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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, 2000

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number     0-18443    

MEDICIS PHARMACEUTICAL CORPORATION
(Exact name of Registrant as specified in its charter)

8125 North Hayden Road
Scottsdale, Arizona 85258-2463
(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.

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MEDICIS PHARMACEUTICAL CORPORATION

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Part I. Financial Information

Item 1. Financial Statements

MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

The accompanying notes are an integral part of this statement.

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MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of this statement.

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MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of this statement.

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MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of this statement.

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MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000

1.

ORGANIZATION AND BASIS OF PRESENTATION

		Medicis Pharmaceutical Corporation and its wholly owned subsidiaries (“Medicis” or the “Company”) is a specialty pharmaceutical company and the leading independent pharmaceutical company in the United States focusing primarily on the treatment of dermatological conditions. The Company offers prescription products and an over-the-counter (“OTC”) product, emphasizing the clinical effectiveness, quality, affordability and cosmetic elegance of its products. Medicis develops and markets leading products for major segments within dermatology, including acne, rosacea, antifungals, eczema, hyperpigmentation, pediculosis (head lice), psoriasis, seborrheic dermatitis, and cosmesis (improvement in the texture and appearance of skin). Medicis has built its business by successfully executing a four-part growth strategy. The Company’s growth strategy includes: (1) expanding sales of existing brands; (2) launching new products from intensive research and development efforts; (3) acquiring complementary strategic products, technologies, and businesses; and (4) collaborating with other companies.
		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, 2000 (“fiscal 2000”). Certain immaterial amounts on the face of the balance sheet have been reclassified to conform with the current period’s presentation.

2.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs, including payments related to products under development and research consulting agreements, are expensed as incurred unless they relate to prepaid research in the regulatory approval process. The Company periodically makes up front, non-refundable payments to third parties for research and development work which has been completed. If there is no recourse provision against the third party for their failure to perform future services to earn such amounts paid, these up-front payments are expensed at the time of payment. Payments made for product rights whereby the product has received regulatory approval for sale are capitalized and amortized over the expected revenue-producing period.

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3.

COMPREHENSIVE INCOME

Total comprehensive income includes net income and other comprehensive income which consists of foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments. Total comprehensive income for the three months ended September 30, 2000 (“the first quarter of fiscal 2001”) was $465,000. Total comprehensive income for the three months ended September 30, 1999 (“the first quarter of fiscal 2000”) was $9.9 million.

4.

STRATEGIC ALLIANCE WITH CORIXA CORPORATION

In August 2000, Medicis entered into a multi-year development, commercialization and license agreement covering Corixa’s novel psoriasis immunotherapeutic product, PVAC(TM) treatment. Under terms of the agreement, Medicis made a non-refundable payment to Corixa of $17.0 million at closing, with additional potential development milestone payments of $35 million, and commercialization and cumulative net sales threshold milestone payments of $55 million. Additionally, upon commercial sale of the product, Medicis will purchase inventory from Corixa and pay royalties on net sales of the product. Medicis also recorded $788,000 in research and development expenses related to this development, commercialization and license agreement. Medicis will continue to look for opportunities such as the Corixa collaboration to enhance its research and development pipeline. The Company records expenses for up front, non-refundable research and development payments in the period they are paid given that there is no recourse provision against Corixa for failing to continue to move the product toward commercialization. The timing of these payments will vary depending upon collaboration opportunities available to the Company. Due to the uncertainty of when these opportunities may be available, Medicis cannot determine which quarter these future payments will be made.

5.

EARNINGS PER SHARE

The following table sets forth all computations of basic and diluted earnings per share:

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Options to purchase 1,957 shares of common stock at $61.50 were outstanding at September 30, 2000, 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.

6.

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 to the best of the Company’s belief based on estimates, either covered by insurance and/or established reserves or, in the opinion of management and 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 and its subsidiaries.

7.

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, 2000 and June 30, 2000, consisted of the following:

8.

INCOME TAXES

		Income taxes have been provided for using the liability method in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes.” The provision for income taxes 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 upon estimated tax expenses for the year.
		At September 30, 2000, 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 $5.8 million increase to equity with a corresponding $5.8 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 actions of the option holder or shareholder. At September 30, 2000, the Company estimates the effective tax rate for fiscal 2001 to be between 35% and 36%.

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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, 2000 (the “2000 Form 10-K”).
		This quarterly report on Form 10-Q (“Form 10-Q”) contains forward-looking statements that anticipate results based upon management’s plans that are subject to uncertainties. Forward-looking statements are based upon current expectations of future results. These statements may be identified by use of the words “expects,” “plans,” “anticipates,” “believes,” “estimates” and similar words used in conjunction with discussions of future operations or financial performance. The Company cannot ensure that any forward-looking statements will be accurate. Actual results could differ materially if underlying assumptions prove inaccurate or unknown risks or uncertainties develop. The Company assumes no obligation to update forward-looking statements as a result of future events or developments.
		In Item 1 of the 2000 Form 10-K, as well as in this Form 10-Q, the Company discusses in more detail various factors that could cause actual results to vary from expectations. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. Investors should understand that it is not possible to predict or identify all such factors and should not consider such factors to be a complete statement of all potential risks and uncertainties that may affect the Company’s business.
		Overview
		Medicis is a specialty pharmaceutical company and the leading independent pharmaceutical company in the United States focusing primarily on the treatment of dermatological conditions. The Company offers prescription products and an over-the-counter (“OTC”) product, emphasizing the clinical effectiveness, quality, affordability and cosmetic elegance of its products. Medicis develops and markets leading products for major segments within dermatology, including acne, rosacea, antifungals, eczema, hyperpigmentation, pediculosis (head lice), psoriasis, seborrheic dermatitis, and cosmesis (improvement in the texture and appearance of skin). Medicis has built its business by successfully executing a four-part growth strategy. The Company’s growth strategy includes: (1) expanding sales of existing brands; (2) launching new products from intensive research and development efforts; (3) acquiring complementary stragetic products, businesses and technologies; and (4) collaborating with other companies.
		The Company’s primary products include the prescription brands DYNACIN(R) (minocycline HC1), TRIAZ(R) (benzoyl peroxide), LOPROX(R) (ciclopirox), LUSTRA(R) and LUSTRA-AF(TM) (hydroquinone), OVIDE(R) (malathion), PLEXION(TM) (sodium sulfacetamide/sulfur), LIDEX(R) (fluocinonide), SYNALAR(R) (fluocinolone acetonide), TOPICORT(R) (desoximetasone), BUPHENYL(TM) (sodium phenylbutyrate), a prescription

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		product indicated in the treatment of Urea Cycle Disorder, and the over-the-counter brand ESOTERICA(R).
		The Company derives a majority of its revenue from sales of its DYNACIN(R), TRIAZ(R), LIDEX(R), LOPROX(R), LUSTRA(R), LUSTRA-AF™ and TOPICORT(R) products (the Key Products”). The Company believes that sales of the Key Products will constitute the majority of net revenues for the foreseeable future. Accordingly, any factor adversely affecting the sale of the Key Products, individually or collectively, could 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 the Key Products could also be adversely affected 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; regulatory action by the FDA; changes in the prescribing practices of dermatologists; changes in the reimbursement policies of third-party payors; product liability claims; the outcome of disputes relating to trademarks, patents and other rights; 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 the acquisition and integration of businesses; the introduction of new products by the Company or its competitors; cost increases from third-party manufacturers; manufacturing and 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; the outcome of disputes relating to trademarks, patents and other rights; general economic and industry conditions that affect customer demand; and the Company’s level of research and development activities. 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 upon anticipated sales levels, and a high percentage of the Company’s operating expenses are relatively fixed in the short term. Consequently, variations in the timing of revenue recognition 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.
		Medicis recognizes revenues from sales upon shipment to its customers. At the time of sale, the Company records reserves for returns based upon 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.
		All research and development costs, including payments related to products under development and research consulting agreements, are expensed as incurred. The Company

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		may continue to make up front, non-refundable payments to third parties for research and development work which has been completed. Medicis, upon regulatory approval or commercialization of the product under development, may obtain the marketing rights. These up-front payments may be expensed at the time of payment depending on the nature of the payment made.
		The Company’s customers include the nation’s leading wholesale pharmaceutical distributors, such as McKesson HBOC, Inc. (“McKesson”); Bergen Brunswig Corporation (“Bergen Brunswig”); Cardinal Health, Inc. (“Cardinal”); Bindley Western Industries, Inc. (“Bindley”); Quality King Distributors Inc. (“Quality King”) and other major drug chains. During fiscal 2000, Cardinal, McKesson, Quality King and Bergen Brunswig accounted for 21.0%, 18.1%, 11.3% and 10.2%, respectively, of the Company’s sales. During fiscal 1999, McKesson and Cardinal accounted for 18.0% and 14.1%, respectively, of the Company’s sales. During fiscal 1998, McKesson, Bergen Brunswig and Cardinal, accounted for 16.9%, 13.2% and 12.6%, respectively, of the Company’s sales. The loss of any of these customers accounts could have a material adverse effect upon the Company’s business, financial condition or results of operations.
		The Company plans to spend substantial amounts of capital to continue the acquisition of and the research and development of pharmaceutical products. Actual expenditures will depend upon 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. The Company may increase total expenditures for research and development and expects that research and development expenditures as a percentage of net revenues will fluctuate from period to period. The company periodically makes up front, non-refundable payments to third parties for research and development work which has been completed. If there is no recourse provision against the third party for their failure to perform future services to earn such amounts paid, these up-front payments are expensed at the time of payment. Payments made for product rights whereby the product has received regulatory approval for sale are capitalized and amortized over the expected revenue producing period. The Company can give no assurance that the research and development projects or payments 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 products, companies or technologies to leverage its existing distribution channels and marketing infrastructure, to provide additional opportunities for growth, and to aggressively market formulations of existing products. The Company is also seeking licensing opportunities. The Company can give no assurance that opportunities will be available on terms acceptable to the Company, if at all.
		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 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

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		Company will be able to obtain adequate supplies of such products in a timely fashion, on acceptable terms, or at all.
		The success of the Company’s efforts is subject to a number of risks and uncertainties, including: dependence on sales of the Key Products; integration of new product acquisitions; risks associated with the GenDerm Corporation and subsidiaries (“GenDerm”) acquisition; reliance upon third-party manufacturers to produce certain Key Products; the ability to effectively manage a changing business; uncertainties related to pharmaceutical pricing and reimbursement; and the uncertainty of competitive forces within the pharmaceutical industry that affects both the market for its product, and the availability of product lines for acquisitions that meet the Company’s acquisition or licensing 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.
		Results of Operations
		The following table sets forth certain data, as a percentage of net revenues, for the periods indicated.

		Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999
		Net Revenue
		Net revenue for the three months ended September 30, 2000 (the “first quarter of fiscal 2001”) increased 27.2%, or $8.7 million, to $40.3 million from $31.6 million for the three months ended September 30, 1999 (the “first quarter of fiscal 2000”). The Company’s net revenue increased in the first quarter of fiscal 2000 primarily as a result of increased prescription volumes of the Company’s core growth brands, DYNACIN(R), LOPROX(R), LUSTRA(R), TRIAZ(R) and OVIDE(R). The aggregate prescription growth of the Company’s core growth brands increased approximately 52% as compared to the first quarter of the prior fiscal year. Additionally, PLEXION(TM), a novel prescription rosacea cleanser, was launched by the Company in the first quarter of fiscal 2001. The first quarter of fiscal 2000 did not include sales of PLEXION(TM).

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		Gross Profit
		Gross profit during the first quarter of fiscal 2001 increased 26.7%, or $6.9 million, to $32.8 million from $25.9 million in the first quarter of fiscal 2000. As a percentage of net revenue, gross profit was 81.4% and 81.7% in the first quarter of fiscal 2001 and 2000, respectively.
		Selling, General and Administrative Expenses
		Selling, general and administrative expenses in the first quarter of fiscal 2001 increased 52.5%, or $5.2 million, to $15.1 million from $9.9 million in the first quarter of fiscal 2000. This change is primarily due to an increase in promotional spending relating to the launch of PLEXION(TM) in the first quarter of fiscal 2001 and continued promotion of the Company’s existing products. The change is also due to variable costs commensurate with increased sales volume and increased personnel costs associated with the hiring of additional full-time equivalent employees, primarily performing sales and marketing functions, and cost-of-living salary adjustments.
		Selling, general and administrative costs, as a percentage of net revenue, increased approximately six percentage points in the first quarter of fiscal 2001 relative to the first quarter of fiscal 2000. This increase was primarily due to an increase in promotional spending and an increase in personnel costs.
		Research and Development Expenses
		Research and development expenses in the first quarter of fiscal 2001 increased $17.6 million, to $19.2 million from $1.6 million in the first quarter of fiscal 2000. This increase was due to the $17.8 million paid in relation to the collaboration with Corixa Corporation in a novel psoriasis immunotherapeutic product currently under development, offset by the timing of clinical support of the Company’s existing products incurred last year.
		Depreciation and Amortization Expenses
		Depreciation and amortization expenses in the first quarter of fiscal 2000 increased 14.5%, or $0.2 million, to $1.9 million from $1.7 million in the first quarter of fiscal 2000, primarily due to amortization of the intangible assets associated with the Company’s acquisition of a minocycline ANDA in September 1999.
		Operating Income
		Operating income during the first quarter of fiscal 2001 decreased $16.2 million, from operating income of $12.6 million in the first quarter of fiscal 2000 to an operating loss of $3.6 million, primarily due to the research and development expense of $17.8 million related to the Corixa collaboration. Absent this charge, operating income increased $1.6 million, to $14.2 million in the first quarter of fiscal 2001 from $12.6 million in the first quarter of fiscal 2000, primarily due to an increase in sales volume offset by an increase in operating expenses.

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		Interest Income
		Interest income in the first quarter of fiscal 2001 increased 50.3%, or $1.6 million, to $4.8 million from $3.2 million in the first quarter of fiscal 2000, primarily due to higher cash, cash equivalent and short-term investment balances. The increased balances are primarily the result of the Company’s cash flows from operations and proceeds from the exercise of stock options.
		Interest Expense
		Interest expense in the first quarter of fiscal 2001 decreased $278,000 to $452,000 from $730,000 in the first quarter of fiscal 2000, primarily due to a decrease in the imputed interest related to the contract obligation recorded in connection with the acquisition of LOPROX®, TOPICORT® and A/T/S®.
		Income Tax Expense
		Income tax expense during the first quarter of fiscal 2001 decreased $5.3 million, to $285,000, from $5.6 million in the first quarter of fiscal 2000. The provision for income taxes recorded for the first quarter of fiscal 2001 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 upon forecasts of income before taxes for the year. The decrease in income tax expense in the first quarter of fiscal 2001, as compared to the first quarter of fiscal 2000, is primarily due to a decrease in pre-tax income. The decrease in pre-tax income is primarily related to the $17.8 million charge to expenses as a result of the Corixa collaboration, and higher operating expenses offset by increased sales volumes. The decrease in the effective tax rate in the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000, is primarily attributable to the implementation of tax-saving strategies.
		Net Income
		Net income during the first quarter of fiscal 2001 decreased $9.1 million, to $517,000 from $9.6 million in the first quarter of fiscal 2000. The decrease is primarily a result of the $17.8 million research and development expense related to the Corixa collaboration. Absent this tax-effected charge, net income increased 24.4%, or $2.4 million, to $12.0 million from $9.6 million in the first quarter of fiscal 2000. The increase is primarily attributable to an increase in sales volume, an increase in interest income, offset by an increase in operating expenses.
		Liquidity and Capital Resources
		Net cash provided by operating activities for the first quarter of fiscal 2001 decreased $0.9 million, to $9.3 million, from $10.2 million in the first quarter of fiscal 2000. The decrease was primarily attributable to the research and development expense related to the Corixa collaboration, which reduced net income, offset by an income tax receivable collected during the quarter and positive cash flow fluctuations in other balance sheet accounts.

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		Net cash used in investing activities for the first quarter of fiscal 2001 increased $2.4 million, to $12.5 million, from $10.1 million in the first quarter of fiscal 2000. The change was primarily due to proceeds received from the sale of product rights to Bioglan Pharma plc in the first quarter of fiscal 2000, offset by fluctuations of the available-for-sale investments and a change in payments for product rights.
		Net cash provided by financing activities for the first quarter of fiscal 2001 increased $9.8 million, to $10.4 million, from $591,000 in the first quarter of fiscal 2000. The increase is primarily attributable to proceeds received on the exercise of options under the Company’s stock option plans.
		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 on the results of the Company during the first quarter of fiscal 2001.

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Item 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

No. 27.1 Financial Data Schedule

(See Note 5 in the Notes to the Condensed Consolidated Financial Statements incorporated herein for computation of per common share results.)

(b)

During the first quarter of fiscal 2001, the Company filed the following report on Form 8-K:

(i)

Current report on Form 8-K dated August 15, 2000 reporting under item 5 that the Company entered into a Development, Commercialization and License Agreement and Supply Agreement with Corixa Corporation, pursuant to which the Company agreed to enter into a strategic alliance with Corixa.

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.

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