Investor's Business Daily
Drug Maker Goes Where The Big Boys Don't
Monday January 13, 10:38 am ET
By Marilyn Alva
Prescription drugs and creams for acne, head lice and foot fungus aren't at the top of the list for most pharmaceutical companies. The same goes for pediatric medications.
Sales of individual medications in those areas aren't high enough to warrant the same kind of attention big drug companies place on heart drugs and other blockbusters, industry analysts say.
In fact, sales of any one dermatology drug rarely exceed $200 million a year.
Medicis Pharmaceutical Corp. (NYSE:MRX - News) likes it that way, since it specializes in the two under-the-radar drug segments.
"(Dermatology and pediatric drugs) are crumbs to the big pharmas, but they are a feast for Medicis," said David Steinberg, analyst with Deutsche Bank Securities. "Medicis has capitalized on niche opportunities as big pharma players move on to multibillion dollar drugs."
The company has built a solid reputation in dermatology with eight core products. Its top selling drug, Dynacin, treats acne. Its second biggest, Loprox, is an anti-fungal agent.
Medicis' 2001 acquisition of Ascent Pediatrics Inc. moved it into the pediatric segment with Orapred, a liquid steroid for asthma. The $60 million purchase proved a good fit. Ascent's 75 sales reps help cross-sell dermatology products to pediatricians.
Pediatric sales generate 23% of Medicis' revenue. Company officials would like to see it hit 50%.
"It would require some new product introductions," said Chief Executive Jonah Shacknai.
He says total sales of all drugs in the combined two markets add up to more than $10 billion a year.
Compared with the drug industry's multibillion dollar behemoths, Medicis looks like a small spot on the surface.
Its revenue totaled only $213 million in fiscal 2002, which ended in June. Officials expect that number to hit $244.7 million this fiscal year.
Still, Medicis is one of the top players in the field of dermatology, Shacknai says. The firm has tried to muscle its way to the top by growing its sales force, spending more on research and development and buying new products and technologies.
Something's working. Medicis posted $58.5 million in first-quarter sales, up 28% from the prior year. Prescription volumes for its eight core brands gained 49%, while new prescriptions grew 69%. Earnings were up 23% to 54 cents a share.
Medicis has met or topped earnings expectations 35 straight quarters, says analyst Donald Ellis of Thomas Weisel Partners.
"For a long period of time, (this company) has underpromised and overperformed," he said.
Analysts polled by First Call expect Medicis' full-year earnings to rise 15% to $2.25 a share.
To help it achieve its growth goals, company execs pledge to introduce at least one new product a year.
CEO Shacknai says 12 products are in various stages of development, including some that are awaiting approval from the Food and Drug Administration.
Drugs in the pipeline address both dermatology and pediatric markets. That's about all Medicis officials are willing to say. Unlike other drug firms, it keeps a lid on details.
"We anticipate from our current portfolio that product launches will take us out past 2006," Shacknai said.
One product outside the official pipeline - and the least certain to hit the market - is a psoriasis drug in development with partner Corixa Corp.
In late spring, results of a phase two clinical trial should show whether the drug, named PVAC, works well enough to advance further in the regulatory process, Shacknai says.
With nearly $600 million in cash, Medicis has plenty of money on hand to make acquisitions, analysts note. Perhaps too much.
"They have a very large cash horde relative to their ($1.4 billion) capitalization," Steinberg said. "So they have about $21 a share in cash, which is unusual. The wild card is when will they use it and how will they use it? We just don't know."
Shacknai says the company could conceivably use the cash to acquire companies, product licenses and new technologies. But he seems to be in no hurry.
"We are not the sort of company to make stupid acquisitions because there is money burning a hole in our pocket," he said. "We have the discipline to resist short-term opportunities that will not contribute on a long-term basis to our franchise."
Although it has bought several products and technologies, Medicis has acquired just two companies in 14 years.
Some of the cash could be used to buy back shares, Shacknai says. Medicis has done that in the past and has authorization to purchase $75 million in stock.
Another wild card is the threat of generic drugs taking business away from Medicis' brand-name medicines, Steinberg says.
The molecule behind Loprox went off patent last year, so the drug could meet up with copycat rivals. None have shown up, perhaps because government hurdles are tougher for topical drugs than for pills, Steinberg says.
Medicis still has patent protection on a Loprox gel. It also has patents pending for other Loprox-related lines.
As Shacknai points out, generics didn't do a lot of damage to Dynacin.
"Dynacin became the leading brand in the category despite vast generic competition, as many as 10 at one point," he said.
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