Q&A With Medicis CEO Jonah Shacknai, Who Sees a "Definite Downturn" in Vanity Pharma

Medicis is going through a dramatic period. The vanity pharma company's Restylane dermal filler is in a battle royale with Allergan's Juvederm. It's waiting for FDA approval for Reloxin, its competitor to Allergan's Botox. And it just acquired LipoSonix, a high-intensity non-invasive ultrasound fat reducer.

I talked to Medicis CEO Jonah Shacknai about why he believes the marketplace is going to soften, about why he is restating his quarterly results from 2003 forward, and why he calls every dermatologist who is a Medicis customer on their birthdays.

BNET: The impression I get from talking to dermatologists is that business is booming, that customers who want dermal fillers and neurotoxin products haven't stopped spending. However, in your last conference call you suggested that the industry was facing a "perfect storm" of negative economic conditions. Which scenario is correct? Jonah Shacknai: My perception from speaking monthly to several hundred physicians in the cosmetics category is there is a definite downturn nationwide. Previously the downward effect was felt more in the West, Southeast and a bit in the Midwest, but the phenomenon has now become national. The physicians that I speak to are sharing with me economic data suggesting flatness or declines in the10 percent range. Certainly we see that reflected in our own business.

BNET: But Medicis recorded a sales increase of something like 22 percent in the last quarter. Shacknai: We don't break out revenue by product, only by segment. My observation applies to us and every other competitor in the market. Physicians are injecting people less frequently with neurotoxins and fillers. We are a fairly robust and successful company, like Allergan, that has a diversified business. Rather it's a matter of helping our customers to weather it, with programs and promotions that help them retain patients in their practice.

BNET: What promotions are you doing? Shacknai: Right now we have a promotion going on that involves a $100 rebate directly to patients for Restylane or Perlane, if you're freshly injected. We've advertised it very aggressively in weekly magazines and daily print vehicles and online in the hope of stimulating business at the physician level.

BNET: What I'm hearing is that the rich are canceling vacations, but they're not canceling their beauty treatments. Injections are in a sweet spot of less than $1,000, much less than a face lift or laser treatment, and therefore still kind of a money-saver for them. Shacknai: In major cities you cannot be treated for less than $500 and the bill typically goes over $1,000 [for a series of injections]. While it's far less money than an invasive procedure, it's still a lot of money. In the dermatology level this is one of the more expensive procedures performed in any office. At the dermatology level, there's really not a huge opportunity to trade down. This is pretty much at the top of the food chain. BNET: How many dermatologists do you talk to in a week? Shacknai: I talk to a lot of dermatologists and plastic surgeons each week, either through my efforts to call them on their birthdays or by receiving communications from them.

BNET: Wait a minute, you call your dermatologist customers on their birthdays? How many calls is that? Shacknai: About 1,500 a year. And plastic surgeons.

BNET: Aren't they a bit surprised to be getting calls from the CEO of Medicis on their birthdays? Shacknai: I've been doing it for 20 years. Now they're conditioned to hearing from me. Last week I called a doctor, it was pretty much 5 p.m., and he said, 'I was beginning to think you were slipping.' I think there's an expectation because you've been going for so long.

BNET: So what's your guidance on the third and fourth quarters? Will sales be down? Shacknai: We've presaged that this segment is weaker than it has been historically ... I've been speaking about this for at least 12 months now as a likely phenomenon. What we saw for the first six months is that the rate of growth decelerated and in the second half, the rate of growth decelerated more to the point of flatness.

BNET: How many sales reps do you have in your army right now? Shacknai: About 100 dermatology reps selling medical dermatology products and a like number on the aesthetic side, selling Restylane and Perlane and, hopefully, Reloxin.

BNET: Is that more or fewer than last year? Shacknai: It's up a bit.

BNET: What's the problem with your accounting? You said you have to restate several years of your numbers, and there's something to do with destocking and the sales return reserve. Shacknai: What we've done is destocked one of our products Solodyn, because we anticipate the launch of a new strength [of that brand]. But the restatement has to do with issues where the public company accounting oversight board took issues with the finding that Ernst & Young and Medicis had over the years in a very obscure reserve account. The restatement is not expected to have any affect on cashflows. It's an accounting phenomenon. When the numbers come out they will characterize themsleves. We've withdrawn our guidance more as a function of the business environment, but also because of the restatement. In some reporting periods the consequences will be negative. In other periods they will be positive.

BNET: Can you give us an idea of the magnitude of those changes? Shacknai: No we really can't. Again, they're all historical.

BNET: When will we see the new numbers? Shacknai: In the next few weeks, hopefully. It's a matter of Ernst & Young's auditing process. But again, none of this will have an affect on cashflows. It's a technical issue and we're doing what we've been asked to do. Ernst & Young agreed with our position and gave us an unqualified opinion for all the periods, but there was a difference in opinion with this quasi- governmental body.