UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

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

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

Commission file number 001-14471

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 N. Dobson Road, Scottsdale, Arizona		85256-2740
(Address of principal executive office)		(Zip Code)
Registrant’s telephone number, including area code:  (602)808-8800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Class A common stock, $0.014 par value		New York Stock Exchange
Preference Share Purchase Rights

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form or any amendment to this Form 10-K 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 Rule 12b-2 of the Exchange Act) Yes o No þ

The aggregate market value of the voting stock held on June 30, 2009 by non-affiliates of the registrant was $932,202,872 based on the closing price of $16.32 per share as reported on the New York Stock Exchange on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter (calculated by excluding all shares held by executive officers, directors and holders known to the registrant of ten percent or more of the voting power of the registrant’s common stock, without conceding that such persons are “affiliates” of the registrant for purposes of the federal securities laws). As of February 23, 2010, there were 59,886,025 outstanding shares of Class A common stock, including 1,888,950 shares of unvested restricted stock awards.

Documents incorporated by reference:

Portions of the Proxy Statement for the registrant’s 2010 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated herein by reference in Part III of this Form 10-K to the extent stated herein.

 

 

TABLE OF CONTENTS

PART I
Item 1. Business			3
Item 1A. Risk Factors			16
Item 1B. Unresolved Staff Comments			43
Item 2. Properties			43
Item 3. Legal Proceedings			44
Item 4. Reserved			48
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			48
Item 6. Selected Financial Data			50
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			55
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			83
Item 8. Financial Statements and Supplementary Data			84
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			84
Item 9A. Controls and Procedures			84
Item 9B. Other Information			87
PART III
Item 10. Directors and Executive Officers and Corporate Governance			87
Item 11. Executive Compensation			87
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			87
Item 13. Certain Relationships and Related Transactions, and Director Independence			87
Item 14. Principal Accounting Fees and Services			87
PART IV
Item 15. Exhibits, Financial Statement Schedules			88
EX-10.70
EX-10.71
EX-10.72
EX-10.73
EX-10.74
EX-10.75
EX-12
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. Business

The Company

     Medicis Pharmaceutical Corporation (“Medicis,” the “Company,” or as used in the context of “we,” “us” or “our”), together with our wholly owned subsidiaries, is a leading independent specialty pharmaceutical company focusing primarily on helping patients attain a healthy and youthful appearance and self-image through the development and marketing in the United States (“U.S.”) of products for the treatment of dermatological and aesthetic conditions. We also market products in Canada for the treatment of dermatological and aesthetic conditions and began commercial efforts in Europe with our acquisition of LipoSonix, Inc. (“LipoSonix”) in July 2008.

     We believe that the U.S. market for dermatological pharmaceutical sales exceeds $6 billion annually. According to the American Society for Aesthetic Plastic Surgery (“ASAPS”), a national not-for-profit organization for education and research in cosmetic plastic surgery, over 10.2 million cosmetic surgical and non-surgical procedures were performed in the U.S. during 2008, including approximately 8.5 million non-surgical cosmetic procedures. LipoSonix, now known as Medicis Technologies Corporation, is a medical device company developing non-invasive body sculpting technology. In the U.S., the LIPOSONIX^TM system is an investigational device and is currently not cleared or approved for sale. We believe the U.S. non-invasive fat ablation market could be several hundred million dollars annually.

     We have built our business by executing a four-part growth strategy: promoting existing brands, developing new products and important product line extensions, entering into strategic collaborations, and acquiring complementary products, technologies and businesses. Our core philosophy is to cultivate high integrity relationships of trust and confidence with the foremost dermatologists and the leading plastic surgeons in the U.S.

     We offer 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). We currently offer 17 branded products. Our primary brands are DYSPORT^TM (abobotulinumtoxinA) 300 Units for Injection, the LIPOSONIX^TM system, PERLANE^® Injectible Gel, RESTYLANE^® Injectible Gel, SOLODYN^® (minocycline HCl, USP) Extended Release Tablets, TRIAZ^® (benzoyl peroxide) 3%, 6% and 9% Cleansers, Gels and Pads, and 3% and 6% Foaming Cloths, VANOS^® (fluocinonide) Cream 0.1%, and ZIANA^® (clindamycin phosphate 1.2% and tretinoin 0.025%) Gel. Many of our primary brands currently enjoy branded market leadership in the segments in which they compete. Because of the significance of these brands to our business, we concentrate our sales and marketing efforts in promoting them to physicians in our target markets. We also sell a number of other products that we consider less critical to our business.

     Our current product lines 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, non-invasive body sculpting technology and contract revenue. Our non-dermatological field also includes contract revenues associated with licensing agreements and authorized generic agreements. The following table sets forth the percentage of net revenues for each of our product categories for 2009, 2008 and 2007:

Product Category			2009				2008				2007
Acne and acne-related dermatological products			69.7	%			62.8	%			53.2	%
Non-acne dermatological products			23.4	%			28.6	%			37.8	%
Non-dermatological products (including contract revenues)			6.9	%			8.6	%			9.0	%

     We have historically developed and obtained marketing and distribution rights to pharmaceutical agents in various stages of development. We have a variety of products under development, ranging from new products to existing product line extensions and reformulations of existing products. Our product development strategy involves

the rapid evaluation and formulation of new therapeutics by obtaining preclinical safety and efficacy data, when possible, followed by rapid safety and efficacy testing in humans. As a result of our increasing financial strength, we have begun adding long-term projects to our development pipeline. Historically, we have supplemented our research and development efforts by entering into research and development agreements with other pharmaceutical and biotechnology companies.

     Currently, except for the LIPOSONIX^TM technology, we outsource all of our product manufacturing needs. The underlying cost to us for manufacturing our products is established in our agreements with outside manufacturers. Because of the short-term nature of these agreements, our expenses for manufacturing are not fixed and could change from contract to contract.

Our Products

     We currently market 17 branded products. Our sales and marketing efforts are currently focused on our primary brands. The following chart details certain important features of our primary brands:

Brand		Treatment		U.S. Market Impact
DYSPORTTM		Temporary improvement in the appearance of moderate to severe glabellar lines in adults younger than 65 years of age		Launched in June 2009 following U.S. Food and Drug Administration (“FDA”) approval on April 29, 2009
LIPOSONIXTM		Uses high intensity focused ultrasound to permanently destroy targeted fat just beneath the skin (subcutaneous adipose tissue) in the treatment of the anterior abdomen as a non-invasive, nonsurgical approach to aesthetic body sculpting		Acquired with the acquisition of LipoSonix in July 2008; cleared for sale and use in European Union in 2008 and Canada in 2009; not currently approved or cleared for sale in the U.S; anticipated filing for FDA approval for sale and use in U.S. in 2010
PERLANE®		Implantation into the deep dermis to superficial subcutis for the correction of moderate to severe facial wrinkles and folds, such as nasolabial folds		Launched in May 2007 following FDA approval on May 2, 2007; PERLANE-LTM was approved by the FDA on January 29, 2010
RESTYLANE®		Implantation into the mid to deep dermis for the correction of moderate to severe facial wrinkles and folds, such as nasolabial folds		The first hyaluronic acid dermal filler approved in the U.S., and the #1-selling and most-studied dermal filler in the world; launched in January 2004 following FDA approval on December 12, 2003; RESTYLANE-LTM was approved by the FDA on January 29, 2010
SOLODYN®		Once daily dosage for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older		The #1 dermatology product by dollars in the U.S.; launched in July 2006 following FDA approval on May 8, 2006
TRIAZ® VANOS®		Topical treatment of acne vulgaris Super-high potency topical corticosteroid for the relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses (e.g. psoriasis) in patients 12 years of age or older		The #1 single-agent branded benzoyl peroxide product in the market; launched during fiscal 1996 Launched in April 2005 following FDA approval on February 11, 2005
ZIANA®		Once daily topical treatment of acne vulgaris in patients 12 years of age and older		First commercial sales to wholesalers in December 2006 and launched in January 2007 following FDA approval on November 7, 2006

Facial Aesthetic Products

     Our principal branded facial aesthetic products are described below:

     DYSPORT^TM, an injectable botulinum toxin type A formulation, is an acetylcholine release inhibitor and a neuromuscular blocking agent. We market DYSPORT^TM in the U.S. for the aesthetic indication of temporary improvement in the appearance of moderate to severe glabellar lines in adults younger than 65 years of age. DYSPORT^TM was approved by the FDA on April 29, 2009 and launched by us in June 2009. We acquired the rights to the aesthetic use of DYSPORT^TM in the U.S., Canada and Japan from Ipsen, S.A. (“Ipsen”) in March 2006. According to the ASAPS, injections of botulinum toxin type A have been the number one nonsurgical cosmetic procedure for the past five years, with over 2.4 million total procedures in 2008 alone. The U.S. aesthetic market for botulinum toxin type A is estimated to be approximately $300 million to $400 million annually.

     RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM are injectable, transparent, stabilized hyaluronic acid gels, which require no patient sensitivity tests in advance of product administration. Their unique particle-based gel formulations offer structural support and lift when implanted into the skin. On a worldwide basis, more than ten million treatments of RESTYLANE^®, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM have been successfully performed in more than 70 countries since market introduction in 1996. In the U.S., the FDA regulates these products as medical devices. We began offering RESTYLANE^® and PERLANE^® in the U.S. on January 6, 2004 and May 21, 2007, respectively, following FDA approvals on December 12, 2003 and May 2, 2007, respectively. RESTYLANE^® is the world’s #1-selling and most-studied dermal filler, and is the first and only hyaluronic acid dermal filler whose FDA-approved label includes duration data up to 18 months with one follow-up treatment. On January 29, 2010, the FDA approved RESTYLANE-L^TM and PERLANE-L^TM, which include the addition of 0.3% lidocaine. We expect to begin shipping RESTYLANE-L^TM and PERLANE-L^TM during the first quarter of 2010. We offer RESTYLANE^®, PERLANE^®, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM in Canada. RESTYLANE FINE LINES ^TM and RESTYLANE SUBQ^TM are not approved by the FDA for use in the U.S. We acquired the exclusive U.S. and Canadian rights to these facial aesthetic products from Q-Med AB, a Swedish biotechnology and medical device company and its affiliates (collectively “Q-Med”) through license agreements in March 2003.

Non-Invasive Body Sculpting Technology

     The LIPOSONIX^TM system uses high intensity focused ultrasound (“HIFU”) energy to permanently destroy targeted fat just beneath the skin (subcutaneous adipose tissue) in the treatment area of the anterior abdomen as a non-invasive, nonsurgical approach to aesthetic body contouring. The LIPOSONIX^TM treatment is not a replacement for liposuction or designed for weight loss or large scale fat reduction, to treat obesity or to tighten loose skin. The LIPOSONIX^TM system is cleared for sale and use in Canada and the European Union. It is not approved or cleared for sale in the U.S. We anticipate filing for FDA review of the LIPOSONIX^TM system during the first quarter of 2010.

Prescription Pharmaceuticals

     Our principal branded prescription pharmaceutical products are described below:

     SOLODYN^®, launched to dermatologists in July 2006 after approval by the FDA on May 8, 2006, is the only branded oral minocycline approved for once daily dosage in the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age or older. SOLODYN^® is the first and only extended release minocycline with five FDA-approved dosing strengths. SOLODYN^® is available by prescription in 45mg, 65mg, 90mg, 115mg and 135mg extended release tablet dosages. The 65mg and 115mg dosages were approved by the FDA in July 2009. SOLODYN^® is lipid soluble, and distributes in the skin and sebum. SOLODYN^® is not bioequivalent to any immediate release minocycline products, and is in no way interchangeable with any immediate release forms of minocycline. SOLODYN^® has three issued patents (see also Item 1A. Risk Factors). U.S. patent No. 5,908,838 (the “’838 Patent”), which expires in 2018, relates to the use of the SOLODYN^® unique dissolution rate. We believe all forms of SOLODYN^® currently approved for use are covered by one or more claims of the ’838 Patent. The FDA listed this patent in the FDA’s Approved Drug Products with Therapeutic Equivalents (“the Orange Book”) for SOLODYN^® in December 2008. U.S. Patent No. 7,541,347, which expires in 2027, relates to the use of the 90mg controlled-release oral dosage form of minocycline to treat acne. U.S. Patent No. 7,544,373, which expires in 2027, relates to the composition of the 90mg dosage form. The

FDA listed these two patents in the Orange Book for SOLODYN^® in June 2009. Multiple patent applications directed to key dosing, labeling and formulation aspects of SOLODYN^®, as well as an ongoing reexamination of the ’838 Patent by the U.S. Patent and Trademark Office (“USPTO”) are pending (see also Item 1A. Risk Factors).

     TRIAZ^® is a topical therapy prescribed for the treatment of numerous forms and varying degrees of acne. TRIAZ^® products are manufactured using the active ingredient benzoyl peroxide in a patented vehicle containing glycolic acid and zinc lactate. Studies conducted by third parties have shown that benzoyl peroxide is the most efficacious agent available for eradicating the bacteria that cause acne with no reported resistance. We introduced the TRIAZ^® brand in fiscal 1996. In July 2003, we launched TRIAZ^® Pads, the first benzoyl peroxide pad available in the U.S. indicated for the topical treatment of acne vulgaris, and in March 2009 we launched TRIAZ^® Foaming Cloths. TRIAZ^® is protected by a U.S. patent that expires in 2015.

     VANOS^® Cream, launched to dermatologists in April 2005 after approval by the FDA on February 11, 2005, is a super-high potency (Class I) topical corticosteroid indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses (e.g. psoriasis) in patients 12 years of age or older. The active ingredient in VANOS^® is fluocinonide 0.1%, and is the only fluocinonide available in the Class I category of topical corticosteroids. Two double-blind clinical studies have demonstrated the efficacy, safety and tolerability of VANOS^®. Its base was formulated to have the cosmetic elegance of a cream, yet behave like an ointment on the skin. In addition, physicians have the flexibility of prescribing VANOS^® either for once or twice daily application. VANOS^® Cream is available by prescription in 30 gram, 60 gram and 120 gram tubes. VANOS^® Cream is protected by one U.S. patent that expires in 2021 and two U.S. patents that expire in 2024.

     ZIANA^® Gel, which contains clindamycin phosphate 1.2% and tretinoin 0.025%, was approved by the FDA on November 7, 2006. Initial shipments of ZIANA^® to wholesalers began in December 2006, with formal promotional launch to dermatologists occurring in January 2007. ZIANA^® is the first and only combination of clindamycin and tretinoin approved for once daily use for the topical treatment of acne vulgaris in patients 12 years and older. ZIANA^® is also the first and only approved acne product to combine an antibiotic and a retinoid. ZIANA^® is available by prescription in 30 gram and 60 gram tubes. ZIANA^® is protected by two U.S. patents for both composition of matter on the aqueous-based vehicle and method that expire in 2015 and 2020. Each of these patents cover aspects of the unique vehicle which are used to deliver the active ingredients in ZIANA^®.

Sale of Medicis Pediatrics

     On June 10, 2009, we, Medicis Pediatrics, Inc. (“Medicis Pediatrics,” formerly known as Ascent Pediatrics, Inc.), a wholly-owned subsidiary of Medicis, and BioMarin Pharmaceutical Inc. (“BioMarin”) entered into an amendment to the Securities Purchase Agreement (the “BioMarin Securities Purchase Agreement”), dated as of May 18, 2004 and amended on January 12, 2005, by and among Medicis Pediatrics, BioMarin, BioMarin Pediatrics Inc., a wholly-owned subsidiary of BioMarin that previously merged into BioMarin and us. The amendment was effected to accelerate the closing of BioMarin’s option under the BioMarin Securities Purchase Agreement to purchase from us all of the issued and outstanding capital stock of Medicis Pediatrics (the “Option”), which was previously expected to close in August 2009. In accordance with the amendment, the parties consummated the closing of the Option on June 10, 2009 (the “BioMarin Option Closing”). The aggregate cash consideration paid to us in conjunction with the BioMarin Option Closing was approximately $70.3 million and the purchase was completed substantially in accordance with the previously disclosed terms of the BioMarin Securities Purchase Agreement.

Research and Development

     We have historically developed and obtained rights to pharmaceutical agents in various stages of development. Currently, we have a variety of products under development, ranging from new products to existing product line extensions and reformulations of existing products. Our product development strategy involves the rapid evaluation and formulation of new therapeutics by obtaining preclinical safety and efficacy data, when possible, followed by rapid safety and efficacy testing in humans. As a result of our increasing financial strength, we have begun adding long-term projects to our development pipeline. Historically, we have supplemented our research and development efforts by entering into research and development and license agreements with other pharmaceutical and biotechnology companies for the development of new products and the enhancement of existing products.

     We incurred total research and development costs for all of our sponsored and unreimbursed co-sponsored pharmaceutical projects for 2009, 2008 and 2007, of $71.8 million, $99.9 million and $39.4 million, respectively. Research and development costs for 2009 include $12.0 million, in aggregate, of milestone payments made to IMPAX Laboratories, Inc. (“IMPAX”) related to our joint development agreement with IMPAX, $10.0 million paid to Revance Therapeutics, Inc. (“Revance”) related to a license agreement with Revance, $5.3 million paid to Glenmark Generics Ltd. and Glenmark Generics Inc., USA (collectively, “Glenmark”) related to a license and settlement agreement with Glenmark and $5.0 million paid to Perrigo Israel Pharmaceutical Ltd. and Perrigo Company (collectively “Perrigo”) related to a joint development agreement with Perrigo. Research and development costs for 2008 include a $40.0 million payment to IMPAX related to our joint development agreement with IMPAX and a $25.0 million payment to Ipsen upon the FDA’s May 2008 acceptance of filing of Ipsen’s Biologics License Application (“BLA”) for DYSPORT^TM. Research and development costs for 2007 include $8.0 million related to our option to acquire Revance or to license Revance’s product currently under development.

     On November 14, 2009, we entered into an Asset Purchase and Development Agreement with Glenmark. In connection with the Asset Purchase and Development Agreement, we purchased from Glenmark the North American rights of a dermatology product currently under development, including the underlying technology and regulatory filings. In accordance with terms of the agreement, we made a $5.0 million payment to Glenmark upon closing of the transaction, and will make additional payments to Glenmark of up to $7.0 million upon the achievement of certain development and regulatory milestones. We will make royalty payments to Glenmark on sales of the product. The initial $5.0 million payment was recognized as research and development expense during the three months ended December 31, 2009.

     On November 26, 2008, we entered into a joint development agreement with IMPAX whereby we and IMPAX will collaborate on the development of five strategic dermatology product opportunities, including an advanced-form SOLODYN^® product. Under terms of the agreement, we made an initial payment of $40.0 million upon execution of the agreement. During the three months ended March 31, 2009, September 30, 2009 and December 31, 2009, we paid IMPAX $5.0 million, $5.0 million and $2.0 million, respectively, upon the achievement of three separate clinical milestones, in accordance with terms of the agreement. In addition, we are required to pay up to $11.0 million upon successful completion of certain other clinical and commercial milestones. We will also make royalty payments based on sales of the advanced-form SOLODYN^® product if and when it is commercialized by us upon approval by the FDA. We will share equally in the gross profit of the other four development products if and when they are commercialized by IMPAX upon approval by the FDA. The $40.0 million payment was recognized as a charge to research and development expense during the three months ended December 31, 2008, and the three separate $5.0 million, $5.0 million and $2.0 million clinical milestone achievement payments were recognized as a charge to research and development expense during the three months ended March 31, 2009, September 30, 2009 and December 31, 2009, respectively.

     On April 8, 2009, we entered into a Joint Development Agreement with Perrigo whereby we will collaborate with Perrigo to develop a novel proprietary product for which we will have the sole right to commercialize. If and when a New Drug Application (“NDA”) for a novel proprietary product is submitted to the FDA, we and Perrigo shall enter into a commercial supply agreement pursuant to which, among other terms, for a period of three years following approval of the NDA, Perrigo would exclusively supply to us all of our novel proprietary product requirements in the U.S. We made an up-front $3.0 million payment to Perrigo upon execution of the agreement. During the three months ended September 30, 2009, a development milestone was achieved, and we made a $2.0 million payment to Perrigo pursuant to the agreement. We will make additional payments to Perrigo of up to $3.0 million upon the achievement of other certain development and regulatory milestones. We will pay to Perrigo royalty payments on sales of the novel proprietary product. The $3.0 million up-front payment and the $2.0 million development milestone payment was recognized as research and development expense during the three months ended June 30, 2009 and September 30, 2009, respectively.

     On March 17, 2006, we entered into a development and distribution agreement with Ipsen, whereby Ipsen granted us the rights to develop, distribute and commercialize Ipsen’s botulinum toxin type A product in the U.S., Canada and Japan for aesthetic use by healthcare professionals. During the development of the product, the proposed name of the product for aesthetic use was RELOXIN^®. In May 2008, the FDA accepted the filing of Ipsen’s BLA for RELOXIN^®, and in accordance with the agreement, we paid Ipsen $25.0 million during the three months ended June 30, 2008. In December 2008, we paid Ipsen $1.5 million upon the achievement of an additional regulatory milestone. The $25.0 million payment was recognized as a charge to research and development expense during the three months ended June 30, 2008, and the $1.5 million payment was recognized as a charge to research and development expense

during the three months ended December 31, 2008. On April 29, 2009, the FDA approved the BLA for Ipsen’s botulinum toxin type A product, DYSPORT^TM. The approval includes two separate indications, the treatment of cervical dystonia in adults to reduce the severity of abnormal head position and neck pain, and the temporary improvement in the appearance of moderate to severe glabellar lines in adults younger than 65 years of age. RELOXIN^®, which was the proposed U.S. name for Ipsen’s botulinum toxin product for aesthetic use, is now marketed under the name of DYSPORT^TM. Ipsen markets DYSPORT^TM in the U.S. for the therapeutic indication (cervical dystonia), while Medicis began marketing DYSPORT^TM in the U.S. in June 2009 for the aesthetic indication (glabellar lines). In accordance with the agreement, we paid Ipsen $75.0 million during the three months ended June 30, 2009, as a result of the approval by the FDA. The $75.0 million payment was capitalized into intangible assets in our consolidated balance sheet. Ipsen will manufacture and provide the product to us for the term of the agreement, which extends to December 2036. Ipsen will receive a royalty based on sales and a supply price, as defined under the agreement. Under the terms of the agreement, we are responsible for all remaining research and development costs associated with obtaining the product’s approval in Canada and Japan. We will be required to pay Ipsen an additional $2.0 million upon regulatory approval of the product in Japan.

     On December 11, 2007, we entered into a strategic collaboration with Revance whereby we 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 our 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 U.S. In consideration for our $20.0 million payment, we 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 was expected to be used by Revance primarily for the development of the new product. Approximately $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 was included in other long-term assets in our 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 a charge to 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 us in North America. We 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. Our 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, as defined in the license. If we elect to exercise the option, the financial terms for the acquisition or license will be determined through an independent valuation in accordance with specified methodologies.

     On July 28, 2009, we entered into a license agreement with Revance granting us worldwide aesthetic and dermatological rights to Revance’s novel, investigational, injectable botulinum toxin type A product, referred to as “RT002”, currently in pre-clinical studies. The objective of the RT002 program is the development of a next-generation neurotoxin with favorable duration of effect and safety profiles. Under the terms of the agreement, we paid Revance $10.0 million upon closing of the agreement, and will pay additional potential milestone payments totaling approximately $94 million upon successful completion of certain clinical, regulatory and commercial milestones, and a royalty based on sales and supply price, the total of which is equivalent to a double-digit percentage of net sales. The initial $10.0 million payment was recognized as research and development expense during the three months ended September 30, 2009.

Sales and Marketing

     Our combined dedicated sales force, consisting of 243 employees as of December 31, 2009, focuses on high patient volume dermatologists and plastic surgeons. Since a relatively small number of physicians are responsible for writing a majority of dermatological prescriptions and performing facial aesthetic procedures, we believe that the size of our sales force is appropriate to reach our target physicians. Our therapeutic dermatology sales forces consist of

119 employees who regularly call on approximately 9,000 dermatologists. Our facial aesthetic sales force consists of 124 employees who regularly call on leading plastic surgeons, facial plastic surgeons, dermatologists and dermatologic surgeons. We also have eight national account managers who regularly call on major drug wholesalers, managed care organizations, large retail chains, formularies and related organizations.

     Our strategy is to cultivate relationships of trust and confidence with the high prescribing dermatologists and the leading plastic surgeons in the U.S. We use a variety of marketing techniques to promote our products including sampling, journal advertising, promotional materials, specialty publications, coupons, educational conferences and informational websites. We also promote our facial aesthetic products through television and radio advertising.

     We believe we have created an attractive incentive program for our sales force that is based upon goals in prescription growth, market share achievement and customer service.

Warehousing and Distribution

     We utilize an independent national warehousing corporation to store and distribute our pharmaceutical products in the U.S. from primarily two regional warehouses in Nevada and Georgia, as well as an additional warehouse in North Carolina. Upon the receipt of a purchase order through electronic data input (“EDI”), phone, mail or facsimile, the order is processed through our inventory management systems and is transmitted electronically to the appropriate warehouse for picking and packing. Upon shipment, the warehouse sends back to us via EDI the necessary information to automatically process the invoice in a timely manner.

Customers

     Our customers include certain of the nation’s leading wholesale pharmaceutical distributors, such as Cardinal Health, Inc. (“Cardinal”) and McKesson Corporation (“McKesson”) and other major drug chains. During 2009, 2008 and 2007, these customers accounted for the following portions of our net revenues:

		2009				2008				2007
McKesson			40.8	%			45.8	%			52.2	%
Cardinal			37.1	%			21.2	%			16.9	%

     McKesson is the sole distributor of our RESTYLANE^® and PERLANE^® products and DYSPORT^TM in the U.S.

Third-Party Reimbursement

     Our operating results and business success depend in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities such as Medicaid, private health insurers and managed care organizations. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve many of these organizations has become important to our business.

     The trend toward managed healthcare in the U.S. and the growth of managed care organizations could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians.

     Some of our products, such as our facial aesthetics products DYSPORT^TM, RESTYLANE^® and PERLANE^®, are not of a type generally eligible for reimbursement. It is possible that products manufactured by others could address the same effects as our products and be subject to reimbursement. If this were the case, some of our products may be unable to compete on a price basis. In addition, decisions by state regulatory agencies, including state pharmacy boards, and/or retail pharmacies may require substitution of generic for branded products, may prefer competitors’ products over our own, and may impair our pricing and thereby constrain our market share and growth.

Seasonality

     Our business, taken as a whole, is not materially affected by seasonal factors. We schedule our inventory purchases to meet anticipated customer demand. As a result, relatively small delays in the receipt of manufactured products by us could result in revenues being deferred or lost.

Manufacturing

     We currently, except for the LIPOSONIX^TM technology, outsource all of our manufacturing needs, and we are required by the FDA to contract only with manufacturers who comply with current Good Manufacturing Practices (“cGMP”) regulations and other applicable laws and regulations. Typically our manufacturing contracts are short term. We review our manufacturing arrangements on a regular basis and assess the viability of alternative manufacturers and suppliers of raw materials if our current manufacturers are unable to fulfill our needs. If any of our manufacturing partners are unable to perform their obligations under our manufacturing agreements or if any of our manufacturing agreements are terminated, we may experience a disruption in the manufacturing of the applicable product that would adversely affect our results of operations. In some cases, the sources of our raw materials are outside of the U.S., and as such we cannot always guarantee that the political and industry climate in these countries will always be stable and provide a surety of supply. We also work though U.S. agents for the supply of active pharmaceutical ingredients brought into the U.S. and in some cases are only able to purchase on a purchase order basis.

     Under several exclusive supply agreements, with certain exceptions, we must purchase most of our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier relationships were terminated, we would be forced to find a replacement manufacturer or supplier. The FDA requires that all manufacturers used by pharmaceutical companies comply with the FDA’s regulations, including the cGMP regulations applicable to manufacturing processes. The cGMP validation of a new facility, the qualification of a new supply source and the approval of that manufacturer for a new drug product may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA validation of a replacement manufacturing facility could cause an interruption in the supply of our products. Although we have business interruption insurance to assist in covering the loss of income for products where we do not have a secondary manufacturer, which may reduce the harm to us from the interruption of the manufacturing of our largest-selling products caused by certain events, the loss of a manufacturer could still cause a significant reduction in our sales, margins and market share, as well as harm our overall business and financial results.

     We and the manufacturers of our products rely on suppliers of raw materials used in the production of our products. Some of these materials are available from only one source and others may become available from only one source. We try to maintain inventory levels at various in-process stages (e.g., raw material inventory and finished product inventory) that are no greater than necessary to meet our current projections, which could have the effect of exacerbating supply problems. Any interruption in the supply of finished products could hinder our ability to timely distribute finished products and prevent us from increasing raw material and finished product inventory levels to mitigate supply risks as a temporary solution. If we are unable to obtain adequate product supplies to satisfy our customers’ orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products. This, in turn, could cause a loss of our market share and reduce our revenues. In addition, any disruption in the supply of raw materials or an increase in the cost of raw materials to our manufacturers could have a significant effect on their ability to supply us with our products, which would adversely affect our financial condition and results of operations.

     Our TRIAZ^®, VANOS^® and ZIANA^® branded products are manufactured by Contract Pharmaceuticals Limited pursuant to a manufacturing agreement that automatically renews on an annual basis, unless terminated by

either party. We are also in the process of evaluating alternative manufacturing facilities and raw material suppliers for some of these products.

     Our RESTYLANE^® and PERLANE^® branded products in the U.S. and Canada are manufactured by Q-Med pursuant to a long-term supply agreement that expires no earlier than 2014.

     Our DYSPORT^TM branded product is manufactured by Ipsen pursuant to a long-term supply agreement that expires in 2036.

     Our SOLODYN^® branded product is manufactured by Wellspring Pharmaceutical and AAIPharma pursuant to long-term supply agreements that expire in 2011 and 2012, respectively, unless extended by mutual agreement. We are also in the process of evaluating an alternative manufacturing facility for future SOLODYN^® production.

Raw Materials

     We and the manufacturers of our products rely on suppliers of raw materials used in the production of our products. Some of these materials are available from only one source and others may become available from only one source. Any disruption in the supply of raw materials or an increase in the cost of raw materials to our manufacturers could have a significant effect on their ability to supply us with our products.

License and Royalty Agreements

     Pursuant to license agreements with third parties, we have acquired rights to manufacture, use or market certain of our existing products, as well as many of our development products and technologies. Such agreements typically contain provisions requiring us to use our best efforts or otherwise exercise diligence in pursuing market development for such products in order to maintain the rights granted under the agreements and may be canceled upon our failure to perform our payment or other obligations. In addition, we have licensed certain rights to manufacture, use and sell certain of our technologies outside the U.S. and Canada to various licensees.

Trademarks, Patents and Proprietary Rights

     We believe that trademark protection is an important part of establishing product and brand recognition. We own a number of registered trademarks and trademark applications. U.S. federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce.

     We have obtained and licensed a number of patents covering key aspects of our products, including a U.S. patent expiring in October of 2015 covering various formulations of TRIAZ^®, a U.S. patent expiring in December 2017 covering RESTYLANE^®, a U.S. patent expiring in February 2018 covering SOLODYN^® Tablets, two U.S. patents expiring in February 2015 and August 2020 covering ZIANA^® Gel, one U.S. patent expiring in December 2021 and two U.S. patents expiring in January 2024 covering VANOS^® Cream, a U.S. patent expiring in December 2024 covering LIPOSONIX^TM technology and two U.S. patents expiring in 2027 covering 90mg SOLODYN^® Tablets. We have patent applications pending relating to SOLODYN^® Tablets and LOPROX^® Shampoo. We are also pursuing several other U.S. and foreign patent applications. We hold additional LIPOSONIX^TM patents, and have numerous LIPOSONIX^TM patent applications pending in the U.S. and in other countries.

     We rely and expect to continue to rely upon unpatented proprietary know-how and technological innovation in the development and manufacture of many of our principal products. Our policy is to require all our employees, consultants and advisors to enter into confidentiality agreements with us, and we employ other security measures to protect our trade secrets and other confidential information. Our success with our products will depend, in part, on our ability to obtain, and successfully defend if challenged, patent or other proprietary protection. Our patents are obtained after examination by the USPTO and are presumed valid. However, the issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. Accordingly, our patents may not prevent other companies from developing similar or functionally equivalent products or from successfully challenging the validity of our patents. As a result, if our patent applications are not approved or, even if approved, patents arising from such patent applications are circumvented or not upheld in a legal proceeding, our ability to competitively exploit our patented products and technologies may be significantly reduced. Also, such patents may

or may not provide competitive advantages for their respective products or they may be challenged or circumvented by competitors, in which case our ability to commercially exploit these products may be diminished.

     Third parties may challenge and seek to invalidate, limit or circumvent our patents and patent applications relating to our products, product candidates and technologies. Challenges may result in potentially significant harm to our business. The cost of responding to these challenges and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, can require a substantial commitment of our management’s time, be costly and can preclude or delay the commercialization of products or result in the genericization of markets for our products. For example, on December 28, 2009, we filed suit against Barr Laboratories, Inc. (“Barr”) and its parent company, Teva Pharmaceuticals USA Inc (together, “Barr/Teva”), in the United States District Court for the District of Maryland seeking an adjudication that Barr/Teva has infringed one or more claims of the ’838 Patent by submitting to the FDA a supplement to its earlier Abbreviated New Drug Application (“ANDA”) for generic versions of 65mg and 115mg strength SOLODYN^®, and on November 17, 2009 we filed suit against Lupin Ltd. (“Lupin”) in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting to the FDA an ANDA for generic versions of 45mg, 90mg and 135mg strength SOLODYN^®, and on December 28, 2009 and February 2, 2010, respectively, we amended our complaint against Lupin seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting to the FDA supplements to its earlier ANDA for generic versions of 65mg and 115mg strengths of SOLODYN^®. See Item 3 of Part I of this report, “Legal Proceedings” and Note 12, “Commitments and Contingencies,” in the notes to the consolidated financial statements listed under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules,” for information concerning our current intellectual property litigation.

     From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented.

Competition

     The pharmaceutical and facial aesthetics industries are characterized by intense competition, rapid product development and technological change. Numerous companies are engaged in the development, manufacture and marketing of health care products competitive with those that we offer. As a result, competition is intense among manufacturers of prescription pharmaceuticals and dermal injection products, such as for our primary brands.

     Many of our competitors are large, well-established pharmaceutical, chemical, cosmetic or health care companies with considerably greater financial, marketing, sales and technical resources than those available to us. Additionally, many of our present and potential competitors have research and development capabilities that may allow them to develop new or improved products that may compete with our product lines. Our products could be rendered obsolete or made uneconomical by the development of new products to treat the conditions addressed by our products, technological advances affecting the cost of production, or marketing or pricing actions by one or more of our competitors. Each of our products competes for a share of the existing market with numerous products that have become standard treatments recommended or prescribed by dermatologists and administered by plastic surgeons and aesthetic dermatologists. In addition to product development, other competitive factors affecting the pharmaceutical industry include testing, approval and marketing, industry consolidation, product quality and price, product technology, reputation, customer service and access to technical information.

     The largest competitors for our prescription dermatological products include Allergan, Galderma, Johnson & Johnson, Sanofi-Aventis, GlaxoSmithKline, plc (Stiefel Laboratories) and Warner Chilcott. Several of our primary prescription brands compete or may compete in the near future with generic (non-branded) pharmaceuticals, which claim to offer equivalent therapeutic benefits at a lower cost. In some cases, insurers, third-party payors and pharmacies seek to encourage the use of generic products, making branded products less attractive, from a cost perspective, to buyers.

     Our facial aesthetics products compete primarily against Allergan. DYSPORT^TM competes directly with Allergan’s Botox^®, an established botulinum toxin product that was approved by the FDA for aesthetic purposes in 2002. Allergan is a larger company than Medicis, and has greater financial resources than those available to us. There are also other botulinum toxin products under development.

     Among other dermal filler products, Allergan markets Juvéderm^® Ultra and Juvéderm^® Ultra Plus. Other dermal filler products on the market include: Prevelle^® Silk by Mentor Corporation (a subsidiary of Johnson & Johnson), BioForm Medical’s Radiesse^®, Sanofi-Aventis’ Sculptra^® Aesthetic, Suneva Medical’s Artefill^® and Coapt Systems’ Hydrelle^TM. Patients may differentiate these products from RESTYLANE^® and PERLANE^® based on price, efficacy and/or duration, which may appeal to some patients. In addition, there are several dermal filler products under development and/or in the FDA pipeline for approval, including products from Johnson & Johnson and its subsididary Mentor Corporation, Allergan and Merz which claim to offer equivalent or greater facial aesthetic benefits than RESTYLANE^® and PERLANE^® and, if approved, the companies producing such products could charge less to doctors for their products.

Government Regulation

     The manufacture and sale of medical devices, drugs and biological products are subject to regulation principally by the FDA, but also by other federal agencies, such as the Drug Enforcement Administration (“DEA”), and state and local authorities in the United States, and by comparable agencies in certain foreign countries. The Federal Trade Commission (“FTC”), the FDA and state and local authorities regulate the advertising of over-the-counter drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, as amended (“FDCA”) and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, sale, distribution, advertising and promotion of our products.

     The FDA requires a Boxed Warning (sometimes referred to as a “Black Box” Warning) for products that have shown a significant risk of severe or life-threatening adverse events. Because there have been post-marketing reports of symptoms consistent with botulinum toxin effects (reported hours to weeks after injection), a Boxed Warning is now required for all botulinum toxin products, including our product DYSPORT^TM, and competitor products Botox^®, Botox^® Cosmetic and Myobloc^®. This is known as a “class label.” The FDA’s requirement for a Boxed Warning on all marketed botulinum toxin products is the culmination of a safety review of Botox^®, Botox^® Cosmetic, and Myobloc^® that the agency announced in early 2008. In addition to the Boxed Warning, the FDA has required implementation of a Risk Evaluation and Mitigation Strategy (“REMS”) for all botulinum toxin products. The REMS will help ensure that healthcare professionals and patients are adequately informed about product risks. The FDA notified the manufacturers of Botox^®, Botox^® Cosmetic, and Myobloc^® that label changes (e.g., the Boxed Warning) and a REMS are necessary to ensure that the benefits of the products outweigh the risks. The Boxed Warning and REMS for DYSPORT™ were approved by the FDA as part of the product approval.

     Our RESTYLANE^® and PERLANE^® dermal filler products are prescription medical devices intended for human use and are subject to regulation by the FDA in the U.S. Unless an exemption applies, a medical device in the U.S. must have a Premarket Approval Application (“PMA”) in accordance with the FDCA, or a 510(k) clearance (a demonstration that the new device is “substantially equivalent” to a device already on the market). RESTYLANE^®, PERLANE^® and non-collagen dermal fillers are subject to PMA regulations that require premarket review of clinical data on safety and effectiveness. FDA device regulations for PMAs generally require reasonable assurance of safety and effectiveness prior to marketing, including safety and efficacy data obtained under clinical protocols approved under an Investigational Device Exemption (“IDE”) and the manufacturing of the device requires compliance with “quality system regulations” (“QSRs”), as verified by detailed FDA inspections of manufacturing facilities. These regulations also require post-approval reporting of alleged product defects, recalls and certain adverse experiences to the FDA. Generally, FDA regulations divide medical devices into three classes. Class I devices are subject to general controls that require compliance with device establishment registration, product listing, labeling, QSRs and other general requirements that are also applicable to all classes of medical devices but, at least currently, most are not subject to premarket review. Class II devices are subject to special controls in addition to general controls and generally require the submission of a premarket notification 501(k) clearance before marketing is permitted. Class III devices are subject to the most comprehensive regulation and in most cases, other than those that remain grandfathered based on clinical use before 1976, require submission to the FDA of a PMA application that includes biocompatibility, manufacturing and clinical data supporting the safety and effectiveness of the device as well as compliance with the same provisions applicable to all medical devices such as QSRs. Annual reports must be submitted to the FDA, as well as descriptions of certain adverse events that are reported to the sponsor within specified timeframes of receipt of such reports. RESTYLANE^® and PERLANE^® are regulated as Class III PMA-required medical devices. RESTYLANE^® and PERLANE^® have been approved by the FDA under a PMA.

     In general, products falling within the FDA’s definition of “new drugs,” including both drugs and biological products, require premarket approval by the FDA. Products falling within the FDA’s definition of “cosmetics” or “drugs” and that are “generally recognized as safe and effective” (and therefore not “new drugs”) do not require premarketing clearance although all drugs must comply with a host of post-market regulations, including manufacture under cGMP and adverse experience reporting.

     “New drug” products are thoroughly tested to demonstrate their safety and effectiveness. Preclinical or biocompatibility testing is generally conducted on laboratory animals to evaluate the potential safety and toxicity of a drug. The results of these studies are submitted to the FDA as a part of an Investigational New Drug Application (“IND”), which must be effective before clinical trials in humans can begin. Typically, clinical evaluation of new drugs involves a time consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of healthy subjects to determine the early safety profile, the relationship of safety to dose, and the pattern of drug distribution and metabolism. In Phase II, one or more clinical trials are conducted with groups of patients afflicted with a specific disease or condition to determine preliminary efficacy and expanded evidence of safety; the degree of effect, if any, as compared to the current treatment regimen; and the optimal dose to be used in large scale trials. In Phase III, typically at least two large-scale, multi-center, comparative trials are conducted with patients afflicted with a target disease or condition to provide sufficient confirmatory data to support the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical trials and may, at its discretion, re-evaluate, alter, suspend or terminate the testing based upon the data that have been accumulated to that point and its assessment of the risk/benefit ratio to the patient.

     The steps required before a “new drug” may be marketed, shipped or sold in the U.S. typically include (i) preclinical laboratory and animal testing of pharmacology and toxicology; (ii) submission to the FDA of an IND; (iii) at least two adequate and well-controlled clinical trials to establish the safety and efficacy of the drug (for some applications, the FDA may accept one large clinical trial) beyond those human clinical trials necessary to establish a safe dose and to identify the human absorption, distribution, metabolism and excretion of the active ingredient or biological substance as applicable; (iv) submission to the FDA of an NDA or BLA; (v) FDA approval of the NDA or BLA; and (vi) manufacture under cGMPs as verified by a pre-approval inspection (“PAI”) by the FDA. In addition to obtaining FDA approval for each product, each drug-manufacturing establishment must be registered with the FDA.

     Generic versions of new drugs may also be approved by the agency pursuant to an ANDA if the product is pharmaceutically equivalent (i.e. it has the same active ingredient, strength, doseage form and route of administration) and bioequivalent to the reference listed drug (“RLD”). The agency will not approve an ANDA, however, if the RLD has statutory marketing exclusivity. If the RLD has patent protection, the FDA will approve an ANDA only if the applicant filed a paragraph IV certification and there is no 30-month stay in place. Approval of an ANDA does not generally require the submission of clinical data on the safety and effectiveness of the drug product if in an oral or parental dosage form. Clinical studies demonstrating equivalence to the innovator drug product may be required for certain topical drug products submitted under ANDAs. However, even if no clinical studies are required, the applicant must provide dissolution and/or bioequivalence studies to show that the active ingredient in an oral generic drug sponsor’s application is comparably available to the patient as the RLD upon which the ANDA is based.

     FDA approval is required before a “new drug” product may be marketed in the U.S. However, many historically over-the-counter (“OTC”) drugs are exempt from the FDA’s premarket approval requirements. In 1972, the FDA instituted the ongoing OTC Drug Review to evaluate the safety and effectiveness of all OTC active ingredients and associated labeling (“OTC drugs”). Through this process, the FDA issues monographs that set forth the specific active ingredients, dosages, indications and labeling statements for OTC drugs that the FDA will consider generally recognized as safe and effective and therefore not subject to premarket approval. Before issuance of a final OTC drug monograph as a federal regulation, OTC drugs are classified by the FDA in one of three categories: Category I ingredients and labeling which are deemed “generally recognized as safe and effective” for OTC use; Category II ingredients and labeling, which are deemed “not generally recognized as safe and effective” for OTC use; and Category III ingredients and labeling, for which “available data are insufficient” to classify as Category I or II, pending further studies. Based upon the results of these ongoing studies and pursuant to a court order, the FDA is required to reclassify all Category III ingredients as either Category I or Category II before issuance of a final monograph through notice and comment rule-making. For certain categories of OTC drugs not yet subject to a final monograph, the FDA usually permits such drugs to continue to be marketed until a final monograph becomes effective, unless the drug will pose a potential health hazard to consumers. Stated differently,

the FDA generally permits continued marketing only of any Category I products and Category III products that are “safe but unknown efficacy” products during the pendency of a final monograph. Drugs subject to final monographs, as well as drugs that are subject only to proposed monographs, are also and separately subject to various FDA regulations concerning, for example, cGMP, general and specific OTC labeling requirements and prohibitions against promotion for conditions other than those stated in the labeling. OTC drug manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties.

     The active ingredient in the LOPROX^® (ciclopirox) products has been approved by the FDA under multiple NDAs. The active ingredient in the DYNACIN^® (minocycline HCl) branded products has been approved by the FDA under multiple ANDAs. Benzoyl peroxide, the active ingredient in the TRIAZ^® products, has been classified as a Category III ingredient under a tentative final FDA monograph for OTC use in treatment of labeled conditions. The FDA has requested, and a task force of the Non-Prescription Drug Manufacturers Association (or “NDMA”), a trade association of OTC drug manufacturers, has undertaken further studies to confirm that benzoyl peroxide is not a tumor promoter when tested in conjunction with UV light exposure. The TRIAZ^® products, which we sell on a prescription basis, have the same ingredients at the same dosage levels as the OTC products. When the FDA issues the final monograph, one of several possible outcomes that may occur is that we may be required by the FDA to discontinue sales of TRIAZ^® products until and unless we file an NDA covering such product. There can be no assurance as to the results of these studies or any FDA action to reclassify benzoyl peroxide. In addition, there can be no assurance that adverse test results would not result in withdrawal of TRIAZ^® products from marketing. An adverse decision by the FDA with respect to the safety of benzoyl peroxide could result in the assertion of product liability claims against us and could have a material adverse effect on our business, financial condition and results of operations.

     Our TRIAZ^® branded products must meet the composition and labeling requirements established by the FDA for OTC products containing their respective basic ingredients. We believe that compliance with those established standards avoids the requirement for premarket clearance of these products. There can be no assurance that the FDA will not take a contrary position in the future. Our PLEXION^® branded products, which contain the active ingredients sodium sulfacetamide and sulfur, are marketed under the FDA compliance policy entitled “Marketed New Drugs without Approved NDAs or ANDAs.”

     We believe that certain of our products, as they are promoted and intended by us for use, are exempt from being considered “new drugs” and therefore do not require premarket clearance. There can be no assurance that the FDA will not take a contrary position in the future. If the FDA were to do so, we may be required to seek FDA approval for these products, market these products as OTC products or withdraw such products from the market. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the U.S. or a disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years. AMMONUL^®, adjunctive therapy for the treatment of acute hyperammonemia and associated encephalopathy in patients with deficiencies in enzymes of the urea cycle, has been granted orphan drug status.

     We also will be subject to foreign regulatory authorities governing clinical trials and pharmaceutical sales for products we seek to market outside the U.S. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained before marketing the product in those countries. The approval process varies from country to country, the approval process time required may be longer or shorter than that required for FDA approval, and any foreign regulatory agency may refuse to approve any product we submit for review.

Our History

     We filed our certificate of incorporation with the Secretary of State of Delaware on July 28, 1988. We completed our initial public offering during our fiscal year ended June 30, 1990, and launched our initial pharmaceutical products during our fiscal year ended June 30, 1991.

Change in Fiscal Year

     Effective December 31, 2005, we changed our fiscal year end from June 30 to December 31. This change was made to align our fiscal year end with other companies within our industry. This Form 10-K is intended to cover the audited calendar year January 1, 2009 to December 31, 2009, which we refer to as “2009.” We refer to the audited calendar year January 1, 2008 to December 31, 2008 as “2008.” We refer to the audited calendar year January 1, 2007 to December 31, 2007 as “2007.” We refer to the audited calendar year January 1, 2006 to December 31, 2006 as “2006.” Comparative financial information to 2006 is provided in this Form 10-K with respect to the calendar year January 1, 2005 to December 31, 2005, which is unaudited and we refer to as “2005.” Additional audited information is provided with respect to the transition period July 1, 2005 through December 31, 2005, which we refer to as the “Transition Period.” We refer to the period beginning July 1, 2004 and ending June 30, 2005 as “fiscal 2005.”

Employees

     At December 31, 2009, we had 612 full-time employees. No employees are subject to a collective bargaining agreement. We believe we have a good relationship with our employees.

Available Information

     We make available free of charge on or through our Internet website, www.Medicis.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, if any, filed or furnished pursuant to Section 13(a) of 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). We also make available free of charge on or through our website our Business Code of Conduct and Ethics, Corporate Governance Guidelines, Nominating and Governance Committee Charter, Stock Option and Compensation Committee Charter, Audit Committee Charter, Employee Development and Retention Committee Charter and Compliance Committee Charter. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.

Item 1A. Risk Factors

     Our statements in this report, other reports that we file with the SEC, our press releases and in public statements of our officers and corporate spokespersons contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current events, and contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “will,” “plan,” “believe,” “should,” “outlook,” “could,” “target” and other words of similar meaning in connection with discussion of future operating or financial performance. These include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings and financial results. These statements are based on certain assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. These forward-looking statements reflect the current views of senior management with respect to future events and financial performance. No assurances can be given, however, that these activities, events or developments will occur or that such results will be achieved, and actual results may vary materially from those anticipated in any forward-looking statement. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context of the various disclosures made by us about our businesses including, without limitation, the risk factors discussed below. We do not plan to update any such forward-looking statements and expressly disclaim any duty to update the information contained in this filing except as required by law.

     We operate in a rapidly changing environment that involves a number of risks. The following discussion highlights some of these risks and others are discussed elsewhere in this report. These and other risks could materially and adversely affect our business, financial condition, prospects, operating results or cash flows.

Risks Related To Our Business

Certain of our primary products could lose patent protection in the near future and become subject to competition from generic forms of such products. If that were to occur, sales of those products would decline significantly and such decline could have a material adverse effect on our results of operations.

     We depend upon patents to provide us with exclusive marketing rights for certain of our primary products for some period of time. If product patents for our primary products expire, or are successfully challenged by our competitors, in the United States and in other countries, we would face strong competition from lower price generic drugs. Loss of patent protection for any of our primary products would likely lead to a rapid loss of sales for that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to our sales, the loss of patent protection could have a material adverse effect on our results of operations.

     We currently have one issued patent, the ’838 Patent, relating to SOLODYN^® that does not expire until 2018, and two other issued patents, U.S. Patent No. 7,541,347 (the “’347 Patent”) and U.S. Patent No. 7,544,373 (the “’373 Patent”), relating to 90mg SOLODYN^® Tablets that do not expire until 2027. As part of our patent strategy, we are currently pursuing additional patent applications for SOLODYN^®. However, we cannot provide any assurance that any additional patents will be issued relating to SOLODYN^®. For example, on November 17, 2009, we received a non-final office action from the USPTO in SOLODYN^® patent application number 12/253,845 (the “’845 Application”) in which the sole basis for rejection could be overcome by the filing of the Terminal Disclaimer. In response, we filed a Terminal Disclaimer with the USPTO on November 25, 2009. The Terminal Disclaimer has the effect of making the expiration dates of the ’845 Application and the related patent application number 11/166817 (“’817 Application”) the same. On November 25, 2009, we filed a Request for Continued Examination with the USPTO in the ’817 Application so that the USPTO could consider references recently filed in the Reexamination of the ’838 Patent, as discussed in more detail below, and in accordance with our ongoing obligation to advise the USPTO of any references that could be deemed by the examiner to be material. The failure to obtain additional patent protection could adversely affect our ability to deter generic competition, which would adversely affect SOLODYN^® revenue and our results of operations.

SOLODYN^® faced generic competition during 2009 and may face additional generic competition in the near future.

     On January 15, 2008, we announced that IMPAX sent us a letter advising that IMPAX has filed an ANDA seeking FDA approval to market a generic version of SOLODYN^® (minocycline HCl) extended-release capsules. Also on January 15, 2008, IMPAX filed a lawsuit against us in the United States District Court for the Northern District of California seeking a declaratory judgment that the ’838 Patent related to SOLODYN^® is invalid and is not infringed by IMPAX’s ANDA for a generic version of SOLODYN^®. On April 16, 2008, the Court granted Medicis’ motion to dismiss the IMPAX complaint for lack of jurisdiction. IMPAX appealed the Court’s order dismissing the case to the United States Court of Appeals for the Federal Circuit. On November 26, 2008, we entered into a License and Settlement Agreement and a Joint Development Agreement with IMPAX. In connection with the License and Settlement Agreement, Medicis and IMPAX agreed to terminate all legal disputes between them relating to SOLODYN^®. Additionally, under terms of the License and Settlement Agreement, IMPAX has confirmed that Medicis’ patents relating to SOLODYN^® are valid and enforceable, and cover IMPAX’s activities relating to its generic product under ANDA #90-024. Under the terms of the License and Settlement Agreement, IMPAX has a license to market its generic versions of SOLODYN^® 45mg, 90mg and 135mg under the SOLODYN^® intellectual property rights belonging to Medicis upon the occurrence of certain events. Upon launch of its generic formulations of SOLODYN^®, IMPAX may be required to pay Medicis a royalty, based on sales of those generic formulations by IMPAX under terms described in the License and Settlement Agreement. On December 12, 2008, we announced that we had received a Paragraph IV Patent Certification from IMPAX, advising it had filed an ANDA with the FDA for generic SOLODYN^® in its current forms of 45mg, 90mg and 135mg strengths. IMPAX’s certification alleged that the ’838 Patent will not be infringed by IMPAX’s manufacture, use or sale of the product for which the ANDA was submitted because it has been granted a patent license by us for the ’838 Patent. On February 3, 2009, the FDA approved IMPAX’s ANDA for generic SOLODYN^®. IMPAX has not yet launched a generic formulation of SOLODYN^®.

     On June 23, 2009, we and IMPAX entered into a Settlement Agreement (the “IMPAX Settlement Agreement”) and Amendment No. 2 to the License and Settlement Agreement. In conjunction with the IMPAX Settlement Agreement, both we and IMPAX released, acquitted, covenanted not to sue and forever discharged each

other and our affiliates from any and all liabilities relating to the litigation stemming from the initial License and Settlement Agreement between IMPAX and us. We made a settlement payment to IMPAX in conjunction with the execution of the IMPAX Settlement Agreement and Amendment No. 2 to the License and Settlement Agreement, which was included in selling, general and administrative expenses during the three months ended June 30, 2009.

     On August 18, 2008, we announced that the USPTO had granted a Request for Ex Parte Reexamination of our ’838 Patent. In March 2009, the USPTO issued a non-final office action in the reexamination of the ’838 Patent. On May 13, 2009, we filed our response to the non-final office action with the USPTO, canceling certain claims and adding amended claims. On November 13, 2009, we received a second non-final office action from the USPTO in the reexamination of the ’838 Patent. The latest office action rejects certain claims of the ’838 Patent. On January 8, 2010, we filed our response to the non-final office action with the USPTO. Reexamination can result in confirmation of the validity of all of a patent’s claims, the invalidation of all of a patent’s claims, or the confirmation of some claims and the invalidation of others. We cannot guarantee the outcome of the reexamination. It is possible that one or more of our patents covering SOLODYN^® may be found invalid or narrowed in scope as the result of the pending reexamination or a future reexamination by the USPTO. If the USPTO’s action leads the court in a SOLODYN^® patent infringement suit, including the suits described in this Report, to hold that the patent for SOLODYN^® is invalid or not infringed, such a holding would permit the FDA to lift the 30-month stay on approval of ANDAs for generic versions of SOLODYN^®.

     Pursuant to Section 125 of the Food and Drug Administration Modernization Act (FDAMA), several statutory provisions added to the FDCA by the Hatch-Waxman Amendments of 1984, including the patent listing, certification and notice provisions and the 30-month stay provision, did not apply to so-called “old antibiotics” such as minocycline HCl, the active ingredient in SOLODYN^®. On October 8, 2008, the President signed into law the QI Program Supplemental Funding Act of 2008, Pub. L. No. 110-379, 122 Stat. 4075 (2008) (the “Antibiotic Act”), which provides that notwithstanding section 125 of FDAMA or any other provision of law, the provisions of the Hatch-Waxman Amendments shall apply to old antibiotics. On December 3, 2008, in accordance with and pursuant to the Antibiotic Act and FDA’s recently issued Draft Guidance for Industry entitled Submission of Patent Information for Certain Old Antibiotics (Nov. 2008) (“November 2008 Guidance”), Medicis submitted the ’838 Patent covering SOLODYN^® to the Orange Book.

     On December 8, 2008, we announced that we had received a Paragraph IV Patent Certification from Mylan Inc. (“Mylan”) advising that Mylan’s majority owned subsidiary Matrix Laboratories Limited (“Matrix”) has filed an ANDA with the FDA for generic SOLODYN^® in its current forms of 45mg, 90mg and 135mg strengths. Mylan has not advised us as to the timing or status of the FDA’s review of Matrix’s filing, or whether Matrix has complied with FDA requirements for proving bioequivalence. Mylan’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable and/or will not be infringed by Matrix’s manufacture, use, or sale of the product for which the ANDA was submitted.

     On December 12, 2008, we announced that we had received a Paragraph IV Patent Certification from Sandoz, Inc., a division of Novartis AG (“Sandoz”), advising that Sandoz had filed an ANDA with the FDA for generic SOLODYN^® in its current forms of 45mg, 90mg and 135mg strengths. Sandoz’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable and/or will not be infringed by Sandoz’s manufacture, use, or sale of the product for which the ANDA was submitted.

     On December 29, 2008 we announced that we had received a Paragraph IV Patent Certification from Barr Laboratories, Inc. (“Barr”) advising that Barr has filed an ANDA with the FDA for generic SOLODYN^® in its current forms of 45mg, 90mg and 135mg strengths. Barr’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable and/or will not be infringed by Barr’s manufacture, use, or sale of the product for which the ANDA was submitted.

     On January 13, 2009, we filed suit against Mylan, Matrix, Matrix Laboratories Inc., Sandoz and Barr (collectively “Defendants”) in the United States District Court for the District of Delaware seeking an adjudication that Defendants have infringed one or more claims of our ’838 Patent by submitting to the FDA their respective ANDAs for generic versions of SOLODYN^®. The relief we requested includes a request for a permanent injunction preventing Defendants from infringing the ’838 Patent by selling generic versions of SOLODYN^®. Mylan has answered that the ’838 Patent is not infringed and/or is invalid. On March 30, 2009, the Delaware court dismissed the claims between us and Matrix Laboratories Inc. without prejudice, pursuant to a stipulation between us and Matrix Laboratories Inc.

     On February 13, 2009, we submitted a Citizen Petition to the FDA arguing that the Agency could not approve the Mylan, Sandoz and Barr ANDAs for generic versions of SOLODYN^® for thirty (30) months pursuant to Section 505(j)(5)(B)(iii) of the FDCA because we sued the submitters of all three ANDAs for patent infringement within 45 days of receiving notice from them of the submission of a Paragraph IV Certification. In light of the recently enacted Antibiotic Act, we argued that neither FDAMA nor the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) stood as a barrier to SOLODYN^® receiving a 30-month stay. On March 17, 2009, we received a response from the FDA in which the agency concluded that the Antibiotic Act did not alter the MMA provision barring ANDA was pending with the FDA at the time the patent was submitted to the Orange Book. Because the ’838 Patent could not be submitted to the Orange Book until the passage of the Antibiotics Act, the ’838 Patent was not submitted to the Orange Book until after the ANDAs in question were already pending with the FDA. The FDA therefore denied the petition.

     On March 17, 2009, Teva Pharmaceutical Industries Ltd. (“Teva”) was granted final approval by the FDA for its ANDA #65-485 to market its generic versions of 45mg, 90mg and 135mg SOLODYN^® Extended Release Tablets. Teva commenced shipment of this product immediately after the FDA’s approval of the ANDA. On March 18, 2009, we entered into a settlement agreement with Teva, whereby all legal disputes between us and Teva relating to SOLODYN^® Extended Release Tablets were terminated and whereby Teva agreed that Medicis’ patents related to SOLODYN^® are valid and enforceable, and cover Teva’s activities relating to its generic SOLODYN^® product under ANDA #65-485. As part of the settlement, Teva agreed to immediately stop all further shipments of its generic SOLODYN^® product. We agreed to release Teva from liability arising from any prior sales of its generic SOLODYN^® product, which were not authorized by us. Under terms of the agreement, Teva has the option to market its generic versions of SOLODYN^® 45mg, 90mg and 135mg under the SOLODYN^® patent rights belonging to us in November 2011, or earlier under certain conditions. Teva’s shipment of its generic SOLODYN^® product upon FDA approval, but prior to the consummation of the settlement agreement with us on March 18, 2009, caused wholesalers to reduce ordering levels for SOLODYN^®, and caused us to increase our reserves for sales returns and consumer rebates during the three months ended March 31, 2009. On November 13, 2009, we entered into an amended and restated settlement agreement with Teva for the purpose of providing additional detail around certain terms of the original settlement agreement.

     On August 13, 2009, Sandoz was granted final approval by the FDA for its ANDA #90-422 to market its generic versions of 45mg, 90mg and 135mg SOLODYN^® Extended Release Tablets. Sandoz commenced shipment of this product immediately after the FDA’s approval of the ANDA. On August 18, 2009, we entered into a settlement agreement with Sandoz whereby all legal disputes between us and Sandoz relating to SOLODYN^® Extended Release Tablets were terminated and where Sandoz agreed that our patents relating to SOLODYN^® are valid and enforceable, and cover Sandoz’s activities relating to its generic SOLODYN^® product under ANDA #90-422. Sandoz agreed that any prior sales of its generic SOLODYN^® product were not authorized by us and further agreed to be permanently enjoined from any further distribution of generic SOLODYN^®. The Delaware court subsequently entered a permanent injunction against any infringement by Sandoz. We agreed in the settlement agreement to release Sandoz from liability arising from any prior sales of its generic SOLODYN^® which were not authorized by us. Sandoz has the option to market its generic version of SOLODYN^® 45mg, 90mg and 135mg under the SOLODYN^® intellectual property rights belonging to us commencing in November 2011, or earlier under certain conditions.

     On May 6, 2009, we received a Paragraph IV Patent Certification from Ranbaxy Laboratories Limited (“Ranbaxy”) advising that Ranbaxy has filed an ANDA with the FDA for generic SOLODYN^® in its form of 135mg strength. Ranbaxy did not advise us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Ranbaxy’s Paragraph IV Certification alleged that Ranbaxy’s manufacture, use, sale or offer for sale of the product for which the ANDA was submitted would not infringe any valid claim of our ’838 Patent. On June 11, 2009, we filed suit against Ranbaxy and Ranbaxy Inc. (hereinafter collectively “Ranbaxy”) in the United States District Court for the District of Delaware seeking an adjudication that Ranbaxy has infringed one or more claims of the ’838 Patent by submitting the above ANDA to the FDA. The relief we requested included a request for a permanent injunction preventing Ranbaxy from infringing the ’838 Patent by selling a generic version of SOLODYN^®. Ranbaxy has answered that the ’838 Patent is not infringed, is invalid and/or is unenforceable. On January 5, 2010, we received a Paragraph IV Patent Certification from Ranbaxy advising that Ranbaxy has filed a supplement or amendment to its earlier filed ANDA assigned ANDA #91-118 (“Ranbaxy ANDA Supplement/Amendment”) with the FDA for generic SOLODYN^® in its forms of 45mg and 90mg strengths. Ranbaxy has not advised us as to the timing or status of the FDA’s review of

its filing, or whether Ranbaxy has complied with FDA requirements for proving bioequivalence. Ranbaxy’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable and/or will not be infringed by Ranbaxy’s manufacture, importation, use, sale and/or offer for sale of the products for which the Ranbaxy ANDA Supplement/Amendment was submitted. Ranbaxy’s Paragraph IV Certification also alleges that neither our ‘347 Patent nor our ‘373 Patent is infringed by Ranbaxy’s manufacture, importation, use, sale and/or offer for sale of the products for which the Ranbaxy ANDA Supplement/Amendment was submitted. Ranbaxy’s submission as to the 45mg and 90mg strengths amends an ANDA already subject to a 30-month stay. As such, we believe that the Ranbaxy ANDA Supplement/Amendment cannot be approved by the FDA until after the expiration of the 30-month period or in the event of a court decision holding that the patents are invalid or not infringed. On February 16, 2010, we filed a complaint against Ranbaxy in the United States District Court for the District of Delaware seeking an adjudication that Ranbaxy has infringed one or more claims of the patents by submitting the Ranbaxy ANDA Supplement/Amendment for generic SOLODYN^® in its forms of 45mg and 90mg strengths.

     On October 8, 2009, we received a Paragraph IV Patent Certification from Lupin advising that Lupin has filed an ANDA with the FDA for generic SOLODYN^® in its forms of 45mg, 90mg, and 135mg strengths. Lupin did not advise us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Lupin’s Paragraph IV Certification alleged that Lupin’s manufacture, use, sale or offer for sale of the product for which the ANDA was submitted would not infringe any valid claim of our ’838 Patent. On November 17, 2009, we filed suit against Lupin in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting to the FDA an ANDA for generic SOLODYN^® in its forms of 45mg, 90mg and 135mg strengths. The relief we requested includes a request for a permanent injunction preventing Lupin from infringing the ’838 Patent by selling generic versions of SOLODYN^®. On November 24, 2009, we received a Paragraph IV Patent Certification from Lupin, advising that Lupin has filed a supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 (“Lupin ANDA Supplement/Amendment I”) with the FDA for generic SOLODYN^® in its form of 65mg strength. Lupin has not advised us as to the timing or status of the FDA’s review of its filing, or whether Lupin has complied with FDA requirements for proving bioequivalence. Lupin’s Paragraph IV Certification alleges that our ’838 Patent is invalid and/or will not be infringed by Lupin’s manufacture, use, sale and/or importation of the products for which the Lupin ANDA Supplement/Amendment I was submitted. Lupin’s submission amends an ANDA already subject to a 30-month stay. As such, we believe that the supplement or amendment cannot be approved by the FDA until after the expiration of the 30-month period or a court decision that the patent is invalid or not infringed. On December 23, 2009, we received a Paragraph IV Patent Certification from Lupin, advising that Lupin has filed a supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 (“Lupin ANDA Supplement/Amendment II”) with the FDA for generic SOLODYN ^® in its form of 115mg strength. Lupin has not advised us as to the timing or status of the FDA’s review of its filing, or whether Lupin has complied with FDA requirements for proving bioequivalence. Lupin’s Paragraph IV Certification alleges that our ’838 Patent is invalid and/or will not be infringed by Lupin’s manufacture, use, sale and/or importation of the products for which the Lupin ANDA Supplement/Amendment II was submitted. Lupin’s submission amends an ANDA already subject to a 30-month stay. As such, we believe that the supplement or amendment cannot be approved by the FDA until after the expiration of the 30-month period or a court decision that the patent is invalid or not infringed. On December 28, 2009, we amended our complaint against Lupin in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting its supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 for generic SOLODYN^® in its form of 65mg strength. On February 2, 2010, we amended our complaint against Lupin in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting its supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 for generic SOLODYN^® in its form of 115mg strength.

     On November 20, 2009, we received a Paragraph IV Patent Certification from Barr, advising that Barr has filed a supplement to its earlier filed ANDA #65-485 (“Barr ANDA Supplement”) with the FDA for generic SOLODYN^® in its forms of 65mg and 115mg strengths. Barr has not advised us as to the timing or status of the FDA’s review of its filing, or whether Barr has complied with FDA requirements for proving bioequivalence. Barr’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable and/or will not be infringed by Barr’s manufacture, use, sale and/or importation of the products for which the Barr ANDA Supplement was submitted. On December 28, 2009, we filed suit against Barr/Teva, in the United States District Court for the District of Maryland seeking an adjudication that Barr/Teva has infringed one or more claims of the ’838 Patent by submitting to the FDA the Barr ANDA Supplement seeking marketing approval for generic SOLODYN^® in its forms of 65mg and 115mg strengths. The relief we requested includes a request for a permanent injunction preventing Barr/Teva from infringing the ’838 Patent by selling generic versions of SOLODYN^® in its forms of 65mg and 115mg strengths. As a result of the filing of the suit, we believe that the supplement to the ANDA cannot

be approved by the FDA until after the expiration of a 30-month stay period or a court decision that the patent is invalid or not infringed.

     On February 1, 2010, we received a Paragraph IV Patent Certification from Sandoz, advising that Sandoz has filed a supplement to its earlier filed ANDA #91-422 (“Sandoz ANDA Supplement”) with the FDA for generic SOLODYN^® in its forms of 65mg and 115mg strengths. Sandoz has not advised us as to the timing or status of the FDA’s review of its filing, or whether Sandoz has complied with FDA requirements for proving bioequivalence. Sandoz’s Paragraph IV Certification alleges that the ’838 Patent will not be infringed by Sandoz’s manufacture, importation, use, sale and/or offer for sale of the products for which the Sandoz ANDA Supplement was submitted because it has been granted a patent license by us for the ’838 Patent.

In addition to SOLODYN^®, our other prescription products, including VANOS ^® and LOPROX^®, are or may be subject to generic competition in the near future.

     On May 1, 2008, we announced that we received notice from Perrigo Israel Pharmaceuticals Ltd. (“Perrigo Israel”), a generic pharmaceutical company, that it had filed an ANDA with the FDA for a generic version of our VANOS^® fluocinonide cream 0.1%. Perrigo Israel’s notice indicated that it was challenging only one of the two patents that we listed with the FDA for VANOS^® cream, our U.S. Patent No. 6,765,001 (the “’001 Patent”) that will expire in 2021. On June 6, 2008, we filed a complaint for patent infringement against Perrigo Israel and, its domestic corporate parent, Perrigo Company, in the United States District Court for the Western District of Michigan. In August 2008, we received notice that Perrigo Israel amended its ANDA to challenge our other patent listed with the FDA for VANOS^® cream, our U.S. Patent No. 7,220,424 (the “’424 Patent) that will expire in 2023. Our complaint asserts that Perrigo Israel and Perrigo Company have infringed on both of our patents for VANOS^® cream. On April 8, 2009, we entered into a license and settlement agreement with Perrigo. In connection with the license and settlement agreement, we and Perrigo agreed to terminate all legal disputes between us relating to our VANOS^® cream. In addition, Perrigo confirmed that certain of our patents relating to VANOS^® cream are valid and enforceable, and are infringed by Perrigo’s activities relating to its generic product under ANDA #090256. Further, subject to the terms and conditions contained in the license and settlement agreement, we granted Perrigo, effective December 15, 2013, or earlier upon the occurrence of certain events, a license to make and sell generic versions of the existing VANOS^® products and, when Perrigo does commercialize generic versions of VANOS^® products, Perrigo will pay us a royalty based on sales of such generic products.

     On May 8, 2009, we received a Paragraph IV Patent Certification from Glenmark advising that Glenmark has filed an ANDA with the FDA for a generic version of VANOS^® cream. Glenmark has not advised us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Glenmark’s Paragraph IV Certification alleges that our ’001 Patent and ’424 Patent will not be infringed by Glenmark’s manufacture, use or sale of the product for which the ANDA was submitted. The expiration date for the ’424 Patent is 2023. On June 19, 2009, we filed a complaint for patent infringement against Glenmark in the United States District Court for the District of New Jersey. On July 14, 2009, Glenmark and Glenmark Ltd. answered our complaint, and filed counterclaims seeking a declaration that the patents we listed with the FDA for VANOS^® cream were invalid and unenforceable, and would not be infringed by Glenmark’s generic version of VANOS^®. On November 14, 2009, we entered into a license and settlement agreement with Glenmark Ltd. and Glenmark. In connection with the license and settlement agreement, we and Glenmark agreed to terminate all legal disputes between us relating to VANOS^®. In addition, Glenmark confirmed that certain of our patents relating to VANOS^® cream are valid and enforceable, and cover Glenmark’s activities relating to its generic versions of VANOS^® cream under its ANDA. Further, subject to the terms and conditions contained in the license and settlement agreement, we granted Glenmark, effective December 15, 2013, or earlier upon the occurrence of certain events, a license to make and sell generic versions of the existing VANOS^® products. Upon commercialization by Glenmark of generic versions of VANOS^® products, Glenmark will pay us a royalty based on sales of such generic products.

     On September 21, 2009, we received a Paragraph IV Patent Certification from Glenmark advising that Glenmark has filed an ANDA with the FDA for a generic version of LOPROX^® Gel. Glenmark did not advise us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Glenmark’s Paragraph IV Certification alleged that our U.S. Patent No. 7,018,656 (the “’656 Patent”) would not be infringed by Glenmark’s manufacture, use or sale of the product for which the ANDA was submitted. The expiration date for the ’656 Patent is 2018. On November 14, 2009, we entered into a License and Settlement Agreement with Glenmark and its foreign corporate parent Glenmark Ltd. In connection with the

License and Settlement Agreement, we and Glenmark agreed to terminate all legal disputes between us relating to LOPROX^® Gel. In addition, Glenmark confirmed that certain of our patents relating to LOPROX^® Gel are valid and enforceable, and cover Glenmark’s activities relating to its generic version of LOPROX^® Gel under an ANDA. Subject to the terms and conditions contained in the License and Settlement Agreement, we also granted Glenmark a license to make and sell generic versions of LOPROX^® Gel. Upon commercialization by Glenmark of generic versions of LOPROX^® Gel, Glenmark will pay us a royalty based on sales of such generic products.

     On December 7, 2009, we entered into a Settlement Agreement (the “Paddock Settlement Agreement”) with Paddock Laboratories, Inc. (“Paddock”). In connection with the Paddock Settlement Agreement, we and Paddock agreed to settle all legal disputes between us relating to our LOPROX^® Shampoo and we agreed to withdraw our complaint against Paddock pending in the U.S. District Court for the District of Arizona. In addition, Paddock confirmed that Paddock’s activities relating to its generic version of LOPROX^® Shampoo are covered by our current and pending patent applications. Further, subject to the terms and conditions contained in the Paddock Settlement Agreement, we granted Paddock a non-exclusive, royalty-bearing license to make and sell limited quantities of its generic version of LOPROX^® Shampoo.

     On February 16, 2010, the FDA approved an ANDA filed by an affiliate of Perrigo for a generic version of LOPROX^® Shampoo. In addition, other companies may seek approval of an ANDA covering a generic version of LOPROX^® Shampoo.

     If any of our primary products are rendered obsolete or uneconomical by competitive changes, including generic competition, our results of operation would be materially and adversely affected.

If we are unable to secure and protect our intellectual property and proprietary rights, or if our intellectual property rights are found to infringe upon the intellectual property rights of other parties, our business could suffer.

     Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets, operate without infringing upon the proprietary rights of others, and prevent others from infringing on our patents, trademarks, service marks and other intellectual property rights.

     The patents and patent applications in which we have an interest may be challenged as to their validity or enforceability or infringement. Any such challenges may result in potentially significant harm to our business and enable generic entry to markets for our products. The cost of responding to any such challenges and the cost of prosecuting infringement claims and any related litigation, could be substantial. In addition, any such litigation also could require a substantial commitment of our management’s time.

     See the previously listed Risk Factor, “Certain of our primary products could lose patent protection in the near future and become subject to competition from generic forms of such products. If that were to occur, sales of those products would decline significantly and such decline could have a material adverse effect on our results of operations,” Item 3 of Part I of this report, “Legal Proceedings,” and Note 12, “Commitments and Contingencies” in the notes to the consolidated financial statements under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules,” for information concerning our current intellectual property litigation.

     We are pursuing several United States patent applications, but we cannot be sure that any of these patents will ever be issued. We also have acquired rights under certain patents and patent applications in connection with our licenses to distribute products and by assignment of rights to patents and patent applications from certain of our consultants and officers. These patents and patent applications may be subject to claims of rights by third parties. If there are conflicting claims to the same patent or patent application, we may not prevail and, even if we do have some rights in a patent or patent application, those rights may not be sufficient for the marketing and distribution of products covered by the patent or patent application.

     The ownership of a patent or an interest in a patent does not always provide significant protection. Others may independently develop similar technologies or design around the patented aspects of our products. We only conduct patent searches to determine whether our products infringe upon any existing patents when we think such searches are appropriate. As a result, the products and technologies we currently market, and those we may market in the future, may infringe on patents and other rights owned by others. If we are unsuccessful in any challenge to the marketing and sale of our products or technologies, we may be required to license the disputed rights, if the holder of those rights is willing to license such rights, otherwise we may be required to cease marketing the

challenged products, or to modify our products to avoid infringing upon those rights. A claim or finding of infringement regarding one of our products could harm our business, financial condition and results of operations. The costs of responding to infringement claims could be substantial and could require a substantial commitment of our management’s time. The expiration of patents may expose our products to additional competition.

     We believe that the protection of our trademarks and service marks is an important factor in product recognition and in our ability to maintain or increase market share. If we do not adequately protect our rights in our various trademarks and service marks from infringement, their value to us could be lost or diminished. If the marks we use are found to infringe upon the trademark or service mark of another company, we could be forced to stop using those marks and, as a result, we could lose the value of those marks and could be liable for damages caused by an infringement.

     We also rely upon trade secrets, unpatented proprietary know-how and continuing technological innovation in developing and manufacturing many of our primary products. It is our policy to require all of our employees, consultants and advisors to enter into confidentiality agreements prohibiting them from taking or disclosing our proprietary information and technology and we employ other strategies to protect our trade secrets and other confidential information. Nevertheless, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how if they are used or disclosed. Despite all of the precautions we may take, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. In addition, others may independently develop similar or equivalent trade secrets or know-how.

We depend on licenses from others, and any loss of such licenses could harm our business, market share and profitability.

     We have acquired the rights to manufacture, use and market certain products, including certain of our primary products. We also expect to continue to obtain licenses for other products and technologies in the future. Our license agreements generally require us to develop a market for the licensed products. If we do not develop these markets within specified time frames, the licensors may be entitled to terminate these license agreements.

     We may fail to fulfill our obligations under any particular license agreement for various reasons, including insufficient resources to adequately develop and market a product, lack of market development despite our diligence and lack of product acceptance. Our failure to fulfill our obligations could result in the loss of our rights under a license agreement.

     Our inability to continue the distribution of any particular licensed product could harm our business, market share and profitability. Also, certain products we license are used in connection with other products we own or license. A loss of a license in such circumstances could materially harm our ability to market and distribute these other products.

Obtaining FDA and other regulatory approvals is time consuming, expensive and uncertain.

     The research, development and marketing of our products are subject to extensive regulation by government agencies in the U.S, particularly the FDA, and other countries. The process of obtaining FDA and other regulatory approvals is time consuming and expensive. Clinical trials are required, and the manufacturing of pharmaceutical and medical device products is subject to rigorous testing procedures. We may not be able to obtain FDA approval to conduct clinical trials or to manufacture or market any of the products we develop, acquire or license on a timely basis or at all. Moreover, the costs to obtain approvals could be considerable, and the failure to obtain or delays in obtaining an approval could significantly harm our business performance and financial results. Marketing approval or clearance of a new product or new indication for an approved product may be delayed, restricted, or denied for many reasons, including:

	•		determination by the FDA that the product is not safe and effective;
	•		a different interpretation of preclinical and clinical data by FDA;
	•		failure to obtain approval of the manufacturing process or facilities;
	•		results of post-marketing studies;
	•		changes in FDA policy or regulations related to product approvals; and
	•		failure to comply with applicable regulatory requirements.

     No amount of time, effort, or resources invested in a new product or new indication for an approved product can guarantee that regulatory approval will be granted.

     The FDA vigorously monitors the ongoing safety of products, which can affect the approvability of our products or the continued ability to market our products. If adverse events are associated with products that have already been approved or cleared for marketing, such products could be subject to increased regulatory scrutiny, changes in regulatory approval or labeling, or withdrawal from the market. Even if pre-marketing approval from the FDA is received, the FDA is authorized to impose post-marketing requirements such as:

	•		testing and surveillance to monitor the product and its continued compliance with regulatory requirements, including cGMPs for drug and biologic products and the QSRs for medical device products;
	•		submitting products, facilities and records for inspection and, if any inspection reveals that the product is not in compliance, prohibiting the sale of all products from the same lot;
	•		suspending manufacturing;
	•		switching status from prescription to over-the-counter drug;
	•		completion of post-marketing studies;
	•		changes to approved product labeling;
	•		advertising or marketing restrictions, including direct-to-consumer advertising;
	•		REMS;
	•		recalling products; and
	•		withdrawing marketing clearance.

     In their regulation of advertising, the FDA and FTC from time to time issue correspondence to pharmaceutical companies alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices, and the receipt of correspondence from the FDA alleging these practices could result in the following:

	•		incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements;
	•		changes in the methods of marketing and selling products;
	•		taking FDA-mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding previous advertisements or promotion; and
	•		disruption in the distribution of products and loss of sales until compliance with the FDA’s position is obtained.

     In recent years, various legislative proposals have been offered in Congress and in some state legislatures that include major changes in the health care system. These proposals have included price or patient reimbursement constraints on medicines, restrictions on access to certain products, re-importation of products from Canada or other sources and mandatory substitution of generic for branded products. We cannot predict the outcome of such initiatives, and it is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting us.

If we market products in a manner that violates health care fraud and abuse laws, we may be subject to civil or criminal penalties.

     Federal health care program anti-kickback statutes prohibit, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid, or other federally financed health care programs. This statute has been interpreted to apply to arrangements between pharmaceutical and medical device manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. From time to time we may enter into business arrangements (e.g. loans or investments) involving our customers and those arrangements may be reviewed by federal and state regulators.

Although we believe that we are in compliance, our practices may be determined to fail to meet all of the criteria for safe harbor protection from anti-kickback liability.

     Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Pharmaceutical and medical device companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated best price information to the Medicaid Rebate Program. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws.

     On April 25, 2007, we entered into a Settlement Agreement with the Justice Department, the Office of Inspector General of the Department of Health and Human Services (“OIG”) and the TRICARE Management Activity (collectively, the “United States”) and private complainants to settle all outstanding federal and state civil suits against us in connection with claims related to our alleged off-label marketing and promotion of LOPROX^® and LOPROX^® TS products to pediatricians during periods prior to our May 2004 disposition of our pediatric sales division (the “Settlement Agreement”). The settlement is neither an admission of liability by us nor a concession by the United States that its claims are not well founded. Pursuant to the Settlement Agreement, we agreed to pay approximately $10 million to settle the matter. Pursuant to the Settlement Agreement, the United States released us from the claims asserted by the United States and agreed to refrain from instituting action seeking exclusion from Medicare, Medicaid, the TRICARE Program and other federal health care programs for the alleged conduct. These releases relate solely to the allegations related to us and do not cover individuals. The Settlement Agreement also provides that the private complainants release us and our officers, directors and employees from the asserted claims, and we release the United States and the private complainants from asserted claims.

     As part of the settlement, we have entered into a five-year Corporate Integrity Agreement (the “CIA”) with the OIG to resolve any potential administrative claims the OIG may have arising out of the government’s investigation. The CIA acknowledges the existence of our comprehensive existing compliance program and provides for certain other compliance-related activities during the term of the CIA, including the maintenance of a compliance program that, among other things, is designed to ensure compliance with the CIA, federal health care programs and FDA requirements. Pursuant to the CIA, we are required to notify the OIG, in writing, of: (i) any ongoing government investigation or legal proceeding involving an allegation that we have committed a crime or have engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws; (iii) any written report, correspondence, or communication to the FDA that materially discusses any unlawful or improper promotion of our products; and (iv) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by Federal health care programs. We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates. We have hired a Chief Compliance Officer and created an enterprise-wide compliance function to administer our obligations under the CIA. Failure to comply under the CIA could result in substantial civil or criminal penalties and being excluded from government health care programs, which could materially reduce our sales and adversely affect our financial condition and results of operations.

     On or about October 12, 2006, we and the United States Attorney’s Office for the District of Kansas entered into a Nonprosecution Agreement wherein the government agreed not to prosecute us for any alleged criminal violations relating to the alleged off-label marketing and promotion of LOPROX^®. In exchange for the government’s agreement not to pursue any criminal charges against us, we agreed to continue cooperating with the government in its ongoing investigation into whether past and present employees and officers may have violated federal criminal law regarding alleged off-label marketing and promotion of LOPROX^® to pediatricians. As a result of the investigation, prosecutions and other proceedings, certain past and present sales and marketing employees and officers separated from the Company. See Item 3 of Part I of this report, “Legal Proceedings” and Note 12,

“Commitments and Contingencies,” in the notes to the consolidated financial statements listed under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules,” for information concerning our current litigation.

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable U.S. federal and state regulations and all potentially applicable foreign regulations.

     The development, manufacturing, distribution, pricing, sales, marketing and reimbursement of our products, together with our general operations, is subject to extensive federal and state regulation in the United States and in foreign countries. While we have developed and instituted a corporate compliance program based on what we believe to be current best practices, we cannot assure you that we or our employees are or will be in compliance with all potentially applicable federal, state or foreign regulations and/or laws or the Corporate Integrity Agreement we entered into with the Office of Inspector General of the Department of Health and Human Services. If we fail to comply with the Corporate Integrity Agreement or any of these regulations and/or laws a range of actions could result, including, but not limited to, the failure to approve a product candidate, restrictions on our products or manufacturing processes, including withdrawal of our products from the market, significant fines, exclusion from government healthcare programs or other sanctions or litigation.

We depend on a limited number of customers for a substantial portion of our revenues, and if we lose any of them, our business could be harmed.

     Our customers include some of the United States’ leading wholesale pharmaceutical distributors, such as Cardinal, McKesson, and major drug chains. We are party to distribution services agreements with McKesson and Cardinal. During 2009, McKesson and Cardinal accounted for 40.8% and 37.1%, respectively, of our net revenues. During 2008, McKesson and Cardinal accounted for 45.8% and 21.2%, respectively, of our net revenues. During 2007, McKesson and Cardinal accounted for 52.2% and 16.9%, respectively, of our net revenues. The loss of either of these customers’ accounts or a material reduction in their purchases could harm our business, financial condition or results of operations. McKesson is our sole distributor of our RESTYLANE^® and PERLANE^® products and DYSPORT^TM in the U.S.

The consolidation of drug wholesalers could increase competition and pricing pressures throughout the pharmaceutical industry.

     We sell our pharmaceutical products primarily through major wholesalers. These customers comprise a significant part of the distribution network for pharmaceutical products in the United States. This distribution network is continuing to undergo significant consolidation marked by mergers and acquisitions. As a result, a smaller number of large wholesale distributors control a significant share of the market. In addition, the number of independent drug stores and small chains has decreased as retail consolidation has occurred. Further consolidation among, or any financial difficulties of, distributors or retailers could result in the combination or elimination of warehouses which may result in product returns to us, cause a reduction in the inventory levels of distributors and retailers, result in reductions in purchases of our products or increase competitive and pricing pressures on pharmaceutical manufacturers, any of which could harm our business, financial condition and results of operations.

We derive a majority of our sales revenue from our primary products, and any factor adversely affecting sales of these products would harm our business, financial condition and results of operations.

     We believe that the prescription volume of our primary prescription products, in particular, SOLODYN^®, VANOS^® and ZIANA^®, and sales of our facial aesthetic products, DYSPORT^TM, RESTYLANE^® and PERLANE^®, will continue to constitute a significant portion of our sales revenue for the foreseeable future. Accordingly, any factor adversely affecting our sales related to these products, individually or collectively, could harm our business, financial condition and results of operations.

     DYSPORT^TM competes directly with Allergan’s Botox^® Cosmetic, an established botulinum toxin product that was approved by the FDA for aesthetic purposes in 2002.

     We are experiencing intense competition in the dermal filler market. Other dermal filler products on the market include: Juvéderm^®, Prevelle^® Silk, Radiesse^®, Sculptra^® Aesthetic, Artefill^® and Hydrelle^TM. Patients may differentiate these products from our RESTYLANE^® and PERLANE^® products based on price, efficacy and/or duration, which may appeal to some patients. In addition, there are several dermal filler products under

development and/or in the FDA pipeline for approval which claim to offer equivalent or greater facial aesthetic benefits to RESTYLANE^® and PERLANE^® and, if approved, the companies producing such products could charge less to doctors for their products.

     We are involved in patent litigation with certain competitors, primarily related to our SOLODYN^® and VANOS^® branded products. See the previously listed Risk Factor, “Certain of our primary products could lose patent protection in the near future and become subject to competition from generic forms of such products. If that were to occur, sales of those products would decline significantly and such decline could have a material adverse effect on our results of operations,” and Item 3 of Part I of this report, “Legal Proceedings,” and Note 12, “Commitments and Contingencies” in the notes to the consolidated financial statements under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules” for information concerning our current intellectual property litigation. There can be no assurance that we will prevail in patent litigation or that these competitors will not successfully introduce products that would cause a loss of our market share and reduce our revenues.

     Sales related to our primary prescription drug products, including SOLODYN^®, VANOS^® and ZIANA^®, and sales of our facial aesthetic products, DYSPORT^TM, RESTYLANE^® and PERLANE^® could also be adversely affected by other factors, including:

	•		manufacturing or supply interruptions;
	•		the development of new competitive pharmaceuticals and technological advances to treat the conditions addressed by our primary products, including the introduction of new products into the marketplace;
	•		generic competition;
	•		marketing or pricing actions by one or more of our competitors;
	•		regulatory action by the FDA and other government regulatory agencies;
	•		importation of other dermal fillers;
	•		changes in the prescribing or procedural practices of dermatologists and/or plastic surgeons;
	•		changes in the reimbursement or substitution policies of third-party payors or retail pharmacies;
	•		product liability claims;
	•		the outcome of disputes relating to trademarks, patents, license agreements and other rights;
	•		changes in state and federal law that adversely affect our ability to market our products to dermatologists and/or plastic surgeons;
	•		restrictions on travel affecting the ability of our sales force to market to prescribing physicians and plastic surgeons in person; and
	•		restrictions on promotional activities.

Our continued growth depends upon our ability to develop new products.

     Our ability to develop new products is the key to our continued growth. Our research and development activities, as well as the clinical testing and regulatory approval process, which must be completed before commercial sales can commence, will require significant commitments of personnel and financial resources. We cannot assure you that we will be able to develop products or technologies in a timely manner, or at all. Delays in the research, development, testing or approval processes will cause a corresponding delay in revenue.

We may not be able to identify and acquire products, technologies and businesses on acceptable terms, if at all, which may constrain our growth.

     Our strategy for continued growth includes the acquisition of products, technologies and businesses. These acquisitions could involve acquiring other pharmaceutical companies’ assets, products or technologies. In addition, we may seek to obtain licenses or other rights to develop, manufacture and distribute products. We cannot be certain that we will be able to identify suitable acquisition or licensing candidates, if they will be accretive in the near future, or if any will be available on acceptable terms. Other pharmaceutical companies, with greater financial, marketing and sales resources than we have, are also attempting to grow through similar acquisition and licensing strategies. Because of their greater resources, our competitors may be able to offer better terms for an acquisition or license than we can offer, or they may be able to demonstrate a greater ability to market licensed products. In addition, even if we identify potential acquisitions and enter into definitive agreements relating to such acquisitions, we may not be able to consummate planned acquisitions on the terms originally agreed upon or at all. For example,

on March 20, 2005, we entered into an agreement and plan of merger with Inamed, pursuant to which we agreed to acquire Inamed. On December 13, 2005, we entered into a merger termination agreement with Inamed following Allergan Inc.’s exchange offer for all outstanding shares of Inamed, which was commenced on November 21, 2005.

     We reevaluate our research and development efforts regularly to assess whether our efforts to develop a particular product or technology are progressing at a rate that justifies our continued expenditures. On the basis of these reevaluations, we have abandoned in the past, and may abandon in the future, our efforts on a particular product or technology. Products that we research or develop may not be successfully commercialized. If we fail to take a product or technology from the development stage to market on a timely basis, we may incur significant expenses without a near-term financial return.

     We have in the past, and may in the future, supplement our internal research and development by entering into research and development agreements with other pharmaceutical companies. We may, upon entering into such agreements, be required to make significant up-front payments to fund the projects. We cannot be sure, however, that we will be able to locate adequate research partners or that supplemental research will be available on terms acceptable to us in the future. If we are unable to enter into additional research partnership arrangements, we may incur additional costs to continue research and development internally or abandon certain projects. Even if we are able to enter into collaborations, we cannot assure you that these arrangements will result in successful product development or commercialization.

Our products may not gain market acceptance.

     There is a risk that our products may not gain market acceptance among physicians, patients and the medical community generally. The degree of market acceptance of any medical device or other product that we develop will depend on a number of factors, including demonstrated clinical efficacy and safety, cost-effectiveness, potential advantages over alternative products, and our marketing and distribution capabilities. Physicians will not recommend our products until clinical data or other factors demonstrate their safety and efficacy compared to other competing products. Even if the clinical safety and efficacy of using our products is established, physicians may elect to not recommend using them for any number of other reasons, including whether our products best meet the particular needs of the individual patient.

Our operating results and financial condition may fluctuate.

     Our operating results and financial condition may fluctuate from quarter to quarter and year to year for a number of reasons. The following events or occurrences, among others, could cause fluctuations in our financial performance from period to period:

	•		development and launch of new competitive products, including OTC or generic competitor products;
	•		the timing and receipt of FDA approvals or lack of approvals;
	•		the timing and receipt of patent claim issuances or lack of issuances or rejections in prosecution or reexamination proceedings before the USPTO;
	•		changes in the amount we spend to develop, acquire or license new products, technologies or businesses;
	•		costs related to business development transactions;
	•		untimely contingent research and development payments under our third-party product development agreements;
	•		changes in the amount we spend to promote our products;
	•		delays between our expenditures to acquire new products, technologies or businesses and the generation of revenues from those acquired products, technologies or businesses;
	•		changes in treatment practices of physicians that currently prescribe our products;
	•		changes in reimbursement policies of health plans and other similar health insurers, including changes that affect newly developed or newly acquired products;
	•		increases in the cost of raw materials used to manufacture our products;
	•		manufacturing and supply interruptions, including failure to comply with manufacturing specifications;

	•		changes in prescription levels and the effect of economic changes in hurricane and other natural disaster-affected areas;
	•		the impact on our employees, customers, patients, manufacturers, suppliers, vendors, and other companies we do business with and the resulting impact on the results of operations associated with the possible mutation of the avian form of influenza from birds or other animal species to humans, current human morbidity, and mortality levels persist following such potential mutation;
	•		the mix of products that we sell during any time period;
	•		lower than expected demand for our products;
	•		our responses to price competition;
	•		expenditures as a result of legal actions, including the defense of our patents and other intellectual property;
	•		market acceptance of our products;
	•		the impairment and write-down of goodwill or other intangible assets;
	•		implementation of new or revised accounting or tax rules or policies;
	•		disposition of primary products, technologies and other rights;
	•		termination or expiration of, or the outcome of disputes relating to, trademarks, patents, license agreements and other rights;
	•		increases in insurance rates for existing products and the cost of insurance for new products;
	•		general economic and industry conditions, including changes in interest rates affecting returns on cash balances and investments that affect customer demand, and our ability to recover quickly from such economic and industry conditions;
	•		seasonality of demand for our products;
	•		our level of research and development activities;
	•		new accounting standards and/or changes to existing accounting standards that would have a material effect on our consolidated financial position, results of operations or cash flows;
	•		costs and outcomes of any tax audits or any litigation involving intellectual property, customers or other issues;
	•		failure by us or our contractors to comply with all applicable FDA and other regulatory requirements;
	•		the imposition of a REMS program requirement on any of our products;
	•		adverse decisions by FDA advisory committees related to any of our products; and
	•		timing of payments and/or revenue recognition related to licensing agreements and/or strategic collaborations.

     As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and these comparisons should not be relied upon as an indication of future performance. The above factors may cause our operating results to fluctuate and adversely affect our financial condition and results of operations.

We face significant competition within our industry.

     The pharmaceutical and facial aesthetics industries are highly competitive. Competition in our industry occurs on a variety of fronts, including:

	•		developing and bringing new products to market before others;
	•		developing new technologies to improve existing products;
	•		developing new products to provide the same benefits as existing products at less cost; and
	•		developing new products to provide benefits superior to those of existing products.

     The intensely competitive environment requires an ongoing, extensive search for technological innovations and the ability to market products effectively. Consequently, we must continue to develop and introduce products in a timely and cost-efficient manner to effectively compete in the marketplace and maintain our revenue and gross margins.

     Our competitors vary depending upon product categories. Many of our competitors are large, well-established companies in the fields of pharmaceuticals, chemicals, cosmetics and health care. Among our largest

competitors are Allergan, Galderma, Johnson & Johnson, Sanofi-Aventis, GlaxoSmithKline, plc (Stiefel Laboratories), Warner Chilcott and others.

     Many of these companies have greater resources than we do to devote to marketing, sales, research and development and acquisitions. As a result, they have a greater ability to undertake more extensive research and development, marketing and pricing policy programs. It is possible that our competitors may develop new or improved products to treat the same conditions as our products or make technological advances reducing their cost of production so that they may engage in price competition through aggressive pricing policies to secure a greater market share to our detriment. These competitors also may develop products that make our current or future products obsolete. Any of these events could significantly harm our business, financial condition and results of operations, including reducing our market share, gross margins, and cash flows.

     We sell and distribute prescription brands, medical devices and over-the-counter products. Each of these products competes with products produced by others to treat the same conditions. Several of our prescription products compete with generic pharmaceuticals, which claim to offer equivalent benefit at a lower cost. In some cases, insurers and other health care payment organizations try to encourage the use of these less expensive generic brands through their prescription benefits coverage and reimbursement policies. These organizations may make the generic alternative more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic product to the patient is less than the net cost of our prescription brand product. Aggressive pricing policies by our generic product competitors and the prescription benefits policies of third-party payors could cause us to lose market share or force us to reduce our gross margins in response.

     There are several dermal filler products under development and/or in the FDA pipeline for approval which claim to offer equivalent or greater facial aesthetic benefits to RESTYLANE^® and PERLANE^® and if approved, the companies producing such products could charge less to doctors for their products.

Our investments in other companies and our collaborations with companies could adversely affect our results of operations and financial condition.

     We have made substantial investments in, and entered into significant collaborations with, other companies. We may use these and other methods to develop or commercialize products in the future. These arrangements typically involve other pharmaceutical companies as partners that may be competitors of ours in certain markets. In many instances, we will not control these companies or collaborations, and cannot assure you that these ventures will be profitable or that we will not lose any or all of our invested capital. If these investments and collaborations are unsuccessful, our results of operations could materially suffer.

Our profitability is impacted by our continued participation in governmental pharmaceutical pricing programs.

     In order for our products to receive reimbursement by state Medicaid programs and the Medicare Part B program, we must participate in the Medicaid drug rebate program. Participation in the program requires us to provide a rebate for each unit of our products that is reimbursed by Medicaid. Rebate amounts for our products are determined by a statutory formula that is based on prices defined by statute: average manufacturer price (“AMP”), which we must calculate for all products that are covered outpatient drugs under the Medicaid program, and best price, which we must calculate only for those of our covered outpatient drugs that are innovator products. We are required to report AMP and best price for each of our covered outpatient drugs to the government on a regular basis. In July 2007, the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that is responsible for administering the Medicaid drug rebate program, issued a final rule that, among other things, clarifies how manufacturers must calculate both AMP and best price and implements new requirements under the Deficit Reduction Act of 2005 on the use of AMP to calculate federal upper limits on pharmacy reimbursement amounts under the Medicaid program. These upper limits are used to determine ceilings placed on the amounts that state Medicaid programs can pay for certain prescription drugs using federal dollars. In December 2007, a federal court issued an injunction prohibiting the implementation of those provisions in the final rule relating to federal upper limits, and that injunction is still in place. We cannot predict the full impact of these changes, which otherwise became effective in part on January 1, 2007 and in part on October 1, 2007, on our business, nor can we predict whether there will be additional federal legislative or regulatory proposals to modify current Medicaid rebate rules.

     To receive reimbursement under state Medicaid programs and the Medicare Part B program for our products, we also are required by federal law to provide discounts under other pharmaceutical pricing programs. For example, we are required to enter into a Federal Supply Schedule (“FSS”) contract with the Department of Veterans Affairs (“VA”) under which we must make our covered drugs available to the “Big Four” federal agencies — the VA, the Department of Defense (“DoD”), the Public Health Service, and the Coast Guard — at pricing that is capped pursuant to a statutory Federal ceiling price (“FCP”) formula set forth in the Veterans Health Care Act of 1992 (“VHCA”). The FCP is based on a weighted average wholesaler price known as the “non-federal average manufacturer price,” which manufacturers are required to report on a quarterly and annual basis to the VA. FSS contracts are federal procurement contracts that include standard government terms and conditions and separate pricing for each product. In addition to the Big Four agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. FSS contractors are permitted to charge FSS purchasers other than the Big Four agencies “negotiated pricing” for covered drugs that is not capped by the VHCA formula; instead, such pricing is negotiated based on a mandatory disclosure of the contractor’s commercial “most favored customer” pricing. Medicis chooses to offer one single FCP-based FSS contract price for each product to the Big Four agencies as well as all to other FSS purchasers. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing to an agreed “tracking customer” is reduced.

     To receive reimbursement under state Medicaid programs and the Medicare Part B program for our products, we also are required by federal law to provide discounted purchase prices under the Public Health Service Drug Pricing Program to certain categories of entities defined by statute. The formula for determining the discounted purchase price is defined by statute and is based on the AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate program, discussed above. To the extent that the statutory and regulatory definitions of AMP and the Medicaid rebate amount change as a result of the Deficit Reduction Act and final rule discussed above, these changes also could impact the discounted purchase prices that we are obligated to provide under this program. We cannot predict the full impact of these changes, which became effective in part on January 1, 2007 and in part on October 1, 2007, on our business, nor can we predict whether there will be additional federal legislative or regulatory proposals to modify this program or current Medicaid rebate rules which then could impact this program as well.

Our profitability may be impacted by our ongoing review of our prior reports under certain Federal pharmaceutical pricing programs.

     Under the terms of our Medicaid drug rebate program agreement and our VA FSS contract and related pricing agreements required under the VHCA, we are required to accurately report our pharmaceutical pricing data, which is based, in part, on accurate classifications of our customers’ classes of trade. On May 1, 2007, and on May 15, 2007, we notified the U.S. Department of Health and Human Services and the VA, respectively, that we may have misclassified certain of our customers’ classes of trade, which could affect the prices previously reported under the Medicaid drug rebate program and/or prices on our VA FSS contract. We have reviewed this issue and have identified certain customer class of trade misclassifications.

     Based on this finding, we undertook a review and recalculation of our Non-Federal Average Manufacturer Prices (“Non-FAMPs”) and related FCPs, AMPs, and Best Prices (“BPs”) for a period going back at least (3) years from the expected completion date of the recalculation to determine the impact, if any, that reclassification of customers to appropriate classes of trade might have on these reported prices. In doing the recalculation, we generally reviewed the methodologies for computing the reported prices, the classification of products under the various programs, and any other potentially significant issues identified in the course of the review. In April 2009, we completed the voluntary review of pricing data submitted to the Medicaid Drug Rebate Program (the “Program”) for the period from the first quarter of 2006 through the fourth quarter of 2007. The review identified certain actions that were needed in relation to the reviewed data. We expect that the actions, when implemented, would result in an increase to our rebate liability under the Program in the amount of approximately $3.1 million for the eight-quarter period reviewed. We have disclosed the results of the review and revised rebate liability to CMS, which administers the Program, and are awaiting CMS’s instruction as to whether and when to re-file the revised pricing data. Our submission to CMS also included a request that CMS approve a change in drug category for certain of our products, which CMS approved in December 2009. The fiscal impact of that change is included in the rebate liability figure noted above. Upon completion of CMS’s review of our submission, we will evaluate the impact that CMS’s conclusions will have on our liability under related drug rebate agreements with various states and the Public Health

Service Drug Pricing Program. We accrued $3.1 million for the 2006 and 2007 liability, which was recognized as a reduction of net revenues during the three months ended March 31, 2009.

     In July 2009, we completed the extension of this review to the pricing data submitted to the Program for the period from the first quarter of 2008 through the fourth quarter of 2008. The review again identified certain actions that were needed in relation to the reviewed data. We expect that the actions, when implemented, would result in an increase to our rebate liability under the Program in the amount of approximately $0.2 million for the additional four-quarter period reviewed. This change in rebate liability includes the impact of the drug category change approved by CMS in December 2009. Upon completion of CMS’s review of our submission for this additional four-quarter period, we will evaluate the impact that CMS’s conclusions will have on our liability under related drug rebate agreements with various states and the Public Health Service Drug Pricing Program. We accrued $0.2 million for the 2008 liability, which was recognized as a reduction of net revenues during the three months ended June 30, 2009.

     On March 17, 2009, the Department of Defense (“DoD”) issued a Final Rule (the “Rule”) implementing Section 703 of the National Defense Authorization Act of 2008. The Rule established a program under which the DoD seeks FCP-based refunds, or rebates, from drug manufacturers on TRICARE retail pharmacy utilization. Under the Rule, effective May 26, 2009, the DoD is seeking rebates on TRICARE retail pharmacy program prescriptions filled from January 28, 2008, forward. The Rule sets forth a program in which the DoD asks manufacturers to enter into agreements with the agency pursuant to which the manufacturers commit to pay such rebates. Products that are not listed in such agreements will not be able to be included on the DoD Uniform Formulary. Additionally, products not listed in TRICARE retail agreements will not be available through TRICARE retail network pharmacies without prior authorization. Among other things, the Rule further provides that manufacturers may apply for compromise or waivers of amounts due. As a result of the Rule, our rebate liability as of March 31, 2009, for 2008 utilization is approximately $1.6 million, the rebate liability for the first quarter of 2009 is approximately $0.8 million, and the rebate liability for the second quarter of 2009 prior to the date of execution of our TRICARE retail agreement on June 29, 2009 is $0.6 million. It is possible that, pursuant to the compromise or waiver process set forth in the Rule, the DoD will agree to accept a lesser sum for the 2008 period and for the first and second quarters of 2009. We applied timely for a waiver of liability from January 28, 2008 through the date of our TRICARE rebate agreement, which was executed on June 29, 2009. We accrued $2.4 million in the aggregate for the liability for 2008 and the first quarter of 2009, which was recognized as a reduction of net revenues during the three months ended March 31, 2009. We also accrued $0.6 million in our financial statements as of June 30, 2009 for TRICARE rebate liability for the second quarter of 2009 through June 28, 2009, the day prior to execution of our TRICARE rebate agreement. This sum was recognized as a reduction of net revenues during that period.

     In addition, we conducted a review and recalculation of our Non-FAMPs and FCPs for a period spanning the duration of our current FSS contract to determine what, if any, impact reclassification of customers to appropriate classes of trade and any other issues identified in the course of the review might have on these reported prices. In doing the recalculation, we assigned all customers to an appropriate class of trade, implemented a revised calculation methodology, and addressed all other issues identified in the course of the review. Our review also involved assessment of compliance with the FSS Price Reductions Clause for the products on our current FSS contract.

     On September 15, 2008, we submitted a report to the VA detailing the recalculations and the impact figures associated with overcharges under the current FSS contract. The submission showed liability in the amount of $121,646, resulting from overcharges under our FSS contract through July 31, 2008. On December 18, 2008, we submitted a supplement to the September 15 submission, which, based on certain issues uncovered subsequent to the September 15, 2008 submission, showed an additional $61,459 in overcharges. The VA informed us that our submission is under review. Upon VA approval of our submissions, we will calculate the impact, if any, associated with August — December 2008.

We will be unable to meet our anticipated development and commercialization timelines if clinical trials for our products are unsuccessful, delayed, or additional information is required by the FDA.

     The production and marketing of our products and our ongoing research and development, pre-clinical testing and clinical trials activities are subject to extensive regulation and review by numerous governmental authorities. Before obtaining regulatory approvals for the commercial sale of any products, we and/or our partners

must demonstrate through pre-clinical testing and clinical trials that our products are safe and effective for use in humans. Conducting clinical trials is a lengthy, time-consuming and expensive process that may be subject to unexpected delays. In addition to testing and approval procedures, extensive regulations also govern marketing, manufacturing, distribution, labeling and record-keeping procedures.

     Completion of clinical trials may take several years or more. Our commencement and rate of completion of clinical trials may be delayed by many factors, including:

	•		lack of efficacy during the clinical trials;
	•		unforeseen safety issues;
	•		severe or harmful side effects;
	•		failure to obtain necessary proprietary rights;
	•		shortage or lack of supply sufficient to complete studies;
	•		the decision to modify the product;
	•		lack of economical pathway to manufacture and commercialize product;
	•		cost-effectiveness of continued product development;
	•		slower than expected patient recruitment;
	•		failure of Medicis, investigators, or other contractors to strictly adhere to federal regulations governing the conduct and data collection procedures involved in clinical trials;
	•		development of issues that might delay or impede performance by a contractor;
	•		errors in clinical documentation or at the clinical locations;
	•		non-acceptance by the FDA of our NDAs, ANDAs or BLAs;
	•		government or regulatory delays; and
	•		unanticipated requests from the FDA for new or additional information.

     The results from pre-clinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. A number of new products have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including perceived defects in the design of the clinical trials and changes in regulatory policy during the period of product development. Any delays in, or termination of, our clinical trials could materially and adversely affect our development and commercialization timelines, which could adversely affect our financial condition, results of operations and cash flows.

Downturns in general economic conditions may adversely affect our financial condition, results of operations and cash flows.

     Our business, and in particular our facial aesthetic and branded prescription products, have been and are expected to continue to be adversely affected by downturns in general economic conditions. Economic conditions such as employment levels, business conditions, interest rates, energy and fuel costs, consumer confidence and tax rates could change consumer purchasing habits or reduce personal discretionary spending. A reduction in consumer spending may have an adverse impact on our financial condition, results of operations and cash flows. In addition, our ability to meet our expected financial performance is dependent upon our ability to rapidly recover from downturns in general economic conditions.

     Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and recession in most major economies continuing into 2010. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility and diminished expectations for western and emerging economies. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have contributed to volatility of unprecedented levels.

     As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce,

and in some cases, cease to provide credit to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers alike, and a corresponding decrease in global infrastructure spending. Continued turbulence in the U.S. and international markets and economies and prolonged declines in business consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access the capital markets to meet liquidity needs.

The current condition of the credit markets may not allow us to secure financing for potential future activities on satisfactory terms, or at all.

     Our existing cash and short-term investments are available for dividends, strategic investments, acquisitions of companies or products complimentary to our business, the repayment of outstanding indebtedness, repurchases of our outstanding securities and other potential large-scale needs. We may consider incurring additional indebtedness and issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to refinance existing debt or for general corporate purposes. As a result of recent subprime loan losses and write-downs, as well as other economic trends in the credit market industry, we may not be able to secure additional financing for future activities on satisfactory terms, or at all, which may adversely affect our financial condition and results of operations.

Negative conditions in the credit markets may impair the liquidity of a portion of our short-term and long-term investments.

     Our short-term and long-term investments consist of corporate and various government agency and municipal debt securities and auction rate floating securities. As of December 31, 2009, our investments included $26.8 million of auction rate floating securities. Our 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. Since early 2008, there has been insufficient demand at auction for auction rate floating securities. As a result, these affected auction rate floating securities are now considered illiquid, and we could be required to hold them until they are redeemed by the holder at maturity. We may not be able to liquidate the securities until a future auction on these investments is successful. We could be required to record impairment losses in the future, depending on market conditions.

If Q-Med is unable to protect its intellectual property and proprietary rights with respect to our dermal filler products, our business could suffer.

     The exclusivity period of the license granted to us by Q-Med for RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM will terminate on the later of (i) the expiration of the last patent covering the products (estimated to be 2017) or (ii) upon the licensed know-how becoming publicly known. If the validity or enforceability of our patents is successfully challenged, the cost to us could be significant and our business may be harmed. For example, if any such challenges are successful, Q-Med may be unable to supply products to us. As a result, we may be unable to market, distribute and commercialize the products or it may no longer be profitable for us to do so.

We depend upon our key personnel and our ability to attract, train, and retain employees.

     Our success depends significantly on the continued individual and collective contributions of our senior management team, and Jonah Shacknai, our Chairman and Chief Executive Officer, in particular. While we have entered into employment agreements with many members of our senior management team, including Mr. Shacknai, the loss of the services of any member of our senior management for any reason or the inability to hire and retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results. In addition, our future success depends on our ability to hire, train and retain skilled employees. Competition for these employees is intense.

We may acquire technologies, products and companies in the future and these acquisitions could disrupt our business and harm our financial condition and results of operations. In addition, we may not obtain the benefits that the acquisitions were intended to create.

     As part of our business strategy, we regularly consider and, as appropriate, make acquisitions (whether by acquisition, license or otherwise) of technologies, products and companies that we believe are complementary to our business. Acquisitions typically entail many risks and could result in difficulties in integrating the operations, personnel, technologies, products and companies acquired, and may result in significant charges to earnings. If we are unable to successfully integrate our acquisitions with our existing business, or we otherwise make an acquisition that does not result in the benefits that we anticipated, our business, results of operations, financial condition and cash flows could be materially and adversely affected, which would adversely affect our ability to develop and introduce new products and the market price of our stock. In addition, in connection with acquisitions, we could experience disruption in our business or employee base, or key employees of companies that we acquire may seek employment elsewhere, including with our competitors. Furthermore, the products of companies we acquire may overlap with our products or those of our customers, creating conflicts with existing relationships or with other commitments that are detrimental to the combined businesses.

We may not realize all of the anticipated benefits of our acquisition of LipoSonix.

     Our ability to realize the anticipated benefits of our acquisition of LipoSonix could be affected by a number of factors, including:

	•		our ability to attain regulatory approvals, both in the United States and worldwide, and the timing of such approvals;
	•		our compliance with existing and future legal and regulatory requirements, both in the United States and worldwide;
	•		the efficacy of the LIPOSONIXTM system;
	•		market acceptance of the LIPOSONIXTM system;
	•		increases or decreases in the expected costs to be incurred in connection with the research and development, clinical trials, regulatory approvals, commercialization and marketing of the LIPOSONIXTM system;
	•		the costs associated with investment in new infrastructure to support worldwide operations;
	•		the strength of our intellectual property portfolio related to the LIPOSONIXTM system;
	•		the ability of other companies to design around the proprietary technology in the LIPOSONIXTM system;
	•		the anticipated pricing, margins, size of the markets and demand related to the LIPOSONIXTM system;
	•		the challenges associated with using distributors or finding new distributors for marketing and sales of the LIPOSONIXTM system;
	•		the challenges associated with advertisement and promotion related to the LIPOSONIXTM system, which is dynamic and varies according to jurisdiction and distribution channel mode;
	•		the possibility of adverse patient events pertaining to the LIPOSONIXTM system;
	•		risks inherent to operations outside of the United States, including foreign currency exchange rate fluctuations;
	•		our ability to integrate the operations of LipoSonix with our operations;
	•		our ability to retain key personnel of LipoSonix; and
	•		our ability to effectively compete in the fat removal marketplace.

We rely on third parties to conduct business operations outside of the U.S., and we may be adversely affected if they act in violation of the U.S. Foreign Corrupt Practices Act or other anti-bribery laws.

     The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions prohibit companies and their agents from making improper payments to government officials for the purpose of obtaining or retaining business. These laws are complex and often difficult to interpret and apply, and in certain cases, local business practices may conflict with strict adherence to anti-bribery laws. Our policies and contractual arrangements are designed to maintain compliance with these anti-bribery laws. We perform, on a periodic basis, an extensive background check to verify several aspects of compliance, including but not limited to, national and international “black lists”. We also provide training to relevant employees and agents regarding compliance with anti-bribery laws. We cannot guarantee that our policies and procedures, contractual obligations, background checks and training programs will prevent reckless or criminal acts committed by our employees or agents. Violations may result in criminal and civil penalties, including fines, imprisonment, loss of our export licenses,

suspension of our ability to do business with the federal government, denial of government reimbursement for our products, and exclusion from participation in government healthcare programs. Allegations or evidence that we or our agents have violated these laws could disrupt our business and subject us to criminal or civil enforcement actions. Such action could have a material adverse effect on our business.

Our success depends on our ability to manage our growth.

     We have experienced a period of rapid growth from both acquisitions and internal expansion of our operations. This growth has placed significant demands on our human and financial resources. We must continue to improve our operational, financial and management information controls and systems and effectively motivate, train and manage our employees to properly manage this growth. If we do not manage this growth effectively, maintain the quality of our products despite the demands on our resources and retain key personnel, our business could be harmed.

We rely on others to manufacture our products.

     Currently, we rely on third-party manufacturers for much of our product manufacturing needs. All third-party manufacturers are required by law to comply with the FDA’s regulations, including the cGMP regulations (for drugs and biologics) and the QSR (for medical devices), as applicable. These regulations set forth standards for both quality assurance and quality control. Third-party manufacturers also must maintain records and other documentation as required by applicable laws and regulations. In addition to a legal obligation to comply, our third-party manufacturers are contractually obligated to comply with all applicable laws and regulations. However, we cannot guarantee that third-party manufacturers will ensure compliance with all applicable laws and regulations. Failure of a third-party manufacturer to maintain compliance with applicable laws and regulations could result in decreased sales of our products and decreased revenues. Failure of a third-party manufacturer to maintain compliance with applicable laws and regulations also could result in reputational harm to Medicis and potentially subject us to sanctions, including:

	•		delays, warning letters, and fines;
	•		product recalls or seizures;
	•		injunctions on sales;
	•		refusal of FDA to review pending applications;
	•		total or partial suspension of production;
	•		withdrawal of prior marketing approvals or clearances; and
	•		civil penalties and criminal prosecutions.

     Typically, our manufacturing contracts are short term. We are dependent upon renewing agreements with our existing manufacturers or finding replacement manufacturers to satisfy our requirements. As a result, we cannot be certain that manufacturing sources will continue to be available or that we can continue to outsource the manufacturing of our products on reasonable or acceptable terms.

     The underlying cost to us for manufacturing our products is established in our agreements with these outside manufacturers. Because of the short-term nature of these agreements, our expenses for manufacturing are not fixed and could change from contract to contract. If the cost of production increases, our gross margins could be negatively affected.

     In addition, we rely on outside manufacturers to provide us with an adequate and reliable supply of our products on a timely basis and in accordance with good manufacturing standards and applicable product specifications. As a result, we are subject to and have little or no control over delays and quality control lapses that our third-party manufacturers and suppliers may suffer. For example, in early May 2008, we became aware that our third-party manufacturer and supplier of SOLODYN^® mistakenly filled at least one bottle labeled as SOLODYN^® with a different pharmaceutical product. As a result of this occurrence, we initiated a voluntary recall of the two affected lots. We were able, however, to recoup some of our losses from this voluntary recall during 2009 as a result of an indemnification claim against the manufacturer.

     Loss of a supplier or any difficulties that arise in the supply chain could significantly affect our inventories and supply of products available for sale. We do not have alternative sources of supply for all of our products. If a

primary supplier of any of our primary products is unable to fulfill our requirements for any reason, it could reduce our sales, margins and market share, as well as harm our overall business and financial results. If we are unable to supply sufficient amounts of our products on a timely basis, our revenues and market share could decrease and, correspondingly, our profitability could decrease.

     Under several exclusive supply agreements, with certain exceptions, we must purchase most of our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier relationships were terminated, we would be forced to find a replacement manufacturer or supplier. Manufacturing facilities must be approved by the FDA before they are used to manufacture our products. The validation of a new facility and the approval of that manufacturer for a new product may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA validation of a replacement manufacturing facility could cause an interruption in the supply of our products. The new facility also may be subject to follow-up inspections. Although we have business interruption insurance to assist in covering the loss of income for products where we do not have a secondary manufacturer, which may mitigate the harm to us from the interruption of the manufacturing of our largest selling products caused by certain events, the loss of a manufacturer could still cause a reduction in our sales, margins and market share, as well as harm our overall business and financial results.

We and our third-party manufacturers rely on a limited number of suppliers of the raw materials of our products. A disruption in supply of raw material would be disruptive to our inventory supply.

     We and the manufacturers of our products rely on suppliers of raw materials used in the production of our products. Some of these materials are available from only one source and others may become available from only one source. We try to maintain inventory levels that are no greater than necessary to meet our current projections, which could have the effect of exacerbating supply problems. Any interruption in the supply of finished products could hinder our ability to timely distribute finished products. If we are unable to obtain adequate product supplies to satisfy our customers’ orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products. This, in turn, could cause a loss of our market share and reduce our revenues. In addition, any disruption in the supply of raw materials or an increase in the cost of raw materials to our manufacturers could have a significant effect on their ability to supply us with our products, which would adversely affect our financial condition and results of operations.

We could experience difficulties in obtaining supplies of RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM.

     The manufacturing process to create bulk non-animal stabilized hyaluronic acid necessary to produce RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM products is technically complex and requires significant lead-time. Any failure by us to accurately forecast demand for finished product could result in an interruption in the supply of RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM products and a resulting decrease in sales of the products.

     We depend exclusively on Q-Med for our supply of RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM products. There are currently no alternative suppliers of these products. Q-Med has committed to supply RESTYLANE^® to us under a long-term license that is subject to customary conditions and our delivery of specified milestone payments. Q-Med manufactures RESTYLANE^®, RESTYLANE-L^TM, PERLANE^®, PERLANE-L^TM, RESTYLANE FINE LINES^TM and RESTYLANE SUBQ^TM at its facility in Uppsala, Sweden. We cannot be certain that Q-Med will be able to meet our current or future supply requirements. Any impairment of Q-Med’s manufacturing capacities could significantly affect our inventories and our supply of products available for sale, which would materially and adversely affect our results of operations.

Supply interruptions may disrupt our inventory levels and the availability of our products.

     Numerous factors could cause interruptions in the supply of our finished products, including:

	•		timing, scheduling and prioritization of production by our contract manufacturers;
	•		labor interruptions;
	•		changes in our sources for manufacturing;

	•		the timing and delivery of domestic and international shipments;
	•		our failure to locate and obtain replacement manufacturers as needed on a timely basis;
	•		conditions affecting the cost and availability of raw materials; and
	•		hurricanes and other natural disasters.

     We estimate customer demand for our prescription products primarily through use of third-party syndicated data sources which track prescriptions written by health care providers and dispensed by licensed pharmacies. The data represents extrapolations from information provided only by certain pharmacies, and are estimates of historical demand levels. We estimate customer demand for our non-prescription products primarily through internal data that we compile. We observe trends from these data, and, coupled with certain proprietary information, prepare demand forecasts that are the basis for purchase orders for finished and component inventory from our third-party manufacturers and suppliers. Our forecasts may fail to accurately anticipate ultimate customer demand for products. Overestimates of demand may result in excessive inventory production and underestimates may result in inadequate supply of our products in channels of distribution.

     We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately 65-75% of our gross revenues are typically derived from two major drug wholesale concerns. We have recently entered into distribution services agreements with our two largest wholesale customers. We review the supply levels of our significant products sold to major wholesalers by reviewing periodic inventory reports supplied by our major wholesalers. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation of substantially all of our products.

     We periodically offer promotions to wholesale and chain drugstore customers to encourage dispensing of our prescription products, consistent with prescriptions written by licensed health care providers. Because many of our prescription products compete in multi-source markets, it is important for us to ensure the licensed health care providers’ dispensing instructions are fulfilled with our branded products and are not substituted with a generic product or another therapeutic alternative product which may be contrary to the licensed health care providers’ recommended prescribed Medicis brand. We believe that a critical component of our brand protection program is maintenance of full product availability at drugstore and wholesale customers. We believe such availability reduces the probability of local and regional product substitutions, shortages and backorders, which could result in lost sales. We expect to continue providing favorable terms to wholesale and retail drug chain customers as may be necessary to ensure the fullest possible distribution of our branded products within the pharmaceutical chain of commerce. From time to time, we may enter into business arrangements (e.g., loans or investments) involving our customers and those arrangements may be reviewed by federal and state regulators.

     Purchases by any given customer, during any given period, may be above or below actual prescription volumes of any of our products during the same period, resulting in fluctuations in product inventory in the distribution channel. Any decision made by management to reduce wholesale inventory levels will decrease our product revenue.

Fluctuations in demand for our products create inventory maintenance uncertainties.

     We schedule our inventory purchases to meet anticipated customer demand. As a result, miscalculation of customer demand or relatively small delays in our receipt of manufactured products could result in revenues being deferred or lost. Our operating expenses are based upon anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in the short term. Depending on the customer, we recognize revenue at the time of shipment to the customer, or at the time of receipt by the customer, net of estimated provisions. Consequently, variations in the timing of revenue recognition could cause significant fluctuations in operating results from period to period and may result in unanticipated periodic earnings shortfalls or losses.

We selectively outsource certain non-sales and non-marketing services, and cannot assure you that we will be able to obtain adequate supplies of such services on acceptable terms.

     To enable us to focus on our core marketing and sales activities, we selectively outsource certain non-sales and non-marketing functions, such as laboratory research, manufacturing and warehousing. As we expand our activities, we expect to expend additional financial resources in these areas. We typically do not enter into long-term manufacturing contracts with third-party manufacturers. Whether or not such contracts exist, we cannot assure

you that we will be able to obtain adequate supplies of such services or products in a timely fashion, on acceptable terms, or at all.

Importation of products from Canada and other countries into the United States may lower the prices we receive for our products.

     Our products are subject to competition from lower priced versions of our products and competing products from Canada and other countries where government price controls or other market dynamics result in lower prices. The ability of patients and other customers to obtain these lower priced imports has grown significantly as a result of the Internet, an expansion of pharmacies in Canada and elsewhere targeted to American purchasers, the increase in United States-based businesses affiliated with Canadian pharmacies marketing to American purchasers, and other factors. Most of these foreign imports are illegal under current United States law. However, the volume of imports continues to rise due to the limited enforcement resources of the FDA and the United States Customs Service, and there is increased political pressure to permit the imports as a mechanism for expanding access to lower priced medicines.

     In December 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This law contains provisions that may change United States import laws and expand consumers’ ability to import lower priced versions of our and competing products from Canada, where there are government price controls. These changes to United States import laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will lead to substantial savings for consumers and will not create a public health safety issue. The former Secretary of Health and Human Services did not make such a certification. However, it is possible that the current Secretary or a subsequent Secretary could make the certification in the future. As directed by Congress, a task force on drug importation recently conducted a comprehensive study regarding the circumstances under which drug importation could be safely conducted and the consequences of importation on the health, medical costs and development of new medicines for United States consumers. The task force issued its report in December 2004, finding that there are significant safety and economic issues that must be addressed before importation of prescription drugs is permitted, and the current Secretary has not yet announced any plans to make the required certification. In addition, federal legislative proposals have been made to implement the changes to the United States import laws without any certification, and to broaden permissible imports in other ways. Even if the changes to the United States import laws do not take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, the United States Customs Service and other government agencies.

     The importation of foreign products adversely affects our profitability in the United States. This impact could become more significant in the future, and the impact could be even greater if there is a further change in the law or if state or local governments take further steps to facilitate the importation of products from abroad.

If we become subject to product liability claims, our earnings and financial condition could suffer.

     We are exposed to risks of product liability claims from allegations that our products resulted in adverse effects to the patient or others. These risks exist even with respect to those products that are approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA.

     In addition to our desire to reduce the scope of our potential exposure to these types of claims, many of our customers require us to maintain product liability insurance as a condition of conducting business with us. We currently carry product liability insurance on a claims-made basis. Nevertheless, this insurance may not be sufficient to cover all claims made against us. Insurance coverage is expensive and may be difficult to obtain. As a result, we cannot be certain that our current coverage will continue to be available in the future on reasonable terms, if at all. If we are liable for any product liability claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could cause our earnings and financial condition to suffer.

If we suffer negative publicity concerning the safety of our products, our sales may be harmed and we may be forced to withdraw products.

     Physicians and potential patients may have a number of concerns about the safety of our products, whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research. Negative

publicity, whether accurate or inaccurate, concerning our products could reduce market or governmental acceptance of our products and could result in decreased product demand or product withdrawal. In addition, significant negative publicity could result in an increased number of product liability claims, whether or not these claims are supported by applicable law.

Rising insurance costs could negatively impact profitability.

     The cost of insurance, including workers compensation, product liability and general liability insurance, has been relatively stable in recent years but may increase in the future. In response, we may increase deductibles and/or decrease certain coverages to mitigate these costs. These increases, and our increased risk due to increased deductibles and reduced coverages, could have a negative impact on our results of operations, financial condition and cash flows.

DYSPORT^TM, RESTYLANE^® and PERLANE^® are consumer products and as such, are susceptible to changes in popular trends and applicable laws, which could adversely affect sales or product margins of DYSPORT^TM, RESTYLANE^® and PERLANE^®.

     DYSPORT^TM, RESTYLANE^® and PERLANE^® are consumer products. If we fail to anticipate, identify or react to competitive products or if consumer preferences in the cosmetic marketplace shift to other treatments for the treatment of glabellar lines, fine lines, wrinkles and deep facial folds, we may experience a decline in demand for DYSPORT^TM, RESTYLANE^® and PERLANE^®. In addition, the popular media has at times in the past produced, and may continue in the future to produce, negative reports regarding the efficacy, safety or side effects of facial aesthetic products. Consumer perceptions of DYSPORT^TM, RESTYLANE^® and PERLANE^® may be negatively impacted by these reports and other reasons.

     Demand for DYSPORT^TM, RESTYLANE^® and PERLANE^® may be materially adversely affected by changing economic conditions. Generally, the costs of cosmetic procedures are borne by individuals without reimbursement from their medical insurance providers or government programs. Individuals may be less willing to incur the costs of these procedures in weak or uncertain economic environments, and demand for DYSPORT^TM, RESTYLANE^® and PERLANE^® could be adversely affected.

The restatement of our consolidated financial statements has subjected us to a number of additional risks and uncertainties, including increased costs for accounting and legal fees and the increased possibility of legal proceedings.

     As discussed in our Form 10-K/A for the year ended December 31, 2007 filed with the SEC on November 10, 2008, and in Note 2 to our consolidated financial statements therein, we determined that our consolidated financial statements for the annual, transition and quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of 2008 should be restated due to an error in our interpretation and application of Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists (“SFAS 48”), as it applies to a component of our sales return reserve calculations. SFAS 48 is now part of ASC 605, Revenue Recognition (“ASC 605”). As a result of the restatement, we have become subject to a number of additional risks and uncertainties, including:

	•		We incurred substantial unanticipated costs for accounting and legal fees in connection with the restatement. Although the restatement is complete, we expect to continue to incur accounting and legal costs as noted below.
	•		As a result of the restatement, we have been named in a putative shareholder class action complaint, as discussed in Item 3 of Part I of this report, “Legal Proceedings” and Note 12, “Commitments and Contingencies.” The plaintiffs in this consolidated lawsuit may make additional claims, expand existing claims and/or expand the time periods covered by the complaints. Other plaintiffs may bring additional actions with other claims, based on the restatement. If such events occur, we may incur substantial defense costs regardless of the outcome of these actions and insurance and indemnification may not be sufficient to cover the losses we may incur. Likewise, such events might cause a diversion of our management’s time and attention. If we do not prevail in this action or other potential actions, we could be required to pay substantial damages or settlement costs, which could adversely affect our business, financial condition, results of operations and liquidity.

•

On January 21, 2009, we received a letter from a stockholder demanding that our Board of Directors take certain actions, including potentially legal action, in connection with the restatement of our consolidated financial statements in 2008, and threatening to pursue a derivative claim if our Board of Directors does not comply with the stockholder’s demands. We may receive similar letters from other stockholders. Our Board of Directors reviewed the letter during the course of 2009 and established a special committee of the Board, comprised of directors who are independent and disinterested with respect to the letter, (i) to assess whether there is any merit to the allegations contained in the letter, (ii) if the special committee were to conclude that there may be merit to any of the allegations contained in the letter, to further assess whether it is in our best interest to pursue litigation or other action against any or all of the persons named in the letter or any other persons not named in the letter, and (iii) to recommend to the Board any other appropriate action to be taken. The special committee engaged outside counsel to conduct an inquiry. The ultimate outcome of these potential actions could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities.

In 2008, management identified a material weakness in our internal control over financial reporting with respect to our accounting for sales return reserves. Although as of December 31, 2008 management determined that the material weakness identified in 2008 had been remediated, management may identify material weaknesses in the future that could adversely affect investor confidence, impair the value of our common stock and increase our cost of raising capital.

     In connection with the restatement of our consolidated financial statements in 2008, management identified a material weakness in our internal control over financial reporting with respect to our interpretation and application of SFAS 48 (now part of ASC 605) as it applies to the calculation of sales return reserves. Management took steps to remediate the material weakness in our internal control over financial reporting and, as of December 31, 2008, management determined that the material weakness identified in 2008 had been remediated. There can be no assurance, however, that additional material weaknesses will not be identified in the future.

     Any failure to remedy additional deficiencies in our internal control over financial reporting that may be discovered in the future could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could, in turn, affect the future ability of our management to certify that our internal control over our financial reporting is effective and, moreover, affect the results of our independent registered public accounting firm’s attestation report regarding our management’s assessment. Inferior internal control over financial reporting could also subject us to the scrutiny of the SEC and other regulatory bodies and could cause investors to lose confidence in our reported financial information, which could have an adverse effect on the trading price of our common stock.

     In addition, if we or our independent registered public accounting firm identify additional deficiencies in our internal control over financial reporting, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our share price. Furthermore, additional deficiencies could result in future non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Such non-compliance could subject us to a variety of administrative sanctions, including the suspension or delisting of our ordinary shares from the NYSE and review by the NYSE, the SEC, or other regulatory authorities.

We may not be able to repurchase the Old Notes when required.

     We have $169.2 million principal amount of outstanding 2.5% Contingent Convertible Senior Notes due 2032 (the “Old Notes”). On June 4, 2012 and 2017 or upon the occurrence of a change in control, holders of the Old Notes may require us to offer to repurchase their Old Notes for cash.

     The source of funds for any repurchase required as a result of any such event will be our available cash or cash generated from operating activities or other sources, including borrowings, sales of assets, sales of equity or funds provided by a new controlling entity. We cannot assure you, however, that sufficient funds will be available at the time of any such event to make any required repurchases of the Notes tendered. If sufficient funds are not available to repurchase the Old Notes, we may be forced to incur other indebtedness or otherwise reallocate our financial resources. Furthermore, the use of available cash to fund the repurchase of the Old Notes may impair our ability to obtain additional financing in the future.

Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability.

     We are subject to income taxes in both the U.S. and other foreign jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in or interpretations of tax laws including pending tax law changes (such as the research and development credit and the deductibility of executive compensation), changes in our manufacturing activities and changes in our future levels of research and development spending. In addition, we are subject to the periodic examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these periodic examinations will not have an adverse effect on our provision for income taxes and estimated income tax liabilities.

Risks Related to Our Industry

The growth of managed care organizations, other third-party reimbursement policies, state regulatory agencies and retailer fulfillment policies may harm our pricing, which may reduce our market share and margins.

     Our operating results and business success depend in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities such as Medicaid, private health insurers and managed care organizations. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve many of these organizations has become important to our business.

     The trend toward managed healthcare in the United States and the growth of managed care organizations could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians. We cannot be certain that the reimbursement policies of these entities will be adequate for our pharmaceutical products to compete on a price basis. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, our market share and gross margins could be harmed, as could our business, financial condition, results of operations and cash flows.

     In addition, healthcare reform could affect our ability to sell our products and may have a material adverse effect on our business, results of operations, financial condition and cash flows.

     Some of our products are not of a type generally eligible for reimbursement. It is possible that products manufactured by others could address the same effects as our products and be subject to reimbursement. If this were the case, some of our products may be unable to compete on a price basis. In addition, decisions by state regulatory agencies, including state pharmacy boards, and/or retail pharmacies may require substitution of generic for branded products, may prefer competitors’ products over our own, and may impair our pricing and thereby constrain our market share and growth.

     Managed care initiatives to control costs have influenced primary-care physicians to refer fewer patients to dermatologists and other specialists. Further reductions in these referrals could reduce the size of our potential market, and harm our business, financial condition, results of operations and cash flows.

We are subject to extensive governmental regulation.

     Pharmaceutical companies are subject to significant regulation by a number of national, state and local governments and agencies. The FDA administers requirements covering testing, manufacturing, safety,

effectiveness, labeling, storage, record keeping, approval, sampling, advertising and promotion of our products. Several states have also instituted laws and regulations covering some of these same areas. In addition, the FTC and state and local authorities regulate the advertising of over-the-counter drugs and cosmetics. Failure to comply with applicable regulatory requirements could, among other things, result in:

	•		fines;
	•		changes to advertising;
	•		suspensions of regulatory approvals of products;
	•		product withdrawals and recalls;
	•		delays in product distribution, marketing and sale; and
	•		civil or criminal sanctions.

     For example, in early May 2008, we became aware that our third-party manufacturer and supplier of SOLODYN^® mistakenly filled at least one bottle labeled as SOLODYN^® with a different pharmaceutical product. As a result of this occurrence, we initiated a voluntary recall of the two affected lots, each of which was shipped subsequent to March 31, 2008, and we may be subject to claims, fines or other penalties.

     Our prescription and over-the-counter products receive FDA review regarding their safety and effectiveness. However, the FDA is permitted to revisit and change its prior determinations. We cannot be sure that the FDA will not change its position with regard to the safety or effectiveness of our products. If the FDA’s position changes, we may be required to change our labeling or formulations or cease to manufacture and market the challenged products. Even prior to any formal regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our products if concerns about their safety or effectiveness develop.

     Before marketing any drug that is considered a “new drug” by the FDA, the FDA must provide its approval of the product. All products which are considered drugs which are not “new drugs” and that generally are recognized by the FDA as safe and effective for use do not require the FDA’s approval. We believe that some of our products, as they are promoted and intended for use, are exempt from treatment as “new drugs” and are not subject to approval by the FDA. The FDA, however, could take a contrary position, and we could be required to seek FDA approval of those products and the marketing of those products. We could also be required to withdraw those products from the market.

     Sales representative activities may also be subject to the Voluntary Compliance Guidance issued for pharmaceutical manufacturers by the OIG of the Department of Health and Human Services, as well as state laws and regulations. We have established compliance program policies and training programs for our sales force, which we believe are appropriate. The OIG and/or state law enforcement entities, however, could take a contrary position, and we could be required to modify our sales representative activities.

Item 1B. Unresolved Staff Comments

     We have received no written comments regarding our periodic or current reports from the Staff of the SEC that were issued 180 days or more preceding the end of 2009 and that remain unresolved.

Item 2. Properties

     During July 2006, we executed a lease agreement for new headquarter office space to accommodate our expected long-term growth. The first phase is for approximately 150,000 square feet with the right to expand. We occupied the new headquarter office space, which is located approximately one mile from our previous headquarter office space in Scottsdale, Arizona, during the second quarter of 2008. We obtained possession of the leased premises and therefore began accruing rent expense during the first quarter of 2008. The term of the lease is twelve years. The average annual expense under the amended lease agreement is approximately $3.9 million. During the first quarter of 2008, we received approximately $6.7 million in tenant improvement incentives from the landlord. This amount has been capitalized into leasehold improvements and is being depreciated on a straight-line basis over the lesser of the useful life or the term of the lease. The tenant improvement incentives are also included in other long-term liabilities as deferred rent, and will be recognized as a reduction of rent expense on a straight-line basis over the term of the lease. In 2008, upon vacating our previous headquarters facility, we recorded a charge for the estimated remaining net cost for the lease, net of potential sublease income, of $4.8 million. See Item 7 of Part II of

this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contingent Convertible Senior Notes and Other Long-Term Commitments”.

     During October 2006, we executed a lease agreement for additional headquarter office space, which is also located approximately one mile from our current headquarter office space in Scottsdale, Arizona to accommodate our current needs and future growth. Under this agreement, approximately 21,000 square feet of office space is being leased for a period of three years. In May 2007, we began occupancy of the additional headquarter office space. The lease expires in May 2010. We intend to extend the lease beyond May 2010.

     LipoSonix, now known as Medicis Technologies Corporation, presently leases approximately 24,700 square feet of office, laboratory and manufacturing space in Bothell, Washington, under a lease agreement that expires in October 2012.

     Medicis Aesthetics Canada Ltd., a wholly owned subsidiary, presently leases approximately 3,600 square feet of office space in Toronto, Ontario, Canada, under a lease agreement, as extended, that expires in June 2010.

     Rent expense was approximately $3.6 million, $9.4 million and $2.5 million for 2009, 2008 and 2007, respectively. Rent expense for 2008 includes a $4.8 million charge for the estimated remaining net cost for our previous headquarters facility lease, net of potential sublease income.

Item 3. Legal Proceedings

     On November 20, 2009, we received a Paragraph IV Patent Certification from Barr, advising that Barr has filed a supplement to its earlier filed ANDA # 65-485 (“Barr ANDA Supplement”) with the FDA for generic SOLODYN^® in its forms of 65mg and 115mg strengths. Barr has not advised us as to the timing or status of the FDA’s review of its filing, or whether Barr has complied with FDA requirements for proving bioequivalence. Barr’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable and/or will not be infringed by Barr’s manufacture, use, sale and/or importation of the products for which the Barr ANDA Supplement was submitted. On December 28, 2009, we filed suit against Barr/Teva, in the United States District Court for the District of Maryland seeking an adjudication that Barr/Teva has infringed one or more claims of the ’838 Patent by submitting to the FDA the Barr ANDA Supplement seeking marketing approval for generic SOLODYN^® in its forms of 65mg and 115mg strengths. The relief we requested includes a request for a permanent injunction preventing Barr/Teva from infringing the ’838 Patent by selling generic versions of SOLODYN^® in its forms of 65mg and 115mg strengths. As a result of the filing of the suit, we believe that the supplement to the ANDA cannot be approved by the FDA until after the expiration of a 30-month stay period or a court decision that the patent is invalid or not infringed.

     On October 8, 2009, we received a Paragraph IV Patent Certification from Lupin advising that Lupin had filed an ANDA with the FDA for generic SOLODYN^® in its forms of 45mg, 90mg, and 135mg strengths. Lupin did not advise us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Lupin’s Paragraph IV Certification alleged that Lupin’s manufacture, use, sale or offer for sale of the product for which the ANDA was submitted would not infringe any valid claim of our ’838 Patent. On November 17, 2009, we filed suit against Lupin in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting to the FDA an ANDA for generic SOLODYN^® in its forms of 45mg, 90mg and 135mg strengths. The relief we requested includes a request for a permanent injunction preventing Lupin from infringing the ’838 Patent by selling generic versions of SOLODYN^®. On November 24, 2009, we received a Paragraph IV Patent Certification from Lupin, advising that Lupin has filed a supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 (“Lupin ANDA Supplement/Amendment I”) with the FDA for generic SOLODYN ^® in its form of 65mg strength. Lupin has not advised us as to the timing or status of the FDA’s review of its filing, or whether Lupin has complied with FDA requirements for proving bioequivalence. Lupin’s Paragraph IV Certification alleges that our ’838 Patent is invalid and/or will not be infringed by Lupin’s manufacture, use, sale and/or importation of the products for which the Lupin ANDA Supplement/Amendment I was submitted. Lupin’s submission amends an ANDA already subject to a 30-month stay. As such, we believe that the amendment cannot be approved by the FDA until after the expiration of the 30-month period or a court decision that the patent is invalid or not infringed. On December 23, 2009, we received a Paragraph IV Patent Certification from Lupin, advising that Lupin has filed a supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 (“Lupin ANDA Supplement/Amendment II”) with the FDA for generic SOLODYN ^® in its form of 115mg strength. Lupin has not advised us as to the timing or status

of the FDA’s review of its filing, or whether Lupin has complied with FDA requirements for proving bioequivalence. Lupin’s Paragraph IV Certification alleges that our ’838 Patent is invalid and/or will not be infringed by Lupin’s manufacture, use, sale and/or importation of the products for which the Lupin ANDA Supplement/Amendment II was submitted. Lupin’s submission amends an ANDA already subject to a 30-month stay. As such, we believe that the amendment cannot be approved by the FDA until after the expiration of the 30-month period or a court decision that the patent is invalid or not infringed. On December 28, 2009, we amended our complaint against Lupin in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting its supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 for generic SOLODYN^® in its form of 65mg strength. On February 2, 2010, we amended our complaint against Lupin in the United States District Court for the District of Maryland seeking an adjudication that Lupin has infringed one or more claims of the ’838 Patent by submitting its supplement or amendment to its earlier filed ANDA assigned ANDA #91-424 for generic SOLODYN^® in its form of 115mg strength.

     On September 21, 2009, we received a Paragraph IV Patent Certification from Glenmark advising that Glenmark has filed an ANDA with the FDA for a generic version of LOPROX^® Gel. Glenmark did not advise us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Glenmark’s Paragraph IV Certification alleged that our U.S. Patent No. 7,018,656 (the “’656 Patent”) would not be infringed by Glenmark’s manufacture, use or sale of the product for which the ANDA was submitted. The expiration date for the ’656 Patent is 2018. On November 14, 2009, we entered into a License and Settlement Agreement with Glenmark and its foreign corporate parent Glenmark Ltd. In connection with the License and Settlement Agreement, we and Glenmark agreed to terminate all legal disputes between us relating to LOPROX^® Gel. In addition, Glenmark confirmed that certain of our patents relating to LOPROX^® Gel are valid and enforceable, and cover Glenmark’s activities relating to its generic version of LOPROX^® Gel under an ANDA. Subject to the terms and conditions contained in the License and Settlement Agreement, we also granted Glenmark a license to make and sell generic versions of LOPROX^® Gel. Upon commercialization by Glenmark of generic versions of LOPROX^® Gel, Glenmark will pay us a royalty based on sales of such generic products.

     On December 7, 2009, we entered into a Settlement Agreement (the “Paddock Settlement Agreement”) with Paddock Laboratories, Inc. (“Paddock”). In connection with the Paddock Settlement Agreement, we and Paddock agreed to settle all legal disputes between us relating to our LOPROX^® Shampoo and we agreed to withdraw our complaint against Paddock pending in the U.S. District Court for the District of Arizona. In addition, Paddock confirmed that Paddock’s activities relating to its generic version of LOPROX^® Shampoo are covered by our current and pending patent applications. Further, subject to the terms and conditions contained in the Paddock Settlement Agreement, we granted Paddock a non-exclusive, royalty-bearing license to make and sell limited quantities of its generic version of LOPROX^® Shampoo.

     On May 8, 2009, we received a Paragraph IV Patent Certification from Glenmark advising that Glenmark has filed an ANDA with the FDA for a generic version of VANOS^® cream. Glenmark has not advised us as to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Glenmark’s Paragraph IV Certification alleges that our ’001 Patent and 424 Patent will not be infringed by Glenmark’s manufacture, use or sale of the product for which the ANDA was submitted. The expiration date for the ’424 Patent is 2023. On June 19, 2009, we filed a complaint for patent infringement against Glenmark in the United States District Court for the District of New Jersey. On July 14, 2009, Glenmark and Glenmark Ltd. answered our complaint, and filed counterclaims seeking a declaration that the patents we listed with the FDA for VANOS^® cream were invalid and unenforceable, and would not be infringed by Glenmark’s generic version of VANOS^®. On November 14, 2009, we entered into a license and settlement agreement with Glenmark Ltd. and Glenmark. In connection with the license and settlement agreement, we and Glenmark agreed to terminate all legal disputes between us relating to VANOS^®. In addition, Glenmark confirmed that certain of our patents relating to VANOS^® cream are valid and enforceable, and cover Glenmark’s activities relating to its generic versions of VANOS^® cream under its ANDA. Further, subject to the terms and conditions contained in the license and settlement agreement, we granted Glenmark, effective December 15, 2013, or earlier upon the occurrence of certain events, a license to make and sell generic versions of the existing VANOS^® products. Upon commercialization by Glenmark of generic versions of VANOS^® products, Glenmark will pay us a royalty based on sales of such generic products.

     On May 6, 2009, we received a Paragraph IV Patent Certification from Ranbaxy advising that Ranbaxy had filed an ANDA with the FDA for generic SOLODYN^® in its form of 135mg strength. Ranbaxy did not advise us as

to the timing or status of the FDA’s review of its filing, or whether it has complied with FDA requirements for proving bioequivalence. Ranbaxy’s Paragraph IV Certification alleged that Ranbaxy’s manufacture, use, sale or offer for sale of the product for which the ANDA was submitted would not infringe any valid claim of our ’838 Patent. On June 11, 2009, we filed suit against Ranbaxy in the United States District Court for the District of Delaware seeking an adjudication that Ranbaxy has infringed one or more claims of the ’838 Patent by submitting the above ANDA to the FDA. The relief we requested included a request for a permanent injunction preventing Ranbaxy from infringing the ’838 Patent by selling a generic version of SOLODYN^®. Ranbaxy has answered that the ’838 Patent is not infringed, is invalid, and/or is unenforceable. On January 5, 2010, we received a Paragraph IV Patent Certification from Ranbaxy advising that Ranbaxy has filed a supplement or amendment to its earlier filed ANDA assigned ANDA #91-118 (“Ranbaxy ANDA Supplement/Amendment”) with the FDA for generic SOLODYN^® in its forms of 45mg and 90mg strengths. Ranbaxy has not advised us as to the timing or status of the FDA’s review of its filing, or whether Ranbaxy has complied with FDA requirements for proving bioequivalence. Ranbaxy’s Paragraph IV Certification alleges that our ’838 Patent is invalid, unenforceable, and/or will not be infringed by Ranbaxy’s manufacture, importation, use, sale and/or offer for sale of the products for which the Ranbaxy ANDA Supplement/Amendment was submitted. Ranbaxy’s Paragraph IV Certification also alleges that our ‘347 Patent or ‘373 Patent is not infringed by Ranbaxy’s manufacture, importation, use, sale and/or offer for sale of the products for which the Ranbaxy ANDA Supplement/Amendment was submitted. Ranbaxy’s submission as to the 45mg and 90mg strengths amends an ANDA already subject to a 30-month stay. As such, we believe that the Ranbaxy ANDA Supplement/Amendment cannot be approved by the FDA until after the expiration of the 30-month period or in the event of a court decision holding that the patents are invalid or not infringed. On February 16, 2010, we filed a complaint against Ranbaxy in the United States District Court for the District of Delaware seeking an adjudication that Ranbaxy has infringed one or more claims of the patents by submitting the Ranbaxy ANDA Supplement/Amendment for generic SOLODYN^® in its forms of 45mg and 90mg strengths.

     On June 23, 2009, the Company and IMPAX entered into a Settlement Agreement (the “IMPAX Settlement Agreement”) and Amendment No. 2 to the License and Settlement Agreement initially entered into between IMPAX and the Company. In conjunction with the IMPAX Settlement Agreement, both IMPAX and the Company released, acquitted, covenanted not to sue and forever discharged one another and their affiliates from any and all liabilities relating to the litigation stemming from the initial License and Settlement Agreement between IMPAX and the Company.

     A third party has requested that the USPTO conduct an Ex Parte Reexamination of the ’838 Patent. The USPTO granted this request. In March 2009, the USPTO issued a non-final office action in the reexamination of the ’838 Patent. On May 13, 2009, Medicis’ filed its response to the non-final office action with the USPTO, canceling certain claims and adding amended claims. On November 13, 2009, we received a second non-final office action from the USPTO in the reexamination of the ’838 Patent. The latest office action rejects certain claims of the ’838 Patent. On January 8, 2010, the Company filed its response to the non-final office action with the USPTO. Reexamination can result in confirmation of the validity of all of a patent’s claims, the invalidation of all of a patent’s claims, or the confirmation of some claims and the invalidation of others. We cannot guarantee the outcome of the reexamination. It is possible that one or more of our patents covering SOLODYN^® may be found invalid or narrowed in scope as the result of the pending reexamination or a future reexamination by the USPTO. If the USPTO’s action leads the court in a SOLODYN^® patent infringement suit, including the suits described in this Report, to hold that the patent for SOLODYN^® is invalid or not infringed, such a holding would permit the FDA to lift the 30-month stay on approval of ANDAs for generic versions of SOLODYN^®.

     On January 13, 2009, we filed suit against Mylan, Matrix, Matrix Laboratories Inc., Sandoz, and Barr (collectively “Defendants”) in the United States District Court for the District of Delaware seeking an adjudication that Defendants have infringed one or more claims of our ’838 Patent by submitting to the FDA their respective ANDAs for generic versions of SOLODYN^®. The relief we requested includes a request for a permanent injunction preventing Defendants from infringing the ’838 Patent by selling generic versions of SOLODYN^®. Mylan has answered that the ’838 Patent is not infringed and/or invalid. On March 18, 2009, we entered into a settlement agreement with Barr, a subsidiary of Teva, whereby all legal disputes between us and Teva relating to SOLODYN^® were terminated and whereby Teva agreed that our patent related to SOLODYN^® valid, and enforceable and cover Teva’s activities relating to its generic SOLODYN^®. As part of the settlement, Teva agreed to immediately stop all further shipments of its generic SOLODYN^® product. On March 30, 2009, the Delaware Court dismissed the claims between us and Matrix Laboratories Inc. without prejudice, pursuant to a stipulation between us and Matrix Laboratories Inc. On August 18, 2009, we entered into a Settlement Agreement with Sandoz whereby all legal disputes between us and Sandoz relating to SOLODYN^® were terminated and where Sandoz agreed that our patents related to SOLODYN^® are valid and enforceable, and cover Sandoz’s activities relating to its generic SOLODYN^®

product under ANDA #90-422. Sandoz agreed to be permanently enjoined from any further distribution of generic SOLODYN^®.

     On February 1, 2010, we received a Paragraph IV Patent Certification from Sandoz, advising that Sandoz has filed a supplement to its earlier filed ANDA #91-422 (“Sandoz ANDA Supplement”) with the FDA for generic SOLODYN^® in its forms of 65mg and 115mg strengths. Sandoz has not advised us as to the timing or status of the FDA’s review of its filing, or whether Sandoz has complied with FDA requirements for proving bioequivalence. Sandoz’s Paragraph IV Certification alleges that the ’838 Patent will not be infringed by Sandoz’s manufacture, importation, use, sale and/or offer for sale of the products for which the ANDA Supplement was submitted because it has been granted a patent license by us for the ’838 Patent.

     On January 21, 2009, we received a letter from an alleged stockholder demanding that our Board of Directors take certain actions, including potentially legal action, in connection with the restatement of our consolidated financial statements in 2008. The letter states that, if the Board of Directors does not take the demanded action, the alleged stockholder will commence a derivative action on behalf of us. Our Board of Directors reviewed the letter during the course of 2009 and established a special committee of the Board, comprised of directors who are independent and disinterested with respect to the allegations in the letter, (i) to assess whether there is any merit to the allegations contained in the letter, (ii) if the special committee were to conclude that there may be merit to any of the allegations contained in the letter, to further assess whether it is in the best interest of us and our shareholders to pursue litigation or other action against any or all of the persons named in the letter or any other persons not named in the letter, and (iii) to recommend to the Board of Directors any other appropriate action to be taken. The special committee engaged outside counsel to assist with the investigation.

     On October 3, 10 and 27, 2008, purported stockholder class action lawsuits styled Andrew Hall v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB); Steamfitters Local 449 Pension Fund v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01870-DKD); and Darlene Oliver v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01964-JAT) were filed in the United States District Court for the District of Arizona on behalf of stockholders who purchased our securities during the period between October 30, 2003, and approximately September 24, 2008. The Court has consolidated these actions into a single proceeding and appointed a lead plaintiff and lead plaintiff’s counsel. On May 18, 2009, the lead plaintiff filed an amended complaint. The amended complaint names as defendants Medicis Pharmaceutical Corp. and our Chief Executive Officer and Chairman of the Board, Jonah Shacknai, our Chief Financial Officer, Executive Vice President and Treasurer, Richard D. Peterson, our Chief Operating Officer and Executive Vice President, Mark A. Prygocki, and our independent auditors, Ernst & Young LLP. The claims alleged in the amended complaint arose in connection with the restatement of our annual, transition, and quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of 2008. The amended complaint alleges violations of federal securities laws, (Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5), based on alleged material misrepresentations to the market that allegedly had the effect of artificially inflating the market price of our stock. The amended complaint sought to recover unspecified damages and costs, including counsel and expert fees. On July 17, 2009, we and the other defendants filed motions to dismiss the amended complaint in its entirety on various grounds. The lead plaintiff filed an opposition to the motions to dismiss on August 31, 2009, and we and the other defendants filed reply memoranda in support of the motions to dismiss on October 15, 2009. On December 2, 2009, the court dismissed the consolidated amended complaint without prejudice, permitting the lead plaintiff the opportunity to replead. On January 18, 2010, the lead plaintiff filed a second amended complaint. On February 19, 2010, we and the other defendants filed motions to dismiss the second amended complaint in its entirety on various grounds. We will continue to vigorously defend the claims in these consolidated matters. There can be no assurance, however, that we will be successful, and an adverse resolution of the lawsuits could have a material adverse effect on our financial position and results of operations in the period in which the lawsuits are resolved. We are not presently able to reasonably estimate potential losses, if any, related to the lawsuits.

     In addition to the matters discussed above, we and certain of our subsidiaries are parties to other actions and proceedings incident to our business, including litigation regarding our intellectual property, challenges to the enforceability or validity of our intellectual property and claims that our products infringe on the intellectual property rights of others. We record contingent liabilities resulting from claims against us when it is probable (as that word is defined in ASC 450, Contingencies) that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose material contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual

losses in any future period are inherently uncertain. In all of the cases noted where we are the defendant, we believe we have meritorious defenses to the claims in these actions and resolution of these matters will not have a material adverse effect on our business, financial condition, or results of operation; however, the results of the proceedings are uncertain, and there can be no assurance to that effect.

     The information set forth under “Legal Matters” in Note 12 in the notes to the consolidated financial statements under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules,” is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see “Risk Factors” in Item 1A of this Report.

Item 4.		Reserved

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Description of Registrant’s Securities, Price Range of Common Stock and Dividends Declared

     Our Class A common stock trades on the New York Stock Exchange under the symbol “MRX”. The following table sets forth the high and low sale prices for our Class A common stock on the New York Stock Exchange for the fiscal periods indicated:

		HIGH				LOW				DIVIDENDS DECLARED
YEAR ENDED DECEMBER 31, 2009
First Quarter		$	15.59			$	7.85			$	0.04
Second Quarter			16.74				11.61				0.04
Third Quarter			22.40				14.70				0.04
Fourth Quarter			27.82				20.48				0.04
YEAR ENDED DECEMBER 31, 2008
First Quarter		$	27.02			$	18.51			$	0.04
Second Quarter			24.49				18.84				0.04
Third Quarter			22.10				13.60				0.04
Fourth Quarter			15.19				9.66				0.04

     On February 23, 2010, the last reported sale price on the New York Stock Exchange for Medicis’ Class A common stock was $22.78 per share. As of such date, there were approximately 180 holders of record of Class A common stock.

Dividend Policy

     We do not have a dividend policy. Since July 2003, we have paid quarterly cash dividends aggregating approximately $46.6 million on our common stock. In addition, on December 16, 2009, we declared a cash dividend of $0.04 per issued and outstanding share of common stock payable on January 29, 2010 to our stockholders of record at the close of business on January 4, 2010. Prior to these dividends, we had not paid a cash dividend on our common stock. Any future determinations to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our Board of Directors deems relevant.

     Our 1.5% Contingent Convertible Senior Notes due 2033 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. As of December 31, 2009, $181,000 of our 1.5% Contingent Convertible Senior Notes was outstanding.

Recent Sales of Unregistered Securities

     None.

Equity Compensation Plan Information

     The following table provides information as of December 31, 2009, about compensation plans under which shares of our common stock may be issued to employees, consultants or non-employee directors of our Board of Directors upon exercise of options, warrants or rights under all of our existing equity compensation plans. Our existing equity compensation plans include our 2006 Incentive Plan, our 2004, 1998, 1996, 1995 and 1992 Stock Option Plans, in which all of our employees and non-employee directors are eligible to participate, and our 2002 Stock Option Plan, in which our employees are eligible to participate but our non-employee directors and officers may not participate. Restricted stock grants may only be made from our 2006 and 2004 Plans. No further shares are available for issuance under the 2001 Senior Executive Restricted Stock Plan.

Number of securities

remaining available for

Number of securities

Weighted-average

future issuance under

to be issued upon

exercise price

equity compensation

exercise of

of outstanding

plans (excluding

outstanding options,

options, warrants

securities reflected in

warrants and rights

and rights

column a)

Plan Category

Date

(a)

(b)

(c)

Plans approved by stockholders (1)

12/31/2009

6,332,755

$

28.70

2,818,071

Plans not approved by stockholders (2)

12/31/2009

2,921,092

$

30.40

—

Total

9,253,847

$

29.24

2,818,071

     As of February 23, 2010, there were 9,223,782 shares subject to issuance upon exercise of outstanding options or awards under all of our equity compensation plans, at a weighted average exercise price of $29.23, and with a weighted average remaining life of 2.8 years. In addition, as of February 23, 2010, there were 1,888,950

unvested shares of restricted stock outstanding under all of our equity compensation plans. As of February 23, 2010, there were 2,852,360 shares available for future issuance under those plans.

Item 6.		Selected Financial Data

     The following table sets forth selected consolidated financial data for the year ended December 31, 2009, 2008, 2007 and 2006. The data for the year ended December 31, 2009, 2008, 2007 and 2006 is derived from our audited consolidated financial statements and accompanying notes. The comparability of the periods presented is impacted by certain product rights and business acquisitions and dispositions. Gross profit does not include amortization of our intangible assets.

		Year				Year				Year				Year
		Ended				Ended				Ended				Ended
		Dec. 31, 2009				Dec. 31, 2008				Dec. 31, 2007				Dec. 31, 2006
						(in thousands, except per share amounts)
Statements of Operations Data:
Net product revenues		$	561,761			$	500,977			$	441,868			$	377,548
Net contract revenues			10,154				16,773				15,526				15,617
Net revenues			571,915				517,750				457,394				393,165
Gross profit (a)			515,082				479,036				401,284				347,059
Operating expenses:
Selling, general and administrative			282,950	(b)			279,768	(e)			242,633	(i)			202,457	(k)
Research and development			71,765	(c)			99,916	(f)			39,428	(j)			161,837	(l)
Depreciation and amortization			29,047				27,698				24,548				23,048
In-process research and development			—				30,500	(g)			—				—
Impairment of intangible assets			—				—				4,067				52,586
Total operating expenses			383,762				437,882				310,676				439,928
Operating income			131,320				41,154				90,608				(92,869	)
Other:
Interest and investment (income) expense, net			(3,403	)			(16,722	)			(28,372	)			(20,147	)
Other income, net			(867	)(d)			15,470	(h)			—				—
Income tax expense			59,639				32,130				48,544				(24,570	)
Net income		$	75,951			$	10,276			$	70,436			$	(48,152	)
Basic net income per share		$	1.29			$	0.18			$	1.25			$	(0.88	)
Diluted net income per share		$	1.21			$	0.18			$	1.07			$	(0.88	)
Cash dividend declared per common share		$	0.16			$	0.16			$	0.12			$	0.12
Basic common shares outstanding			57,252				56,567				55,988				54,688
Diluted common shares outstanding			63,172				56,567				71,179				54,688

		DECEMBER 31,
		2009				2008					2007				2006
						(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	528,280			$	343,885		(a)		$	794,680			$	554,261		(b)
Working capital			434,639				307,635					422,971				323,070
Long-term investments			25,524				55,333					17,072				130,290
Total assets			1,172,198				973,434					1,213,411				1,122,720
Current portion of long-term debt			—				—					283,910				169,155
Long-term debt			169,326				169,326					169,145				283,910
Stockholders’ equity			695,259				603,694					583,301				475,520

		Year Ended
		Dec. 31, 2009					Dec. 31, 2008				Dec. 31, 2007					Dec. 31, 2006
							(in thousands)
Cash Flow Data:
Net cash provided by (used in) operating activities		$	177,885		(c)		$	45,770		(d)	$	158,944		(e)		$	(40,963	)	(f)
Net cash (used in) provided by investing activities			(62,226	)				220,091		(g)		(269,486	)	(h)			(216,915	)
Net cash provided by (used in) financing activites			6,953					(287,314	)	(i)		14,470					14,278

     The following table sets forth selected consolidated financial data for the year ended December 31, 2005, the Transition Period, the corresponding six-month period in 2004, and the year ended June 30, 2005. The data for the Transition Period and the year ended June 30, 2005 is derived from our audited consolidated financial statements and accompanying notes, while the data for the year ended December 31, 2005 and the six-month period ended December 31, 2004 is derived from our unaudited consolidated financial statements. The comparability of the periods presented is impacted by certain product rights and business acquisitions and dispositions. Gross profit does not include amortization of our intangible assets.

																Fiscal
							Transition					Six Months				Year Ended
		Year Ended					Period Ended					Ended				June 30,
		Dec. 31, 2005					Dec. 31, 2005					Dec. 31, 2004				2005
		(unaudited)										(unaudited)
							(in thousands, except per share amounts)
Statements of Income Data:
Net product revenues		$	306,735				$	156,963				$	144,116			$	293,888
Net contract revenues			46,002					8,385					34,168				71,785
Net revenues			352,737					165,348					178,284				365,673
Gross profit (a)			297,000					139,583					148,859				307,548
Operating expenses:
Selling, general and administrative			146,158		(b)			78,535		(f)			63,305		(h)		130,927		(j)
Research and development			42,903		(c)			22,367		(g)			45,140		(i)		65,676		(k)
Depreciation and amortization			24,548					12,420					10,222				22,350
Impairment of intangible assets			9,171					9,171					—				—
Total operating expenses			222,780					122,493					118,667				218,953
Operating income			74,220					17,090					30,192				88,595
Other:
Interest and investment (income) expense, net			(5,804	)				(4,726	)				248				(830	)
Other income, net			(59,801	)	(d)			(59,801	)	(d)			—				—
Income tax expense			49,551					29,811					10,377				30,996
Net income		$	90,274				$	51,806				$	19,567			$	58,429
Basic net income per share		$	1.66				$	0.95				$	0.35			$	1.06
Diluted net income per share		$	1.39		(e)		$	0.79				$	0.32			$	0.92
Cash dividend declared per common share		$	0.12				$	0.06				$	0.06			$	0.12
Basic common shares outstanding			54,290					54,323					55,972				55,196
Diluted common shares outstanding			69,558		(e)			69,772					72,160				70,909

        The cash flow data for the year ended December 31, 2005 and the six months ended December 31, 2004, is unaudited.

		December 31,				June 30,
		2005				2005
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents, and short-term investments		$	742,532			$	603,568
Working capital			630,951				530,850
Total assets			1,196,354				1,095,087
Long-term debt			453,065				453,065
Stockholders’ equity			481,751				416,891

														Fiscal
		Year								Six Months				Year Ended
		Ended				Transition				Ended				June 30,
		Dec. 31, 2005				Period				Dec. 31, 2004				2005
		(unaudited)								(unaudited)
						(in thousands)
Cash Flow Data:
Net cash provided by operating activities		$	232,506	(a)		$	147,990	(a)		$	45,465			$	129,981
Net cash provided by investing activities			187,994				123,665				76,158				140,487
Net cash used in financing activities			(5,137	)			(2,792	)			(137,447	)			(139,793	)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations, as well as discusses our critical accounting policies and estimates. You should read the following discussion and analysis together with our consolidated financial statements, including the related notes, which are included in this Form 10-K. Certain information contained in the discussion and analysis set forth below and elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See “Risk Factors” in Item 1A of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements in this report. Our MD&A is composed of four major sections; Executive Summary, Results of Operations, Liquidity and Capital Resources and Critical Accounting Policies and Estimates.

Executive Summary

     We are a leading independent specialty pharmaceutical company focused primarily on helping patients attain a healthy and youthful appearance and self-image through the development and marketing in the U.S. of products for the treatment of dermatological and aesthetic conditions. We also market products in Canada for the treatment of dermatological and aesthetic conditions and began commercial efforts in Europe with our acquisition of LipoSonix in July 2008. We offer a broad range of products addressing various conditions or aesthetics improvements, including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin).

     Our current product lines 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, non-invasive body sculpting technology and contract revenue. Our acne and acne-related dermatological product lines include DYNACIN^®, PLEXION^®, SOLODYN^®, TRIAZ^® and ZIANA^®. Our non-acne dermatological product lines include DYSPORT^TM, LOPROX^®, PERLANE^®, RESTYLANE^® and VANOS^®. Our non-dermatological product lines include AMMONUL^®, BUPHENYL^® and the LIPOSONIX^TM system. Our non-dermatological field also includes contract revenues associated with licensing agreements and authorized generic agreements.

Financial Information About Segments

     We operate in one business segment: pharmaceuticals. Our current pharmaceutical franchises are divided between the dermatological and non-dermatological fields. Information on revenues, operating income, identifiable assets and supplemental revenue of our business franchises appears in the consolidated financial statements included in Item 8 hereof.

Key Aspects of Our Business

     We derive a majority of our revenue from our primary products: DYSPORT^TM, PERLANE^®, RESTYLANE^®, SOLODYN^®, TRIAZ^®, VANOS^® and ZIANA^®. We believe that sales of our primary products will constitute a significant portion of our revenue for 2010.

     We have built our business by executing a four-part growth strategy: promoting existing brands, developing new products and important product line extensions, entering into strategic collaborations and acquiring complementary products, technologies and businesses. Our core philosophy is to cultivate high integrity relationships of trust and confidence with the foremost dermatologists and the leading plastic surgeons in the U.S. We rely on third parties to manufacture our products (except for the LIPOSONIX^TM system).

     We estimate customer demand for our prescription products primarily through use of third-party syndicated data sources which track prescriptions written by health care providers and dispensed by licensed pharmacies. The data represents extrapolations from information provided only by certain pharmacies and are estimates of historical demand levels. We estimate customer demand for our non-prescription products primarily through internal data that we compile. We observe trends from these data and, coupled with certain proprietary information, prepare demand

forecasts that are the basis for our purchase orders for finished and component inventory from our third-party manufacturers and suppliers. Our forecasts may fail to accurately anticipate ultimate customer demand for our products. Overestimates of demand and sudden changes in market conditions may result in excessive inventory production and underestimates may result in inadequate supply of our products in channels of distribution.

     We schedule our inventory purchases to meet anticipated customer demand. As a result, miscalculation of customer demand or relatively small delays in our receipt of manufactured products could result in revenues being deferred or lost. Our operating expenses are based upon anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in the short term.

     We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately 65-75% of our gross revenues are typically derived from two major drug wholesale concerns. Depending on the customer, we recognize revenue at the time of shipment to the customer, or at the time of receipt by the customer, net of estimated provisions. As a result of certain modifications made to our distribution services agreement with McKesson, our exclusive U.S. distributor of our aesthetics products DYSPORT^TM, PERLANE^® and RESTYLANE^®, we began recognizing revenue on these products upon the shipment from McKesson to physicians beginning in the second quarter of 2009. Consequently, variations in the timing of revenue recognition could cause significant fluctuations in operating results from period to period and may result in unanticipated periodic earnings shortfalls or losses. We have distribution services agreements with our two largest wholesale customers. We review the supply levels of our significant products sold to major wholesalers by reviewing periodic inventory reports that are supplied to us by our major wholesalers in accordance with the distribution services agreements. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation of substantially all of our prescription products. We believe our estimates of trade inventory levels of our products, based on our review of the periodic inventory reports supplied by our major wholesalers and the estimated demand for our products based on prescription and other data, are reasonable. We further believe that inventories of our products among wholesale customers, taken as a whole, are similar to those of other specialty pharmaceutical companies, and that our trade practices, which periodically involve volume discounts and early payment discounts, are typical of the industry.

     We periodically offer promotions to wholesale and chain drugstore customers to encourage dispensing of our prescription products, consistent with prescriptions written by licensed health care providers. Because many of our prescription products compete in multi-source markets, it is important for us to ensure the licensed health care providers’ dispensing instructions are fulfilled with our branded products and are not substituted with a generic product or another therapeutic alternative product which may be contrary to the licensed health care providers’ recommended and prescribed Medicis brand. We believe that a critical component of our brand protection program is maintenance of full product availability at drugstore and wholesale customers. We believe such availability reduces the probability of local and regional product substitutions, shortages and backorders, which could result in lost sales. We expect to continue providing favorable terms to wholesale and retail drug chain customers as may be necessary to ensure the fullest possible distribution of our branded products within the pharmaceutical chain of commerce. From time to time we may enter into business arrangements (e.g. loans or investments) involving our customers and those arrangements may be reviewed by federal and state regulators.

     Purchases by any given customer, during any given period, may be above or below actual prescription volumes of any of our products during the same period, resulting in fluctuations of product inventory in the distribution channel.

Recent Developments

     As described in more detail below, the following significant events and transactions occurred during 2009, and affected our results of operations, our cash flows and our financial condition:

-		Asset Purchase and Development Agreement and License and Settlement Agreements with Glenmark;
-		FDA approval of additional strengths of SOLODYN®;
-		License Agreement with Revance;
-		License and Settlement Agreement and Joint Development Agreement with Perrigo;
-		FDA approval of DYSPORTTM;
-		Sale of Medicis Pediatrics;
-		Teva’s launch of a generic to SOLODYN®, our settlement agreement with Teva and the impact of the launch on our sales reserves;

-		Clinical milestone payments related to our collaboration with IMPAX;
-		Reduction in the carrying value of our investment in Revance; and
-		Obtainment of a CE Mark verification for the LIPOSONIXTM system in Europe and Health Canada’s approval of LIPOSONIXTM system sales in Canada.

Asset Purchase and Development Agreement and License and Settlement Agreements with Glenmark

     On November 14, 2009, we entered into an Asset Purchase and Development Agreement with Glenmark Generics Ltd. and Glenmark Generics Inc., USA (collectively, “Glenmark”) (the “Glenmark Asset Purchase and Development Agreement”) and two License and Settlement Agreements with Glenmark (one, the “Vanos License and Settlement Agreement, the other, the “Loprox License and Settlement Agreement” and, collectively, the “Glenmark License and Settlement Agreements”) with Glenmark.

     In connection with the Glenmark Asset Purchase and Development Agreement, we purchased from Glenmark the North American rights of a dermatology product currently under development, including the underlying technology and regulatory filings. In accordance with terms of the agreement, we made a $5.0 million payment to Glenmark upon closing of the transaction, and will make additional payments to Glenmark of up to $7.0 million upon the achievement of certain development and regulatory milestones. We will make royalty payments to Glenmark on sales of the product. The initial $5.0 million payment was recognized as research and development expense during the three months ended December 31, 2009.

     In connection with the Glenmark License and Settlement Agreements, we and Glenmark agreed to terminate all legal disputes between us relating to our VANOS^® (fluocinonide) Cream 0.1% and LOPROX^® Gel. In addition, Glenmark confirmed that certain of our patents relating to VANOS^® and LOPROX^® are valid and enforceable, and cover Glenmark’s activities relating to its generic versions of VANOS^® and LOPROX^® Gel under ANDAs. Further, subject to the terms and conditions contained in the Vanos License and Settlement Agreement, we granted Glenmark, effective December 15, 2013, or earlier upon the occurrence of certain events, a license to make and sell generic versions of the existing VANOS^® products. Upon commercialization by Glenmark of generic versions of VANOS^® products, Glenmark will pay us a royalty based on sales of such generic products. Subject to the terms and conditions contained in the Loprox License and Settlement Agreement, we also granted Glenmark a license to make and sell generic versions of LOPROX^® Gel. Upon commercialization by Glenmark of generic versions of LOPROX^® Gel, Glenmark will pay us a royalty based on sales of such generic products. In accordance with the terms of the Glenmark License and Settlement Agreements, we paid Glenmark $0.3 million for attorneys’ fees incurred by Glenmark related to the legal disputes. The $0.3 million payment was recognized as selling, general and administrative expense during the three months ended December 31, 2009.

FDA approval of additional strengths of SOLODYN^®

     On July 27, 2009, we announced that the FDA had approved additional strengths of SOLODYN^® in 65mg and 115mg dosages for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older. With the addition of these newly-approved strengths, SOLODYN^® is now available in five dosages: 45mg, 65mg, 90mg, 115mg, and 135mg. Shipment of the newly-approved 65mg and 115mg products to wholesalers began during the third quarter of 2009.

License Agreement with Revance

     On July 28, 2009, we and Revance, a privately-held, venture-backed development-stage company, entered into a license agreement granting us worldwide aesthetic and dermatological rights to Revance’s novel, investigational, injectable botulinum toxin type A product, referred to as “RT002”, currently in pre-clinical studies. The objective of the RT002 program is the development of a next-generation neurotoxin with favorable duration of effect and safety profiles.

     Under the terms of the agreement, we paid Revance $10.0 million upon execution of the agreement, and will pay additional potential milestone payments totaling approximately $94 million upon successful completion of certain clinical, regulatory and commercial milestones, and a royalty based on sales and supply price, the total of which is equivalent to a double-digit percentage of net sales. The initial $10.0 million payment was recognized as research and development expense during the three months ended September 30, 2009.

License and Settlement Agreement and Joint Development Agreement with Perrigo

     On April 8, 2009, we entered into a License and Settlement Agreement (the “Perrigo License and Settlement Agreement”) and a Joint Development Agreement (the “Perrigo Joint Development Agreement”) with Perrigo Israel Pharmaceuticals Ltd. Perrigo Company was also a party to the Perrigo License and Settlement Agreement. Perrigo Israel Pharmaceuticals Ltd. and Perrigo Company are collectively referred to as “Perrigo.”

     In connection with the Perrigo License and Settlement Agreement, we and Perrigo agreed to terminate all legal disputes between us relating to our VANOS^® (fluocinonide) Cream 0.1%. On April 17, 2009, the Court entered a consent judgment dismissing all claims and counterclaims between us and Perrigo, and enjoining Perrigo from marketing a generic version of VANOS^® other than under the terms of the settlement agreement. In addition, Perrigo confirmed that certain of our patents relating to VANOS^® are valid and enforceable, and cover Perrigo’s activities relating to its generic product under ANDA #090256. Further, subject to the terms and conditions contained in the Perrigo License and Settlement Agreement:

	•		we granted Perrigo, effective December 15, 2013, or earlier upon the occurrence of certain events, a license to make and sell generic versions of the existing VANOS® products; and
	•		when Perrigo does commercialize generic versions of VANOS® products, Perrigo will pay us a royalty based on sales of such generic products.
			Pursuant to the Perrigo Joint Development Agreement, subject to the terms and conditions contained therein:
	•		we and Perrigo will collaborate to develop a novel proprietary product;
	•		we have the sole right to commercialize the novel proprietary product;
	•		if and when a New Drug Application (“NDA”) for a novel proprietary product is submitted to the FDA, we and Perrigo shall enter into a commercial supply agreement pursuant to which, among other terms, for a period of three years following approval of the NDA, Perrigo would exclusively supply to us all of our novel proprietary product requirements in the U.S.;
	•		we made an up-front $3.0 million payment to Perrigo, and will make additional payments to Perrigo of up to $5.0 million upon the achievement of certain development, regulatory and commercialization milestones; and
	•		we will pay to Perrigo royalty payments on sales of the novel proprietary product.

     During the three months ended September 30, 2009, a development milestone was achieved, and we made a $2.0 million payment to Perrigo pursuant to the Perrigo Joint Development Agreement. The $3.0 million up-front payment and the $2.0 million development milestone payment was recognized as research and development expense during the three months ended June 30, 2009 and September 30, 2009, respectively.

FDA approval of DYSPORT^TM

     On April 29, 2009, the FDA approved the Biologics License Application (“BLA”) for DYSPORT^TM, an acetylcholine release inhibitor and a neuromuscular blocking agent. The approval includes two separate indications, the treatment of cervical dystonia in adults to reduce the severity of abnormal head position and neck pain, and the temporary improvement in the appearance of moderate to severe glabellar lines in adults younger than 65 years of age. RELOXIN^®, which was the proposed U.S. name for Ipsen’s botulinum toxin product for aesthetic use, is now marketed under the name of DYSPORT^TM. Ipsen markets DYSPORT^TM in the U.S. for the therapeutic indication (cervical dystonia), while Medicis began marketing DYSPORT^TM in the U.S. during June 2009 for the aesthetic indication (glabellar lines).

     In March 2006, Ipsen granted us the rights to develop, distribute and commercialize Ipsen’s botulinum toxin product for aesthetic use in the U.S., Canada and Japan. In accordance with the agreement, we paid Ipsen $75.0 million during the second quarter of 2009 as a result of the approval by the FDA. The $75.0 million payment was capitalized into

intangible assets in our consolidated balance sheet. We will pay Ipsen a royalty based on sales and a supply price, as defined under the agreement.

Sale of Medicis Pediatrics

     On June 10, 2009, we, Medicis Pediatrics, Inc. (“Medicis Pediatrics,” formerly known as Ascent Pediatrics, Inc.), a wholly-owned subsidiary of Medicis, and BioMarin Pharmaceutical Inc. (“BioMarin”) entered into an amendment to the Securities Purchase Agreement (the “BioMarin Securities Purchase Agreement”), dated as of May 18, 2004 and amended on January 12, 2005, by and among, Medicis Pediatrics, BioMarin and BioMarin Pediatrics Inc., a wholly-owned subsidiary of BioMarin that previously merged into BioMarin, and us. The amendment was effected to accelerate the closing of BioMarin’s option under the BioMarin Securities Purchase Agreement to purchase from us all of the issued and outstanding capital stock of Medicis Pediatrics (the “Option”), which was previously expected to close in August 2009. In accordance with the amendment, the parties consummated the closing of the Option on June 10, 2009 (the “BioMarin Option Closing”). The aggregate cash consideration paid to us in conjunction with the BioMarin Option Closing was approximately $70.3 million and the purchase was completed substantially in accordance with the previously disclosed terms of the BioMarin Securities Purchase Agreement.

     As a result of the BioMarin Option Closing, we recognized a pretax gain of $2.2 million during the three months ended June 30, 2009, which is included in other (income) expense, net, in the accompanying consolidated statements of income for the year ended December 31, 2009. Because of the difference between our book and tax basis of goodwill in Medicis Pediatrics, the transaction resulted in a $24.8 million gain for income tax purposes, and, accordingly, we recorded a $9.0 million income tax provision during the three months ended June 30, 2009, which is included in income tax expense in the accompanying consolidated statements of operations for the year ended December 31, 2009.

Teva’s launch of a generic to SOLODYN^®, our settlement agreement with Teva, and the impact of the launch on our sales reserves

     On March 17, 2009, Teva Pharmaceutical Industries Ltd. (“Teva”) was granted final approval by the FDA for its ANDA #065485 to market its generic version of 45mg, 90mg and 135mg SOLODYN^® Extended Release Tablets. Teva commenced shipment of this product immediately after the FDA’s approval of the ANDA.

     On March 18, 2009, we entered into a Settlement Agreement with Teva whereby all legal disputes between us and Teva relating to SOLODYN^® were terminated. Pursuant to the agreement, Teva confirmed that our patents relating to SOLODYN^® are valid and enforceable, and cover Teva’s activities relating to its generic SOLODYN^® product. As part of the settlement, Teva agreed to immediately stop all further shipments of its generic SOLODYN^® product. We agreed to release Teva from liability arising from any prior sales of its generic SOLODYN^® product, which were not authorized by Medicis. Under terms of the agreement, Teva has the option to market its generic versions of 45mg, 90mg and 135mg SOLODYN^® Extended Release Tablets under the SOLODYN^® patent rights belonging to us in November 2011, or earlier under certain conditions.

     Teva’s shipment of its generic SOLODYN^® product upon FDA approval, but prior to the consummation of the Settlement Agreement with us on March 18, 2009, caused wholesalers to reduce ordering levels for SOLODYN^®, and caused us to increase our reserves for sales returns and consumer rebates. As a result, net revenues of SOLODYN^® during the three months ended March 31, 2009, decreased as compared to the three months ended March 31, 2008, and as compared to the three months ended December 31, 2008.

Clinical milestone payments related to our collaboration with IMPAX

     On November 26, 2008, we entered into a License and Settlement Agreement and a Joint Development Agreement with IMPAX. In connection with the License and Settlement Agreement, we and IMPAX agreed to terminate all legal disputes between us relating to SOLODYN^®. Additionally, under terms of the License and Settlement Agreement, IMPAX confirmed that our patents relating to SOLODYN^® are valid and enforceable, and cover IMPAX’s activities relating to its generic product under ANDA #090024. Under the terms of the License and Settlement Agreement, IMPAX has a license to market its generic versions of SOLODYN^® 45mg, 90mg and 135mg under the SOLODYN^® patent rights belonging to us upon the occurrence of certain events. Upon launch of its generic formulations of SOLODYN^®, IMPAX may be required to pay us a royalty, based on sales of those generic

formulations by IMPAX under terms described in the License and Settlement Agreement. Under the Joint Development Agreement, we and IMPAX will collaborate on the development of five strategic dermatology product opportunities, including an advanced-form SOLODYN^® product. Under terms of the agreement, we made an initial payment of $40.0 million upon execution of the agreement. During the three months ended March 31, 2009, September 30, 2009, and December 31, 2009, we paid IMPAX $5.0 million, $5.0 million and $2.0 million, respectively, upon the achievement of three separate clinical milestones, in accordance with terms of the agreement. In addition, we are required to pay up to $11.0 million upon successful completion of certain other clinical and commercial milestones. We will also make royalty payments based on sales of the advanced-form SOLODYN^® product if and when it is commercialized by us upon approval by the FDA. We will share equally in the gross profit of the other four development products if and when they are commercialized by IMPAX upon approval by the FDA. The $40.0 million initial payment was recognized as a charge to research and development expense during the three months ended December 31, 2008, and the three separate $5.0 million, $5.0 million and $2.0 million clinical milestone achievement payments were recognized as a charge to research and development expense during the three months ended March 31, 2009, September 30, 2009 and December 31, 2009, respectively.

Reduction in the carrying value of our investment in Revance

     On December 11, 2007, we announced a strategic collaboration with Revance, whereby we 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 our 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 U.S. In consideration for our $20.0 million payment, we 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 was expected to be used by Revance primarily for the development of the product. Approximately $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 was included in other long-term assets in our 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.

     We estimate the net realizable value of the Revance 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).

     During 2008, we reduced the carrying value of our investment in Revance and recorded a related charge to earnings of approximately $9.1 million 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 December 31, 2008. Additionally, during the three months ended March 31, 2009, we reduced the carrying value of our investment in Revance by approximately $2.9 million 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 March 31, 2009. We recognized the $2.9 million as other expense in our consolidated statement of operations during the three months ended March 31, 2009, and as a result, our investment in Revance as of March 31, 2009, was $0.

Obtainment of a CE Mark verification for the LIPOSONIX^TM system in Europe and Health Canada’s approval of LIPOSONIX^TM system sales in Canada.

     During 2009, we filed for a CE Marking certification for the LIPOSONIX^TM system in Europe in accordance with the European Union’s (“EU”) Medical Device Directive (“MDD”). A CE marking certifies that a product has met EU consumer safety, health or environmental requirements. We also filed in 2009 for approval from Health Canada for the use and sale of the LIPOSONIX^TM system in Canada. The filing process in Europe and Canada required us to provide efficacy, safety and scientific information about the LIPOSONIX^TM system. In September 2009, LipoSonix was granted the CE marking in accordance with the MDD. In June 2009, Health Canada provided its market clearance approval. The LIPOSONIX^TM system is not approved for sales in the U.S. We anticipate filing for FDA approval for the sale and use of the LIPOSONIX^TM system in the U.S. in 2010.

Subsequent Event

     On January 29, 2010, the FDA approved our dermal fillers RESTYLANE-L^TM and PERLANE-L^TM, which include the addition of 0.3% lidocaine. RESTYLANE-L^TM is approved for implantation into the mid to deep dermis, and PERLANE-L^TM is approved for implantation into the deep dermis to superficial subcutis, both for the correction of moderate to severe facial wrinkles and folds, such as nasolabial folds. We began shipping RESTYLANE-L^TM and PERLANE-L^TM during February 2010.

Results of Operations

     The following table sets forth certain data as a percentage of net revenues for the periods indicated.

		YEARS ENDED DECEMBER 31,
		2009					2008					2007
Net revenues			100.0	%				100.0	%				100.0	%
Gross profit (d)			90.1					92.5					87.7
Operating expenses			67.1		(a)			84.6		(b)			67.9		(c)
Operating income			23.0					7.9					19.8
Other income (expense), net			0.2					(3.0	)				—
Interest and investment income, net			0.6					3.3					6.2
Income before income tax expense			23.8					8.2					26.0
Income tax expense			(10.4	)				(6.2	)				(10.6	)
Net income			13.4	%				2.0	%				15.4	%

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

Net Revenues

     The following table sets forth our net revenues for the year ended December 31, 2009 and the year ended December 31, 2008, along with the percentage of net revenues and percentage point change for each of our product categories (dollar amounts in millions):

		2009				2008				$ Change				% Change
Net product revenues		$	561.7			$	501.0			$	60.7				12.1	%
Net contract revenues			10.2				16.8				(6.6	)			(39.3)	%
Total net revenues		$	571.9			$	517.8			$	54.1				10.4	%

		2009				2008				$ Change				% Change
Acne and acne-related dermatological products		$	398.8			$	325.0			$	73.8				22.7	%
Non-acne dermatological products			133.6				148.0				(14.4	)			(9.7)	%
Non-dermatological products (including contract revenues)			39.5				44.8				(5.3	)			(11.8)	%
Total net revenues		$	571.9			$	517.8			$	54.1				10.4	%

		2009				2008				Change
Acne and acne-related dermatological products			69.7	%			62.8	%			6.9	%
Non-acne dermatological products			23.4	%			28.6	%			(5.2)	%
Non-dermatological products (including contract revenues)			6.9	%			8.6	%			(1.7)	%
Total net revenues			100.0	%			100.0	%			—

     Net revenues associated with our acne and acne-related dermatological products increased by $73.8 million, or 22.7%, during 2009 as compared to 2008 primarily as a result of increased sales of SOLODYN^®. The increased sales of SOLODYN^® were primarily generated by strong prescription growth, partially offset by the negative impact of units of Teva’s and Sandoz’ respective unauthorized generic SOLODYN^® products that were sold into the distribution channel prior to the consummation of settlement agreements with us on March 18, 2009, and August 18, 2009, respectively. In addition, during the third quarter of 2009 we launched new 65mg and 115mg strengths of SOLODYN^® after they were approved by the FDA. We expect net revenues of SOLODYN^® will continue to be negatively affected during 2010 as units of Teva’s and Sandoz’ respective unauthorized generic SOLODYN^® products are sold and prescribed through the distribution channel.

     Net revenues associated with our non-acne dermatological products decreased as a percentage of net revenues, and decreased in net dollars by $14.4 million, or 9.7%, during 2009 as compared to 2008, primarily due to decreased sales of RESTYLANE^® and PERLANE^®, partially offset by the initial sales of DYSPORT^TM, which was launched in June 2009. As a result of certain modifications made to our distribution services agreement with McKesson, our exclusive U.S. distributor of our aesthetics products DYSPORT^TM, PERLANE^® and RESTYLANE^®, we began recognizing revenue on these products upon the shipment from McKesson to physicians beginning in the second quarter of 2009.

     Net revenues associated with our non-dermatological products decreased by $5.3 million, or 11.8%, during 2009 as compared to 2008, primarily due to a decrease in contract revenues.

Gross Profit

     Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue primarily includes our acquisition cost for the products we purchase from our third-party manufacturers and royalty payments made to third parties. Amortization of intangible assets related to products sold is not included in gross profit. Amortization expense related to these intangibles for 2009 and 2008 was approximately $22.4 million and $21.5 million, respectively. Product mix plays a significant role in our quarterly and annual gross profit as a percentage of net revenues. Different products generate different gross profit margins, and the relative sales mix of higher gross profit products and lower gross profit products can affect our total gross profit.

     The following table sets forth our gross profit for 2009 and 2008, along with the percentage of net revenues represented by such gross profit (dollar amounts in millions):

		2009				2008				$ Change				% Change
Gross profit		$	515.1			$	479.0			$	36.1				7.5	%
% of net revenues			90.1	%			92.5	%

     The increase in gross profit during 2009, compared to 2008, was due to the increase in our net revenues, while the decrease in gross profit as a percentage of net revenues was primarily due to the different mix of products sold during 2009 as compared to 2008, including the impact of the launch of DYSPORT^TM during the second quarter of 2009, which has a lower gross profit margin than most of our other products, and the decrease in contract revenues. In addition, gross margin for 2009 included a charge of $4.8 million associated with an increase in our inventory reserve during 2009, due to an increase in the amount of inventory projected not to be sold by expiry dates.

Selling, General and Administrative Expenses

     The following table sets forth our selling, general and administrative expenses for 2009 and 2008, along with the percentage of net revenues represented by selling, general and administrative expenses (dollar amounts in millions):

		2009				2008				$ Change				% Change
Selling, general and administrative		$	283.0			$	279.8			$	3.2				1.1	%
% of net revenues			49.5	%			54.0	%
Share-based compensation expense included in selling, general and administrative		$	18.1			$	16.3			$	1.8				11.0	%

     The $3.2 million increase in selling, general and administrative expenses during 2009 as compared to 2008 was attributable to approximately $10.6 million of increased personnel costs, primarily related to an increase in the number of employees from 587 as of December 31, 2008, to 620 as of December 31, 2009, and the effect of the annual salary increase that occurred during February 2009, and $8.5 million of increased promotion expenses, primarily due to the launch of DYSPORT^TM during the second quarter of 2009, partially offset by $9.4 million of decreased professional and consulting expenses, $4.8 million related to a lease retirement obligation recorded during 2008 and a net reduction of $1.7 million of other selling, general and administrative costs incurred during 2009. Professional and consulting expenses incurred during 2008 included costs related to the restatement of our 2007 Form 10-K and our Form 10-Q’s for the first and second quarters of 2008 and the implementation of our new enterprise resource planning (ERP) system. The decrease of selling, general and administrative expenses as a percentage of net revenues during 2009 as compared to 2008 was primarily due to the $54.1 million increase in net revenues.

Research and Development Expenses

     The following table sets forth our research and development expenses for 2009 and 2008 (dollar amounts in millions):

		2009				2008				$ Change				% Change
Research and development		$	71.8			$	99.9			$	(28.1	)			(28.1)	%
Up-front and milestone payments included in research and development		$	32.5			$	65.0			$	(32.5	)			(50.0)	%
Share-based compensation expense included in research and development		$	1.1			$	0.3			$	0.8				266.7	%

     Included in research and development expenses for 2009 was a $10.0 million up-front payment to Revance related to a product development agreement, $12.0 million (in aggregate) of milestone payments to Impax related to a product development agreement, a $5.0 million up-front payment to Glenmark related to a product development agreement, $5.0 million (in aggregate) of up-front and milestone payments to Perrigo related to a product development agreement and a $0.5 million milestone payment made to a U.S. company related to a product development agreement. Included in research and development expenses for 2008 was a $40.0 million up-front payment to Impax related to a development agreement and a $25.0 million milestone payment to Ipsen, upon the FDA’s acceptance of Ipsen’s BLA for DYSPORT^TM, which was formerly known as RELOXIN^® during clinical development. We expect research and development expenses to continue to fluctuate from quarter to quarter based on the timing of the achievement of development milestones under license and development agreements, as well as the timing of other development projects and the funds available to support these projects.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses during 2009 increased $1.3 million, or 4.9%, to $29.0 million from $27.7 million during 2008. This increase was primarily due to initial amortization of the $75.0 million milestone payment made to Ipsen during the second quarter of 2009 upon the FDA’s approval of DYSPORT^TM, which was capitalized as an intangible asset, and depreciation incurred related to our new headquarters facility.

In-Process Research and Development Expense

     On July 1, 2008, we acquired LipoSonix, a medical device company developing non-invasive body sculpting technology. As part of the acquisition, we recorded a $30.5 million charge for acquired in-process research and development during the third quarter of 2008. No income tax benefit was recognized related to this charge.

Interest and Investment Income

     Interest and investment income during 2009 decreased $15.8 million, or 67.4%, to $7.6 million from $23.4 million during 2008, due to an decrease in the funds available for investment due to the repurchase of $283.7 million of our New Notes in June 2008 and our $150.0 million acquisition of LipoSonix in July 2008, and a decrease in the interest rates achieved by our invested funds during 2009.

Interest Expense

     Interest expense during 2009 decreased $2.4 million, to $4.2 million during 2009 from $6.7 million during 2008. Our interest expense during 2009 and 2008 consisted of interest expense on our Old Notes, which accrue interest at 2.5% per annum, our New Notes, which accrue interest at 1.5% per annum, and amortization of fees and other origination costs related to the issuance of the New Notes. The decrease in interest expense during 2009 as compared to 2008 was primarily due to the repurchase of $283.7 million of our New Notes in June 2008, and the fees and origination costs related to the issuance of the New Notes becoming fully amortized during the second quarter of 2008. See Note 11, “Contingent Convertible Senior Notes” in the notes to the consolidated financial statements under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules” for further discussion on the Old Notes and New Notes.

Other (Income) Expense, net

     Other income, net, of $0.9 million recognized during 2009 primarily represented a $2.2 million gain on the sale of Medicis Pediatrics to BioMarin, which closed during June 2009 and a $1.5 million gain on the sale of certain auction rate floating securities, partially offset by a $2.9 million reduction in the carrying value of our investment in Revance 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 March 31, 2009. The $1.5 million gain on the sale of certain auction rate floating securities was the result of a transaction whereby the broker through which we purchased auction rate floating securities agreed to repurchase from us three auction rate floating securities with an aggregate par value of $7.0 million, at par. The adjusted basis of these securities was $5.5 million, in aggregate, as a result of an other-than-temporary impairment loss of $1.5 million recorded during the year ended December 31, 2008. The realized gain of $1.5 million was recognized as other income during 2009.

     Other expense of $15.5 million recognized during 2008 represented a $9.1 million reduction in the carrying value of our investment in Revance 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 December 31, 2008, and a $6.4 million other-than-temporary impairment loss recognized related to our auction-rate securities investments. $1.5 million of this impairment loss was recognized as a gain during 2009 upon the sale, at par, of certain auction rate floating securities, as discussed above.

Income Tax Expense

     The following table sets forth our income tax expense and the resulting effective tax rate stated as a percentage of pre-tax income for 2009 and 2008 (dollar amounts in millions):

		2009				2008				$ Change				% Change
Income tax expense		$	59.6			$	32.1			$	27.5				85.7	%
Effective tax rate			44.0	%			75.8	%

     The effective tax rate for 2009 reflects a $9.0 million discrete tax expense due to the taxable gain on the sale of Medicis Pediatrics. Our effective tax rate for 2008 included the impact of no tax benefit being recorded on the charge associated with the reduction in carrying value of our investment in Revance or on the in-process research and development charge related to our investment in LipoSonix. As of December 31, 2009, the cumulative $21.0 million reduction in the carrying value of the Revance investment is currently an unrealized loss for income tax purposes. We will not be able to determine the character of the loss until we exercise or fail to exercise our option. A realized loss is characterized as a capital loss can only be utilized to offset capital gains. We recorded a valuation allowance against the deferred tax asset associated with this unrealized tax loss to reduce the carrying value to $0, which is the amount that we believe is more likely than not to be realized.

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Net Revenues

     The following table sets forth our net revenues for the year ended December 31, 2008 and the year ended December 31, 2007, along with the percentage of net revenues and percentage point change for each of our product categories (dollar amounts in millions):

		2008				2007				$ Change				% Change
| | | |
Net product revenues		$	501.0			$	441.9			$	59.1				13.4	%
Net contract revenues			16.8				15.5				1.3				8.4	%
Total net revenues		$	517.8			$	457.4			$	60.4				13.2	%

		2008				2007				$ Change				% Change
| | | |
Acne and acne-related dermatological products		$	325.0			$	243.4			$	81.6				33.5	%
Non-acne dermatological products			148.0				172.9				(24.9	)			(14.4	)%
Non-dermatological products (including contract revenues)			44.8				41.1				3.7				9.0	%
Total net revenues		$	517.8			$	457.4			$	60.4				13.2	%

		2008				2007				Change
Acne and acne-related dermatological products			62.8	%			53.2	%			9.6	%
Non-acne dermatological products			28.6	%			37.8	%			(9.2	)%
Non-dermatological products (including contract revenues)			8.6	%			9.0	%			(0.4	)%
Total net revenues			100.0	%			100.0	%			—	%

     Our total net revenues increased during 2008 primarily as a result of an increase in sales of SOLODYN^®.

     Net revenues associated with our acne and acne-related dermatological products increased by $81.6 million, or 33.5%, and by 9.6 percentage points as a percentage of net revenues during 2008 as compared to 2007 primarily as a result of the increased sales of SOLODYN^®.

     Net revenues associated with our non-acne dermatological products decreased as a percentage of net revenues, and decreased in net dollars by 14.4% during 2008 as compared to 2007. This decrease is a result of the non-acne dermatological product category being more sensitive to weakness in the U.S. economy than the acne and acne-related dermatological product category.

     Net revenues associated with our non-dermatological products increased by $3.7 million, or 9.0%, during 2008 as compared to 2007, primarily due to an increase in sales of BUPHENYL^® and AMMONUL^® and an increase in contract revenue.

Gross Profit

     Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue primarily includes our acquisition cost for the products we purchase from our third-party manufacturers and royalty payments made to third parties. Amortization of intangible assets related to products sold is not included in gross profit. Amortization expense related to these intangible assets for 2008 and 2007 was approximately $21.5 million and $21.6 million, respectively. Product mix plays a significant role in our quarterly and annual gross profit as a percentage of net revenues. Different products generate different gross profit margins, and the relative sales mix of higher gross profit products and lower gross profit products can affect our total gross profit.

     The following table sets forth our gross profit for 2008 and 2007, along with the percentage of net revenues represented by such gross profit (dollar amounts in millions):

		2008				2007				$ Change				% Change
Gross profit		$	479.0			$	401.3			$	77.7				19.4	%
% of net revenues			92.5	%			87.7	%