UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from                      to                     

MEDICIS PHARMACEUTICAL CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware		52-1574808
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7720 North Dobson Road
Scottsdale, Arizona 85256-2740
(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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

	Class			Shares Outstanding at November 3, 2008
	Class A Common Stock $.014 Par Value			56,717,496

 

 

MEDICIS PHARMACEUTICAL CORPORATION

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007			5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007			6
Notes to the Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3 Quantitative and Qualitative Disclosures About Market Risk			55
Item 4 Controls and Procedures			55
PART II. OTHER INFORMATION
Item 1 Legal Proceedings			57
Item 1A Risk Factors			59
Item 6 Exhibits			62
SIGNATURES			63
EX-31.1
EX-31.2
EX-32.1

Part I. Financial Information

Item 1. Financial Statements

MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

		September 30, 2008				December 31, 2007
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	59,021			$	108,046
Short-term investments			248,124				686,634
Accounts receivable, net			48,011				22,205
Inventories, net			25,433				29,973
Deferred tax assets, net			44,992				9,190
Other current assets			21,050				18,049
Total current assets			446,631				874,097
Property and equipment, net			26,214				13,850
Intangible assets:
Intangible assets related to product line acquisitions and business combinations			265,573				258,873
Other intangible assets			10,141				6,695
			275,714				265,568
Less: accumulated amortization			108,686				92,482
Net intangible assets			167,028				173,086
Goodwill			156,774				63,107
Deferred tax assets, net			74,513				59,577
Long-term investments			93,422				17,072
Other assets			6,532				12,622
		$	971,114			$	1,213,411

See accompanying notes to condensed consolidated financial statements.

MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

		September 30, 2008				December 31, 2007
		(unaudited)
Liabilities
Current liabilities:
Accounts payable		$	48,236			$	34,891
Current portion of contingent convertible senior notes			181				283,910
Reserve for sales returns			59,295				68,787
Income taxes payable			—				7,731
Other current liabilities			71,674				55,807
Total current liabilities			179,386				451,126
Long-term liabilities:
Contingent convertible senior notes			169,145				169,145
Deferred revenue			4,792				6,667
Other liabilities			10,896				3,172
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: 150,000,000; issued and outstanding: 69,395,894 and 69,005,019 at September 30, 2008 and December 31, 2007, respectively			969				965
Class B common stock, $0.014 par value; shares authorized: 1,000,000; no shares issued			—				—
Additional paid-in capital			658,645				641,907
Accumulated other comprehensive (loss) income			(2,543	)			2,221
Accumulated earnings			293,190				281,218
Less: Treasury stock, 12,678,398 and 12,656,503 shares at cost at September 30, 2008 and December 31, 2007, respectively			(343,366	)			(343,010	)
Total stockholders’ equity			606,895				583,301
		$	971,114			$	1,213,411

See accompanying notes to condensed consolidated financial statements.

MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Restated)								(Restated)
Net product revenues		$	110,574			$	107,093			$	368,668			$	313,659
Net contract revenues			4,851				3,890				13,111				9,595
Net revenues			115,425				110,983				381,779				323,254
Cost of product revenues (1)			10,848				18,583				31,185				45,411
Gross profit			104,577				92,400				350,594				277,843
Operating expenses:
Selling, general and administrative (2)			71,575				58,877				215,509				178,712
Impairment of long-lived assets			—				—				—				4,067
Research and development (3)			7,143				7,354				49,333				22,508
In-process research and development			30,500				—				30,500				—
Depreciation and amortization			7,078				6,461				20,579				17,793
Operating (loss) income			(11,719	)			19,708				34,673				54,763
Other expense			(2,593	)			—				(5,465	)			—
Interest and investment income			3,436				9,842				20,086				28,100
Interest expense			(1,059	)			(2,396	)			(5,614	)			(7,622	)
(Loss) income before income tax expense			(11,935	)			27,154				43,680				75,241
Income tax expense			2,722				10,161				24,802				28,027
Net (loss) income		$	(14,657	)		$	16,993			$	18,878			$	47,214
Basic net (loss) income per share		$	(0.26	)		$	0.30			$	0.33			$	0.84
Diluted net (loss) income per share		$	(0.26	)		$	0.26			$	0.33			$	0.73
Cash dividend declared per common share		$	0.04			$	0.03			$	0.12			$	0.09
Basic common shares outstanding			56,698				56,120				56,517				55,896
Diluted common shares outstanding			56,698				71,155				57,358				71,353

(1) amounts exclude amortization of intangible assets related to acquired products		$	5,454			$	5,671			$	16,026			$	15,634
(2) amounts include share-based compensation expense		$	4,019			$	4,744			$	12,949			$	15,646
(3) amounts include share-based compensation expense		$	111			$	(215	)		$	223			$	40

See accompanying notes to condensed consolidated financial statements.

MEDICIS PHARMACEUTICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

(in thousands)

		Nine Months Ended
		September 30, 2008				September 30, 2007
						(Restated)
Operating Activities:
Net income		$	18,878			$	47,214
Adjustments to reconcile net income to net cash provided by operating activities:
In-process research and development			30,500				—
Depreciation and amortization			20,579				17,793
Amortization of deferred financing fees			666				1,249
Impairment of long-lived assets			—				4,067
Loss on disposal of property and equipment			36				19
Charge reducing value of investment in Revance			5,465				—
Gain on sale of available-for-sale investments			(1,021	)			(49	)
Share-based compensation expense			13,172				15,686
Deferred income tax (benefit) expense			(31,994	)			9,328
Tax (expense) benefit from exercise of stock options and vesting of restricted stock awards			(1,276	)			2,664
Excess tax benefits from share-based payment arrangements			(169	)			(1,365	)
Increase (decrease) in provision for sales discounts and chargebacks			1,314				(1,078	)
Amortization of (discount)/premium on investments			(438	)			(2,405	)
Changes in operating assets and liabilities:
Accounts receivable			(26,615	)			35,952
Inventories			5,486				(1,526	)
Other current assets			(2,550	)			262
Accounts payable			12,911				3,030
Reserve for sales returns			(9,492	)			(19,652	)
Income taxes payable			(7,731	)			(3,423	)
Other current liabilities			13,342				9,269
Other liabilities			(338	)			10,503
Net cash provided by operating activities			40,725				127,538
Investing Activities:
Purchase of property and equipment			(9,395	)			(7,195	)
LipoSonix acquisition, net of cash acquired			(149,805	)			—
Payment of direct merger costs			(3,615	)			—
Payments for purchase of product rights			(746	)			(30,090	)
Increase in other assets			(35	)			—
Purchase of available-for-sale investments			(329,021	)			(570,463	)
Sale of available-for-sale investments			390,921				173,014
Maturity of available-for-sale investments			297,038				173,396
Net cash provided by (used in) investing activities			195,342				(261,338	)
Financing Activities:
Payment of dividends			(6,295	)			(5,063	)
Payment of contingent convertible senior notes			(283,729	)			(5	)
Excess tax benefits from share-based payment arrangements			169				1,365
Proceeds from the exercise of stock options			4,846				17,052
Net cash (used in) provided by financing activities			(285,009	)			13,349
Effect of exchange rate on cash and cash equivalents			(83	)			713
Net decrease in cash and cash equivalents			(49,025	)			(119,738	)
Cash and cash equivalents at beginning of period			108,046				203,319
Cash and cash equivalents at end of period		$	59,021			$	83,581

See accompanying notes to condensed consolidated financial statements.

MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(unaudited)

1. NATURE OF BUSINESS

          Medicis Pharmaceutical Corporation (“Medicis” or the “Company”) is a leading specialty pharmaceutical company focusing primarily on the development and marketing of products in the United States (“U.S.”) for the treatment of dermatological, aesthetic and podiatric conditions. Medicis also markets products in Canada for the treatment of dermatological and aesthetic conditions.

          The Company offers a broad range of products addressing various conditions or aesthetic improvements including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin). Medicis currently offers 18 branded products. Its primary brands are PERLANE^®, RESTYLANE^®, SOLODYN^®, TRIAZ^®, VANOS^® and ZIANA^®.

          The consolidated financial statements include the accounts of Medicis and its wholly owned subsidiaries. The Company does not have any subsidiaries in which it does not own 100% of the outstanding stock. All of the Company’s subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

          The accompanying interim condensed consolidated financial statements of Medicis have been prepared in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2007. The financial information is unaudited, but reflects all adjustments, consisting only of normal recurring adjustments and 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 information included in this Form 10-Q should be read in conjunction with the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2007.

2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

          On November 10, 2008, the Company restated its financial statements for the annual, transition and quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of 2008 in its amended Form 10-K/A for the year ended December 31, 2007 and its amended Forms 10-Q/A for the quarterly periods ended March 31, 2008 and June 30, 2008. Within this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, the Company has restated its condensed consolidated financial statements for the comparative three and nine month periods ended September 30, 2007 in conjunction with this restatement.

          The restatement primarily relates to an error in the Company’s interpretation and application of Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists (“SFAS 48”), as its applies to a component of the Company’s sales return reserve calculations. During the third quarter of 2008, management determined that its method of accounting for returns of short-dated and expired goods in the periods covered by the financial statements was not in conformity with generally accepted accounting principles, as the returns for expired product did not qualify for warranty or exchange accounting and, accordingly, under SFAS 48, the Company should have deferred the full sales price of the product for the amount of estimated returns.

          The Company’s prior accounting method with respect to sales return reserves accrued estimated future returns of short-dated and expired product, which were expected to be replaced with similar products, at replacement cost, based on the Company’s view of the economic impact of returns on its business, rather than deferring the gross sales price. The replacement of short-dated and expired product,

which was treated as a warranty or an exchange, was reserved for based on the estimated cost associated with the exchange. In the course of the Company’s review and analysis, the Company determined that although the exchanged product was similar, it was not of the same quality, strictly due to dating, as the Company was replacing nearly-expired or expired product with newer, fresher product. Therefore, in accordance with SFAS 48, the Company has revised its reserve calculations to defer the gross sales value of the estimated product returns that were expected to be replaced with similar products. The revised reserve calculations were developed based on conditions that existed at the end of each reporting period and in certain cases were revised based on the Company’s actual return experience. Additionally, because of the impact of the changes in the sales returns reserve, the Company recorded adjustments to certain managed care, Medicaid and consumer rebate accruals and have also reflected the related income tax effects of these adjustments. The Company’s reserve for estimated future returns was previously included as an allowance reducing accounts receivable in the Company’s condensed consolidated balance sheets. As a result of the restatement, the reserve for estimated future returns has been classified within current liabilities, rather than as an allowance reducing accounts receivable, in the accompanying condensed consolidated balance sheets.

          The restated condensed consolidated financial statements include other adjustments, including adjustments related to conforming the Company’s historical accounting policies to current accounting policies, that were previously identified, but not previously recorded, as they were not material, either individually or in the aggregate. While none of these other adjustments is individually material, they are being made as part of the restatement process. These other adjustments include the reclassification of certain amounts in prior year financial statements to conform to the 2007 financial statement presentation, including the reclassification of donated product to charitable organizations from selling, general and administrative expenses to cost of product revenues.

          The following is a summary of the effects of the restatement on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2007 and its condensed consolidated statements of cash flows for the nine months ended September 30, 2007:

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2007
(in thousands, except per share data)

		As
		Previously				Restatement				As
		Reported				Adjustments				Restated
Net product revenues		$	116,532			$	(9,439	)		$	107,093
Net contract revenues			3,890								3,890
Net revenues			120,422				(9,439	)			110,983
Cost of product revenues (1)			17,461				1,122				18,583
Gross profit			102,961				(10,561	)			92,400
Operating expenses:
Selling, general and administrative (2)			60,285				(1,408	)			58,877
Research and development (3)			7,354								7,354
Depreciation and amortization			6,461								6,461
Operating income			28,861				(9,153	)			19,708
Interest and investment income			9,842								9,842
Interest expense			(2,396	)							(2,396	)
Income before income tax			36,307				(9,153	)			27,154
Income tax expense			13,547				(3,386	)			10,161
Net income		$	22,760			$	(5,767	)		$	16,993
Basic net income per share		$	0.41			$	(0.11	)		$	0.30
Diluted net income per share		$	0.34			$	(0.08	)		$	0.26
Cash dividend declared per common share		$	0.03							$	0.03
Basic common shares outstanding			56,120								56,120
Diluted common shares outstanding			71,155								71,155

(1) amount excludes amortization of intangible assets related to acquired products		$	5,671							$	5,671
(2) amount includes share-based compensation expense		$	4,744							$	4,744
(3) amount includes share-based compensation expense		$	(215	)						$	(215	)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2007
(in thousands, except per share data)

		As
		Previously				Restatement				As
		Reported				Adjustments				Restated
Net product revenues		$	314,805			$	(1,146	)		$	313,659
Net contract revenues			9,595								9,595
Net revenues			324,400				(1,146	)			323,254
Cost of product revenues (1)			41,969				3,442				45,411
Gross profit			282,431				(4,588	)			277,843
Operating expenses:
Selling, general and administrative (2)			182,440				(3,728	)			178,712
Impairment of intangible assets			4,067								4,067
Research and development (3)			22,508								22,508
Depreciation and amortization			17,793								17,793
Operating income			55,623				(860	)			54,763
Interest and investment income			28,100								28,100
Interest expense			(7,622	)							(7,622	)
Income before income tax			76,101				(860	)			75,241
Income tax expense			28,530				(503	)			28,027
Net income		$	47,571			$	(357	)		$	47,214
Basic net income per share		$	0.85			$	(0.01	)		$	0.84
Diluted net income per share		$	0.73			$	—			$	0.73
Cash dividend declared per common share		$	0.09							$	0.09
Basic common shares outstanding			55,896								55,896
Diluted common shares outstanding			71,353								71,353

(1) amount excludes amortization of intangible assets related to acquired products		$	15,634							$	15,634
(2) amount includes share-based compensation expense		$	15,646							$	15,646
(3) amount includes share-based compensation expense		$	40							$	40

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2007
(in thousands)

		As
		Previously				Restatement				As
		Reported				Adjustments				Restated
Operating Activities:
Net income		$	47,571			$	(357	)		$	47,214
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			17,793								17,793
Amortization of deferred financing fees			1,249								1,249
Impairment of intangible assets			4,067								4,067
Loss on disposal of property and equipment			19								19
Gain on sale of available-for-sale investments			(49	)							(49	)
Share-based compensation expense			15,686								15,686
Deferred income tax expense			9,732				(404	)			9,328
Tax benefit from exericise of stock options and vesting of restricted stock awards			2,664								2,664
Excess tax benefits from share-based payment arrangements			(1,365	)							(1,365	)
Decrease in provision for sales discounts and chargebacks			(14,877	)			13,799				(1,078	)
Amortization of (discount) premium on investments			(2,405	)							(2,405	)
Changes in operating assets and liabilities:
Accounts receivable			35,952								35,952
Inventories			(1,526	)							(1,526	)
Other current assets			262								262
Accounts payable			3,030								3,030
Reserve for sales returns			—				(19,652	)			(19,652	)
Income taxes payable			(3,325	)			(98	)			(3,423	)
Other current liabilities			2,557				6,712				9,269
Other liabilities			10,503								10,503
Net cash provided by operating activities			127,538				—				127,538
Investing Activities:
Purchase of property and equipment			(7,195	)							(7,195	)
Payments for purchase of product rights			(30,090	)							(30,090	)
Purchase of available-for-sale investments			(570,463	)							(570,463	)
Sale of available-for-sale investments			173,014								173,014
Maturity of available-for-sale investments			173,396								173,396
Net cash used in investing activities			(261,338	)			—				(261,338	)
Financing Activities:
Payment of dividends			(5,063	)							(5,063	)
Payment of contingent convertible senior notes			(5	)							(5	)
Excess tax benefits from share-based payment arrangements			1,365								1,365
Proceeds from the exercise of stock options			17,052								17,052
Net cash provided by financing activities			13,349				—				13,349
Effect of exchange rate on cash and cash equivalents			713								713
Net decrease in cash and cash equivalents			(119,738	)			—				(119,738	)
Cash and cash equivalents at beginning of period			203,319								203,319
Cash and cash equivalents at end of period		$	83,581			$	—			$	83,581

3. SHARE-BASED COMPENSATION

          At September 30, 2008, the Company had seven active share-based employee compensation plans. Of these seven share-based compensation plans, only the 2006 Incentive Award Plan is eligible for the granting of future awards. Stock option awards granted from these plans are granted at the fair market value on the date of grant. The option awards vest over a period determined at the time the options are granted, ranging from one to five years, and generally have a maximum term of ten years. Certain options provide for accelerated vesting if

there is a change in control (as defined in the plans). When options are exercised, new shares of the Company’s Class A common stock are issued. Effective July 1, 2005, the Company adopted SFAS No. 123R using the modified prospective method. Other than restricted stock, no share-based employee compensation cost has been reflected in net income prior to the adoption of SFAS No. 123R.

          The total value of the stock option awards is expensed ratably over the service period of the employees receiving the awards. As of September 30, 2008, total unrecognized compensation cost related to stock option awards, to be recognized as expense subsequent to September 30, 2008, was approximately $8.2 million and the related weighted-average period over which it is expected to be recognized is approximately 1.2 years.

          A summary of stock options activity within the Company’s stock-based compensation plans and changes for the nine months ended September 30, 2008 is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number				Exercise				Contractual				Intrinsic
		of Shares				Price				Term				Value
Balance at December 31, 2007			11,666,955			$	27.99
Granted			127,702			$	22.22
Exercised			(278,492	)		$	15.59
Terminated/expired			(724,458	)		$	31.26
Balance at September 30, 2008			10,791,707			$	28.02				4.0			$	2,482,577

          The intrinsic value of options exercised during the nine months ended September 30, 2008 was $1,914,487. Options exercisable under the Company’s share-based compensation plans at September 30, 2008 were 9,864,369, with a weighted average exercise price of $27.44 a weighted average remaining contractual term of 3.8 years, and an aggregate intrinsic value of $2,482,577.

          A summary of fully vested stock options and stock options expected to vest, based on historical forfeiture rates, as of September 30, 2008, is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number				Exercise				Contractual				Intrinsic
		of Shares				Price				Term				Value
Outstanding			9,907,890			$	28.20				4.0			$	2,040,430
Exercisable			9,042,469			$	27.64				3.9	.		$	2,040,430

          The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

		Nine Months Ended		Nine Months Ended
		September 30, 2008		September 30, 2007
Expected dividend yield		0.6% to 0.7%		0.4%
Expected stock price volatility		0.35 to 0.38		0.35
Risk-free interest rate		3.0% to 3.4%		4.5% to 4.8%
Expected life of options		7 Years		7 Years

          The expected dividend yield is based on expected annual dividends to be paid by the Company as a percentage of the market value of the Company’s stock as of the date of grant. The Company determined that a blend of implied volatility and historical volatility is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. The risk-free interest rate is based on the U.S. treasury security rate in effect as of the date of grant. The expected lives of options are based on historical data of the Company.

          The weighted average fair value of stock options granted during the nine months ended September 30, 2008 and 2007 was $8.90 and $14.98, respectively.

          The Company also grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company’s Class A common stock on the date of grant, and the total value of the award is expensed ratably over the service period of the employees receiving the grants. During the nine months ended September 30, 2008, 827,330 shares of restricted stock were granted to certain employees. Share-based compensation expense related to all restricted stock awards outstanding during the three months and nine months ended September 30, 2008, was approximately $1.7 million and $4.3 million, respectively. Share-based compensation expense related to all restricted stock awards outstanding during the three months and nine months ended September 30, 2007, was approximately $1.0 million and $2.8 million, respectively. As of September 30, 2008, the total amount of unrecognized compensation cost related to non-vested restricted stock awards, to be recognized as expense subsequent to September 30, 2008, was approximately $24.3 million, and the related weighted-average period over which it is expected to be recognized is approximately 3.7 years.

          A summary of restricted stock activity within the Company’s share-based compensation plans and changes for the six months ended September 30, 2008 is as follows:

						Weighted-
						Average
						Grant-Date
Non-vested Shares		Shares				Fair Value
Non-vested at December 31, 2007			552,769			$	31.92
Granted			827,330			$	19.51
Vested			(122,222	)		$	31.57
Forfeited			(50,677	)		$	25.31
Non-vested at September 30, 2008			1,207,200			$	23.73

          The total fair value of restricted shares vested during the nine months ended September 30, 2008 and the nine months ended September 30, 2007 was approximately $3.9 million and $1.3 million, respectively.

4. SHORT-TERM AND LONG-TERM INVESTMENTS

          The Company’s short-term and long-term investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to the Company’s investment guidelines and market conditions. Short-term and long-term investments consist of corporate and various government agency and municipal debt securities. The Company’s investments in auction rate floating securities consist primarily of investments in student loans. Management classifies the Company’s short-term and long-term investments as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses reported in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary, if any, are included in operations. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary, results in an impairment in the fair value of the investment. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. Dividends and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification method. At September 30, 2008, the Company has recorded the estimated fair value in available-for-sale securities for short-term and long-term investments of approximately $248.1 million and $93.4 million, respectively.

          Available-for-sale securities consist of the following at September 30, 2008 (amounts in thousands):

		SEPTEMBER 30, 2008
						Gross				Gross
						Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Corporate notes and bonds		$	97,678			$	94			$	(1,444	)		$	96,328
Federal agency notes and bonds			168,405				461				(170	)			168,696
Auction rate floating securities			44,750				—				(4,825	)			39,925
Asset-backed securities			36,944				48				(395	)			46,597
Commercial paper			—				—				—				—
Total securities		$	347,777			$	603			$	(6,834	)		$	341,546

          During the three months and nine months ended September 30, 2008, the gross realized gains on sales of available-for-sale securities totaled $73,275 and $1,134,731, respectively, while gross losses of $0 and $114,034, respectively, were realized. Such amounts of gains and losses are determined based on the specific identification method. The net adjustment to unrealized losses during the three months and nine months ended September 30, 2008, on available-for-sale securities included in stockholders’ equity totaled $3,387,942 and $4,680,781, respectively. The amortized cost and estimated fair value of the available-for-sale securities at September 30, 2008, by maturity, are shown below (amounts in thousands):

		SEPTEMBER 30, 2008
						Estimated
		Cost				Fair Value
Available-for-sale
Due in one year or less		$	215,575			$	214,765
Due after one year through five years			87,452				86,856
Due after five years through 10 years			—				—
Due after 10 years			44,750				39,925
		$	347,777			$	341,546

          Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations. At September 30, 2008, approximately $93.4 million in estimated fair value expected to mature greater than one year has been classified as long-term investments because these investments are in an unrealized loss position, and it is management’s intent to hold these investments until recovery of fair value, which may be maturity.

          As of September 30, 2008, the Company’s investments included auction rate floating securities with a fair value of $39.9 million. The Company’s auction rate floating securities are debt instruments with a long-term maturity and with an interest rate that is reset in short intervals through auctions. The recent negative conditions in the credit markets have prevented some investors from liquidating their holdings, including their holdings of auction rate floating securities. During the three months ended March 31, 2008, the Company was informed that there was insufficient demand at auction for the auction rate floating securities. As a result, these affected auction rate floating securities are now considered illiquid, and the Company could be required to hold them until they are redeemed by the holder at maturity. The Company may not be able to make the securities liquid until a future auction on these investments is successful. As a result of the lack of liquidity of these investments, the Company recorded unrealized losses of $0.8 million during the three months ended March 31, 2008, $0.5 million during the three months ended June 30, 2008 and $3.5 million during the three months ended September 30, 2008 on its auction rate floating securities in accumulated other comprehensive (loss) income.

          The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2008 (amounts in thousands):

		Less Than 12 Months								Greater Than 12 Months
						Gross								Gross
		Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss
Corporate notes and bonds		$	70,475			$	1,345			$	11,400			$	100
Federal agency notes and bonds			79,365				170				—				—
Auction rate floating securities			39,925				4,825				—				—
Asset-backed securities			12,718				43				2,394				352
Total securities		$	202,483			$	6,383			$	13,794			$	452

          As of September 30, 2008, the Company has concluded that the unrealized losses on its investment securities are temporary in nature.  Available-for-sale securities are reviewed quarterly for possible other-than-temporary impairment.  This review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance and the creditworthiness of the issuer.  The Company believes that the changes in the unrealized losses on the securities were caused by changes in credit spreads and liquidity issues in the marketplace and other-than-temporary impairments do not exist. Additionally, the Company has the intent and ability to hold these investments for the time necessary to recover its cost, which for debt securities may be at maturity.

5. FAIR VALUE MEASUREMENTS

          In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 157 as of January 1, 2008. Although the adoption of SFAS No. 157 did not materially impact the Company’s financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.

          SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

          As of September 30, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis.  These included certain of the Company’s short-term and long-term investments, including investments in auction rate floating securities, and the Company’s investment in Revance Therapeutics, Inc. (“Revance”).

          The Company has invested in auction rate floating securities, which are classified as available-for-sale securities and are reflected at fair value.  However, due to recent events in credit markets, the auction events for some of these instruments held by the Company failed during the three months ended March 31, 2008 (see Note 4).  Therefore, the fair values of these auction rate floating securities are estimated utilizing a discounted cash flow analysis as of September 30, 2008.  These analyses consider, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction.  These investments were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company. Changes to these assumptions in future periods could result in additional declines in fair value of the auction rate floating securities.

          As a result of the temporary declines in fair value for the Company’s auction rate floating securities, which the Company attributes to liquidity issues rather than credit issues, it has recorded an unrealized loss of $4.8 million in accumulated other comprehensive (loss) income.  The majority of the auction rate floating securities held by the Company at September 30, 2008, totaling $39.9 million, were in securities collateralized by student loan portfolios.  These securities were included in long-term investments at September 30, 2008 in the accompanying condensed consolidated balance sheets. As of September 30, 2008, the Company continued to earn interest on virtually all of its auction rate floating securities.  Any future fluctuation in fair value related to these investments that the Company deems to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss) income.  If the Company determines that any future valuation adjustment was other than temporary, it would record a charge to earnings as appropriate.

          The Company estimates changes in the net realizable value of its investment in Revance based on a hypothetical liquidation at book value approach (see Note 8). During the three and nine month periods ended September 30, 2008, the Company reduced the carrying value of its investment in Revance and recorded a related charge to earnings of approximately $2.6 million and $5.5 million, respectively, as a result of a reduction in the estimated net realizable value of the investment using the hypothetical liquidation at book value approach as of September 30, 2008.

          The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS No. 157 at September 30, 2008, were as follows (in thousands):

						Fair Value Measurement at Reporting Date Using
						Quoted				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Sept. 30, 2008				(Level 1)				(Level 2)				(Level 3)
Auction rate floating securities		$	39,925			$	—			$	—			$	39,925
Other available-for-sale securities			301,621				301,621				—				—
Investment in Revance			6,492				—				—				6,492
Total assets measured at fair value		$	348,038			$	301,621			$	—			$	46,417

          Based on market conditions, the Company changed its valuation methodology for auction rate floating securities to a discounted cash flow analysis during the three months ended March 31, 2008.  Accordingly, these securities changed from Level 1 to Level 3 within SFAS No. 157’s hierarchy since the Company’s initial adoption of SFAS No. 157 at January 1, 2008.

          The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157 for the three and nine months ended September 30, 2008 (in thousands):

		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
		Auction Rate				Investment
		Floating				in
		Securities				Revance
Balance at June 30, 2008		$	43,620			$	9,086
Transfers to Level 3			—				—
Total gains (losses) included in earnings			—				(2,594	)
Total gains (losses) included in other comprehensive (loss) income			(3,545	)			—
Purchases and settlements (net)			(150	)			—
Balance at September 30, 2008		$	39,925			$	6,492

		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
		Auction Rate				Investment
		Floating				in
		Securities				Revance
Balance at January 1, 2008		$	—			$	11,957
Transfers to Level 3			101,650				—
Total gains (losses) included in earnings			—				(5,465	)
Total gains (losses) included in other comprehensive (loss) income			(4,825	)			—
Purchases and settlements (net)			(56,900	)			—
Balance at September 30, 2008		$	39,925			$	6,492

6. ACQUISITION OF LIPOSONIX

          On July 1, 2008, the Company, through its wholly-owned subsidiary Donatello, Inc., acquired LipoSonix, Inc. (“LipoSonix”), an independent, privately-held company that employs a staff of approximately 40 scientists, engineers and clinicians located near Seattle, Washington. LipoSonix is a medical device company developing non-invasive body sculpting technology, and recently launched its first product in Europe, where it is being marketed and sold through distributors. The LipoSonix technology is currently not approved for sale or use in the United States.

          Under terms of the transaction, Medicis paid $150 million in cash for all of the outstanding shares of LipoSonix. In addition, Medicis will pay LipoSonix stockholders certain milestone payments up to an additional $150 million upon FDA approval of the LipoSonix technology and if various commercial milestones are achieved on a worldwide basis.

          The following is a summary of the components of the LipoSonix purchase price (in millions):

Cash consideration		$	150.0
Transaction costs			3.6
		$	153.6

          The following is a summary of the estimated fair values of the net assets acquired (in millions):

Current assets		$	2.1
Deferred tax assets, short-term			3.8
Deferred tax assets, long-term			14.9
Property and equipment			0.7
Identifiable intangible assets			9.4
In-process research and development			30.5
Goodwill			93.7
Accounts payable and other current liabilities			(1.5	)
		$	153.6

          The Company believes the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions.

          Identifiable intangible assets of $9.4 million include existing technology of $6.7 million, with an estimated amortizable life of ten years, and trademarks and trade names of $2.7 million, with an estimated indefinite amortizable life.

          The $30.5 million of acquired in-process research and development has been recognized as in-process research and development expense in the Company’s statement of operations during the three months ended September 30, 2008. No tax benefit has been recognized related to this charge.

          The results of operations of LipoSonix are included in the Company’s condensed consolidated financial statements beginning on July 1, 2008.

          Unaudited pro forma financial information for the combined Company, assuming the Company’s acquisition of LipoSonix occurred on January 1, 2007, excluding the in-process research and development charge, is as follows (in millions, except per share data):

		Nine Months Ended				Three Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2007				September 30, 2007
Net revenues		$	382.5			$	111.0			$	323.3
Net income			7.7				14.5				39.4
Diluted net income per share		$	0.13			$	0.22			$	0.62

7. STRATEGIC COLLABORATION

          On June 27, 2008, the Company and a U.S. company entered into a license agreement that provides patent rights for development and commercialization of dermatologic products. Under terms of the agreement, the Company made an initial payment of $2.0 million upon execution of the agreement. In addition, the Company will be required to pay $19.0 million upon successful completion of certain clinical milestones, $15.0 million upon the first commercial sales of the products in the U.S. and $30.0 million upon achievement of certain commercial milestones. The Company will also make royalty payments based on net sales as defined in the license. The $2.0 million payment was recognized as a charge to research and development expense during the three months ended June 30, 2008.

8. INVESTMENT IN REVANCE

          On December 11, 2007, the Company announced a strategic collaboration with Revance, a privately-held, venture-backed development-stage entity, whereby the Company made an equity investment in Revance and purchased an option to acquire Revance or to license exclusively in North America Revance’s novel topical botulinum toxin type A product currently under clinical development. The consideration to be paid to Revance upon the Company’s exercise of the option will be at an amount that will approximate the then fair value of Revance or the license of the product under development, as determined by an independent appraisal. The option period will extend through the end of Phase 2 testing

in the United States. In consideration for the Company’s $20.0 million payment, the Company received preferred stock representing an approximate 13.7 percent ownership in Revance, or approximately 11.7 percent on a fully diluted basis, and the option to acquire Revance or to license the product under development. The $20.0 million is expected to be used by Revance primarily for the development of the product. $12.0 million of the $20.0 million payment represents the fair value of the investment in Revance at the time of the investment and is included in other long-term assets in the Company’s condensed consolidated balance sheets as of December 31, 2007. The remaining $8.0 million, which is non-refundable and is expected to be utilized in the development of the new product, represents the residual value of the option to acquire Revance or to license the product under development and was recognized as research and development expense during the three months ended December 31, 2007.

          Prior to the exercise of the option, Revance will remain primarily responsible for the worldwide development of Revance’s topical botulinum toxin type A product in consultation with the Company in North America. The Company will assume primary responsibility for the development of the product should consummation of either a merger or a license for topically delivered botulinum toxin type A in North America be completed under the terms of the option. Revance will have sole responsibility for manufacturing the development product and manufacturing the product during commercialization worldwide. The Company’s right to exercise the option is triggered upon Revance’s successful completion of certain regulatory milestones through the end of Phase 2 testing in the United States. A license would contain a payment upon exercise of the license option, milestone payments related to clinical, regulatory and commercial achievements, and royalties based on sales defined in the license. If the Company elects to exercise the option, the financial terms for the acquisition or license will be determined through an independent valuation in accordance with specified methodologies.

          The Company estimates the impairment and/or the net realizable value of the investment based on a hypothetical liquidation at book value approach as of the reporting date, unless a quantitative valuation metric is available for these purposes (such as the completion of an equity financing by Revance). The amount of the Company’s investment that will be expensed periodically is uncertain due to the timing of Revance’s expenditures for research and development of the product, and any charges will not be immediately, if ever, deductible for income tax purposes and will increase the Company’s effective tax rate. Further equity investments, if any, will also be subject to the same accounting treatment as the Company’s original equity investment. During the three and nine month periods ended September 30, 2008, the Company reduced the carrying value of its investment in Revance and recorded a related charge to earnings of approximately $2.6 million and $5.5 million, respectively, as a result of a reduction in the estimated net realizable value of the investment using the hypothetical liquidation at book value approach as of September 30, 2008.

          A business entity is subject to the consolidation rules of FASB Interpretation No. 46, Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”) and is referred to as a variable interest entity if it lacks sufficient equity to finance its activities without additional financial support from other parties or its equity holders lack adequate decision making ability based on criteria set forth in FIN 46. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which a company has a significant variable interest. The Company has determined that Revance is a variable interest entity and that the Company is not the primary beneficiary, and therefore the Company’s equity investment in Revance currently does not require the Company to consolidate Revance into its financial statements. The consolidation status could change in the future, however, depending on changes in the Company’s relationship with Revance.

9. DEVELOPMENT AND DISTRIBUTION AGREEMENT WITH IPSEN FOR RIGHTS TO IPSEN’S BOTULINUM TOXIN TYPE
    A PRODUCT KNOWN AS RELOXIN^®

          On March 17, 2006, the Company entered into a development and distribution agreement with Ipsen Ltd., a wholly-owned subsidiary of Ipsen, S.A. (“Ipsen”), whereby Ipsen granted Aesthetica Ltd., a wholly-owned subsidiary of Medicis, rights to develop, distribute and commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan for aesthetic use by physicians. The product is commonly referred to as RELOXIN^® in the U.S. aesthetic market and DYSPORT^® in medical and

aesthetic markets outside the U.S. The product is not currently approved for use in the U.S., Canada or Japan.

          In May 2008, the FDA accepted the filing of Ipsen’s Biologics License Application for RELOXIN^®, and in accordance with the agreement, Medicis paid Ipsen $25.0 million during the three months ended June 30, 2008 upon achievement of this milestone. The $25.0 million was recognized as a charge to research and development expense during the three months ended June 30, 2008.

          Medicis will pay an additional $1.5 million upon the successful completion of a regulatory milestone, $75.0 million upon the product’s approval by the FDA and $2.0 million upon regulatory approval of the product in Japan. Ipsen will manufacture and provide the product to Medicis for the term of the agreement, which extends to December 2036. Ipsen will receive a royalty based on sales and a supply price, the total of which is equivalent to approximately 30% of net sales as defined under the agreement. Under the terms of the agreement, Medicis is responsible for all remaining research and development costs associated with obtaining the product’s approval in the U.S., Canada and Japan.

10. IMPAIRMENT OF LONG-LIVED ASSETS

          The Company assesses the potential impairment of long-lived assets on a periodic basis and when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant under-performance of a product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the Company’s use of the assets. Recoverability of assets that will continue to be used in the Company’s operations is measured by comparing the carrying amount of the asset grouping to the Company’s estimate of the related total future net cash flows. If an asset carrying value is not recoverable through the related cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset grouping’s carrying amount and its fair value, based on the best information available, including market prices or discounted cash flow analysis. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss through a charge to operating results to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. When it is determined that the useful life of assets are shorter than originally estimated, and there are sufficient cash flows to support the carrying value of the assets, the Company will accelerate the rate of amortization charges in order to fully amortize the assets over their new shorter useful lives.

          During the quarter ended June 30, 2007, an intangible asset related to OMNICEF^® was determined to be impaired based on the Company’s analysis of the intangible asset’s carrying value and projected future cash flows. As a result of the impairment analysis, the Company recorded a write-down of approximately $4.1 million related to this intangible asset.

          Factors affecting the future cash flows of the OMNICEF^® intangible asset included an early termination letter received during May 2007 from Abbott Laboratories, Inc. (“Abbott”), which, in accordance with the Company’s agreement with Abbott, transitions the Company’s co-promotion agreement into a two-year residual period, and competitive pressures in the marketplace, including generic competition.

          In addition, as a result of the impairment analysis, the remaining amortizable life of the intangible asset related to OMNICEF^® was reduced to two years. The intangible asset related to OMNICEF^® will become fully amortized by June 30, 2009. The net impact on amortization expense as a result of the write-down of the carrying value of the intangible asset and the reduction of its amortizable life is a decrease in quarterly amortization expense of approximately $126,000.

11. SEGMENT AND PRODUCT INFORMATION

          The Company operates in one significant business segment: pharmaceuticals. The Company’s current pharmaceutical franchises are divided between the dermatological and non-dermatological fields. The dermatological field represents products for the treatment of acne and acne-related dermatological conditions and non-acne dermatological conditions. The non-dermatological field represents products for

the treatment of urea cycle disorder and contract revenue. The acne and acne-related dermatological product lines include DYNACIN^®, PLEXION^®, SOLODYN^®, TRIAZ^® and ZIANA^®. The non-acne dermatological product lines include LOPROX^®, PERLANE^®, RESTYLANE^® and VANOS^®. The non-dermatological product lines include AMMONUL^® and BUPHENYL^®. The non-dermatological field also includes contract revenues associated with licensing agreements and authorized generics.

          The Company’s pharmaceutical products, with the exception of AMMONUL^® and BUPHENYL^®, are promoted to dermatologists, podiatrists and plastic surgeons. Such products are often prescribed by physicians outside these three specialties; including family practitioners, general practitioners, primary-care physicians and OB/GYNs, as well as hospitals, government agencies and others. Currently, all products are sold primarily to wholesalers and retail chain drug stores.

          Net revenues and the percentage of net revenues for each of the product categories are as follows (amounts in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Restated)								(Restated)
Acne and acne-related dermatological products		$	66,289			$	56,180			$	232,806			$	166,003
Non-acne dermatological products			34,080				43,778				113,695				130,085
Non-dermatological products			15,056				11,024				35,278				27,166
Total net revenues		$	115,425			$	110,982			$	381,779			$	323,254

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Restated)								(Restated)
Acne and acne-related dermatological products			57	%			51	%			61	%			52	%
Non-acne dermatological products			30				39				30				40
Non-dermatological products			13				10				9				8
Total net revenues			100	%			100	%			100	%			100	%

12. 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 distribution and sale. Inventories consist of salable products held at the Company’s warehouses, as well as raw materials and components at the manufacturers’ facilities, and are valued at the lower of cost or market using the first-in, first-out method. The Company provides valuation reserves for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

          Inventory costs associated with products that have not yet received regulatory approval are capitalized if, in the view of the Company’s management, there is probable future commercial use and future economic benefit. If future commercial use and future economic benefit are not considered probable, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. As of September 30, 2008, there was approximately $0.6 million of costs capitalized into inventory for products that have not yet received regulatory approval. As of December 31, 2007, there were no costs capitalized into inventory for products that have not yet received regulatory approval.

          Inventories consist of the following at September 30, 2008 and December 31, 2007 (amounts in thousands):

		September 30, 2008				December 31, 2007
Raw materials		$	7,637			$	9,002
Finished goods			18,981				24,789
Valuation reserve			(1,185	)			(3,818	)
Total inventories		$	25,433			$	29,973

13. CONTINGENT CONVERTIBLE SENIOR NOTES

          In June 2002, the Company sold $400.0 million aggregate principal amount of its 2.5% Contingent Convertible Senior Notes Due 2032 (the “Old Notes”) in private transactions. As discussed below, approximately $230.8 million in principal amount of the Old Notes was exchanged for New Notes on August 14, 2003. The Old Notes bear interest at a rate of 2.5% per annum, which is payable on June 4 and December 4 of each year, beginning on December 4, 2002. The Company also agreed to pay contingent interest at a rate equal to 0.5% per annum during any six-month period, with the initial six-month period commencing June 4, 2007, if the average trading price of the Old Notes reaches certain thresholds. No contingent interest related to the Old Notes was payable at June 30, 2008 or December 31, 2007. The Old Notes will mature on June 4, 2032.

          The Company may redeem some or all of the Old Notes at any time on or after June 11, 2007, at a redemption price, payable in cash, of 100% of the principal amount of the Old Notes, plus accrued and unpaid interest, including contingent interest, if any. Holders of the Old Notes may require the Company to repurchase all or a portion of their Old Notes on June 4, 2012 and June 4, 2017, or upon a change in control (as defined in the indenture governing the Old Notes) at 100% of the principal amount of the Old Notes, plus accrued and unpaid interest, and contingent interest, if any, to the date of the repurchase, payable in cash. Pursuant to SFAS No. 48, Classification of Obligations That Are Callable by the Creditor, if an obligation is due on demand or will be due on demand within one year from the balance sheet date, even though liquidation may not be expected within that period, it should be classified as a current liability. Accordingly, the outstanding balance of Old Notes along with the deferred tax liability associated with accelerated interest deductions on the Old Notes will be classified as a current liability during the respective twelve month periods prior to June 4, 2012 and June 4, 2017.

          The Old Notes are convertible, at the holders’ option, prior to the maturity date into shares of the Company’s Class A common stock in the following circumstances:

	•		during any quarter commencing after June 30, 2002, if the closing price of the Company’s Class A common stock over a specified number of trading days during the previous quarter, including the last trading day of such quarter, is more than 110% of the conversion price of the Old Notes, or $31.96. The Old Notes are initially convertible at a conversion price of $29.05 per share, which is equal to a conversion rate of approximately 34.4234 shares per $1,000 principal amount of Old Notes, subject to adjustment;
	•		if the Company has called the Old Notes for redemption;
	•		during the five trading day period immediately following any nine consecutive day trading period in which the trading price of the Old Notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of the Company’s Class A common stock on that day multiplied by the number of shares of the Company’s Class A common stock issuable upon conversion of $1,000 principal amount of the Old Notes; or
	•		upon the occurrence of specified corporate transactions.

          The Old Notes, which are unsecured, do not contain any restrictions on the payment of dividends, the incurrence of additional indebtedness or the repurchase of the Company’s securities and do not contain any financial covenants.

          The Company incurred $12.6 million of fees and other origination costs related to the issuance of the Old Notes. The Company amortized these costs over the first five-year Put period, which ran through June 4, 2007.

          On August 14, 2003, the Company exchanged approximately $230.8 million in principal amount of its Old Notes for approximately $283.9 million in principal amount of its 1.5% Contingent Convertible Senior Notes Due 2033 (the “New Notes”). Holders of Old Notes that accepted the Company’s exchange offer received $1,230 in principal amount of New Notes for each $1,000 in principal amount of Old Notes. The terms of the New Notes are similar to the terms of the Old Notes, but have a different interest rate, conversion rate and maturity date. Holders of Old Notes that chose not to exchange continue to be subject to the terms of the Old Notes.

          The New Notes bear interest at a rate of 1.5% per annum, which is payable on June 4 and December 4 of each year, beginning December 4, 2003. The Company will also pay contingent interest at a rate of 0.5% per annum during any six-month period, with the initial six-month period commencing June 4, 2008, if the average trading price of the New Notes reaches certain thresholds. No contingent interest related to the New Notes was payable at June 30, 2008. The New Notes mature on June 4, 2033.

          As a result of the exchange, the outstanding principal amounts of the Old Notes and the New Notes were $169.2 million and $283.9 million, respectively. The Company incurred approximately $5.1 million of fees and other origination costs related to the issuance of the New Notes. The Company amortized these costs over the first five-year Put period, which ran through June 4, 2008.

          Holders of the New Notes were able to require the Company to repurchase all or a portion of their New Notes on June 4, 2008, at 100% of the principal amount of the New Notes, plus accrued and unpaid interest, including contingent interest, if any, to the date of the repurchase, payable in cash. Holders of approximately $283.7 million of New Notes elected to require the Company to repurchase their New Notes on June 4, 2008. The Company paid $283.7 million, plus accrued and unpaid interest of approximately $2.2 million, to the holders of New Notes that elected to require the Company to repurchase their New Notes. The Company was also required to pay an accumulated deferred tax liability of approximately $34.9 million related to the repurchased New Notes. Approximately $26.2 million of this $34.9 million deferred tax liability, which was included in income taxes payable as of June 30, 2008, was paid during the three months ended September 30, 2008. The remaining $8.7 million of this deferred tax liability will be paid during the three months ended December 31, 2008. Following the repurchase of these New Notes, $181,000 of principal amount of New Notes remained outstanding as of June 30, 2008 and September 30, 2008. The Company intends to redeem the remaining $181,000 of principal amount of New Notes during the fourth quarter of 2008 or during 2009, when practicable.

          The Company may redeem some or all of the remaining New Notes at any time on or after June 11, 2008, at a redemption price, payable in cash, of 100% of the principal amount of the New Notes, plus accrued and unpaid interest, including contingent interest, if any. Holders of the remaining New Notes may require the Company to repurchase all or a portion of their remaining New Notes on June 4, 2013 and June 4, 2018, and upon a change in control (as defined in the indenture governing the New Notes), at 100% of the principal amount of the New Notes, plus accrued and unpaid interest, including contingent interest, if any, to the date of the repurchase, payable in cash.

          The remaining New Notes are convertible, at the holders’ option, prior to the maturity date into shares of the Company’s Class A common stock in the following circumstances:

•

during any quarter commencing after September 30, 2003, if the closing price of the Company’s Class A common stock over a specified number of trading days during the previous quarter, including the last trading day of such quarter, is more than 120% of the conversion price of the New Notes, or $46.51. The Notes are initially convertible at a conversion price of $38.76 per

			share, which is equal to a conversion rate of approximately 25.7998 shares per $1,000 principal amount of New Notes, subject to adjustment;
	•		if the Company has called the New Notes for redemption;
	•		during the five trading day period immediately following any nine consecutive day trading period in which the trading price of the New Notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of the Company’s Class A common stock on that day multiplied by the number of shares of the Company’s Class A common stock issuable upon conversion of $1,000 principal amount of the New Notes; or
	•		upon the occurrence of specified corporate transactions.

          The remaining New Notes, which are unsecured, do not contain any restrictions on the incurrence of additional indebtedness or the repurchase of the Company’s securities and do not contain any financial covenants. The remaining New Notes require an adjustment to the conversion price if the cumulative aggregate of all current and prior dividend increases above $0.025 per share would result in at least a one percent (1%) increase in the conversion price. This threshold has not been reached and no adjustment to the conversion price has been made.

          During the quarter ended December 31, 2006, the Old Notes met the criteria for the right of conversion into shares of the Company’s Class A common stock. This right of conversion of the holders of Old Notes was triggered by the Company’s Class A common stock closing above $31.96 on 20 of the last 30 trading days and the last trading day of the quarter ended December 31, 2006. The holders of Old Notes had this conversion right only until March 31, 2007. During the three months ended March 31, 2007, outstanding principal amounts of $5,000 of Old Notes were converted into shares of the Company’s Class A common stock. During the quarters ended September 30, 2008, June 30, 2008, March 31, 2008 and December 31, 2007, the Old Notes and New Notes did not meet the criteria for the right of conversion. At the end of each future quarter, the conversion rights will be reassessed in accordance with the bond indenture agreement to determine if the conversion trigger rights have been achieved.

14. INCOME TAXES

          Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, enhanced charitable contribution deductions for inventory, tax credits available in the U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to normally result in tax deductions, various expenses that are not deductible for tax purposes, changes in valuation allowances against deferred tax assets, and differences in tax rates in certain non-U.S. jurisdictions. The Company’s effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions it uses to estimate its annual effective tax rate, including factors such as its mix of pre-tax earnings in the various tax jurisdictions in which it operates, changes in valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws in jurisdictions where the Company conducts operations. The Company recognizes tax benefits in accordance with FIN 48. Under FIN 48, tax benefits are recognized only if the tax position is “more likely than not” of being sustained. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities, along with net operating losses and credit carryforwards. The Company records valuation allowances against deferred tax assets to reduce the net carrying value to amounts that management believes is more likely than not to be realized.

          At September 30, 2008 the Company has an unrealized tax loss of $14.8 million related to the Company’s option to acquire Revance or license Revance’s product that is under development. The Company has currently assessed that the unrealized loss would result in a capital loss carryover if realized. Due to tax limitations on the utilization of capital loss carryovers, the Company recorded a valuation allowance of $3.3 million against the capital loss carryover as of December 31, 2007. The valuation allowance increased $2.0 million to $5.3 million during the nine months ended September 30, 2008.

          During the three months ended September 30, 2008 and September 30, 2007, the Company made net tax payments of $36.9 million and $2.5 million, respectively. During the nine months ended September 30, 2008 and September 30, 2007, the Company made net tax payments of $67.1 million and $19.7 million, respectively.

          The Company operates in multiple tax jurisdictions and is periodically subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. The Company and its domestic subsidiaries file a consolidated U.S. federal income tax return. Such returns have either been audited or settled through statute expiration through fiscal 2004. The Internal Revenue Service is currently conducting a limited scope examination of the Company’s tax return for the six-month Transition Period ending December 31, 2005. To date, no adjustments have been proposed.

          The Company owns two subsidiaries that file corporate tax returns in Sweden. The Swedish tax authorities examined the tax return of one of the subsidiaries for fiscal 2004. The examiners issued a no change letter, and the examination is complete. The Company’s other subsidiary in Sweden has not been examined by the Swedish tax authorities. The Swedish statute of limitation may be open for up to five years from the date the tax return was filed. Thus, all returns filed since this entity’s formation in fiscal 2003 are open under the statute of limitation.

          The Company and its consolidated subsidiaries received a final notice of proposed assessment in January 2007 from the Arizona Department of Revenue for fiscal years ended 2001 through 2004. The Company and the Arizona Department of Revenue agreed to the resolution of certain proposed adjustments, and the Company included a net $315,000 negotiated settlement amount in income taxes payable in its condensed consolidated balance sheets as of December 31, 2007. The Company paid the $315,000 negotiated settlement amount during the three months ended March 31, 2008.

          At December 31, 2007, the Company had $3.4 million in unrecognized tax benefits, the recognition of which would have a favorable effect of $2.7 million on the Company’s effective tax rate. The amount of unrecognized tax benefits decreased $0.9 million from $3.4 million to $2.5 million during the nine months ended September 30, 2008 as part of the settlement with the Arizona Department of Revenue. Recognition of the $2.5 million unrecognized tax benefits would have a favorable effect of $2.1 million on the Company’s effective tax rate. During the next twelve months, the Company estimates that it is reasonably possible that the liability for unrecognized tax benefits may decrease by $1.3 million.

          The Company recognizes accrued interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense. The Company has accrued approximately $280,000 and $265,000 (net of tax benefits) for the payment of interest and penalties at December 31, 2007, and September 30, 2008, respectively.

15. DIVIDENDS DECLARED ON COMMON STOCK

          On September 17, 2008, the Company declared a cash dividend of $0.04 per issued and outstanding share of its Class A common stock payable on October 31, 2008 to stockholders of record at the close of business on October 1, 2008. The $2.3 million dividend was recorded as a reduction of accumulated earnings and is included in other current liabilities in the accompanying condensed consolidated balance sheets as of September 30, 2008.

16. SHARE REPURCHASE PROGRAM

          On August 29, 2007, the Company’s Board of Directors approved a stock trading plan to purchase up to $200.0 million in aggregate value of shares of Medicis’ Class A common stock upon satisfaction of certain conditions. The number of shares to be repurchased and the timing of the repurchases (if any) were dependent on factors such as the market price of Medicis’ Class A common stock, economic and market conditions, and corporate and regulatory requirements. The plan terminated on August 29, 2008, as it was scheduled to terminate on the earlier of the first anniversary of the plan or at the time when the aggregate purchase limit was reached. No shares were repurchased under this plan.

17. COMPREHENSIVE (LOSS) INCOME

          Total comprehensive (loss) income includes net (loss) income and other comprehensive (loss) income, which consists of foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments. Total comprehensive (loss) income for the three months and nine months ended September 30, 2008 was $(18.1) million and $14.1 million, respectively. Total comprehensive income for the three months and nine months ended September 30, 2007 was $18.0 million and $48.4 million, respectively.

18. NET (LOSS) INCOME PER COMMON SHARE

          The following table sets forth the computation of basic and diluted net (loss) income per common share (in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Restated)								(Restated)
BASIC
Net (loss) income		$	(14,657	)		$	16,993			$	18,878			$	47,215
Weighted average number of common shares outstanding			56,698				56,120				56,517				55,896
Basic net (loss) income per common share		$	(0.26	)		$	0.30			$	0.33			$	0.84
DILUTED
Net (loss) income		$	(14,657	)		$	16,993			$	18,878			$	47,215
Add:
Tax-effected interest expense and issue costs related to Old Notes			—				669				—				2,284
Tax-effected interest expense and issue costs related to New Notes			—				841				—				2,518
Net (loss) income assuming dilution		$	(14,657	)		$	18,503			$	18,878			$	52,017
Weighted average number of common shares			56,698				56,120				56,517				55,896
Effect of dilutive securities:
Old Notes			—				5,823				—				5,823
New Notes			—				7,325				—				7,325
Stock options and restricted stock			—				1,887				841				2,309
Weighted average number of common shares assuming dilution			56,698				71,155				57,358				71,353
Diluted net (loss) income per common share		$	(0.26	)		$	0.26			$	0.33			$	0.73