FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)
Medicis Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDRX)") else Response.Write("(Nasdaq: MDRX)") end if %>
4343 East Camelback
Suite 250
Phoenix, AZ 85018-2700
(602) 808-8800
http://www.medicis.com

UNION CITY, Ca., January 19, 1997/FOOLWIRE/ --- Medicis Pharmaceutical released their Q2 fiscal 1997 results last Tuesday after the market close. They had a 32% increase in revenues, a 21% increase in sales attributed to their market-leading Dynacin brand, and a 101% increase in sales attributable to Triaz (which celebrated it's one year anniversary in the market during the quarter). Medicis is proud of the results they've had and see them as part of an important progression toward becoming the nation's premier dermatology concern.

GROSS MARGIN EXPANSION. Of great significance financially are their gross profit margins and they are pleased to continue a trend of increasing their gross profit margin up to 74%, which is an increase of 1%. They think that reflects the increasing emphasis of Triaz in their revenue base and they would obviously hope for that to move forward in the future.

TRIAZ SHARE EXPANDING. Triaz is gaining share relative to its competitors and it made some very important strides in that regard in the second quarter, but Medicis has also noticed a market expansion. The absolute number of prescriptions written in the category has increased. They suspect that they, as well as several other companies that have launched anti-acne products within the last six months are partly behind the growth in the category.

DYNACIN GROWTH. They have not had a price increase, so what increases there are in sales are attributable to new or greater numbers of prescriptions. They continue to see a number of physicians make conversion within their practices from Mynacin or other products to Dynacin, so the number of practices actively prescribing Dynacin continues to increase. Dynacin has between 50-60% share of its market.

OPERATING INCOME AND R&D EXPENSES. Of their total revenue number, 27% dropped down to operating income. This too is an uptrend that they are very pleased about. They also had an increase in their spending against R&D, with about a 5.3% level of expenditure relative to revenues. They see this as being relatively constant going forward as they move forward with certain R&D projects.

LIQUIDITY. From a balance sheet point of view, the company enjoys a strong cash position with well over $100 million in cash and short-term investments. They have no debt or liabilities to speak of. Receivables were approximately $4.8 million. Inventory was approximately $1.4 million.

NEW CLINICAL TRIALS FOR TRIAZ. They were pleased that so much research support has been generated for their products. During this quarter they completed a clinical trial showing the differences in antimicrobial effect between their Triaz brand, the market-leading product from Pharmacia and Upjohn, and an Allergan product. The trial dramatically favored Triaz as having a profoundly greater antimicrobial effect than the other agents, as much as a 10 to 20-fold greater effect. They spoke last quarter about comparative information on performance between Triaz and Benzomycin (the #2 topical agent in their category) and they are pleased to be doing more research in that area as well.

NEW RESEARCH RESULTS FOR DYNACIN. This quarter, information became available through publication in the Journal of Dermatologic Therapeutics that compared the effects of Medicis' market-leading Dynacin brand against Tetracycline and Doxacycline which, although relatively unimportant in dollars, represent the majority of units in the anti-acne market. They were heartened to note that there was a dramatically greater effect at all measurement points favoring Dynacin over these two other modalities -- at a 3-week period, at a 6-week period, and with the residual effect 3 weeks after therapy that for Dynacin was actually equal to the peak effect of the other agents after six weeks of continuous dosing.

CLINICAL TRIALS SHOWING THE EFFECTIVENESS OF DYNACIN AND TRIAZ USED IN COMBINATION. They have spoken now at two investment conferences about the important effect of the combined use of Dynacin and Triaz. Again, in a study that was conducted at the University of Pennsylvania, they saw that the effect of these two agents resulted in almost a complete sterilization of the pilosebaceous unit where the microorganism p.acnes is found. So, they went at baseline in this study from a p.acnes count per centimeter squared on the skin of these patients from about 1.2 million to under 100 organisms at a 6-week period. This is a very dramatic finding, many believe among the most dramatic that have ever been produced in the clinic in controlled circumstances.

R&D EFFORTS. They are very excited about the R&D program in support of their existing brands and as they look forward they are very excited about the prospect of introducing new brands in the future that would be responsive to the needs of patients in their areas of emphasis. Obviously acne is a principal area of emphasis and interest and inflammatory skin diseases are another area of interest, including conditions like psoriasis, excema, and dermatitis. They have talked about the importance of cosmetic dermatology as a market sector and they feel strongly that their research and development has advanced significantly in that area.

PRODUCT ACQUISITION. Finally, they look to the possibility of product acquisitions, of deploying the very strong capital position they have against opportunities that may be available through the divestiture of existing brands from large, multi-national firms or from the acquisition of businesses from smaller firms that may wish to obtain liquidity for their owners or achieve a business combination. They certainly think there are good things to be looking at. They think Medicis has emerged as the buyer of choice for those companies with brands in this category that they may be interested in divesting because larger companies recognize that Medicis is today the largest independent dermatology concern and they recognize that with well over $100 million in the bank in cash and short-term investments, Medicis has the liquidity necessary to close a transaction rapidly. As far as criteria, they have established a 74% gross profit margin and want to expand that, so that sets a threshold for profitability for new product acquisitions. Also, they want products to complement their existing product line. They have a number of very successful brands and do not want to cannibalize those brands, they want to enhance their strength.

FOCUS GOING FORWARD. As they finish the second quarter and move into the third quarter, their enthusiasm for the business is heightened. They feel they are very much on their trajectory to becoming the nation's most important and leading dermatology concern. There is a great deal of work to be done ahead of them. There is a lot of market share that can still be gained for their existing brands. There are new products to introduce. There are acquisitions to consider to the extent that they meet Medicis' investment criteria of high margins, compatibility with the rest of their product line, and consistency with the kind of image they try to develop in dermatology.

WHAT'S OUT THERE IN TERMS OF ACQUSITION PROSPECTS. When asked to talk more about the quality of products available for acquisition, the company responded that as alluring as the $5 billion dermatology market is to them, it is lacking allure to a number of major multi-national companies who really have much higher economic thresholds of interest. The most successful products in this category are typically doing well under $50 million per year in annual revenue and that is just a negligible amount to a large multi-national concern. That accounts for whatever motivation those companies may feel to sell products. Obviously their determination to divest something represents an assessment of what they might gain by selling it in prestige customer service versus the financial model of essentially milking the brands themselves and enjoying profits on admittedly diminishing revenue levels. There are good things out there. Medicis believes themselves to be the buyer of choice not because they are an imprudent buyer, but quite the opposite, because they are a motivated buyer of high gross profit margin products that have a strong story of efficacy and safety that is flattering to their franchise and fit into therapeutic categories of interest to the company. They are viewed as a sophisticated buyer because they do understand the markets and are able to make evaluations on the basis of information and experience rather than conjecture and because they are sophisticated enough to negotiate transactions in a sensible financial way.

FUTURE REVENUE/EARNINGS GROWTH. The company was asked about future growth and responded that they certainly have seen important progression quarter-to-quarter as their brands become more mature and better penetrate the market. Certainly to the extent that they would expect to introduce a new product in the second half of fiscal 1997, consistent with their objective of introducing at least one new product in each fiscal year, they think that expecting further fiscal growth along these lines is reasonable.

TAX SITUATION. They have not yet fully used up their net operating loss carryforward. At the end of last year, they had about $26 million in net operating loss carryforwards. They have used up the net income amount of that. They have left a credit against future taxes payable of a little over $5 million. There is still room in the future for the company to make an assessment at a point in time to take a future tax benefit. The reason why they took it in the last quarter was the fact that there was a significant event.

SALES FORCE. They continue to operate with approximately 30 members of their field organization. They have made no secret of their intention to expand the size of that organization incrementally and they are certainly in the process of doing that. In other contexts, when they occur, they would be happy to talk about expansion on an historical basis. They are keeping recruiters busy in several sectors of the country where they feel that the addition of territory managers to their already very successful sales organization would enhance the revenue base of their products and therefore their profitability. It will be important from a sales point of view, but the impact on SG&A will probably be inconsequential.

OVERSEAS SALES. Medicis continues to have discussions with companies that have interest in either marketing or manufacturing Medicis products in foreign territories. This has been an area of a little disappointment, not reflecting the enthusiasm of potential partners, but reflecting the fact that they have been extremely focused and busy worrying about the domestic market and, if anything, whatever failure to progress as rapidly as they would like has occured is probably their responsibility. They are in the middle of doing a number of very exciting things at the headquarters, they spend a lot of time in the field, and that has been their highest priority.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.