<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or the transition period from ___________ to ______________
Commission file number 0-18443
MEDICIS PHARMACEUTICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 52-1574808
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4343 East Camelback Road, Suite 250
Phoenix, Arizona 85018-2700
(Address of principal executive offices)
(602) 808-8800
(Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 1998
Class A Common Stock $.014 Par Value 18,522,506
Class B Common Stock $.014 Par Value 281,974
<PAGE> 2
MEDICIS PHARMACEUTICAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998........................... 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 1998 and 1997......... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1997................. 6
Notes to the Condensed Consolidated Financial Statements....... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.................................. 17
SIGNATURES........................................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $142,709,130 $147,411,127
Short-term investments................ 106,098,499 90,510,029
Accounts receivable, net.............. 18,364,701 18,899,868
Inventories, net...................... 10,376,238 9,208,384
Deferred tax assets................... 3,136,000 3,300,000
Accrued interest income............... 1,381,035 2,050,264
Other current assets.................. 4,247,132 6,750,170
------------ ------------
Total current assets............ 286,312,735 278,129,842
------------ ------------
Property and equipment, net............ 1,493,898 1,343,603
Intangible assets:
Intangible assets related to product
acquisitions.......................... 74,307,592 70,386,665
Other intangible assets............... 4,914,624 6,874,626
Less accumulated amortization...... 6,869,594 5,977,399
------------ ------------
Net intangible assets........... 72,352,622 71,283,892
------------ ------------
Other non-current assets............... 1,592,891 1,592,907
------------ ------------
$361,752,146 $352,350,244
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
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MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- -------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable................................................ $ 6,229,306 $ 5,496,526
Notes payable................................................... 11,364 11,364
Accrued incentives.............................................. 728,102 1,786,392
Accrued royalties............................................... 1,407,883 1,040,993
Other accrued liabilities....................................... 7,468,322 6,838,397
------------- -------------
Total current liabilities................................. 15,844,977 15,173,672
------------- -------------
Long-term liabilities:
Notes payable................................................... 94,556 94,556
Other non-current liabilities................................... 129,191 124,115
Deferred tax liability.......................................... 10,502,416 10,502,416
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.................................................. 1,995,354 1,960,000
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value;
shares authorized: 5,000,000; no shares issued................. -- --
Class A Common Stock, $0.014 par value;
shares authorized: 50,000,000; issued and
outstanding: 18,501,195 and 18,474,256 at
September 30, 1998 and at June 30, 1998,
respectively.................................................... 259,017 258,640
Class B Common Stock, $0.014 par value;
shares authorized: 1,000,000; issued and
outstanding: 281,974 at September 30, 1998
and at June 30, 1998............................................ 3,948 3,948
Additional paid-in capital....................................... 344,607,296 344,107,350
Accumulated deficit.............................................. (11,684,609) (19,874,453)
------------- -------------
Total stockholders' equity................................ 333,185,652 324,495,485
------------- -------------
$ 361,752,146 $ 352,350,244
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
4
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MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 24,780,359 $ 13,911,331
------------ ------------
Operating costs and expenses:
Cost of product revenue................. 4,707,490 2,545,739
Selling, general and administrative..... 8,825,981 5,375,610
Research and development................ 496,852 544,121
Depreciation and amortization........... 956,415 483,557
------------ ------------
Operating costs and expenses........... 14,986,738 8,949,027
------------ ------------
Operating income.......................... 9,793,621 4,962,304
Interest income........................... 3,106,672 1,196,642
Interest expense.......................... (7,658) (8,326)
------------ ------------
Income before taxes....................... 12,892,635 6,150,620
Income tax expense........................ (4,803,263) (2,399,718)
------------ ------------
Net income................................ $ 8,089,372 $ 3,750,902
============ ============
Basic net income per
common share........................... $ 0.43 $ 0.26
============ ============
Diluted net income per
common shares........................... $ 0.42 $ 0.25
============ ============
Shares used in computing basic net
income per common share................. 18,772,927 14,313,347
============ ============
Shares used in computing diluted net
income per common share................. 19,393,738 15,022,119
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
5
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MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net income $ 8,089,372 $ 3,750,902
Adjustments to reconcile net income to
net cash provided by operating activities:..............................
Depreciation and amortization.......................................... 956,415 483,557
Minority interest...................................................... 35,354 --
Accretion of discount on investments................................... (19,090) (88,489)
Deferred income tax expense............................................ 537,000 2,715,000
Provision for doubtful accounts and returns............................ (132,841) (37,000)
Other non-cash expenses................................................ -- 6,000
Gain on sale of available-for-sale investments......................... 19,194 (2,775)
Change in operating assets and liabilities:
Inventories.......................................................... (843,234) (1,337,391)
Accounts receivable.................................................. 634,379 (1,503,064)
Accounts payable..................................................... 732,780 298,546
Accrued incentives................................................... (1,058,290) (659,822)
Other current liabilities............................................ 996,815 (173,974)
Other current assets................................................. 999,610 (965,117)
------------- -------------
Net cash provided by operating activities........................ 10,947,464 2,486,373
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment...................................... (214,515) (107,082)
Payment of license agreement............................................ -- (615,750)
Increase in other assets................................................ (79,261) --
Purchase of available-for-sale securities............................... (45,536,905) (23,219,374)
Sale of available-for-sale securities................................... 16,049,142 9,034,503
Maturity of available-for-sale securities............................... 14,100,000 11,500,000
------------- -------------
Net cash used in investing activities............................ (15,681,539) (3,407,703)
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of stock options............................. 129,603 411,174
Other non-current liabilities........................................... 2,810 (20,889)
------------- -------------
Net cash provided by financing activities........................ 132,413 390,285
------------- -------------
Effect of foreign currency exchange rate
on cash and cash equivalents........................................... (100,335) --
------------- -------------
Net decrease in cash and cash equivalents................................. (4,701,997) (531,045)
Cash and cash equivalents at beginning of period.......................... 147,411,127 33,623,397
------------- -------------
Cash and cash equivalents at end of period................................ $ 142,709,130 $ 33,092,352
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,658 $ 6,453
Taxes $ 1,170,600 $ 248,074
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 7
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
Medicis Pharmaceutical Corporation ("Medicis" or the "Company") is the
leading independent pharmaceutical company in the United States focusing
primarily on the treatment of dermatological conditions. The Company offers
prescription, over-the-counter ("OTC"), and cosmetic dermatology products
emphasizing the clinical effectiveness, quality, affordability and cosmetic
elegance of its products. Medicis has achieved a leading position in
branded products for the treatment of acne, acne-related conditions,
psoriatic conditions and anti-pruritic conditions while also offering the
leading OTC fade cream product line in the United States. The Company has
built its business through successfully introducing prescription
pharmaceuticals such as DYNACIN(R) and TRIAZ(R) products for the treatment
of acne, LUSTRA(R), for the treatment of dyschromia and other
discolorations of the skin, as well as the acquisition of the ESOTERICA(R)
fade cream product line. In addition, Medicis acquired the rights to
LIDEX(R) and SYNALAR(R) corticosteroid product lines from Syntex USA, Inc.
and the entire product line from GenDerm Corporation ("GenDerm"), including
ZOSTRIX(R) topical analgesics and NOVACET(R) acne rosacea treatments.
The financial information is unaudited but reflects all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
the Company's management, necessary to a fair statement of the results for
the interim periods presented. Interim results are not necessarily
indicative of results for a full year. The financial statements should be
read in conjunction with the Company's audited financial statements and
notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations relating thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998 ("fiscal 1998"). Certain immaterial amounts on the face of the balance
sheet have been reclassified to conform with the current period's
presentation.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 131
establishes a new method by which companies will report operating segment
information. This method is based on the manner in which management
organizes the segments within a company for making operating decisions and
assessing performance. The Company is evaluating the provisions of SFAS No.
131 and, upon adoption, may report operating segments. The adoption of SFAS
No. 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
7
<PAGE> 8
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS No. 130".) SFAS No. 130 establishes new rules
for the reporting and display of comprehensive income and shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. During the first quarter of fiscal 1999 and fiscal 1998, the
amounts of unrealized gains or losses on such securities were not material.
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share," ("SFAS No. 128"). SFAS No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per share
amounts for all periods have been presented, and where necessary, restated
to conform to the SFAS No. 128 requirements and have been computed by using
the weighted average number of shares.
The following table sets forth all computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
------- -------
(in thousands, except per share data)
<S> <C> <C>
Numerator:
Net income......................... $ 8,089 $ 3,751
------- -------
Denominator for basic
earnings per common share.......... 18,773 14,313
Effect of dilutive securities:
Stock options...................... 621 709
------- -------
Denominator for diluted
earnings per common share.......... 19,394 15,022
======= =======
Basic net income per
common share....................... $ 0.43 $ 0.26
======= =======
Diluted net income per
common share...................... $ 0.42 $ 0.25
======= =======
</TABLE>
Options to purchase 703,929 shares of common stock at prices ranging from
$38.25 to $54.00 per share were outstanding at September 30, 1998 but were
not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price of the
Company's common stock and, therefore, the effect would be anti-dilutive.
8
<PAGE> 9
4. CONTINGENCIES
The Company and certain of its subsidiaries, from time to time, 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, in the opinion of
management and after consultation with counsel, are not anticipated, in the
aggregate, to have a material adverse effect on the consolidated financial
position or results of operations of the Company and its subsidiaries.
5. INVENTORIES
Although the Company utilizes third parties to manufacture and package
inventories held for sale, the Company takes title to certain inventories
and records the associated liability once inventories are manufactured.
Inventories are valued at the lower of cost or market as determined by net
realizable value using the first-in, first-out method. Inventories, net of
reserves, at September 30, 1998 and June 30, 1998 consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
<S> <C> <C>
Raw materials................. $ 2,709,377 $ 1,086,585
Finished goods................ 7,666,861 8,121,799
----------- -----------
Total inventories, net...... $10,376,238 $ 9,208,384
=========== ===========
</TABLE>
6. 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." The provision for income taxes (recorded at an effective
rate of 37.3% for the quarter ended September 30, 1998) reflects
management's estimation of the effective tax rate expected to be applicable
for the full fiscal year. This estimate is reevaluated by management each
quarter based on estimated tax expenses for the year.
At September 30, 1998, the Company took advantage of additional tax
deductions available relating to the exercise of non-qualified stock
options and disqualified dispositions of incentive stock options.
Accordingly, the Company recorded a $0.4 million increase to equity with a
corresponding $0.4 million reduction to taxes payable. Quarterly
adjustments for the exercise of non-qualified stock options and
disqualified dispositions of incentive stock options may vary as they
relate to the intentions of the option holder.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto and with the
Company's audited financial statements, notes to the consolidated financial
statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations relating thereto included or incorporated by
reference in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998 (the "1998 Form 10-K").
9
<PAGE> 10
This report on Form 10-Q contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
In addition, from time to time, the Company or its representatives have
made or may make forward looking statements, orally or in writing. Forward
looking statements involve known and unknown risks and uncertainties. The
Company's actual actions or results could differ materially from those
anticipated in forward looking statements as a result of certain factors
including, but not limited to, those factors discussed in the documents
filed by the Company with the Securities and Exchange Commission from time
to time, including the prospectus dated February 6, 1998, which is set
forth in the Company's Registration Statement on Form S-3 and the 1998 Form
10-K. The Company undertakes no obligation to update any forward looking
statements.
OVERVIEW
Medicis was founded in 1987 to develop and market prescription and
over-the-counter ("OTC") 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.
Medicis is the leading independent pharmaceutical company in the United
States focusing primarily on the treatment of dermatological conditions.
The Company offers prescription, OTC, and cosmetic dermatology products,
emphasizing the clinical effectiveness, quality, affordability and cosmetic
elegance of its products. Medicis has achieved a leading position in
branded products for the treatment of acne, acne-related conditions,
psoriatic conditions, and anti-pruritic conditions, while also offering the
leading OTC fade cream product line in the United States. The Company has
built its business through successfully introducing prescription
pharmaceuticals such as DYNACIN(R) and TRIAZ(R) products for the treatment
of acne, LUSTRA(R) for dyschromia and other discolorations of the skin, as
well as marketing OTC products such as the ESOTERICA(R) fade cream product
line. In addition, Medicis acquired the rights to LIDEX(R) and SYNALAR(R)
corticosteroid product lines in the United States and Canada from Syntex
USA, Inc. and the entire product line from GenDerm Corporation ("GenDerm"),
including ZOSTRIX(R) topical analgesics and NOVACET(R) acne rosacea
treatments.
Prescription pharmaceuticals accounted for 77.0%, 86.5% and 83.2% of net
sales in the fiscal years ending June 30, 1998, June 30, 1997 ("fiscal
1997") and June 30, 1996 ("fiscal 1996"), respectively, and 68.0% in the
first quarter ended September 30, 1998. Although DYNACIN(R) products
accounted for a majority of the Company's total sales in fiscal 1997 and
fiscal 1996, the Company believes it will no longer derive the majority of
its net sales from DYNACIN(R) in the future. As a result of the GenDerm
acquisition, in December 1997, OTC products have accounted for a greater
percentage of the Company's total sales with minimal impact on the
Company's gross profit margins.
10
<PAGE> 11
The Company derives a majority of its revenue from sales of DYNACIN(R),
LIDEX(R), TRIAZ(R), LUSTRA(R) and ZOSTRIX(R) products (the "Key Products").
The Company believes that sales of the Key Products will constitute the
majority of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the sale of the Key Products individually or
collectively would have a material adverse effect on the Company's
business, financial condition and results of operations. Each of the Key
Products could be rendered obsolete or uneconomical by regulatory or
competitive changes. The sale of Key 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 the Key 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 prescribing
practices of dermatologists, changes in the reimbursement policies of
third-party payors, product liability claims or other factors.
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, expenditures and timing relating to acquisition
and integration of businesses, changes in prescribing practices of
dermatologists, 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,
general economic and industry conditions that affect customer demand, and
the Company's level of research and development activities. 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 has been 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 by the Company 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 or profitability or avoid losses
in any future period.
The Company's strategy for growth is substantially dependent upon its
continued ability to acquire products primarily targeted at the skin care
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 or technologies. 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 acquire rights to additional
products on acceptable terms, or at all. The failure of the Company to
acquire additional products or
11
<PAGE> 12
successfully introduce new products could have a material adverse effect on
the Company's business, financial condition and results of operations.
Further, any new internally developed or acquired products may have
different distribution channels, pricing resources and levels and
competition than the Company's current products. Consequently, there can be
no assurance that the Company will be able to compete favorably and attain
market acceptance in any new product category or successfully integrate any
acquired products or businesses. In addition, any such products may require
the Company to significantly increase its sales force and incur
commensurate expense levels in anticipation of a new product introduction.
Failure of the Company to successfully introduce and market new products,
whether internally developed or acquired from third parties, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has recently experienced and will continue to experience a
period of significant expansion of its operations that has placed a
significant strain upon its management system and resources. The Company's
ability to compete effectively and to manage future growth, if any, will
require the Company to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand,
hire, train and manage an increasing number of employees. The Company's
failure to do so would have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company's
business strategy includes potential acquisitions of products and
businesses and introductions of new products. The Company anticipates that
the integration of additional new businesses or potential products, if any,
would require significant expense and management time and attention.
Failure to manage such change effectively would have a material adverse
effect on the Company's business, financial condition and results of
operations.
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 and/or discounts.
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 Drug Company ("McKesson"), Bergen Brunswig
Drug Company ("Bergen Brunswig"), Cardinal Health, Inc. ("Cardinal"), and
other major drug chains. In fiscal 1998, McKesson, Bergen Brunswig and
Cardinal accounted for 16.9%, 13.2% and 12.6%, respectively, of the
Company's sales. In fiscal 1997, McKesson, Cardinal and Bergen Brunswig
accounted for 20.6%, 16.3% and 10.9%, respectively, of the Company's sales.
The loss of, or deterioration in, any of these customer accounts could have
a material adverse effect upon the Company's business, financial condition
or results and operations.
To enable Medicis to focus on its core marketing and sales activities, the
Company selectively out-sources certain non-sales and non-marketing
functions, such as laboratory research, manufacturing and warehousing. As
the Company expands its activities in these
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<PAGE> 13
areas, additional financial resources are expected to be utilized. 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 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. Actual expenditures will
depend on a variety of factors, including the Company's financial
condition, 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. There can be no
assurance that any product or technology under development will result in
the successful introduction of any new product.
The Year 2000 issue results from the inability of some computer programs to
identify the year 2000 properly, potentially leading to errors or system
failure. A company's business may be adversely affected if it, or any of
its suppliers and customers or others with whom it transacts business
(including its banks and governmental agencies), have not timely resolved
the year 2000 issue. In response to its rapid growth, the Company selected
a new management information system in fiscal 1997, which was implemented
in fiscal 1998 that is expected to meet its presently anticipated needs. In
selecting a system, Year 2000 compliance was one of the criteria. The
Company is reviewing the areas within its business and operations which
could be adversely affected by Year 2000 issues and evaluating the costs
associated with modifying and testing its systems for the Year 2000.
Although the Company is not yet able to estimate its incremental cost for
the Year 2000 issues, within its internal information systems, based on its
preliminary review to date, the Company does not believe Year 2000 issues
will have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is currently working with
critical third parties to determine the impact of Year 2000 issues on their
business and operations and its collateral impact on the business and
operations of the Company and to determine such third parties plans to
remediate Year 2000 issues where their systems interface with the Company's
systems. The assessment and necessary modification for the Year 2000 issue
are estimated to be completed in late 1999.
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<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth certain data as a percentage of net sales
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales .................... 100.0% 100.0% 100.0%
Gross profit ................. 81.0 81.7 73.1
Operating expenses ........... 41.5 46.0 51.2
Operating income ............. 39.5 35.7 21.9
Net interest income .......... 12.5 8.5 1.5
Income tax benefit (expense).. (19.4) (17.2) 26.2
----- ----- -----
Net income ................... 32.6% 27.0% 49.6%
===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales
Net sales for the three months ended September 30, 1998 (the "first quarter
of fiscal 1999") increased 78.1%, or $10.9 million, to $24.8 million from
$13.9 million for the three months ended September 30, 1997 (the "first
quarter of fiscal 1998"). The Company's net sales increased in the first
quarter of fiscal 1999 primarily as a result of the effect of sales of the
GenDerm products which were acquired in December of 1997. The first quarter
of fiscal 1998 did not include sales of the GenDerm products. The Company's
net sales also increased as a result of both unit and dollar sales growth
of the Company's prescription products including sales associated with
LUSTRA(R), which was introduced by the Company in the third quarter of
fiscal 1998. The Company's prescription products accounted for 68.0% of net
sales in the first quarter of fiscal 1999 and 88.0% in the first quarter of
fiscal 1998. The OTC and doctor-dispensed products accounted for 32.0% and
12.0% in the first quarter of fiscal 1999 and 1998 respectively.
Gross Profit
Gross profit during the first quarter of fiscal 1999 increased 76.6%, or
$8.7 million, to $20.1 million from $11.4 million in the first quarter of
fiscal 1998. As a percentage of net sales, gross profit decreased to 81.0%
in the first quarter of fiscal 1999 from 81.7% in the first quarter of
fiscal 1998, primarily as a result of greater OTC sales as a percentage of
total net sales. OTC products have a lower gross profit percentage than the
Company's prescription brands.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the first quarter of fiscal
1999 increased 64.2%, or $3.4 million, to $8.8 million from $5.4 million in
the first quarter of fiscal 1998, primarily due to the expenses associated
with the promotion and administration of the
14
<PAGE> 15
Company's existing brands, including LUSTRA(R), and the sampling and
advertising associated with the GenDerm brands.
Additionally, selling, general and administrative costs also increased due
to an increase in variable costs commensurate with increased sales volume,
the expansion of the Company's sales force to 61 sales representatives from
47 sales representatives at fiscal year end June 30, 1998 and additional
personnel costs attributable to the hiring of additional full-time
equivalent employees and cost-of-living salary adjustments. Selling,
general and administrative costs, as a percentage of net sales, decreased
three percentage points in the first quarter of fiscal 1999 relative to the
first quarter of fiscal 1998.
Research and Development Expenses
Research and development expenses in the first quarter of fiscal 1999
decreased 8.7%, or $47,000, to $497,000 from $544,000 in the first quarter
of fiscal 1998, primarily due to the timing of various research and
development projects offset by expenses associated with the clinical
support of the Company's existing products.
Depreciation and Amortization Expenses
Depreciation and amortization expenses in the first quarter of fiscal 1999
increased 97.8%, or $473,000, to $956,000 from $483,000 in the first
quarter of fiscal 1998, primarily due to amortization of the intangible
assets associated with the Company's acquisition of GenDerm in December
1997.
Operating Income
Operating income during the first quarter of fiscal 1999 increased 97.4%,
or $4.8 million, to $9.8 million from $5.0 million in the first quarter of
fiscal 1998. This increase was primarily a result of higher sales volume,
coupled with a decrease of 4.5 percentage points in operating costs as a
percentage of net sales.
Interest Income
Interest income in the first quarter of fiscal 1999 increased 159.6%, or
$1.9 million, to $3.1 million from approximately $1.2 million in the first
quarter of fiscal 1998, primarily due to higher cash equivalent and
short-term investment balances in the first quarter of fiscal 1999, as a
result of the Company's February 1998 public offering and the Company's
cash flow from operations.
Income Tax Expense
Income tax expense during the first quarter of fiscal 1999 increased $2.4
million to an expense of $4.8 million from an expense of $2.4 million in
the first quarter of fiscal 1998. The provision for income taxes recorded
for the first quarter of fiscal 1999 reflects management's estimate of the
effective tax rate expected to be applicable for the full fiscal year. This
estimate is reevaluated by management each quarter based on forecasts of
income before taxes for the year. The Company's tax provision is recorded
at an effective
15
<PAGE> 16
tax rate of 37.3% for the first quarter of fiscal 1999. The increase in
income tax expense as compared to the first quarter of fiscal 1998 is due
to additional pre-tax income. The decrease in the effective tax rate as
compared to the first quarter of fiscal 1998 is primarily attributable to
an increase in tax exempt interest income.
Net Income
Net income during the first quarter of fiscal 1999 increased approximately
115.7%, or approximately $4.3 million, to $8.1 million from $3.8 million
from the first quarter of fiscal 1998. The increase is primarily
attributable to an increase in sales volume, lower operating expenses as a
percentage of sales, and interest income generated by higher cash and cash
equivalent balances.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 and June 30, 1998, the Company had cash equivalents
and short-term investments of approximately $248.8 million and $237.9
million, respectively. The Company's working capital was $270.5 million and
$263.0 million at September 30, 1998 and June 30, 1998, respectively. The
increase in working capital is primarily attributable to the Company's cash
flow from operations of approximately $10.9 million.
At September 30, 1998 and June 30, 1998, the Company had inventories of
$10.4 million and $9.2 million, respectively. The increase in the Company's
inventory balances is primarily related to an increase in the Company's
inventory held by third parties which the Company is required to record in
its inventory balance and which fluctuates due to the timing of the third
parties' manufacturing cycles which the Company does not control.
At September 30, 1998 and June 30, 1998, the Company had current
liabilities of $15.8 million and $15.2 million, respectively. The increase
is primarily due to an increase in accrued royalties on the Company's
products which is due to increased sales of the Company's products and
timing of the royalty payments.
In accordance with various manufacturing agreements, the Company is
required to provide manufacturers with pro forma estimated production
requirements by product 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. However, the Company records
its obligation to the manufacturer at the time finished inventory is
produced.
Inflation did not have a significant impact upon the results of the Company
during the three months ended September 30, 1998.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 27.1 Financial Data Schedule
(See Note 2 to the Notes to the Condensed Consolidated Financial Statements
incorporated herin for computation of Per Common Share Results.)
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICIS PHARMACEUTICAL CORPORATION
Date: November 12, 1998 By: /s/ Jonah Shacknai
-------------------------------
Jonah Shacknai
Chairman and Chief Executive
Officer
Date: November 12, 1998 By: /s/ Mark A. Prygocki, Sr.
-------------------------------
Mark A. Prygocki, Sr.
Chief Financial Officer, Secretary
and Treasurer
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MEDICIS
BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 142,709,130
<SECURITIES> 106,098,499
<RECEIVABLES> 18,364,701
<ALLOWANCES> 0
<INVENTORY> 10,376,238
<CURRENT-ASSETS> 286,312,735
<PP&E> 1,918,712
<DEPRECIATION> 424,814
<TOTAL-ASSETS> 361,752,146
<CURRENT-LIABILITIES> 15,844,977
<BONDS> 0
0
0
<COMMON> 262,965
<OTHER-SE> 332,922,687
<TOTAL-LIABILITY-AND-EQUITY> 361,752,146
<SALES> 24,780,359
<TOTAL-REVENUES> 24,780,359
<CGS> 4,707,490
<TOTAL-COSTS> 10,279,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,099,014)
<INCOME-PRETAX> 12,892,635
<INCOME-TAX> 4,803,263
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,089,372
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
</TABLE>
