dr. Gans upon specified notice. Under the Company's
agreement with Dr. Gans, the Company sponsors and funds the development of
specified projects selected by the Company, as to which the Company owns all
intellectual property rights. Dr. Gans has rights to perform consulting work for
other companies that may result in the development of certain products,
including certain dermatology products specified in the agreement, which the
Company elects not to develop.

In December 1988, the Company entered into a royalty agreement with Lincoln
Ventures, Inc., a company owned by Dr. Gans, to compensate Dr. Gans for
development and formulation work he performed before he joined the Company on
products which the Company currently now uses and markets. Royalties paid to
Lincoln Ventures, Inc. are based on sales of the certain products, including the
THERAPLEX line of products. Lincoln Ventures, Inc. does not have the power to
prohibit the Company's marketing of such products upon termination of this
agreement.

EMPLOYMENT AGREEMENTS

In July 1996, the Company entered into an employment agreement (the
"Employment Agreement") with Jonah Shacknai, effective as of July 1, 1996, to
continue to serve as Chairman of the Board and Chief Executive Officer of the
Company. The Employment Agreement expires on June 30, 2001, and automatically
renews for successive periods of five years, unless either party gives timely
notice of an intention not to renew such agreement. Mr. Shacknai may also
terminate the Employment Agreement prior to the end of the term. Under the
Employment Agreement, Mr. Shacknai agreed that, during his employment by the
Company and for a period of one year following termination for reasons other
than a change in ownership or control of the Company, he will not engage in,
consult with or be employed by any Competing Business (as defined in the
Employment Agreement). The Employment Agreement contains customary
non-solicitation provisions and provides for the transfer to the Company of any
intellectual property relating to the business of the Company.

Under the Employment Agreement, Mr. Shacknai receives an annual base salary
of $400,000, effective July, 1996, plus certain benefits and an annual grant of
options to purchase shares of Common Stock representing a minimum specified
percentage of the fully diluted capitalization of the Company. Mr. Shacknai is
also eligible for annual cash bonuses and increases in his base compensation.

The Employment Agreement provides that, if Mr. Shacknai's employment is
terminated in connection with a change in control of the Company, the Company is
obligated to pay Mr. Shacknai a lump sum amount equal to four times the sum of
(i) his base salary at the highest rate in effect during the proceeding 12
months and (ii) the average annual bonus, if any, paid during the proceeding
three years. If Mr. Shacknai's employment is terminated without cause or by his
Resignation for Good Reason (as defined in the Employment Agreement) the Company
is obligated to pay him a lump sum equal to the sum of (i) the amount he would
have collected in salary for the unexpired term of the Employment Agreement,
were he paid at the highest salary rate in effect for the 12 months preceding
his termination and (ii) his average annual bonus, if any, paid during the
preceding three years multiplied by the number of years remaining in the
Employment Agreement. In no event, however, will Mr. Shacknai's severance
payment for termination without cause be less than twice the sum of (i) his
highest effective salary and (ii) the average annual bonus, if any, paid during
the preceeding three years, plus 1/24 of such lump sum for each full year of Mr.
Shacknai's service with the Company. If Mr. Shacknai's employment is terminated
by his death, the Employment Agreement provides that the Company will continue
to pay his salary, at the then-current rate, to his estate for 12 months. If Mr.
Shacknai is terminated pursuant to his Disability (as defined in the Employment
Agreement), the

48
<PAGE> 49

Employment Agreement provides that the Company will pay him 100% of his base
salary for 12 months, and 50% of that base salary for the remainder of the term
of the Employment Agreement, but in no event for less than an additional 12
months of his base salary. Finally, the Employment Agreement provides that, if
it is not renewed by the Company for at least three years after its initial
expiration, the Company must pay Mr. Shacknai a lump sum equal to twice the sum
of (i) his annual base salary at the highest rate in effect during his last 12
months of employment with the Company and (ii) the annual average of bonus
payments, if any, paid during the preceding three years, plus 1/24 of such lump
sum for each full year of Mr. Shacknai's service with the Company. Upon the
termination of Mr. Shacknai's employment, all options previously granted to him
will automatically vest, and will remain exercisable for the full terms thereof.
After termination, Mr. Shacknai will also receive the employee benefits he was
eligible to participate in for four years unless the Employment Agreement is not
renewed, in which event Mr. Shacknai will receive such employee benefits for two
years. Under certain circumstances, the Employment Agreement may require the
Company to make payments that would constitute excess parachute payments under
the Internal Revenue Code of 1986, as amended. In the event that the Company
were required to make payments constituting excess parachute payments, payments
to Mr. Shacknai would not be deductible by the Company for tax purposes, and Mr.
Shacknai would be required to pay an excise tax.

In July 1996, the Company paid to Mr. Shacknai $205,000 that was due to Mr.
Shacknai and had been maintained as a liability on the Company's consolidated
balance sheet.

The Company currently has no employment agreements with other employees.

MODIFICATIONS TO STOCK OPTION PLANS

In April 1996, the Company's Board of Directors approved certain amendments
to the Medicis 1988 Stock Option Plan, the Medicis 1990 Stock Option Plan, the
Medicis 1992 Stock Option Plan and the Medicis 1995 Stock Option Plan (the
"Plans"). Those amendments provide for the acceleration of vesting of
outstanding stock options granted under the Plans upon the occurrence of certain
events defined in the Plans to constitute a change in control of the Company.

In September 1995, the Company's Compensation Committee approved the
repricing of certain outstanding options granted to all employees and full-time
consultants under the Plans pursuant to an option exchange program in accordance
with the Plans. Under the exchange program, options to purchase 300,726 shares
of the Common Stock having a weighted average option exercise price per share of
$10.85 (adjusted for subsequent stock splits and dividends) were exchanged for
options with an exercise price per share of $4.39 (adjusted for subsequent stock
splits and dividends). The revised exercise price was equal to the fair market
value of the Common Stock at the time of the repricing. The options that were
repriced included options to purchase 139,288 and 12,324 shares of Class A
Common Stock held by Messrs. Shacknai and Prygocki, respectively, which were
repriced from an average weighted option exercise price per share of $11.17 and
$9.91, respectively, to an exercise price per share of $4.39.

In August 1996, in response to certain amendments to Securities and
Exchange Commission rules governing stock options plans, the Company's
Compensation Committee determined to suspend the grant of any additional options
under the Plans and directed the executive officers of the Company to prepare
the Medicis 1996 Stock Option Plan and submit it for the approval by the
Company's stockholders at the Company's 1996 Annual Meeting of Stockholders. The
terms of such plan have yet to be determined.

49
<PAGE> 50

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information concerning the
beneficial ownership of the Company's equity securities at August 5, 1996, and
as adjusted to reflect the sale of the shares offered hereby, by (i) all persons
known by the Company to own beneficially 5% or more of the outstanding shares of
the Company's equity securities; (ii) each current executive officer of the
Company; (iii) each current director of the Company; and (iv) all currrent
executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
PERCENT OF
SHARES BENEFICIALLY OWNED CLASS A COMMON STOCK
----------------------------------- OUTSTANDING(3)
COMMON COMMON SERIES B ---------------------
NAME AND ADDRESS OF BENEFICIAL STOCK STOCK PREFERRED PRIOR TO AFTER
OWNER OR IDENTITY OF GROUP(1)(2) CLASS A CLASS B STOCK OFFERING OFFERING
- ----------------------------------- --------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Jonah Shacknai(4).................. 526,498 112,301 56,150 9.65% 7.68%
Mark A. Prygocki, Sr.(5)........... 16,285 -- -- * *
Joseph Salvani(6).................. 59,514 -- -- * *
Michael A. Pietrangelo(7).......... 34,880 -- -- * *
Arthur G. Altschul, Jr.(8)......... 33,441 -- -- * *
Richard L. Dobson, M.D.(9)......... 9,211 -- -- * *
Lottie H. Shackelford(10).......... 8,568 -- -- * *
Philip S. Schein, M.D.(11)......... 6,962 -- -- * *
All executive officers and
directors of the Company as a
group (8 persons)(12)............ 695,359 112,301 56,150 11.87% 9.46%
</TABLE>

- ---------------
* Represents beneficial ownership of less than 1%.

(1) Unless otherwise indicated, the address of the beneficial owner is c/o
Medicis Pharmaceutical Corporation, 4343 East Camelback Road, Suite 250,
Phoenix, Arizona 85018-2700.

(2) Beneficial ownership is determined with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Class A Common Stock subject to stock
options and warrants currently exercisable or exercisable within 60 days
are deemed to be outstanding for computing the percentage ownership of the
person holding such options and the percentage ownership of any group of
which the holder is a member, but are not deemed outstanding for computing
the percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of capital stock shown beneficially owned by them.

(3) Assumes that each share of Class B Common Stock and Series B Preferred
Stock has been converted into one share of Class A Common Stock.

(4) Includes: (a) 48,826 shares of Class A Common Stock owned by a trust
established by Mr. Shacknai for the benefit of his family; (b) 182,729
shares of Class A Common Stock issuable upon exercise of stock options
within 60 days; and (c) 9,577 shares of Class A Common Stock held in an IRA
for Mr. Shacknai.

(5) Includes 16,285 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.

(6) Includes 17,672 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.

(7) Includes 11,780 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.

50
<PAGE> 51

(8) Includes (a) 10,026 shares of Class A Common Stock beneficially owned by
Altschul Investment Group L.P., of which Mr. Altschul is a general partner;
and (b) 8,568 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.

(9) Includes 6,427 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days. Also includes 106 shares of Class A Common
Stock owned by Dr. Dobson's spouse, as to which shares Dr. Dobson disclaims
beneficial ownership.

(10) Includes 8,568 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.

(11) Includes 6,962 shares of Class A Common Stock issuable upon exercise of
stock options within 60 days.

(12) Includes an aggregate of 258,991 shares of Class A Common Stock issuable
upon exercise of stock options within 60 days held by eight executive
officers and directors. Also see footnotes (4), (7) and (9).

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<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

The Company has two classes of authorized common stock: Class A Common
Stock, par value $0.014 per share, of which the Company is authorized to issue
10,000,000 shares, and Class B Common Stock, par value $0.014 per share, of
which the Company is authorized to issue 125,322 shares. As of the close of
business on August 5, 1996, 6,832,633 shares of Class A Common Stock were issued
and outstanding and held by approximately 750 holders of record. As of August 5,
1996, 125,322 shares of Class B Common Stock were issued and outstanding and
held by two holders. As of such date, an additional 994,057 shares of Class A
Common Stock were subject to outstanding options.

Except as noted below, the designations, preferences, limitations and
relative rights of the Class A Common Stock and Class B Common Stock are
substantially identical. Holders of Class A Common Stock are entitled to one
vote per share while holders of Class B Common Stock are entitled to ten votes
per share. Except as required by law, holders of Class A Common Stock and Class
B Common Stock vote together as a class on all matters with respect to which
stockholders of the Company are entitled to vote.

Holders of Class A Common Stock and Class B Common Stock have equal rights
to receive dividends and other distributions, if any, as such may be declared
from time to time by the Board of Directors; provided, that any dividend of
shares to be declared and paid to holders of Class A Common Stock must be
accompanied by an equivalent dividend to holders of Class B Common Stock. If the
Company shall in any manner subdivide, combine or reclassify the outstanding
shares of Class A Common Stock or Class B Common Stock, the outstanding shares
of the other such class shall be subdivided, combined or reclassified
proportionately in the same manner and on the same basis as the outstanding
shares of Class A Common Stock or Class B Common Stock, as the case may be, have
been subdivided, combined or reclassified.

Holders of Class A Common Stock and Class B Common Stock are not entitled
to preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share-for-share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
transfer other than to another holder of Class B Common Stock.

PREFERRED STOCK

The Company currently has authorized 5,000,000 shares of Preferred Stock,
par value $0.01 per share, of which 62,660 shares are issued or outstanding. As
described below, two additional series of Preferred Stock have been established,
one of which remains unissued. See "-- Preference Stock Purchase Rights."

Upon liquidation, dissolution or winding up of the Company, any holders of
Preferred Stock shall be paid in full the amounts to which they may be entitled
prior to such time as the holders of Class A Common Stock and Class B Common
Stock are entitled to share in the assets of the Company on a pro-rata basis.

On July 22, 1996, the Company's Board of Directors declared a 3-for-2 stock
split in the form of a 50% dividend paid on August 2, 1996 to shareholders of
record of Common Stock on July 22, 1996. In connection with such stock dividend,
a new class of Preferred Stock designated Series B Automatically Convertible
Preferred Stock, consisting of 62,660 authorized and issued shares, was created
and paid to holders of the Company's Class B Common Stock. Such shares have
rights, preferences and privileges that are identical to the Company's Class B
Common Stock and are automatically convertible into shares of Class B Common
Stock upon an amendment to the Company's Certificate of Incorporation creating a
number of shares of Class B Common Stock which is sufficient to effect such
conversion. The Company anticipates submission of such an amendment for approval
at its 1996 Annual Meeting of Shareholders anticipated to occur in October 1996.

52
<PAGE> 53

PREFERENCE STOCK PURCHASE RIGHTS

On August 17, 1995, the Board of Directors adopted a stockholder rights
plan (the "Rights Plan") by which it declared a dividend of one Preference Stock
Purchase Right (the "Rights") on each outstanding share of Class A Common Stock,
Class B Common Stock and in August 1996, Series B Preferred Stock. The
description and terms of the Rights are set forth in a Rights Agreement, dated
as of August 17, 1995, as amended (the "Rights Amendment"), between the Company
and American Stock Transfer Company, as Rights Agent. The rights are exercisable
only if a person or group acquires beneficial ownership of 15% or more of the
Class A Common Stock or announces a tender offer the consummation of which would
result in beneficial ownership by a person or group of 15% or more of the Class
A Common Stock. Each Right entitles the holder to buy one one-hundredth of a
share of a new Series A Junior Participating Preference Stock at an exercise
price of $123.00 per share, subject to adjustment (including adjustment for the
reverse stock split).

If the Company is acquired in a merger or other business combination
transaction after a person has acquired beneficial ownership of 15% or more of
the Class A Common Stock, each Right will entitle the holder to purchase, at the
Right's then-current exercise price, a number of shares of the acquiring
company's common stock having a market value of twice such price. In addition,
if a person or group acquires 50% or more of the outstanding Class A Common
Stock, each Right will entitle the holder (other than such person or members of
such group) to purchase, at the Right's then-current exercise price, a number of
shares of Class A Common Stock of such other person or group (including the
Company as successor to the acquiring company or as the surviving corporation)
having a market value of twice such price.

Following the acquisition by a person or group of beneficial ownership of
15% or more of the Class A Common Stock and prior to an acquisition of 50% or
more of the Class A Common Stock, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group), in whole or in part, at an
exchange ratio of one share of Class A Common Stock or one one-hundredth of a
share of the Series A Preference Stock (or of a share of a class or series of
the Company's preferred stock having equivalent rights, preferences and
privileges) per Right. Prior to the acquisition by a person or group of
beneficial ownership at 15% or more of the Company's Class A Common Stock, the
Rights are redeemable for $0.001 per Right at the option of the Board of
Directors.

DELAWARE ANTI-TAKEOVER LAW

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

53
<PAGE> 54

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and A.G. Edwards & Sons, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC......................................... 1,184,000
A.G. Edwards & Sons, Inc. ................................................ 296,000
Hambrecht & Quist LLC..................................................... 100,000
Pennsylvania Merchant Group Ltd........................................... 100,000
Principal Financial Securities, Inc. ..................................... 100,000
Brookehill Equities, Inc. ................................................ 70,000
-----------
Total........................................................... 1,850,000
===========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $1.42 per share, of which $0.10
may be reallowed to other dealers. After the public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 277,500 shares of Common Stock at the same price per share as the
Company will receive for the 1,850,000 shares that the Underwriters have agreed
to purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above tables represents as a percentage of
the 1,850,000 shares offered hereby. If purchased, such additional shares will
be sold by the Underwriters on the same terms as those on which the 1,850,000
shares are being sold.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liability arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Subject to certain exceptions relating to charitable gifts, estate planning
transfers and sales relating to the exercise of expiring options, each executive
officer, director and senior staff officer of the Company has agreed with the
Representatives for a period of 90 days from the effective date of this
Prospectus (the "Lock-Up Period") not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any option to purchase any
shares of Common Stock, any options to purchase any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock now
owned or hereafter acquired directly by such holders or with respect to which
they have the power of disposition, without the prior written consent of
Robertson, Stephens & Company LLC which may, in its sole discretion and at any
time or from time to time, without notice, release all or any portion of the
shares subject to the lock-up agreements. In addition, the Company has agreed
that, during the Lock-Up Period, the Company will not, without the prior written
consent of Robertson, Stephens & Company LLC, issue, sell, contract to sell or
otherwise dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
issuance of Common

54
<PAGE> 55

Stock upon the exercise of outstanding options and the Company's grant of
options under existing stock option plans.

The offering price for the Common Stock has been determined by negotiations
among the Company and the Representative of the Underwriters, based largely upon
the market price for the Common Stock as reported on the Nasdaq National Market.

The rules of the Commission prohibit the Underwriters and other members of
the selling group from making a market in the Company's Common Stock during the
period immediately preceding the commencement of sales. The Commission has,
however, adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an Underwriter or other member of
the selling group to continue to make a market in the Company's Common Stock
subject to the conditions, among others, that its bid not exceed the highest bid
by a market maker not connected with the offering and that its net purchases on
any one trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters and other members of the selling group intend to engage in
passive market making in the Company's Common Stock during such period.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

LEGAL MATTERS

The validity of the issuance of the Common Stock being offered hereby will
be passed upon for the Company by Brown & Bain, P.A., Phoenix, Arizona. Certain
legal matters related to the offering will be passed upon for the Underwriters
by Cooley Godward LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements of the Company at June 30, 1996 and
1995 and for each of the three years in the period ended June 30, 1996,
appearing in this Prospectus and Registration Statement and appearing in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996 have been
audited by Ernst & Young, LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and incorporated herein by reference.
Such financial statements are included and incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

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<PAGE> 56

AVAILABLE INFORMATION

The Company is subject to the information reporting requirements of the
Exchange Act, as amended, and, in accordance therewith, files periodic reports
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Room of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional offices located at Seven World Trade Center, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained from the Public Reference Section of the
Commission at its Washington address at prescribed rates. The Common Stock is
traded on the Nasdaq National Market and such reports, proxy statements and
other information can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information filed electronically with
the Commission. The address of the Commission's World Wide Web site is
http://www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus.

1. Annual Report on Form 10-K of the Company for the fiscal year ended
June 30, 1996.

2. The definitive Proxy Statement of the Company filed pursuant to
Section 14 of the Exchange Act in connection with the 1995 Annual Meeting
of Stockholders of the Company.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated by reference or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that the statement is
modified or superseded by any other subsequently filed document which is
incorporated or is deemed to be incorporated by reference herein. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide without
charge to each person, including any beneficial owner, to whom this Prospectus
has been delivered, on the written or oral request of such person, a copy of any
or all of the documents referred to above which have been or may be incorporated
into this Prospectus and deemed to be part hereof, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference in
such documents. These documents are available upon request from Mark A.
Prygocki, Sr., Chief Financial Officer, Medicis Pharmaceutical Corporation, 4343
East Camelback Road, Suite 250, Phoenix, Arizona 85018-2700, (602) 808-8800.

56
<PAGE> 57

MEDICIS PHARMACEUTICAL CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-5
Consolidated Statement of Stockholders' Equity........................................ F-6
Consolidated Statements of Cash Flows................................................. F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>

F-1
<PAGE> 58

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Medicis Pharmaceutical Corporation

We have audited the accompanying consolidated balance sheets of Medicis
Pharmaceutical Corporation as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Medicis Pharmaceutical Corporation at June 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

Phoenix, Arizona
August 2, 1996

F-2
<PAGE> 59

MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 7,956,050 $ 953,438
Accounts receivable, less allowance:
1996: $680,000; 1995: $520,000............................. 5,210,704 4,214,424
Inventories.................................................. 2,080,014 798,956
Deferred tax assets.......................................... 3,000,000 --
Other current assets......................................... 738,911 251,086
----------- -----------
Total current assets.................................... 18,985,679 6,217,904
Property and equipment, at cost:
Furniture and equipment......................................... 336,544 201,009
Leasehold improvements.......................................... 170,000 170,000
----------- -----------
506,544 371,009
Less accumulated depreciation................................ 100,897 54,907
----------- -----------
Net property and equipment.............................. 405,647 316,102
Intangible assets, at cost:
Patents, trademarks and licenses................................ 203,326 131,554
Intangible assets related to ESOTERICA product acquisition...... 9,168,853 9,168,853
----------- -----------
9,372,179 9,300,407
Less accumulated amortization................................ 2,450,705 1,984,269
----------- -----------
Net intangible assets................................... 6,921,474 7,316,138
----------- -----------
$26,312,800 $13,850,144
=========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE> 60

MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable........................................... $ 3,371,184 $ 3,227,173
Accrued officer's salaries................................. 204,750 204,750
Accrued royalties.......................................... 552,952 468,182
Notes payable.............................................. 10,000 140,000
Accrued incentives......................................... 1,184,111 631,231
Other accrued liabilities.................................. 1,262,134 927,243
-------- --------
Total current liabilities............................. 6,585,131 5,598,579
ESOTERICA products acquisition payables, net of discount of:
1995: $13,100................................................. -- 586,900
Note payable.................................................... 116,580 107,437
Other non-current liabilities................................... 151,437 170,234
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value, 4,937,340 shares authorized;
no shares issued.............................................. -- --
Series B Automatically Convertible Preferred Stock, $0.01 par
value, shares authorized, issued and outstanding: 62,660 at
June 30, 1996 and 1995........................................ 627 627
Class A Common Stock, $0.014 par value, shares authorized:
10,000,000; issued and outstanding: 1996: 6,816,318 1995:
6,498,843..................................................... 95,429 90,984
Class B Common Stock, $0.014 par value, shares authorized,
issued and outstanding: 1996 and 1995: 125,322................ 1,754 1,754
Additional paid-in capital...................................... 44,251,722 40,063,251
Accumulated deficit............................................. (24,889,880) (32,769,622)
-------- --------
Total stockholders' equity............................ 19,459,652 7,386,994
-------- --------
$ 26,312,800 $ 13,850,144
======== ========
</TABLE>

See accompanying notes.

F-4
<PAGE> 61

MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $25,309,743 $19,131,665 $17,058,504
Operating costs and expenses:
Cost of sales..................................... 6,955,685 5,849,886 5,819,275
Selling, general and administrative (includes
relocation charges of $609,762 for the year
ended June 30, 1995)........................... 10,867,979 10,330,162 8,786,192
Research and development.......................... 951,888 769,577 1,571,769
Depreciation and amortization..................... 558,802 522,221 653,192
----------- ----------- -----------
Operating costs and expenses................... 19,334,354 17,471,846 16,830,428
----------- ----------- -----------
Operating income.................................... 5,975,389 1,659,819 228,076
Minority share of losses of Dyad.................... -- -- 677,000
Gain on disposition of Dyad......................... -- 106,640 --
Interest income..................................... 154,023 57,543 29,287
Interest expense.................................... (75,670) (150,895) (278,652)
----------- ----------- -----------
Income before taxes................................. 6,053,742 1,673,107 655,711
Income tax benefit (expense)........................ 1,826,000 (60,000) --
----------- ----------- -----------
Net income.......................................... $ 7,879,742 $ 1,613,107 $ 655,711
=========== =========== ===========
Net income per common and common equivalent share... $ 1.09 $ 0.24 $ 0.10
=========== =========== ===========
Shares used in computing net income per common and
common equivalent share........................... 7,242,162 6,593,164 6,303,453
=========== =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 62

MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES B
AUTOMATICALLY
CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
--------------- ------------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ --------- ------- ------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993.... 62,660 $627 5,591,227 $78,277 125,322 $1,754 $37,894,565 $(35,038,440) $ 2,936,783
Shares issued in
connection with
Regulation S offering... 671,902 9,407 1,637,542 1,646,949
Options issued in lieu of
payment for services
rendered................ 24,000 24,000
Net income................ 655,711 655,711
------ ---- --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1994.... 62,660 627 6,263,129 87,684 125,322 1,754 39,556,107 (34,382,729 ) 5,263,443
Shares issued in
connection with private
offering................ 235,714 3,300 507,144 510,444
Net income................ 1,613,107 1,613,107
------ ---- --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1995.... 62,660 627 6,498,843 90,984 125,322 1,754 40,063,251 (32,769,622 ) 7,386,994
Exercise of stock options
and warrants, net....... 317,475 4,445 3,101,471 3,105,916
Tax effect of stock
options exercised....... 1,067,000 1,067,000
Options issued in lieu of
payment for services
rendered................ 20,000 20,000
Net income................ 7,879,742 7,879,742
------ ---- --------- ------- ------- ------ ----------- ------------ -----------
Balance at June 30, 1996.... 62,660 $627 6,816,318 $95,429 125,322 $1,754 $44,251,722 $(24,889,880) $19,459,652
====== ==== ========= ======= ======= ====== =========== ============ ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 63

MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................ $ 7,879,742 $ 1,613,107 $ 655,711
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 558,802 522,221 653,192
Non-cash interest.............................. 13,100 49,602 45,410
Other non-cash expenses........................ 20,000 -- 24,000
Deferred income tax benefit.................... (1,933,000) -- --
Allowance for doubtful accounts and returns.... 160,000 120,000 160,000
Minority share of losses of Dyad............... -- -- (677,000)
Changes in operating assets and liabilities:
Accounts receivable.......................... (1,156,280) (1,154,922) (2,380,654)
Inventories.................................. (1,281,058) (370,929) 1,457,239
Other current assets......................... (487,825) (48,013) (29,231)
Accounts payable............................. 144,011 1,282,949 (1,284,786)
Accrued officer's salaries................... -- -- (3,334)
Accrued royalties............................ 84,770 70,601 257,639
Interest payable............................. -- (250,016) (60,743)
Accrued incentives........................... 552,880 222,711 (107,774)
Other accrued liabilities.................... 334,891 (307,792) (319,787)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 4,890,033 1,749,519 (1,610,118)
INVESTING ACTIVITIES:
Purchase of property and equipment................ (181,911) (140,754) (12,029)
Payments of license agreement and ESOTERICA
products acquisition........................... -- -- (8,838)
Other, net........................................ (71,772) (7,885) (31,317)
----------- ----------- -----------
Net cash used in investing activities..... (253,683) (148,639) (52,184)
FINANCING ACTIVITIES:
Sales of common equity securities................. -- 510,444 1,646,949
Proceeds from issuance of note payable............ 9,143 107,437 --
Principal payments of debt........................ (748,797) (2,040,000) (120,000)
Proceeds from sale of equity in Dyad.............. -- -- 677,000
Proceeds from the exercise of options/warrants.... 3,105,916 -- --
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 2,366,262 (1,422,119) 2,203,949
Net increase in cash and cash equivalents......... 7,002,612 178,761 541,647
Cash and cash equivalents at beginning of year.... 953,438 774,677 233,030
----------- ----------- -----------
Cash and cash equivalents at end of year.......... $ 7,956,050 $ 953,438 $ 774,677
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................... $ 243,570 $ 351,309 $ 301,044
Taxes........................................ 132,233 79,631 79,237
</TABLE>

See accompanying notes.

F-7
<PAGE> 64

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

NOTE 1. FORMATION AND DEVELOPMENT OF THE COMPANY

Medicis Pharmaceutical Corporation and its wholly owned subsidiaries
("Medicis" or the "Company") is an independent pharmaceutical company in the
United States offering prescription and non-prescription (over-the-counter)
products exclusively to treat dermatological conditions. The Company has
acquired rights to manufacture and sell certain of its dermatological products
pursuant to several license and asset purchase agreements. The Company sells
these products for use in various segments of the dermatological market,
including the acne segment, the therapeutic emollient and moisturizer segment
and the fade cream segment.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Medicis and all wholly owned subsidiaries, and through June 30, 1994, the
accounts of Dyad Pharmaceutical Corporation ("Dyad") (see Note 4). The Company
has since sold its interest in Dyad and, accordingly, the accounts of Dyad have
not been consolidated subsequent to June 30, 1994. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs, including payments related to products
under development and research consulting agreements, are expensed as incurred.

INTANGIBLE ASSETS

Legal fees and other direct costs incurred in obtaining and protecting
patents and trademarks are capitalized as incurred. When patent applications are
approved or trademarks are registered, these costs are amortized over the
shorter of the useful life of the patent or trademark, or the related product on
the straight-line basis. The costs are expensed if and when it is concluded that
nonapproval is probable or, in the Company's opinion, the patent or trademark
should be abandoned. Intangible assets resulting from the ESOTERICA line of skin
care products (the "ESOTERICA products") acquisition principally consist of the
excess of the acquisition cost over the fair value of the net assets acquired
and are being amortized on a straight-line basis over twenty years. The Company
assesses the recoverability of intangible assets resulting from the ESOTERICA
products acquisition based on the gross profit of the related products over the
remaining amortization period.

CASH AND CASH EQUIVALENTS

At June 30, 1996, cash equivalents include highly liquid investments of
approximately $7,500,000 invested largely in money market accounts consisting of
government securities and high-grade commercial paper. These investments are
stated at cost which approximates fair value. The Company considers all highly
liquid investments purchased with a remaining maturity of three months or less
to be cash equivalents.

INVENTORIES

The Company utilizes third parties to manufacture and package inventories
held for sale, takes title to certain inventories once manufactured, and
warehouses such goods until packaged for final

F-8
<PAGE> 65

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

distribution and sale. Inventories consist of salable dermatological products
held at the Company's warehouses as well as at the manufacturers' facilities and
are valued at the lower of cost or market as more determined by their net
realizable value using the first-in, first-out method.

Inventories are as follows:

<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Raw materials................................................ $ 72,633 --
Work in progress............................................. 23,749 $ 37,971
Finished goods............................................... 1,983,632 760,985
---------- --------
Total inventories.......................................... $2,080,014 $798,956
========== ========
</TABLE>

DEPRECIATION AND AMORTIZATION

Property and equipment are stated at cost. Depreciation is calculated on
the straight-line basis over the estimated useful lives of property and
equipment (three to five years). Leasehold improvements are amortized over the
shorter of their estimated useful lives or the remaining lease term.

REVENUE RECOGNITION

The Company recognizes product revenue upon shipment to its customers. The
Company records reserves for returns based on estimates at the time of sale.

ADVERTISING

The Company expenses advertising as incurred. Advertising expenses for the
fiscal years ended June 30, 1996 ("Fiscal 1996"), June 30, 1995 ("Fiscal 1995")
and June 30, 1994 ("Fiscal 1994") were approximately $1,887,000, $1,525,000 and
$1,408,000, respectively.

STATEMENTS OF CASH FLOWS

Non-cash investing and financing activities were as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
---------- -------- -------
<S> <C> <C> <C>
Property and equipment acquired under capital lease
obligations...................................... -- $170,234 --
Options/warrants issued in lieu of payment for
services rendered................................ $ 20,000 -- $24,000
Tax benefit of stock options exercised............. 1,067,000 -- --
</TABLE>

NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

Net income per common and common equivalent share have been computed by
using the weighted average number of shares outstanding and common equivalent
shares. Net income per share has been adjusted to reflect the 3-for-2 stock
split described in Note 7.

INCOME TAXES

Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes("SFAS No. 109").

F-9
<PAGE> 66

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates based upon future events, which could include, among other risks,
changes in the regulations governing the manner in which the Company sells its
products, changes in health care environment and the reliance on contract
manufacturing services.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt reported in the consolidated balance sheets
approximate their fair value.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires the revaluation of
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying value. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of the year ending June
30, 1997 ("Fiscal 1997") as required and, based on current circumstances, does
not believe the effect, if any, of adoption will be material.

In Fiscal 1997, the Company is also required to adopt Statement No. 123,
Accounting for Stock Based Compensation ("SFAS No. 123"). As permitted by SFAS
No. 123, the Company will continue to account for stock based compensation with
its employees, directors, and consultants pursuant to Accounting Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company grants stock
options for a fixed rate of shares with an exercise price equal to the fair
value of the shares at the date of grant and accordingly recognizes no
compensation expense for the stock option grants. SFAS No. 123 requires
companies which do not choose to account for the effects of stock based
compensation in the financial statements to disclose in the Company's Notes to
the Consolidated Financial Statements the pro forma effects on earnings and
earnings per share as if such accounting had occurred. The Company will adopt
SFAS No. 123 in the first quarter of Fiscal 1997.

NOTE 3. DEBT

Upon the Company's relocation to Arizona, the Company entered into a note
from the Commerce and Economic Development Commission in the amount of
approximately $131,000 bearing interest at a rate of 6.5% due in installments
through June 2, 2000. At June 30, 1996, $126,580 was outstanding on the note.

On June 3, 1996, the Company obtained a revolving line of credit facility
of up to $5 million from Norwest Bank Arizona, N.A ("Norwest"). The facility may
be drawn upon by the Company at its discretion and is collateralized by
substantially all of the assets of the Company. The outstanding balance of the
credit facility bears interest at a floating rate of 1.25% above Norwest's prime
rate per annum and expires in June 1997. The Agreement requires the Company to
comply with certain covenants, including covenants relating to the Company's
financial condition and results of operation. The Company has not drawn on this
credit facility.

F-10
<PAGE> 67

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. INVESTMENT

The consolidated financial statements for Fiscal 1994 include the accounts
and operations of Dyad, a then majority owned development stage enterprise.
Accordingly, net losses from the operations of Dyad amounting to approximately
$862,000 are included in net income in Fiscal 1994, partly offset by the
minority share in the losses of Dyad of $677,000. The sale of the Company's
interest in Dyad in Fiscal 1995 resulted in a gain of approximately $106,000. As
a result of the disposition of the Dyad Shares, the Company's and Dyad's
financial statements are not consolidated subsequent to June 30, 1994. The sale
contained provisions for possible additional consideration to the Company;
however, the amount to be received, if any, is uncertain.

NOTE 5. COMMITMENTS AND CONTINGENCIES

OCCUPANCY ARRANGEMENTS

The Company presently occupies approximately 12,150 square feet of office
space, at an average annual expense of $191,007 per annum, under a lease
agreement which expires in May 2005. The lease contains certain rent escalation
clauses and upon expiration can be renewed for a period of five years. Rent
expense was approximately $207,000, $188,000 and $314,000 for Fiscal 1996, 1995
and 1994, respectively.

RESEARCH AND DEVELOPMENT AND CONSULTING CONTRACTS

The Company has in the past and may in the future enter into agreements
with various research organizations and individuals under which the Company
acquires certain patent and marketing rights for therapeutics developed under
such agreements in exchange for providing funding for collaborative research. It
is also anticipated that, before any commercial marketing can be commenced, the
Company will be required to secure certain regulatory approvals on the
technological processes involved.

The Company has various consulting agreements with certain scientists in
exchange for the assignment of certain rights and consulting services. In
addition, the Company has granted options to purchase shares of Class A Common
Stock which are included in the stock option plan described in Note 8. These
options vest annually over the commitment periods. At June 30, 1996, the Company
had approximately $870,000 (solely attributable to the Chairman of the Central
Research Committee of the Company) of commitments payable over the remaining
five years under an agreement, which is cancelable by either party under certain
conditions.

LICENSING, MARKETING AND MANUFACTURING AGREEMENTS

The Company has entered into licensing and marketing agreements under which
it has obtained rights to market certain existing and future pharmaceutical
products. Generally, the terms of such agreements vary, but range from 10 to 20
years from the date of the first sale of the related product or until the
expiration of the patent applicable to the product. The agreements provide for
varying royalties with certain stated minimum annual amounts, which vary by
agreement from $17,500 to, for one such agreement, $55,000. A commitment to pay
a minimum annual royalty of $160,000 commences twelve months after the United
States Food and Drug Administration grants approval to market the product
governed by the agreement. Total minimum royalties required to be paid on
products currently being sold approximate $72,500 per year.

F-11
<PAGE> 68

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER

The Company and certain of its subsidiaries are parties to other actions
and proceedings incident to their business. Liability in the event of final
adverse determinations in any of these matters is either covered by insurance
and/or established reserves, or, in the opinion of management, after
consultation with counsel, should not, in the aggregate, have a material adverse
effect on the consolidated financial position or results of operations of the
Company.

NOTE 6. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows:

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $10,500,000 $13,000,000
Reserves................................................ 700,000 630,000
Research and experimentation credits.................... 450,000 450,000
Alternative Minimum Tax credits......................... 70,000 --
----------- -----------
11,720,000 14,080,000
Deferred tax liabilities:
Tax over book amortization of intangible assets related
to ESOTERICA products acquisition.................... (120,000) (120,000)
----------- -----------
Net deferred tax assets available......................... 11,600,000 13,960,000
Less valuation allowance.................................. 8,600,000 13,960,000
----------- -----------
Deferred tax assets....................................... $ 3,000,000 $ --
=========== ===========
</TABLE>

At June 30, 1996, a valuation allowance of $8,600,000 has been recorded.
The valuation allowance decreased by $5,360,000 and $540,000 during Fiscal 1996
and 1995, respectively. Of the decrease in Fiscal 1996, $1,280,000 related to
the utilization of net operating loss carryforwards due to Fiscal 1996 taxable
income, $1,067,000 as a direct credit to equity for Fiscal 1996 tax deductions
related to stock option exercises, $1,080,000 for lower estimated deferred tax
rates based on the Company's relocation, and an additional $1,933,000 with
respect to changes in estimate with respect to the deferred tax assets that are
more likely than not expected to be recovered through future income. In Fiscal
1995, the decrease was as a result of decreases in net deferred tax assets due
to the utilization of net operating loss carryforwards.

During the fourth quarter of Fiscal 1996, the Company reevaluated the
estimated amount of valuation allowance required to reduce deferred tax assets
in accordance with SFAS No. 109 to an amount management believes appropriate.
Accordingly, a credit to deferred tax benefit of $1,933,000 was reflected in the
consolidated income statement. The amount of net deferred tax assets, estimated
to be recoverable, was based upon management's assessment of the likelihood of
near-term operating income coupled with the uncertainties with respect to the
impact of future competitive and market conditions. The amount of deferred tax
assets available that will be ultimately realized will depend upon future events
which are uncertain.

At June 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $26,000,000 and research and
experimentation credits of approximately

F-12
<PAGE> 69

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$450,000, which begin expiring in varying amounts in the years 2005 through 2010
if not previously utilized. During Fiscal 1996, the Company incurred
approximately $70,000 in Alternative Minimum Tax which is available as a future
tax credit. The Alternative Minimum Tax credits do not expire for income tax
purposes.

Components of the provision for income taxes (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
1996 1995
------------------- -------------------
<S> <C> <C>
Current
Federal....................................... $ 70,000 $35,000
State......................................... 37,000 25,000
----------- -------
107,000 60,000
Deferred
Federal....................................... (1,500,000) --
State......................................... (433,000) --
----------- -------
(1,933,000) --
----------- -------
Total................................. $(1,826,000) $60,000
=========== =======
</TABLE>

Income tax expense (benefit) for the three years ended June 30, 1996, 1995,
and 1994 differs from the amount computed applying the federal statutory rates
due to the following:

<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 34.0% 34.0% 34.0%
State tax rate.......................................... 6.0 10.0 10.0
Utilization of net operating loss carryforwards......... (38.0) (43.2) (65.6)
Change in estimate valuation allowance.................. (32.0) -- --
Losses of Dyad not generating tax benefit............... -- -- 13.5
Other................................................... -- 2.8 8.1
----- ----- -----
Expense (benefit)....................................... (30.0%) 3.6% --
===== ===== =====
</TABLE>

NOTE 7. STOCK TRANSACTIONS

Class A Common Stock has one vote per share and Class B Common Stock has
ten votes per share. Each share of Class B Common Stock may be converted into
one share of Class A Common Stock at the option of the holder or, in some
circumstances, may automatically be converted upon a vote of the board of
directors and the majority of the Class B Common Stockholders. The Series B
Automatically Convertible Preferred Stock ("Series B Preferred Stock") was
issued as part of the 3-for-2 stock split described in this Note and has all the
relative rights, preferences, privileges and limitations of the Company's Class
B Common Stock and has no liquidation preferences or stated dividend rates. Each
share of Series B Preferred Stock shall be automatically converted into one
share of Class B Common Stock immediately upon approval of the Company's
shareholders of an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of Class B Common Stock by a number
equal to or greater than the number of outstanding and issued shares of Series B
Preferred Stock. In addition, shares of Series B Preferred Stock are convertible
into Class A Common Stock on the same terms and conditions applicable to the
conversion of Class B Common Stock into Class A Common Stock.

F-13
<PAGE> 70

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pursuant to a Subscription Agreement, dated as of November 17, 1994, (the
"Subscription Agreement") with Frost Nevada Limited Partnership, a Nevada
limited partnership ("Frost Nevada"), the Company issued 235,714 shares of its
Class A Common Stock, $0.014 par value to Frost Nevada for a purchase price of
$600,600. The 235,714 shares of Class A Common Stock issued by the Company were
sold to Frost Nevada as part of a two-part transaction in which Frost Nevada
purchased an aggregate of 342,856 shares of Class A Common Stock. Pursuant to a
Stock Purchase Agreement dated as of November 17, 1994, (the "Stock Purchase
Agreement") between the Chairman of the Company and Frost Nevada, Frost Nevada
purchased from the Chairman 107,142 shares of Class A Common Stock.

On August 17, 1995, the Board of Directors adopted a Preferred Stock
Purchase Rights plan and declared a dividend of one preference share purchase
right for each outstanding share of Class A Common Stock and Class B Common
Stock. Under certain circumstances, after a person has acquired beneficial
ownership of 15% of the Class A Common Stock, each Preference Stock Purchase
Right will entitle the holder to purchase, at the Right's then-current exercise
price, stock of the Company or its successor at a discount.

On August 29, 1995, the Executive Committee of the Board of Directors
declared a one-for-fourteen reverse stock split which was approved by
shareholders on October 23, 1995. As a result of the reverse stock split, the
Company's outstanding shares decreased from approximately 61.0 million to
approximately 4.3 million at that date. Per share amounts and the average number
of shares outstanding at that date were retroactively revised for all periods
presented.

Subsequent to year end, on July 22, 1996, the Board of Directors declared a
3-for-2 stock split effected in the form of a 50% stock dividend payable August
2, 1996, to common shareholders of record at the close of business on July 22,
1996. As a result of the stock split, the Company's outstanding shares increased
from approximately 4.5 million to 6.8 million. Per share amounts and the
weighted average number of shares outstanding have been retroactively revised
for all periods presented.

NOTE 8. STOCK OPTION PLANS

The Company has four Stock Option Plans ("the 1988, 1990, 1992 and 1995
Plans" or collectively, the "Plans") under which options may be granted for the
benefit of certain key employees, non-employee directors, and consultants of the
Company. The 1988, 1990, 1992 and 1995 Plans, as amended, provide originally for
the granting of a maximum of 321,429, 428,571, 535,714, and 535,714
respectively, qualified incentive stock options and non-qualified stock options,
to purchase Class A Common Stock of the Company. On July 22, 1996, the Board of
Directors authorized the granting of 201,474 shares to employees and consultants
at fair market value and has placed limitations on the number of shares
available for grant under the plans in the future. The Plans allow the Company
to designate options as qualified incentive or non-qualified on an as needed
basis.

Qualified and non-qualified stock options vest over a period determined at
the time the options are granted ranging from one to five years, except for
certain non-qualified stock options that vest immediately. In April 1996, the
Plans were amended to provide for acceleration of vesting in the event of a
change in control of the Company. The options are generally granted at the fair
market value on the date of the grant and are exercisable at prices from $1.77
to $31.83, with a weighted average of $6.93 at June 30, 1996. In September 1995,
the Company approved the repricing of certain options under the Plans to
purchase 300,726 shares of Class A Common Stock previously exercisable at a
weighted average option exercise price of $10.85 per share to an exercise price
of $4.39 per share, which was the fair market value of the Class A Common Stock
at the date of repricing. The Company

F-14
<PAGE> 71

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

has not previously repriced any of its stock options. Options for the year were
exercised at prices from $1.77 to $20.44. Information as to the options for
Fiscal 1994, 1995 and 1996 is as follows:

<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED TOTAL EXERCISABLE
--------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1993............. 279,676 398,052 677,728 459,312
=======
Granted.............................. 85,019 87,054 172,073
Terminated/expired................... (39,983) (4,286) (44,269)
-------- -------- --------
Balance at June 30, 1994............. 324,712 480,820 805,532 587,589
=======
Granted.............................. 188,695 326,213 514,908
Terminated/expired................... (240,381) (226,682) (467,063)
-------- -------- --------
Balance at June 30, 1995............. 273,026 580,351 853,377 524,481
=======
Granted.............................. 211,311 298,709 510,020
Exercised............................ (25,672) (117,880) (143,552)
Terminated/expired................... (131,973) (221,972) (353,945)
-------- -------- --------
Balance at June 30, 1996............. 326,692 539,208 865,900 250,455
======== ======== ======== =======
</TABLE>

The table includes 90,716 shares of Common Stock that will be available to
certain employees relating to the stock split described in Note 7 upon
authorization of additional shares by the Company's shareholders.

During Fiscal 1996, 128,568 of non-qualified stock options not subject to
the stock option plans have been exercised by outside parties at $14.56. An
additional 47,121 non-qualified stock options not subject to the plans are
issued and outstanding to outside parties at June 30, 1996 with exercise price
ranges of $14.56 to $28.00. During Fiscal 1996, 45,355 warrants were exercised
at $4.67. At June 30, 1996, there were no outstanding warrants.

NOTE 9. SIGNIFICANT CUSTOMERS

For Fiscal 1996, three customers accounted for approximately 15.5%, 12.2%,
and 11.8% of sales. For Fiscal 1995, two customers accounted for approximately
15.9% and 9.6% of sales. For Fiscal 1994, two customers accounted for
approximately 15.1% and 11.2% of sales.

NOTE 10. FINANCIAL INSTRUMENTS -- CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.

The Company maintains cash and cash equivalents primarily with two
financial institutions that invest funds in short-term, interest bearing,
investment grade, marketable securities. The Company performs periodic
evaluations of the relative credit standing of these financial institutions.

At June 30, 1996 and 1995, five and six customers, respectively, comprised
approximately 55.2% and 48.8%, respectively, of accounts receivable. The Company
does not require collateral from its customers but performs periodic credit
evaluations of its customers' financial condition. Management does not believe
significant credit risk exists at June 30, 1996.

F-15
<PAGE> 72

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11. DEFINED CONTRIBUTION PLAN

The Company has a defined contribution plan (the "Plan") that is intended
to qualify under Section 401(k) of the Internal Revenue Code. All employees,
except those with less than three months of service and those who have not
attained the age of 21, are eligible to participate in the Contribution Plan.
Participants may contribute, through payroll deductions, up to 20% of their
basic compensation, not to exceed Internal Revenue Code limitations. Although
the Contribution Plan provides for profit sharing contributions by the Company,
the Company has not made any such contributions since its inception.

NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

In the table below is the quarterly financial information for Fiscal 1996
and 1995. (All figures are in thousands except per share data).

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996
(FOR THE QUARTERS ENDED)
-----------------------------------------------------------------------
SEPTEMBER 30, 1995 DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales.................. $4,574 $ 6,449 $7,016 $ 7,271
Gross profit............... 3,257 4,667 5,040 5,390
Net income................. 646 1,404 1,759 4,071
Net income per share....... 0.10 0.21 0.24 0.54
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1995
(FOR THE QUARTERS ENDED)
-----------------------------------------------------------------------
SEPTEMBER 30, 1994 DECEMBER 31, 1994 MARCH 31, 1995 JUNE 30, 1995
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales.................. $3,690 $ 4,725 $5,033 $ 5,684
Gross profit............... 2,519 3,024 3,659 4,080
Net income................. 26 308 312 967
Net income per share....... -- 0.05 0.05 0.14
</TABLE>

The quarterly net income per share data disclosed above does not agree with
the amounts reported in the Company's Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission as the amounts have been revised to
reflect the stock splits discussed in Note 7 and for certain reclassification
made to conform with fourth quarter presentation. The net income for the quarter
ended June 30, 1996 includes a fourth quarter adjustment to record deferred
income tax benefits of $1,933,000 as described in Note 6.

F-16
<PAGE> 73
MEDICIS
The Dermatology Company[sm]