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

For the year ended December 31, 2006.

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

For the transition period from                      to                     .

MEDICIS PHARMACEUTICAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		52-1574808
(State of other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)
8125 North Hayden Road , Scottsdale, Arizona		85258-2463
(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:Class A common stock, $0.014 par value

New York Stock Exchange		Preference Share Purchase Rights
(Name of each exchange on which		(Title of each Class)
registered)

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 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, or a non -accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer 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, 2006 by non-affiliates of the registrant was $798,138,672 based on the closing price of $24.00 per share as reported on the New York Stock Exchange on June 30, 2006, 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 five 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, 2007, there were 55,602,652 outstanding shares of Class A common stock.

Documents incorporated by reference:

Portions of the Proxy Statement for the registrant’s 2007 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.

 

 

PART I

Item 1. Business

Change in Fiscal Year

     Effective December 31, 2005, Medicis Pharmaceutical Corporation (“Medicis”, the “Company”, or as used in the context of “we”, “us” or “our”) changed its 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, 2006 to December 31, 2006, which we refer to 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 information is provided with respect to the transition period July 1, 2005 through December 31, 2005 (the “Transition Period”), which is audited. We refer to the period beginning July 1, 2004 and ending June 30, 2005 as “fiscal 2005”, and the period beginning July 1, 2003 and ending June 30, 2004 as “fiscal 2004.”

The Company

     Medicis Pharmaceutical Corporation, together with its wholly owned subsidiaries, is 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, aesthetic and podiatric conditions. We also market products in Canada for the treatment of dermatological and aesthetic conditions. We believe that the U.S. market for dermatological pharmaceutical sales exceeds $5 billion annually. According to the American Society for Aesthetic Plastic Surgery, a national not-for-profit organization for education and research in cosmetic plastic surgery, nearly 11.5 million surgical and non-surgical cosmetic procedures were performed in the United States during 2005, including approximately 9.3 million non-surgical cosmetic procedures.

     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 relationships of trust and confidence with the high prescribing dermatologists and podiatrists and the leading plastic surgeons in the United States.

     We offer a broad range of products addressing various conditions or aesthetic improvements, including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, skin and skin-structure infections, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin). We currently offer 17 branded products. Our primary brands are OMNICEF^® (cefdinir), RESTYLANE^® (hyaluronic acid), SOLODYN^® (minocycline HCl, USP), TRIAZ^® (benzoyl peroxide), 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 are considered less critical to our business.

     We develop and obtain marketing and distribution rights to pharmaceutical agents in various stages of development. For example, in 2006, we obtained the rights to develop, distribute and commercialize RELOXIN^® in the U.S., Canada and Japan. 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, we outsource our entire 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.

     OMNICEF^® is a trademark of Fujisawa Pharmaceutical Co. Ltd. and is used under a license from Abbott Laboratories, Inc. (“Abbott”). On April 1, 2005, Fujisawa Pharmaceutical Co. Ltd. merged with Yamanouchi Pharmaceutical Co. Ltd., creating Astelles Pharma, Inc.

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
OMNICEF®		A patented oral cephalosporin for skin and skin-structure infections		Better pathogen eradication rates compared to most frequently prescribed antibiotic for this indication
RESTYLANE®		Injectable gel for treatment of moderate to severe facial wrinkles and folds, such as nasolabial folds		The leading worldwide injectable dermal filler
SOLODYN®		Once daily dosage in the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 and older		Launched in July 2006 following U.S. Food and Drug Administration (“FDA”) approval on May 8, 2006
TRIAZ®		Topical patented gel and cleanser and patent-pending pad treatments for acne		A leading branded prescription benzoyl peroxide product
VANOS™		Super-high potency topical corticosteroid indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses in patients 12 years of age or older		Launched in April 2005 following FDA approval on February 11, 2005
ZIANA™		Once daily topical gel treatment for acne vulgaris in patients 12 and older		Approved by the FDA on November 7, 2006. First commercial sales to wholesalers in December 2006 and launched in January 2007

Prescription Pharmaceuticals

     Our principal branded prescription pharmaceutical products are described below:

     OMNICEF^® is indicated for the treatment of uncomplicated skin and skin-structure infections. Studies show that OMNICEF^® has superior pathogen eradication rates versus Cephalexin, the most frequently prescribed antibiotic for uncomplicated skin and skin-structure infections. OMNICEF^® has been promoted to dermatologists and podiatrists since May 2001 pursuant to our exclusive co-promotion agreement with Abbott. In return, we receive commission revenue from Abbott based on prescriptions generated in these categories. Our agreement with Abbott expires in 2013.

     SOLODYN^®, launched to dermatologists in July 2006 after approval by the FDA on May 8, 2006, is the only 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 and older. SOLODYN^® is also the only approved minocycline in extended release tablet form. SOLODYN^® is lipid soluble, and its mode of action occurs in the skin and sebum. SOLODYN^® is not bioequivalent to any other minocycline products, and is in no way interchangeable with other forms of minocycline. SOLODYN^® is patented until 2018 by a U.S. patent which covers SOLODYN^®‘s unique dissolution rate. Other patents covering SOLODYN^® are to be filed or are pending. SOLODYN^® is available by prescription in 45mg, 90mg and 135mg extended release tablet dosages.

     TRIAZ^®, a topical therapy prescribed for the treatment of numerous forms and varying degrees of acne, is available as a patented gel or cleanser or in a patent-pending pad in three concentrations. 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. 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 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. Physicians may already be familiar with the fluocinonide 0.05%, the active ingredient in another of our products, the Class II corticosteroid LIDEX^®. 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 protected by a U.S. patent that expires in 2021.

     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 protected by a U.S. patent for both composition of matter and method that expires in 2020. An additional patent covering composition of matter has been placed before the U.S. Patent and Trademark Office to be reissued. Each of these patents cover aspects of the unique vehicle which are used to deliver the active ingredients in ZIANA^™. ZIANA^™ is available by prescription in 30 gram and 60 gram tubes.

Dermal Restorative Products

     Our principal branded dermal restorative products are described below:

     RESTYLANE^®, PERLANE^®, RESTYLANE FINE LINES^TM and SubQ^TM are injectable, transparent, stabilized hyaluronic acid gels, which require no patient sensitivity tests in advance of product administration. These products are the only particle-based hyaluronic acid dermal fillers and offer patients a “tissue tailored” result based on their particular skin type volume augmentation needs. In the United States, the FDA regulates these products as medical devices. Medicis offers all four of these products in Canada, and began offering RESTYLANE^® in the United States on January 6, 2004. PERLANE^®, RESTYLANE FINE LINES ^TM and SubQ^TM have not yet been approved by the FDA for use in the United States. We acquired the exclusive U.S. and Canadian rights to these dermal restorative products from Q-Med AB, a Swedish biotechnology/medical device company and its affiliates (collectively “Q-Med”) through license agreements.

Research and Development

     We develop and obtain 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 agreements with other pharmaceutical and biotechnology companies.

     On September 26, 2002, we entered into an exclusive license and development agreement with Dow Pharmaceutical Sciences, Inc. (“Dow”) for the development and commercialization of a patented dermatologic product, ZIANA^™. Under terms of the agreement, as amended, we made an initial payment of $5.4 million and a development milestone payment of $8.8 million to Dow during fiscal 2003, a development milestone payment of $2.4 million to Dow during fiscal 2004 and development milestone payments totaling $11.9 million to Dow during

the Transition Period. These payments were recorded as charges to research and development expense in the periods in which the milestones were achieved. During the quarter ended December 31, 2006, ZIANA^™ was approved by the FDA and, in accordance with the agreement between the parties, we made an additional payment of $1.0 million to Dow for the achievement of this milestone. The $1.0 million payment was recorded as a long-lived asset in our consolidated balance sheets.

     On July 15, 2004, we entered into an exclusive license agreement and other ancillary documents with Q-Med to market, distribute and commercialize in the United States and Canada Q-Med’s product currently known as SubQ ^TM. Q-Med has the exclusive right to manufacture SubQ ^TM for Medicis. SubQ ^TM is currently not approved for use in the United States. Under the terms of the license agreement, Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of Medicis, licenses SubQ ^TM for approximately $80.0 million, due as follows: approximately $30.0 million paid on July 15, 2004, which was recorded as research and development expense during the first quarter of fiscal 2005; approximately $10.0 million upon successful completion of certain clinical milestones; approximately $20.0 million upon the satisfaction of certain defined regulatory milestones; and approximately $20.0 million upon U.S. launch of SubQ ^TM. We also will make additional milestone payments to Q-Med upon the achievement of certain commercial milestones. SubQ ^TM is comprised of the same NASHA ^TM substance as RESTYLANE^®, PERLANE^® and RESTYLANE FINE LINES ^TM with a larger gel particle size and has patent protection until at least 2015 in the United States.

     On December 13, 2004, we entered into an exclusive development and license agreement and other ancillary agreements with Ansata Therapeutics, Inc. (“Ansata”). The development and license agreement granted us the exclusive, worldwide rights to Ansata’s early stage, proprietary antimicrobial peptide technology. In accordance with the development and license agreement, we paid $5.0 million upon signing of the contract, and would have been required to make additional payments for the achievement of certain developmental milestones. In June 2006, the development project was terminated. We have no current or future obligations related to this project. The initial $5.0 million payment was recorded as a charge to research and development expense during the second quarter of fiscal 2005.

     On January 28, 2005, we amended our strategic alliance with AAIPharma, Inc. (“AAIPharma”) previously initiated in June 2002 for the development, commercialization and license of a dermatologic product, SOLODYN^®. The consummation of the amendment did not affect the timing of the development project. The amendment allowed for the immediate transfer of the work product as defined under the agreement, as well as the product’s management and development, to us, and provided that AAIPharma would continue to assist us with the development of SOLODYN^® on a fee for services basis. We had no financial obligations to pay AAIPharma on the attainment of additional clinical milestones, but we incurred approximately $8.3 million as a charge to research and development expense during the third quarter of fiscal 2005, as part of the amendment and the assumption of all liabilities associated with the project. SOLODYN^® was approved by the FDA on May 8, 2006.

     On March 17, 2006, we entered into a development and distribution agreement with Ipsen, whereby Ipsen granted Aesthetica Ltd., our wholly-owned subsidiary, rights to develop, distribute and commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan for aesthetic use by physicians. The product is commonly referred to as RELOXIN^® in the U.S. aesthetic market and DYSPORT^® in medical and aesthetic markets outside the U.S. The product is not currently approved for use in the U.S., Canada or Japan. Upon execution of the development and distribution agreement, we made an initial payment to Ipsen in the amount of $90.1 million in consideration for the exclusive distribution rights in the U.S., Canada and Japan. We will pay Ipsen an additional $26.5 million upon successful completion of various clinical and regulatory milestones, $75.0 million upon the product’s approval by the FDA and $2.0 million upon regulatory approval of the product in Japan. Ipsen will manufacture and provide the product to us for the term of the agreement, which extends to September 2019. Ipsen will receive a royalty based on sales and a supply price, the total of which is equivalent to approximately 30% of net sales as defined under the agreement. Under the terms of the agreement, we are responsible for all remaining research and development costs associated with obtaining the product’s approval in the U.S., Canada and Japan.

     Additionally, Medicis and Ipsen agreed to negotiate and enter into an agreement relating to the exclusive distribution and development rights of the product for the aesthetic market in Europe, and subsequently in certain other markets. Under the terms of the U.S., Canada and Japan agreement, we were obligated to make an additional

$35.1 million payment, as amended, to Ipsen if this agreement was not entered into by April 15, 2006. On April 13, 2006, Medicis and Ipsen agreed to extend this deadline to July 15, 2006. In connection with this extension, we paid Ipsen approximately $12.9 million in April 2006, which would be applied against the total obligation, in the event an agreement was not entered into by the extended deadline. On July 17, 2006, Medicis and Ipsen agreed that the two companies would not pursue an agreement for the commercialization of the product outside of the U.S., Canada and Japan. On July 17, 2006, we made the additional $22.2 million payment to Ipsen, representing the remaining portion of the $35.1 million total obligation, resulting from the discontinuance of negotiations for other territories.

     The initial $90.1 million payment and the $35.1 million obligation was recognized as a charge to research and development expense during 2006.

     On June 19, 2006, we entered into an exclusive start-up development agreement with a company for the development of a dermatologic product. Under terms of the agreement, we made an initial payment of $1.0 million upon execution of the agreement, and are required to pay a milestone payment of $3.0 million upon execution of a Development and License Agreement between the parties. In addition, we will pay approximately $16.0 million upon successful completion of certain clinical milestones and approximately $12.0 million upon the first commercial sales of the product in the U.S. We also will make additional milestone payments upon the achievement of certain commercial milestones. The $1.0 million payment was recognized as a charge to research and development expense during 2006.

     We incurred total research and development costs for all of our sponsored and unreimbursed co-sponsored pharmaceutical projects for 2006, the Transition Period, the corresponding six-month period of 2004, fiscal 2005, fiscal 2004 and fiscal 2003 of $161.3 million, $22.4 million, $45.1 million, $65.7 million and $16.5 million, respectively. Research and development costs for 2006 include $125.2 million paid to Ipsen pursuant to the RELOXIN^® development agreements and $1.0 million paid pursuant to the agreement discussed above. Research and development costs for the Transition Period include $11.9 million paid to Dow pursuant to the development agreement. Research and development costs for the corresponding six-month period of 2004 include $30.0 million related to our license agreement with Q-Med related to the SubQ^TM product, and $5.0 million related to our development and license agreement with Ansata. Research and development costs for fiscal 2005 include $30.0 million related to our license agreement with Q-Med related to the SubQ^TM product, $5.0 million related to our development and license agreement with Ansata, and $8.3 million related to our research and development collaboration with AAIPharma. Research and development costs for fiscal 2004 include $2.4 million paid to Dow pursuant to the development agreement.

Sales and Marketing

     Our combined dedicated sales force, consisting of 167 employees as of December 31, 2006, focuses on high patient volume dermatologists, plastic surgeons and podiatrists. Since a relatively small number of physicians are responsible for writing a majority of dermatological and podiatric prescriptions and performing dermal aesthetic procedures, we believe that the size of our sales force, including its currently ongoing expansion, is appropriate to reach our target physicians. Our therapeutic dermatology and podiatric sales forces consist of 95 employees who regularly call on approximately 9,600 dermatologists and 1,100 podiatrists. Our dermal aesthetic sales force consists of 72 employees who regularly call on leading plastic surgeons, facial plastic surgeons, dermatologists and dermatologic surgeons. We also have seven national account managers who regularly call on major drug wholesalers, managed care organizations, large retail chains, formularies and related organizations.

     We cultivate relationships of trust and confidence with the high prescribing dermatologists and podiatrists and the leading plastic surgeons in the United States. We use a variety of marketing techniques to promote our products including sampling, journal advertising, promotional materials, specialty publications, coupons, money-back or product replacement guarantees, educational conferences and informational websites.

     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 products from primarily two regional warehouses in Nevada and Georgia, as well as additional warehouses in Maryland and 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 2006, the Transition Period, the comparable six-month period in 2004, fiscal 2005 and fiscal 2004, these customers accounted for the following portions of our net revenues:

										Comparable
										Six-Month
						Transition				Period
		2006				Period				in 2004				Fiscal 2005				Fiscal 2004
McKesson			56.8	%			54.9	%			50.8	%			51.2	%			36.9	%
Cardinal			19.3	%			18.9	%			19.7	%			21.8	%			23.8	%

     McKesson is our sole distributor of our RESTYLANE^® products in the United States and Canada. RESTYLANE^® was our highest-selling product during 2006, the Transition Period and fiscal 2005.

Seasonality

     Our business, taken as a whole, is not materially affected by seasonal factors, although a substantial portion of our prescription product revenues has been recognized in the last month of each quarter and 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 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 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 which would adversely affect our results of operations.

     Our TRIAZ^® 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.

     Our OMNICEF^® branded product, which we promote through a license agreement with Abbott, is manufactured, warehoused and distributed by Abbott. The license agreement expires in 2013.

     Our RESTYLANE^® 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 2013.

     Our SOLODYN^® branded product is manufactured by AAIPharma pursuant to a long-term supply agreement that expires in 2010, unless extended by mutual agreement. We are also in the process of qualifying an alternative manufacturing facility for SOLODYN^®.

     Our VANOS^™ branded product is manufactured by Patheon under a supply agreement that automatically renews on an annual basis, unless terminated by either party.

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 United States 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 2015 covering various formulations of TRIAZ^®, a U.S. patent expiring in October of 2015 covering RESTYLANE^®, a U.S. patent expiring in February of 2018 covering SOLODYN^® tablets, five U.S. patents expiring in June and August of 2020 covering the PLEXION^® cleanser formulation and the PLEXION^® TS (topical suspension) and PLEXION^® SCT formulations, two U.S. patents expiring in February of 2015 and August of 2020 covering ZIANA^TM Gel, and a U.S. patent expiring in December 2021 covering VANOS^TM Cream. We have patent applications pending relating to SOLODYN^®, ZIANA^™ Gel and our LOPROX^® Shampoo formulation. We are also pursuing several other U.S. and foreign patent applications.

     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.

     Our success with our products will depend, in part, on our ability to obtain, and successfully defend if challenged, patent or other proprietary protection. 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, such patents 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.

     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 dermal 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 podiatrists and administered by plastic surgeons and aesthetic dermatologists. In addition to product development, testing, approval and marketing, industry consolidation, product quality and price, product technology, reputation, customer service and access to technical information are other competitive factors affecting the pharmaceutical industry.

     The largest competitors for our prescription dermatological products include Allergan, Galderma, Johnson & Johnson, Sanofi-Aventis, Stiefel Laboratories, Warner Chilcott and others. 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 against Allergan and others. On June 5, 2006, Allergan announced that the FDA had approved its dermal filler product Juvéderm^TM. Allergan is a larger company than Medicis, and has greater financial, marketing, sales and technical resources than those available to us. Other dermal filler products, such as Artes Medical’s Artefill^®, BioForm Medical’s Radiesse^®, and a cosmetic tissue augmentation product developed by Anika Therapeutics, Inc. have also recently been approved by the FDA. Patients may differentiate these products from RESTYLANE^® 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, if approved, the companies producing such products could charge less to doctors for their products.

Government Regulation

     The manufacture and sale of biological products, drugs and medical devices are subject to regulation principally by the FDA, but also by other federal agencies 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 Cosmetics Act 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.

     Our RESTYLANE^® dermal filler product is a medical device intended for human use and is subject to regulation by the FDA in the United States. Unless an exemption applies, each medical device in the U.S. must have a Premarket Approval Application (“PMA”) in accordance with the Federal Food, Drug, and Cosmetic Act, as amended, or a 510(k) clearance (a demonstration that the new device is “substantially equivalent” to a device already on the market). RESTYLANE^® 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 systems regulations” (“QSRs”), as verified by detailed FDA investigations 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 pre-market 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 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^® is regulated as a Class III PMA-required medical device. RESTYLANE^® has been approved by the FDA under a PMA.

     In general, products falling within the FDA’s definition of “new drugs” require premarket approval by the FDA. Products falling within the FDA’s definition of “cosmetics” or of “drugs” (if they are not also “new drugs”) and that are generally recognized as “safe and effective” 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. The steps required before a “new drug” may be marketed, shipped or sold in the United States include (i) preclinical laboratory and animal testing of pharmacology and toxicology; (ii) manufacture under cGMP; (iii) submission to the FDA of an Investigational New Drug (or “IND”) application, which must become effective before clinical trials may commence; (iv) 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 as applicable; (v) submission to the FDA of a New Drug Application (or “NDA”); and (vi) FDA approval of the NDA. In addition to obtaining FDA approval for each product, each drug-manufacturing establishment must be registered with, and approved through a pre-approval application (PAI) by, the FDA.

     New drugs may also be approved by the agency pursuant to an ANDA for generic drugs if the same active ingredient has previously been approved by the agency and the original sponsor of the NDA no longer has patent protection or statutory marketing exclusivity. 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 may be required for certain topical ANDAs. However, even if no clinical studies are required, the applicant must provide dissolution and/or metabolic studies to show that the active ingredient in an oral generic drug sponsor’s application is comparably available to the patent as the original product in the NDA upon which the ANDA is based.

     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 IND or IDE application, which must be approved 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 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 to determine preliminary efficacy and expanded evidence of safety and to determine the degree of effect, if any, as compared to the current treatment regimen. In Phase III, at least two large-scale, multi-center, comparative trials are conducted with patients afflicted with a target disease 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.

     FDA approval is required before a ‘new drug’ product may be marketed in the United States. 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 active ingredients and associated labeling (“OTC drugs”) that were proven to be in the market before enactment of the Drug Amendments of 1962. 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 “safe and effective for over-the-counter use;” Category II ingredients and labeling which are deemed “not generally recognized as safe and effective for over-the-counter use;” and Category III ingredients and labeling which are deemed “possibly safe and effective with studies ongoing.” 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 those 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.

     Each of the active ingredients in LOPROX^® products and OMNICEF^® products have been approved by the FDA under an NDA. The active ingredient in DYNACIN^® branded products has been approved by the FDA under an ANDA. 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, an active ingredient in the TRIAZ^® products, 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 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” based upon the introduction date of their active ingredients 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 over-the-counter products or withdraw such products from the market. We believe that these products are compliant with applicable regulations governing product safety, use of ingredients, labeling, promotion and manufacturing methods.

     We also will be subject to foreign regulatory authorities governing clinical trials and pharmaceutical sales for products we seek to market outside the United States. 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. During our fiscal year ended June 30, 2003, we acquired the exclusive U.S. and Canada license to the RESTYLANE^® family of products.

Financial Information About Segments

     We operate in one significant 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.

Employees

     At December 31, 2006, we had 391 full-time employees. No employees are subject to a collective bargaining agreement. We believe our relationship with our employees is good.

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. We also make available free of charge on or through our website our Business Code of Conduct and Ethics, Corporate Governance Guidelines, Nominating and Corporate Governance Committee Charter, Compensation Committee Charter and Audit Committee Charter. The information contained on our website is not intended to be incorporated into this annual report on Form 10-K.

Item 1A. Risk Factors

     Our statements in this report, other reports that we file with the Securities and Exchange Commission (“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

We derive a majority of our sales 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^®, and sales of our dermal aesthetic product, RESTYLANE^®, will continue to constitute a significant portion of our sales 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. On June 5, 2006, Allergan announced that the FDA had approved its Juvéderm^TM dermal filler family of products. Allergan began marketing these products in January 2007. Other dermal filler products, such as Artefill^®, Radiesse^®, and a cosmetic tissue augmentation product developed by Anika Therapeutics, Inc. have also recently been approved by the FDA. Patients may differentiate these products from RESTYLANE^® 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, if approved, the companies producing such products could charge less to doctors for their products. Many of our primary prescription products may be subject to generic competition in the near future. Each of our primary products could be rendered obsolete or uneconomical by competitive changes, including generic competition.

     Sales related to our primary prescription products and RESTYLANE^® 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, plastic surgeons and/or podiatrists;
	•		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, plastic surgeons and/or podiatrists; and
	•		restrictions on travel affecting the ability of our sales force to market to prescribing physicians and plastic surgeons in person.

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 of new competitive products or generics by others;
	•		the timing and receipt of FDA approvals or lack of approvals;
	•		changes in the amount we spend to develop, acquire or license new products, technologies or businesses;
	•		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;
	•		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;
	•		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; and
	•		timing of 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 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. 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;
	•		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;
	•		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.

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.

     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.

     The patents and patent applications in which we have an interest may be challenged as to their validity or enforceability. 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, could be substantial. Such litigation also could require a substantial commitment of our management’s time.

     We are pursuing several United States patent applications; although 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 technology. 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 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. 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.

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

     RESTYLANE^®, PERLANE^®, RESTYLANE FINE LINES^TM and SubQ^TM currently have patent protection in the United States until 2015, and the exclusivity period of the license granted to us by Q-Med will terminate on the later of (i) the expiration of the last patent covering the products or (ii) upon the licensed know-how becoming publicly known. If the validity or enforceability of these 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 may not be able to collect all scheduled license payments from BioMarin.

     As part of our asset purchase agreement, license agreement and securities purchase agreement with BioMarin Pharmaceutical Inc. (“BioMarin”) discussed in Note 8 to our consolidated financial statements, BioMarin will make license payments to us of $1.75 million per quarter for the six quarters beginning in January 2007 and $1.5 million per quarter for the subsequent four quarters beginning in July 2008. While we did receive all scheduled quarterly license payments during 2006, the Transition Period and during the fiscal year ending June 30, 2005, we cannot give any assurances as to BioMarin’s continuing ability to make payments to us. Currently, our revenue recognition of these payments is on a cash basis. In addition, we cannot give any assurances as to BioMarin’s ability to make the $70.6 million payment to us in 2009 for the purchase of all of the outstanding shares of Ascent Pediatrics. If BioMarin defaults on its obligations to make the required payments, we may be forced to incur indebtedness or otherwise reallocate our financial resources to cover the loss of these expected cash payments.

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, 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.

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

     We have internally developed potential pharmaceutical compounds and agents. We also have acquired the rights to certain potential compounds and agents in various stages of development. We currently have a variety of new products in various stages of research and development and are working on possible improvements, extensions and reformulations of some existing products. These research and development activities, as well as the clinical testing and regulatory approval process, which must be completed before commercial quantities of these developments can be sold, will require significant commitments of personnel and financial resources. We cannot assure you that we will be able to develop a product or technology in a timely manner, or at all. Delays in the research, development, testing or approval processes will cause a corresponding delay in revenue generation from those products. Regardless of whether they are ever released to the market, the expense of such processes will have already been incurred.

     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.

     There is also 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.

We may acquire companies in the future and these acquisitions could disrupt our business. 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 of technologies, products and businesses that we believe are complementary to our business. Acquisitions typically entail many risks and could result in difficulties in integrating the operations, personnel, technologies and products of

the companies acquired, some of which may result in significant charges to earnings. If we are unable to successfully integrate our acquisitions with our existing business, we may not obtain the advantages that the acquisitions were intended to create, which may materially adversely affect our business, results of operations, financial condition and cash flows, 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 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, have also tried 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.

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. Even if these steps are taken, we cannot be sure that our acquisitions will be integrated successfully into our business operations. If we are not able to successfully integrate our acquisitions, we may not obtain the advantages that the acquisitions were intended to create. In addition, 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.

Implementation of our new enterprise resource planning system could cause business interruptions and negatively affect our profitability and cash flows.

     During 2007, we will be developing and will begin implementing a new enterprise resource planning (“ERP”) system to help us integrate and improve the financial and operational aspects of our business. The design and implementation of an ERP system involves risks such as cost overruns, project delays and business interruption. A significant amount of our resources will be committed to the ERP project, and we may experience challenges in designing and implementing the new ERP system that could adversely affect our operations and our ability to timely and accurately process and report key components of our financial position. If we experience a material business interruption as a result of our design and implementation of our new ERP system, it could have a material adverse effect on our business, results of operations and cash flows.

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, and 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.

We depend on a limited number of customers, 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. During 2006, McKesson and Cardinal accounted for 56.8% and 19.3%, respectively, of our net revenues. During the Transition Period, McKesson and Cardinal accounted for 54.9% and 18.9%, respectively, of our net revenues. During fiscal 2005, McKesson and Cardinal accounted for 51.2%, and 21.8%, respectively, of our net revenues. The loss of any of these customers’ accounts or a material reduction in their purchases could harm our business, financial condition or results of operations. In addition, we may face pricing pressure from our customers. McKesson is our sole distributor of our RESTYLANE^® products in the United States and Canada.

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 our company, cause a reduction in the inventory levels of distributors and retailers, result in reductions in purchases of our products, increase competitive and pricing pressures on pharmaceutical manufacturers, any of which could harm our business, financial condition and results of operations.

We rely on others to manufacture our products.

     Currently, we outsource our entire product manufacturing needs. 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. 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. 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 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 covering the loss of income for up to 12 months, 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 affect 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 ^® ,PERLANE ^® , RESTYLANE FINE LINES ^TM and SubQ^TM.

     The manufacturing process to create bulk non-animal stabilized hyaluronic acid necessary to produce RESTYLANE^®, PERLANE^®, RESTYLANE FINE LINES^TM and 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^®, PERLANE^®, RESTYLANE FINE LINES^TM and SubQ^TM products and a resulting decrease in sales of the products.

     We depend exclusively on Q-Med for our supply of RESTYLANE^®, PERLANE^®, RESTYLANE FINE LINES^TM and 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^®, PERLANE^®, RESTYLANE FINE LINES^TM and 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.

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 75% of our gross revenues are derived from two major drug wholesale concerns. While we attempt to estimate inventory levels of our products at our major wholesale customers by using historical prescription information, historical purchase patterns, and limited inventory level information by product type, this process is inherently imprecise. Rarely do wholesale customers provide us complete inventory levels at regional distribution centers, or within their national distribution systems. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation 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.

     We cannot control or influence greatly the purchasing patterns of our wholesale and retail drug chain customers. They are highly sophisticated customers that purchase our products in a manner consistent with their industry practices and, presumably, based upon their projected demand levels. 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.

     As a result of customer buying patterns, a substantial portion of our prescription product revenues has been recognized in the last month of each quarter, and 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 in these areas, additional financial resources are expected to be utilized. 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 in the amount of $50.0 million per claim and $50.0 million in the

aggregate 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.

Rising insurance costs could negatively impact profitability.

     The cost of insurance, including workers compensation, product liability and general liability insurance, have risen significantly in recent years and 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.

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.

RESTYLANE ^® is a consumer product and as such, it is susceptible to changes in popular trends and applicable laws, which could adversely affect sales or product margins of RESTYLANE^®.

     RESTYLANE^® is a consumer product. 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 fine lines, wrinkles and deep facial folds, we may experience a decline in demand for RESTYLANE^®. 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 RESTYLANE^® may be negatively impacted by these reports and other reasons.

     Demand for RESTYLANE^® 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 RESTYLANE^® could be adversely affected.

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

     In June 2002, we sold Contingent Convertible Senior Notes, due in 2032 (the “Old Notes”), in the amount of $400.0 million. In August 2003, we exchanged approximately $230.8 million in principal of these Old Notes for approximately $283.9 million of our Contingent Convertible Senior Notes due in 2033 (the “New Notes”).

     On June 4, 2007, 2012 and 2017 and upon the occurrence of a change in control, holders of the remaining Old Notes may require us to offer to repurchase their Old Notes for cash. On June 4, 2008, 2013 and 2018 and upon the occurrence of a change in control, holders of the New Notes may require us to offer to repurchase their New Notes for cash. We may not have sufficient funds at the time of any such events to make the required repurchases.

     The source of funds for any repurchase required as a result of any such events 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 events to make any required repurchases of the Notes tendered. Furthermore, the use of

available cash to fund the repurchase of the Old Notes or New Notes may impair our ability to obtain additional financing in the future.

Our publicly-filed reports are reviewed by the SEC from time to time and any significant changes required as a result of any such review may result in material liability to us, and have a material adverse impact on the trading price of our common stock.

     The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published rules and regulations of the SEC, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.

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), changes in our manufacturing activities and changes in our future levels of research and development spending. In addition, we are subject to the continuous 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 continuous 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 recalls;
	•		delays in product distribution, marketing and sale; and
	•		civil or criminal sanctions.

     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. For example, in the August 29, 2006 Federal Register, the FDA issued a notice of proposed rulemaking to categorically establish that over-the-counter skin bleaching drug products are not generally recognized as safe and effective and are misbranded. If the proposed rule is adopted, all manufacturers of skin bleaching products would be required to remove their products from the market and obtain FDA approval prior to re-entering the U.S. market. The FDA has issued a Guidance document entitled “Marketed Unapproved Drugs — Compliance Policy Guide.” During a public workshop on January 9, 2007 concerning this Guidance, the FDA was reported to have stated the intention to accelerate its evaluation of such products. ESOTERICA^® is an over-the-counter product line that we sell that contains bleaching products that would be regulated by the proposed rule and if that occurs we do not currently intend to invest in obtaining an approved NDA for this product line. This product accounted for approximately $2.0 million in net revenues during 2006.

     Sales representative activities may also be subject to the Voluntary Compliance Guidance issued for pharmaceutical manufacturers by the Office of Inspector General (“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. See Item 3. Legal Proceedings of this Form 10-K.

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 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. 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 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. The government notified us on December 14, 2004, that it is investigating claims that we violated the federal False Claims Act in connection with the 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. On or around October 5, 2006, the parties agreed in principle to resolve all federal and state civil claims against us for approximately $9.8 million. As of December 31, 2006, we have accrued a loss contingency of $10.2 million for this matter in connection with the possibility of additional expenses related to the settlement amount. On or about October 12, 2006, the Company and the United States Attorney’s Office for the District of Kansas entered into a Nonprosecution Agreement wherein the government agreed not to prosecute the Company 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 have agreed to continue cooperating with the government in its ongoing investigation into whether our past and present employees and officers may have violated federal criminal law regarding alleged off-label marketing and promotion of LOPROX^® to pediatricians. No individuals have been designated as targets of the investigation. Any such claims, prosecutions or other proceedings, with respect to our past and present employees and officers, the cost of their defense and fines and penalties resulting therefrom could have a material impact on our reputation, business and financial condition. The Company also is engaged in discussions with the Office of Inspector General of the Department of Health and Human Services (“IG”) to resolve any potential administrative claims the IG may have arising out of the government’s investigation into the Company’s marketing and promotion of LOPROX^®. See Item 3. Legal Proceedings of this Form 10-K

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

     The process of obtaining FDA and other regulatory approvals is time consuming and expensive. Clinical trials are required and the marketing and manufacturing of pharmaceutical products are 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. 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;
	•		submitting products 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;
	•		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, reimportation 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.

We face significant competition within our industry.

     The pharmaceutical and dermal 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, 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, if approved, the companies producing such products could charge less to doctors for their products.

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 2006 and that remain unresolved.

Item 2. Properties

     Our office space in Scottsdale, Arizona has approximately 75,000 square feet under an amended lease agreement that expires in December 2010. The average annual expense under the amended lease agreement is approximately $2.1 million. The lease contains certain rent escalation clauses and, upon expiration, can be renewed for two additional periods of five years each.

     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. Occupancy of the new headquarter office space, which is located approximately one mile from our current headquarter office space in Scottsdale, Arizona, is expected to occur in 2008. The term of the lease is twelve years.

     During October 2006, we executed an interim lease agreement for additional headquarter office space to accommodate our current needs and future growth. Approximately 21,000 square feet of office space is being leased for a period of three years. Occupancy of the additional headquarter office space, which is located approximately one mile from our current headquarter office space in Scottsdale, Arizona, is expected to occur in 2007.

     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 that expires in February 2008.

     Rent expense was approximately $2.2 million, $1.2 million, $1.1 million, $2.3 million and $2.1 million for 2006, the Transition Period, the comparable six-month period in 2004, fiscal 2005 and fiscal 2004, respectively.

Item 3. Legal Proceedings

     The government notified us on December 14, 2004, that it is investigating claims that we violated the federal False Claims Act in connection with the 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. On or around October 5, 2006 the parties agreed in principle to resolve all federal and state civil claims against us for $9.8 million. As of December 31, 2006, we have accrued a loss contingency of $10.2 million for this matter in connection with the possibility of additional expenses related to the settlement amount.

     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 have 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. No individuals have been designated as targets of the investigation. Any such claims, prosecutions or other proceedings, with respect to our past and present employees and officers, the cost of their defense and fines and penalties resulting therefrom could have a material impact on our reputation, business and financial condition.

     We are also engaged in discussions with the Office of Inspector General of the Department of Health and Human Services (“IG”) to resolve any potential administrative claims the IG may have arising out of the government’s investigation into the Company’s marketing and promotion of LOPROX^®.

     On October 27, 2005, we filed suit against Upsher-Smith Laboratories, Inc. of Plymouth, Minnesota and against Prasco Laboratories of Cincinnati, Ohio for infringement of Patent No. 6,905,675 entitled “Sulfur Containing Dermatological Compositions and Methods for Reducing Malodors in Dermatological Compositions” covering our sodium sulfacetamide/sulfur technology. This intellectual property is related to our PLEXION^® Cleanser product. The suit was filed in the U.S. District Court for the District of Arizona, and seeks an award of damages, as well as a preliminary and a permanent injunction. A hearing on our preliminary injunction motion was heard on March 8 and March 9, 2006. On May 2, 2006, an order denying the motion for a preliminary injunction was received by Medicis. The Court has entered an order staying this case until the conclusion of a patent reexamination request submitted by Medicis.

     On June 22, 2006, Medicis and Aventis-Sanofi (the manufacturer of LOPROX^® Gel), filed a complaint in the U.S. District Court for the District of Minnesota against Paddock Laboratories, asserting that Paddock's proposed generic version of Medicis’ LOPROX^® Gel product will infringe one or more claims of one of the Company’s patents on LOPROX^® Gel. Paddock filed an answer and counterclaims and later amended these filings, denying infringement and seeking fees and costs. On December 7, 2006, plaintiffs served Paddock with a covenant not to sue for infringement of the ‘656 patent based on the products that are the subject of Paddock’s current ANDA, and filed their reply to Paddock’s counterclaims, which included a denial of Paddock’s allegations that the ’337 patent claims are invalid, unenforceable and not infringed. On January 26, 2007, the Court entered a stipulated Amended Pretrial Scheduling Order, extending all pre-trial and discovery dates in the case by 30 days to allow the parties to engage in discussions.

     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 Statement of Financial Accounting Standards No. 5) 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.

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

     Medicis’ 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:

										DIVIDENDS
		HIGH				LOW				DECLARED
FISCAL YEAR ENDED DECEMBER 31, 2006
First Quarter		$	34.40			$	28.20			$	0.03
Second Quarter			34.90				23.54				0.03
Third Quarter			32.46				22.57				0.03
Fourth Quarter			40.31				32.08				0.03
TRANSITION PERIOD
Three Months Ended September 30, 2005		$	35.45			$	31.08			$	0.03
Three Months Ended December 31, 2005			35.16				26.30				0.03
FISCAL YEAR ENDED JUNE 30, 2005
First Quarter		$	40.65			$	32.85			$	0.03
Second Quarter			41.00				34.64				0.03
Third Quarter			37.67				28.69				0.03
Fourth Quarter			31.97				26.80				0.03

     On February 23, 2007, the last reported sale price on the New York Stock Exchange for Medicis’ Class A common stock was $37.81 per share. As of such date, there were approximately 201 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 $21.8 million on our common stock. In addition, on December 14, 2006, we declared a cash dividend of $0.03 per issued and outstanding share of common stock payable on January 31, 2007 to our stockholders of record at the close of business on January 2, 2007. 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.

Recent Sales of Unregistered Securities

     None.

Equity Compensation Plan Information

     Information required to be included about our equity compensation plan is incorporated by reference to the material under the caption “Equity Compensation Plan Information” in the proxy statement for our 2007 annual meeting of stockholders.

Item 6. Selected Financial Data

     The following table sets forth selected consolidated financial data for the year ended December 31, 2006 and 2005, the Transition Period, and the corresponding six-month period in 2004. The data for December 31, 2006 and the Transition Period 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.

		Year				Year								Six Months
		Ended				Ended				Transition				Ended
		Dec. 31, 2006				Dec. 31, 2005				Period				Dec. 31, 2004
		(in thousands, except per share amounts)
Statements of Operations Data:
Net product revenues		$	333,625			$	313,684			$	155,569			$	146,999
Net contract revenues			15,617				46,002				8,385				34,168
Net revenues			349,242				359,686				163,954				181,167
Gross profit (a)			307,501				307,398				139,843				153,897
Operating expenses:
Selling, general and administrative			206,822	(b)			149,607	(d)			80,189	(g)			65,736	(i)
Impairment of long-lived assets			52,586				9,171				9,171				—
Research and development			161,837	(c)			42,903	(e)			22,367	(h)			45,140	(j)
Depreciation and amortization			23,048				24,548				12,420				10,222
Total operating expenses			444,293				226,229				124,147				121,098
Operating (loss) income			(136,792	)			81,169				15,696				32,799
Other:
Other income, net			—				59,801	(f)			59,801	(f)			—
Net interest income (expense)			20,147				5,804				4,726				(248	)
Income tax benefit (expense)			40,796				(53,288	)			(30,502	)			(11,328	)
Net (loss) income		$	(75,849	)		$	93,486			$	49,721			$	21,223
Basic net (loss) income per share		$	(1.39	)		$	1.72			$	0.92			$	0.38
Diluted net (loss) income per share		$	(1.39	)		$	1.44	(k)		$	0.76			$	0.34
Cash dividend declared per common share		$	0.12			$	0.12			$	0.06			$	0.06
Basic common shares outstanding			54,688				54,290				54,323				55,972
Diluted common shares outstanding			54,688				69,558	(k)			69,772				72,160

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

		December 31,
		2006				2005
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	554,261	(a)		$	742,532
Working capital			550,022				692,453
Long-term investments			130,290				—
Total assets			1,069,286				1,145,954
Long-term debt			453,065				453,065
Stockholders’ equity			509,559				543,487

														Six Months
		Year Ended				Year Ended				Transition				Ended
		Dec. 31, 2006				Dec. 31, 2005				Period				Dec. 31, 2004
		(in thousands)
Cash Flow Data:
Net cash (used in) provided by operating activities		$	(40,963	)(b)		$	232,506	(c)		$	147,990	(c)		$	45,465
Net cash (used in) provided by investing activities			(216,915	)			187,994				123,665				76,158
Net cash provided by (used in) by financing activities			14,278				(5,137	)			(2,792	)			(137,447	)

     The following selected consolidated financial data for the four-year period ended June 30, 2005 is derived from our audited consolidated financial statements and accompanying notes. The comparability of the years presented is impacted by certain product rights and business acquisitions and dispositions. All business acquisitions were accounted for under the purchase method and accordingly, the results of operations reflect the financial results of each business acquisition from the date of the acquisition. Certain business acquisitions resulted in the write-off of in-process research and development resulting from an independent valuation. Gross profit does not include amortization of the related intangible assets.

		FISCAL YEAR ENDED JUNE 30,
		2005				2004				2003				2002
		(in thousands, except per share amounts)
Statements of Operations Data:
Net product revenues		$	305,114			$	291,607			$	241,909			$	211,248
Net contract revenues			71,785				12,115				5,630				1,559
Net revenues			376,899				303,722				247,539				212,807
Gross profit (a)			321,452				257,116				209,279				177,042
Operating expenses:
Selling, general and administrative			135,154	(b)			118,253				91,648				77,314
Research and development			65,676	(c)			16,494	(d)			29,568	(e)			15,132	(f)
In-process research and development			—				—				—				6,217
Depreciation and amortization			22,350				16,794				10,125				7,928
Total operating expenses			223,180				151,541				131,341				106,591
Operating income			98,272				105,575				77,938				70,451
Other:
Net interest income (expense)			830				(758	)			(278	)			8,533
Loss on early extinguishment of debt			—				(58,660	)			—				—
Income tax expense			(34,112	)			(15,317	)			(26,404	)			(28,960	)
Net income		$	64,990			$	30,840			$	51,256			$	50,024
Basic net income per share		$	1.18			$	0.55			$	0.94			$	0.83
Diluted net income per share		$	1.01			$	0.52			$	0.84			$	0.79
Cash dividend declared per common share		$	0.12			$	0.10			$	0.025				—
Basic common shares outstanding			55,196				55,618				54,376				60,536
Diluted common shares outstanding			70,909				72,481				70,191				63,828

		JUNE 30,
		2005				2004				2003				2002
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term investments		$	603,568			$	634,040			$	552,663			$	577,576
Working capital			600,070				666,743				576,781				611,259
Total assets			1,043,251				1,078,384				932,841				876,273
Long-term debt			453,065				453,067				400,000				400,000
Stockholders’ equity			486,346				555,303				461,121				429,059

		FISCAL YEAR ENDED JUNE 30,
		2005				2004				2003				2002
		(in thousands)
Cash Flow Data:
Net cash provided by operating activities		$	129,981			$	127,964			$	84,667			$	73,542
Net cash provided by (used in) investing activities			140,487				(166,341	)			(113,709	)			(341,660	)
Net cash (used in) provided by financing activities			(139,793	)			40,621				(23,343	)			254,938

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 report on 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.

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 MD&A is intended to cover the audited calendar year January 1, 2006 to December 31, 2006, which we refer to 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 information is provided with respect to the transition period July 1, 2005 through December 31, 2005 (the “Transition Period”), which is audited. We refer to the period beginning July 1, 2004 and ending June 30, 2005 as “fiscal 2005”, and the period beginning July 1, 2003 and ending June 30, 2004 as “fiscal 2004”.

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, aesthetic and podiatric conditions. We also market products in Canada for the treatment of dermatological and aesthetic conditions. We offer a broad range of products addressing various conditions or aesthetics improvements, including dermal fillers, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, skin and skin-structure infections, 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. Our dermatological field represents products for the treatment of acne and acne-related dermatological conditions and non-acne dermatological conditions. Our non-dermatological field represents products for the treatment of asthma (until May 2004), urea cycle disorder and contract revenue. Our acne and acne-related dermatological product lines include DYNACIN^®, PLEXION^®, SOLODYN^®, TRIAZ^® and ZIANA^TM. Our non-acne dermatological product lines include LOPROX^®, OMNICEF^®, RESTYLANE^® and VANOS^TM. Our non-dermatological product lines include AMMONUL^®, BUPHENYL^® and ORAPRED^®. ORAPRED^® was licensed to BioMarin in May 2004. Our non-dermatological field also includes contract revenues associated with licensing agreements and authorized generic agreements.

Key Aspects of Our Business

     We derive a majority of our revenue from our primary products: OMNICEF^®, RESTYLANE^®, SOLODYN^®, TRIAZ^®, VANOS^TM and ZIANA^TM. We believe that sales of our primary products and PERLANE^®, which is not currently approved for use by the FDA in the U.S., will constitute a significant portion of our sales for the foreseeable future.

     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 relationships of trust and

confidence with the high prescribing dermatologists and podiatrists and the leading plastic surgeons in the United States.

     As a result of customer buying patterns, a substantial portion of our product revenues has been recognized in the last month of each quarter, and 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 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 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 75% of our gross revenues are derived from two major drug wholesale concerns. While we attempt to estimate inventory levels of our products at our major wholesale customers by using historical prescription information and historical purchase patterns, this process is inherently imprecise. Rarely do wholesale customers provide us complete inventory levels at regional distribution centers, or within their national distribution systems. We rely wholly upon our wholesale and drug chain customers to effect the distribution allocation of substantially all of our products. Based upon historically consistent purchasing patterns of our major wholesale customers, we believe our estimates of trade inventory levels of our products 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.

     We cannot control or significantly influence the purchasing patterns of our wholesale and retail drug chain customers. They are highly sophisticated customers that purchase products in a manner consistent with their industry practices and, presumably, based upon their projected demand levels. 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.

     As described in more detail below, the following significant events and transactions occurred during 2006, and affected our results of operations, our cash flows and our financial condition:

	-		Development and distribution agreement with Ipsen for rights to Ipsen’s botulinum toxin type A product known as RELOXIN®;
	-		FDA approval of SOLODYN®;
	-		Loss contingency for a pending governmental investigation relating to our marketing and promotion of LOPROX® products;
	-		Write-down of long-lived assets due to impairment; and
	-		FDA approval of ZIANATM.

Development and Distribution Agreement With Ipsen for Rights to Ipsen’s Botulinum Toxin Type A Product Known as RELOXIN ^®

     On March 17, 2006, we entered into a development and distribution agreement with Ipsen Ltd., a wholly-owned subsidiary of Ipsen S.A. (“Ipsen”), whereby Ipsen granted Aesthetica Ltd., a wholly-owned subsidiary of Medicis, rights to develop, distribute and commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan for aesthetic use by physicians. The product is commonly referred to as RELOXIN^® in the U.S. aesthetic market and DYSPORT^® in medical and aesthetic markets outside the U.S. The product is not currently approved for use in the U.S., Canada or Japan. Upon execution of the development and distribution agreement, we made an initial payment to Ipsen in the amount of $90.1 million.

     Additionally, we agreed to negotiate and enter into an agreement relating to the exclusive distribution and development rights of the product for the aesthetic market in Europe, and subsequently in certain other markets. Under the terms of the U.S., Canada and Japan agreement, we were obligated to make an additional $35.1 million payment, as amended, to Ipsen if this agreement was not entered into by April 15, 2006. On April 13, 2006, we agreed with Ipsen to extend this deadline to July 15, 2006. In connection with this extension, we paid Ipsen approximately $12.9 million in April 2006, which would be applied against the total obligation, in the event an agreement was not entered into by the extended deadline. On July 17, 2006, we reached a decision with Ipsen to not pursue an agreement for the commercialization of the product outside of the U.S., Canada and Japan. On July 17, 2006, we made the additional $22.2 million payment to Ipsen, representing the remaining portion of the $35.1 million total obligation, resulting from the discontinuance of negotiations for other territories.

     The initial $90.1 million payment was recognized as a charge to research and development expense during the three months ended March 31, 2006, and the $35.1 million obligation was recognized as a charge to research and development expense during the three months ended June 30, 2006.

     We will pay an additional $26.5 million upon successful completion of various clinical and regulatory milestones, $75.0 million upon the product’s approval by the FDA and $2.0 million upon regulatory approval of the product in Japan. Ipsen will manufacture and provide the product to us for the term of the agreement, which extends to September 2019. Ipsen will receive a royalty based on sales and a supply price, the total of which is equivalent to approximately 30% of net sales as defined under the agreement. Under the terms of the agreement, we are responsible for all remaining research and development costs associated with obtaining the product’s approval in the U.S., Canada and Japan. We expect to incur significant additional research and development expenses related to the development of RELOXIN^® each quarter throughout the development process. It is our current expectation that we will file a Biologic License Application (“BLA”) for RELOXIN^® with the FDA during calendar 2007.

FDA approval of SOLODYN^®

     On May 8, 2006, the FDA approved our New Drug Application for our SOLODYN^® (minocycline HCl, USP) Extended Release Tablets. SOLODYN^® is the only 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 and older. SOLODYN^® is also the only approved minocycline in extended release tablet form. The first sales of SOLODYN^® to our wholesale customers occurred during June 2006.

Loss contingency for a pending governmental investigation relating to our marketing and promotion of LOPROX^® products

     The government notified us on December 14, 2004, that it is investigating claims that we violated the federal False Claims Act in connection with the 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. In April 2006, we offered $6.0 million to resolve the government’s civil claims contingent on the execution of appropriate releases. The Justice Department countered with a demand of $12.8 million to resolve the civil claims that the government is prepared to pursue. In May 2006, we countered with an offer of $8.0 million that was contingent on resolving other aspects of the government’s investigation to our satisfaction. In June 2006, the Justice Department countered with a $10.0 million offer for settlement. On or about October 5, 2006 the parties agreed in principle to resolve all federal and state civil claims against us for $9.8 million. As of December 31, 2006, we have accrued a loss contingency of $10.2 million for this matter in connection with the possibility of additional expenses related to the settlement amount. Of this amount, $6.0 million was recorded during the three months ended March 31, 2006, $2.0 million was recorded during the three months ended June 30, 2006 and $2.2 million was recorded during the three months ended September 30, 2006.

     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 have 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. No individuals have been designated as targets of the investigation. Any such claims, prosecutions or other proceedings, with respect to our past and present employees and officers, the cost of their defense and fines and penalties resulting therefrom could have a material impact on our reputation, business and financial condition.

     We are also engaged in discussions with the Office of Inspector General of the Department of Health and Human Services (“IG”) to resolve any potential administrative claims the IG may have arising out of the government’s investigation into our marketing and promotion of LOPROX^®.

Write-down of Long-lived Assets Due to Impairment

     We assess the potential impairment of long-lived assets on a periodic basis and when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset grouping to our estimate of the related total future net cash flows. If an asset carrying value is not recoverable through the related cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset grouping’s carrying amount and its fair value, based on the best information available, including market prices or discounted cash flow analysis.

     During the quarter ended September 30, 2006, long-lived assets related to certain of our products were determined to be impaired based on our analysis of the long-lived assets’ carrying value and projected future cash flows. As a result of the impairment analysis, we recorded a write-down of approximately $52.6 million related to these long-lived assets. This write-down included the following (in thousands):

Long-lived asset related to LOPROX® products		$	49,163
Long-lived asset related to ESOTERICA® products			3,267
Other long-lived asset			156
		$	52,586

     Factors affecting the future cash flows of the LOPROX^® long-lived asset included competitive pressures in the marketplace and the cancellation of the development plan to support future forms of LOPROX^®. Factors

affecting the future cash flows of the ESOTERICA^® long-lived asset included a notice of proposed rulemaking by the FDA for an NDA to be required for continued marketing of hydroquinone products, such as ESOTERICA^®. ESOTERICA^® is currently an over-the-counter product line, and we do not plan to invest in obtaining an approved NDA for this product line if this proposed rule is made final without change.

     In addition, as a result of the impairment analysis, the remaining amortizable lives of the long-lived assets related to LOPROX^® and ESOTERICA^® were reduced to fifteen years and fifteen months, respectively. The long-lived asset related to LOPROX^® will become fully amortized on September 30, 2021, and the long-lived asset related to ESOTERICA^® will become fully amortized on December 31, 2007. The net impact on amortization expense as a result of the write-down of the carrying value of the long-lived assets and the reduction of their respective amortizable lives is a decrease in quarterly amortization expense related to LOPROX^® of $354,051 and an increase in quarterly amortization expense related to ESOTERICA^® of $48,077.

FDA approval of ZIANA^TM

     On November 7, 2006, the FDA approved ZIANA^™ (clindamycin phosphate 1.2% and tretinoin 0.025%) Gel for once daily use for the topical treatment of acne vulgaris in patients 12 years or older. We began selling ZIANA^™ to wholesale customers during the fourth quarter of 2006. In accordance with the terms of a development and license agreement, as amended, we paid Dow $1.0 million during the fourth quarter of 2006 as a result of the FDA’s approval of this product. The $1.0 million payment is classified as a long-lived asset in our consolidated balance sheet.

Results of Operations

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

						(Unaudited)								(Unaudited)
		Year				Year								Six Months
		Ended				Ended								Ended
		Dec. 31,				Dec. 31,				Transition				Dec. 31,				Fiscal Year Ended
		2006(a)				2005(b)				Period(c)				2004(d)				2005(e)				2004(f)
Net revenues			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%
Gross profit (g)			88.0				85.5				85.3				84.9				85.3				84.7
Operating expenses			127.2				62.9				75.7				66.8				59.2				49.9
Operating (loss) income			(39.2	)			22.6				9.6				18.1				26.1				34.8
Other income, net			—				16.6				36.5				—				—				—
Interest and investment income (expense), net			5.8				1.6				2.9				(0.1	)			0.2				(0.2	)
Loss on early extinguishment of debt			—				—				—				—				—				(19.3	)
(Loss) income before income tax benefit (expense)			(33.4	)			40.8				49.0				18.0				26.3				15.3
Income tax benefit (expense)			11.7				(14.8	)			(18.7	)			(6.3	)			(9.1	)			(5.1	)
Net (loss) income			(21.7	)%			26.0	%			30.3	%			11.7	%			17.2	%			10.2	%

Year Ended December 31, 2006 Compared to the Unaudited Year Ended December 31, 2005

Net Revenues

     The following table sets forth the net revenues for the year ended December 31, 2006 and 2005, along with the percentage of net revenues and percentage point change for each of our product categories (dollar amounts in millions):

		2006				2005				$ Change				% Change
Net product revenues		$	333.6			$	313.7			$	19.9				6.4	%
Net contract revenues			15.6				46.0				(30.4	)			(66.1	)
Net revenues		$	349.2			$	359.7			$	(10.5	)			(2.9	)%

										Percentage
										Point
		2006				2005				Change
Acne and acne-related dermatological products			45.3	%			27.2	%			18.1	%
Non-acne dermatological products			45.2				53.8				( 8.6	)
Non-dermatological products			9.5				19.0				( 9.5	)
Total net revenues			100.0	%			100.0	%			—

     Our total net revenues decreased during 2006 primarily due to a decrease in net contract revenues associated with licensing agreements. Net contract revenues decreased primarily due to a decrease in contract revenues during 2006 related to our outlicensing of the ORAPRED^® brand pursuant to the terms of our license agreement with BioMarin. Net revenues associated with our acne and acne-related dermatological products increased as a percentage of net revenues, and increased in net revenue dollars by 61.8% during 2006 as compared to 2005, primarily due to sales of SOLODYN^®, which was approved by the FDA during the second quarter of 2006, and sales of ZIANA^™, which was approved by the FDA during the fourth quarter of 2006, partially offset by decreases in sales of DYNACIN^®, PLEXION^® and TRIAZ^® products due to competitive pressures, including generic competition. Net revenues associated with our non-acne dermatological products decreased as a percentage of net revenues, and decreased in net revenue dollars by 18.4% during 2006, primarily due to decrease in sales of VANOS^™ and LOPROX^® products, which was offset by an increase in sales of RESTYLANE^®. Net revenues associated with our non-dermatological products decreased as a percentage of net revenues, and decreased in net revenue dollars by 51.6% during 2006, primarily due to the decrease in ORAPRED^® contract revenues discussed above.

Gross Profit

     Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue 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 2006 and 2005 was approximately $20.0 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 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 2006 and 2005, along with the percentage of net revenues represented by such gross profit (dollar amounts in millions):

		2006				2005				$ Change				% Change
Gross profit		$	307.5			$	307.4			$	0.1				0.0	%
% of net revenues			88.0	%			85.5	%

     The increase in gross profit as a percentage of net revenues was primarily due to the different mix of high gross margin products sold during 2006 as compared to 2005. The launch of SOLODYN^® during the second quarter of 2006, a higher margin product, was the primary change in the mix of products sold during the comparable periods that affected gross profit as a percentage of net revenues.

Selling, General and Administrative Expenses

     The following table sets forth our selling, general and administrative expenses for 2006 and 2005, along with the percentage of net revenues represented by selling, general and administrative expenses (dollar amounts in millions):

		2006				2005				$Change				% Change
Selling, general and administrative		$	206.8			$	149.6			$	57.2				38.2	%
% of net revenues			59.2	%			41.6	%
Inamed business integration planning costs included in selling, general and administrative		$	—			$	6.0			$	(6.0	)			(100.0	)%
Share-based compensation expense included in selling, general and administrative		$	24.5			$	14.2			$	10.3				72.1	%

     The increase in selling, general and administrative expenses during 2006 from 2005 was attributable to approximately $10.3 million of additional share-based compensation expense recognized in accordance with SFAS No. 123R (twelve months of expense was recognized during 2006 as compared to six months of expense recognized during 2005 as SFAS No. 123R was adopted as of July 1, 2005), $10.2 million related to a loss contingency for a legal matter related to our marketing of LOPROX^® to pediatricians (see Part II, Item 3, Legal Proceedings), approximately $11.2 million of increased promotional expense, primarily related to the promotion of RESTYLANE^®, the launches of SOLODYN^® and ZIANA^™ and pre-launch costs for PERLANE^®, $11.2 million of increased personnel costs due to increased headcount and the effect of the annual salary increase that occurred during August 2005 and the partial-year salary increase that occurred during February 2006, $1.8 million related to a settlement of a dispute related to our merger with Ascent, and $18.5 million of other additional selling, general and administrative expenses incurred during 2006, which was partially offset by $6.0 million of business integration planning costs related to the proposed (and subsequently terminated) merger with Inamed incurred during 2005.

Impairment of Long-lived Assets

     During the third quarter of 2006, long-lived assets related to certain of our products were determined to be impaired based on our analysis of the long-lived assets’ carrying value and projected future cash flows. As a result of the impairment analysis, we recorded a write-down of approximately $52.6 million related to these long-lived assets. This write-down included the following (in thousands):

Long-lived asset related to LOPROX® products		$	49,163
Long-lived asset related to ESOTERICA® products			3,267
Other long-lived asset			156
		$	52,586

     Factors affecting the future cash flows of the LOPROX^® long-lived asset included competitive pressures in the marketplace and the cancellation of the development plan to support future forms of LOPROX^®. Factors affecting the future cash flows of the ESOTERICA^® long-lived asset included a notice of proposed rulemaking by the FDA for an NDA to be required for continued marketing of hydroquinone products, such as ESOTERICA^®.

ESOTERICA^® is currently an over-the-counter product line, and we do not plan to invest in obtaining an approved NDA for this product line if this proposed rule is made final without change.

     During the fourth quarter of 2005, a long-lived asset related to our DYNACIN^® capsule products was determined to be impaired based on our analysis of the long-lived asset’s carrying value and projected future cash flows. Factors affecting the long-lived asset’s future cash flows included our promotional focus on our DYNACIN^® tablet products, and competitive pressures in the marketplace. As a result of the impairment analysis, we recorded a write-down of approximately $9.2 million related to this long-lived asset.

Research and Development Expenses

     The following table sets forth our research and development expenses for 2006 and 2005 (dollar amounts in millions):

		2006				2005				$ Change				% Change
Research and development		$	161.8			$	42.9			$	118.9				277.2	%
Charges included in research and development		$	125.2			$	20.2			$	105.0				518.8	%
Share-based compensation expense included in research and development		$	1.6			$	1.0			$	0.6				62.7	%

     Included in research and development expenses for 2006 was $125.2 million related to the development and distribution agreement with Ipsen for the development of RELOXIN^® and approximately $1.6 million of share-based compensation expense. Included in research and development expense for 2005 was approximately $11.9 million related to research and development of ZIANA^TM, $8.3 million related to a research and development of SOLODYN^® and approximately $1.0 million of share-based compensation expense. In addition to these increases in development milestone charges and share-based compensation expense, research and development expenses increased due to costs related to the development of RELOXIN^® incurred during 2006. 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. We expect to incur significant research and development expenses related to the development of RELOXIN^® each quarter throughout the development process.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses during 2006 decreased $1.5 million, or 6.1%, to $23.0 million from $24.5 million during 2005. This decrease was primarily due to a decrease in the amount of intangible assets being amortized during 2006 as compared to 2005, due to the write-down of a long-lived asset due to impairment during the three months ended December 31, 2005. This long-lived asset had a cost basis of approximately $15.4 million and was being amortized at a rate of approximately $0.3 million per quarter.

Interest and Investment Income

     Interest and investment income during 2006 increased $14.3 million, or 87.1%, to $30.8 million from $16.5 million during 2005, due to an increase in the funds available for investment and an increase in the interest rates achieved by our invested funds during 2006.

Interest Expense

     Interest expense during 2006 remained consistent with 2005, at $10.6 million. Our interest expense during 2006 and 2005 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 Old Notes and New Notes. See Note 13 in our accompanying consolidated financial statements for further discussion on the Old Notes and New Notes.

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 2006 and 2005 (dollar amounts in millions):

		2006				2005				$ Change				% Change
Income tax (benefit) expense		$	(40.8	)		$	53.3			$	(94.1	)			(176.6	)%
Effective tax rate			(35.0	)%			36.3	%

     Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, charitable contribution deductions, tax credits available in the U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to normally result in tax deductions, various expenses that are non-deductible for tax purposes, and differences in tax rates in certain non-U.S. jurisdictions. Our effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pre-tax earnings in the various tax jurisdictions in which we operate, changes in valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws in jurisdictions where we conduct operations. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating losses and credit carryforwards. We record valuation allowances against our deferred tax assets to reduce the net carrying values to amounts that management believes is more likely than not to be realized.

     Income taxes during 2006 was a benefit of $40.8 million, due to our pre-tax loss recognized during 2006, compared to income tax expense of $53.3 million during 2005. The effective tax rate for 2006 of 35.0% includes a $5.1 million tax benefit recorded during the second quarter of 2006 relating to resolutions of income tax examinations through years ended June 30, 2004. The effective tax rate for 2006 absent this $5.1 million benefit is (30.8)%.

Six Months Ended December 31, 2005 Compared To Unaudited Six Months Ended December 31, 2004

Net Revenues

     The following table sets forth the net revenues for the Transition Period and December 31, 2004 (the “comparable 2004 six months”), along with the percentage of net revenues for each of our product categories (amounts in millions):

						Comparable
		Transition				2004
		Period				Six Months				$ Change				%Change
Net product revenues		$	155.6			$	147.0			$	8.6				5.8	%
Net contract revenues			8.4				34.2				(25.8	)			(75.5	)%
Net revenues		$	164.0			$	181.2			$	(17.2	)			(9.5	)%

						Comparable				Percentage
		Transition				2004				Point
		Period				Six Months				Change
Acne and acne-related dermatological products			28.1	%			32.8	%			(4.7	)%
Non-acne dermatological products			58.9	%			44.4	%			14.5	%
Non-dermatological products			13.0	%			22.8	%			(9.8	)%
Total net revenues			100.0	%			100.0	%			—

     Our total net revenues decreased during the Transition Period compared to the comparable 2004 six months primarily as a result of a decrease in net contract revenues associated with licensing agreements and authorized generic agreements. Net contract revenues decreased primarily due to a decrease in contract revenues during the Transition

Period related to our outlicensing of the ORAPRED^® brand pursuant to the terms of our license agreement with BioMarin. Net revenues associated with our acne and acne-related dermatological products decreased as a percentage of net revenues and decreased in net dollars by 22.6% during the Transition Period as compared to the comparable 2004 six months, primarily due to generic competition with our DYNACIN^® brand of products. Net revenues associated with our non-acne dermatological products increased as a percentage of net revenues, and increased in net dollars by 20.0% during the Transition Period, primarily due to the launch of VANOS^™ in April 2005, and an increase in sales of RESTYLANE^®. Net revenues associated with our non-dermatological products decreased as a percentage of net revenues and decreased in net dollars by 48.1% during the Transition Period, primarily due to the decrease in ORAPRED^® contract revenues discussed above.

Gross Profit

     Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue 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 the Transition Period and the comparable 2004 six months was approximately $10.9 million and $8.9 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 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 the Transition Period and comparable 2004 six months, along with the percentage of net revenues represented by such gross profit (amounts in millions):

						Comparable
		Transition				2004
		Period				Six Months				$ Change				% Change
Gross profit		$	139.8			$	153.9			$	(14.1	)			(9.1	)%
% of net revenues			85.3	%			84.9	%

     The decrease in gross profit during the Transition Period as compared to the comparable 2004 six months was due to the decrease in our net revenues, while the increase in gross profit as a percentage of net revenues was primarily due to the different mix of products sold during the Transition Period as compared to the comparable 2004 six months.

Selling, General and Administrative Expenses

     The following table sets forth our selling, general and administrative expenses for the Transition Period and comparable 2004 six months, along with the percentage of net revenues represented by selling, general and administrative expenses (amounts in millions):

						Comparable
		Transition				2004
		Period				Six Months				$ Change				% Change
Selling, general and administrative		$	80.2			$	65.7			$	14.5				22.0	%
% of net revenues			48.9	%			36.3	%
Share-based compensation expense included in selling, general and administrative		$	13.9			$	0.3			$	13.6				5,416.1	%

     The increase in selling, general and administrative expenses during the Transition Period from the comparable 2004 six months was attributable to $13.6 million of additional share-based compensation expense recognized upon our adoption of SFAS No. 123R, $0.7 million of integration costs related to the proposed merger with Inamed incurred during the three months ended September 30, 2005, and $1.5 million of additional selling, general and administrative expenses incurred during the Transition Period, partially offset by approximately $1.3 million of professional fees related to a research and development agreements with Q-Med (for the development of SubQ^TM) and Ansata incurred during the comparable 2004 six months.

Impairment of Long-lived Assets

     During the three months ended December 31, 2005, a long-lived asset related to our DYNACIN^® capsule products was determined to be impaired based on our analysis of the long-lived asset’s carrying value and projected future cash flows. Factors affecting the long-lived asset’s future cash flows included our promotional focus on our DYNACIN^® tablet products, and competitive pressures in the marketplace. As a result of the impairment analysis, we recorded a write-down of approximately $9.2 million related to this long-lived asset.

Research and Development Expenses

     The following table sets forth our research and development expenses for the Transition Period and comparable 2004 six months (amounts in millions):

						Comparable
		Transition				2004
		Period				Six Months				$ Change				% Change
Research and development		$	22.4			$	45.1			$	(22.7	)			(50.4	)%
Charges included in research and development			11.9				35.0				(23.1	)			(65.9	)%
Share-based compensation expense included in research and development			1.0				—				1.0				100.0	%

     Included in research and development expenses for the Transition Period was approximately $11.9 million of milestone payments related to the license and development agreement with Dow for ZIANA^TM and approximately $1.0 million of share-based compensation expense stock recognized upon our adoption of SFAS No. 123R. Included in research and development expenses for the comparable 2004 six months was approximately $30.0 million related to the SubQ^TM license agreement and $5.0 million related to the Ansata development and license agreement.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses during the Transition Period increased $2.2 million, or 21.5%, to $12.4 million from $10.2 million during the comparable 2004 six months. This increase was primarily due to increased amortization that began during the third quarter of fiscal 2005 related to certain intangible assets whose useful lives were determined to be shorter than originally estimated.

Other Income, net

     Other income, net, during the Transition Period represented a termination fee received from Inamed as a result of the termination of the proposed merger, net of the expensing of accumulated transaction costs related to the transaction and integration planning costs incurred during the three months ended December 31, 2005. The net amount of these items is summarized as follows (in millions):

Termination fee received from Inamed, including expense reimbursement fees		$	90.5
Less:
Transaction costs expensed, including legal and advisory fees			27.0
Integration planning costs incurred during the three months ended December 31, 2005			3.7
		$	59.8

Interest and Investment Income

     Interest and investment income during the Transition Period increased $5.0 million, or 98.2%, to $10.1 million from $5.1 million during the comparable 2004 six months, primarily due to an increase in funds available for investment and an increase in the interest rates achieved by our invested funds during the Transition Period. The increase in interest rates achieved was partially due to a shift from non-taxable to taxable investments, which yield higher rates.

Interest Expense

     Interest expense during the Transition Period remained consistent with the comparable 2004 six months, at $5.3 million. Our interest expense during the Transition Period and the comparable 2004 six months 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 Old Notes and New Notes. See Note 13 in our accompanying consolidated financial statements for further discussion on the Old Notes and New Notes.

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 the Transition Period and comparable 2004 six months (dollar amounts in millions):

						Comparable
		Transition				2004
		Period				Six Months				$ Change				% Change
Income tax expense		$	30.5			$	11.3			$	19.2				169.3	%
Effective tax rate			38.0	%			34.8	%

     Income taxes are determined using an annual effective tax rate, which generally differs from the U.S. Federal statutory rate, primarily because of state and local income taxes, charitable contribution deductions, tax deductions available in the U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to normally result in tax deductions, tax-exempt interest in applicable periods, various expenses that are non-deductible for tax purposes, and difference in tax rates in certain non-U.S. jurisdictions. Our effective tax rate may be subject to fluctuations during the fiscal year as new information is obtained which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pre-tax earnings in the various tax jurisdictions in which we operate, changes in valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of research and development tax credits and changes in tax laws in jurisdictions where we conduct operations. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We record valuation allowances against our deferred tax assets to reduce the net carrying values to amounts that management believes is more likely than not to be realized.

     Income tax expense during the Transition Period increased 169.3%, or $19.2 million, to $30.5 million, from $11.3 million in the comparable 2004 six months. The increase in income tax expense was primarily due to the increase in our pre-tax income for the same period. The increase in our Transition Period effective tax rate from the comparable 2004 six months effective tax rate was primarily due to: (i) an increase in the relative weighting of interest income in our mix of taxable and tax-exempt investments and (ii) the adoption of SFAS No. 123R which precludes the recognition of tax benefits relating to the expensing of share-based awards that are not ordinarily designed to result in a tax deduction.

Fiscal Year Ended June 30, 2005 Compared To Fiscal Year Ended June 30, 2004

Net Revenues

     The following table sets forth the net revenues for the fiscal years ended June 30, 2005 and June 30, 2004, along with the percentage of net revenues for each of our product categories (dollar amounts in millions):

		Fiscal 2005				Fiscal 2004				$ Change				% Change
Net product revenues		$	305.1			$	291.6			$	13.5				4.6	%
Net contract revenues			71.8				12.1				59.7				492.5	%
Net revenues		$	376.9			$	303.7			$	73.2				24.1	%

										Percentage
										Point
		Fiscal 2005				Fiscal 2004				Change
Acne and acne-related dermatological products			29.5	%			30.5	%			(1.0	)%
Non-acne dermatological products			47.1	%			50.9	%			(3.8	)%
Non-dermatological products			23.4	%			18.6	%			4.8	%
Total net revenues			100.0	%			100.0	%			—

     Our total net revenues increased during fiscal 2005 primarily as a result of growth in sales of the PLEXION^®, RESTYLANE^® and VANOS^TM products and an increase in contract revenue. Net revenues associated with our Acne and acne-related dermatological products decreased as a percentage of net revenues, but increased in net dollars by 20.0% primarily due to an increase in PLEXION^® net revenues due to the launch of PLEXION^® Cleansing Cloths during the first quarter of fiscal 2005. Net revenues associated with our Non-acne dermatological products decreased as a percentage of net revenues, but increased in net dollars by 14.8% during fiscal 2005, primarily due to the launch of RESTYLANE^® in the United States in January 2004 and the launch of VANOS^TM in April 2005, partially offset by a decrease in LOPROX^® net revenues due to increased competition from generic products launched during fiscal 2005. Net revenues associated with our Non-dermatological products increased as a percentage of net revenues primarily due to the increase in contract revenues associated with the outlicensing of the ORAPRED^® and LUSTRA^® brands, which was greater than the revenues generated by those products for the comparable period during fiscal 2004. Contract revenue during fiscal 2005 included fees derived from authorized generics launched on our behalf.

Gross Profit

     Gross profit represents our net revenues less our cost of product revenue. Our cost of product revenue 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 acquired products is not included in gross profit. Amortization expense related to these intangibles for fiscal 2005 and fiscal 2004 was approximately $19.6 million and $14.9 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 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 fiscal 2005 and fiscal 2004, along with the percentage of net revenues represented by such gross profit (dollar amounts in millions):

		Fiscal 2005				Fiscal 2004				$ Change				% Change
Gross profit		$	321.5			$	257.1			$	64.4				25.0	%
% of net revenues			85.3	%			84.7	%

     The increase in gross profit during fiscal 2005 as compared to fiscal 2004 was due to the increase in our net revenues, while the increase in gross profit as a percentage of net revenues was primarily due to the different mix of products sold during fiscal 2005 as compared to during fiscal 2004, and an increase in contract revenue during fiscal 2005 as compared to fiscal 2004.

Selling, General and Administrative Expenses

     The following table sets forth our selling, general and administrative expenses for fiscal 2005 and fiscal 2004, along with the percentage of net revenues represented by selling, general and administrative expenses (dollar amounts in millions):

		Fiscal 2005				Fiscal 2004				$ Change				% Change
Selling, general and administrative		$	135.2			$	118.3			$	16.9				14.3	%
% of net revenues			35.9	%			38.9	%

     The increase in selling, general and administrative expenses from fiscal 2004 as compared to fiscal 2005 was primarily attributable to incremental costs associated with RESTYLANE^®, $5.3 million of business integration planning costs related to the proposed merger with Inamed and approximately $1.3 million of professional fees related to research and development collaborations. The decrease in selling, general and administrative expenses as a percentage of net revenues from fiscal 2004 to fiscal 2005 was due to net revenues during fiscal 2005, which exceeded the increase in selling, general and administrative spending. A pre-market approval application for RESTYLANE^® was approved by the FDA on December 12, 2003, followed by the product launch and first U.S. commercial sales of RESTYLANE^® on January 6, 2004. During fiscal 2004, we incurred incremental costs associated with the establishment of a sales and marketing strategy for RESTYLANE^®, prior to the commercial launch of the product.

Research and Development Expenses

     The following table sets forth our research and development expenses for fiscal 2005 and fiscal 2004 (dollar amounts in millions):

		Fiscal 2005				Fiscal 2004				$ Change				% Change
Research and development		$	65.7			$	16.5			$	49.2				298.2	%
Charges included in research and development associated with research and development transactions			43.3				2.4				40.9				1,686.2	%

     Included in research and development expenses for fiscal 2005 was approximately $8.3 million related to the AAIPharma research and development collaboration, $30.0 million related to the SubQ^TM license agreement and $5.0 million related to the Ansata development and license agreement. Included in research and development expenses for fiscal 2004 was a $2.4 million milestone payment under a license and development agreement with Dow for ZIANA^TM.

Depreciation and Amortization Expenses

     Depreciation and amortization expenses during fiscal 2005 increased $5.5 million, or 33.1%, to $22.3 million from $16.8 million during fiscal 2004. This increase was primarily due to the amortization of expenses related to the $53.3 million and $19.4 million milestone payments made to Q-Med in December 2003 and May 2004, respectively, which are being amortized over the period from the date of payment through January 2018 and increased amortization related to certain intangible assets whose useful lives were determined to be shorter than originally estimated.

Interest and Investment Income

     Interest and investment income during fiscal 2005 increased $1.5 million, or 14.1%, to $11.5 million from $10.0 million during fiscal 2004, primarily due to an increase in the rates achieved by our invested funds during fiscal 2005.

Interest Expense

     Interest expense during fiscal 2005 decreased $0.2 million, or 1.6%, to $10.6 million from $10.8 million during fiscal 2004. This decrease was due to the August 2003 exchange of a portion of our Old Notes, which accrue interest at 2.5% per annum, for our New Notes, which accrue interest at 1.5% per annum.

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 fiscal 2005 and fiscal 2004 (dollar amounts in millions):

		Fiscal 2005				Fiscal 2004				$ Change				% Change
Income tax expense		$	34.1			$	15.3			$	18.8				122.7	%
Effective tax rate			34.4	%			33.2	%

     The increase in income tax expense from fiscal 2004 to fiscal 2005 was primarily due to the increase in pretax earnings over the same period. Excluding the loss on early extinguishment of debt in fiscal 2004, our adjusted effective tax rate for fiscal 2004 was 35%. The effective rate is lower than the expected combined federal and state income tax rates due primarily to tax-exempt interest income and contributions to charitable programs that receive favorable tax treatment. Our full year effective tax rate may increase in fiscal 2006 compared to our effective tax rate in fiscal 2005 due to expected changes in the mix of earnings, the adoption of Financial Accounting Standards Board (“FASB”) Statement No. 123R, “Share-Based Payment” (“SFAS No. 123R”), and the expiration of the U.S. research and development tax credit, the latter of which is currently expected to sunset on December 31, 2005.

Liquidity and Capital Resources

Overview

     The following table highlights selected cash flow components for the year ended December 31, 2006 and the unaudited year ended December 31, 2005, and selected balance sheet components as of December 31, 2006 and 2005 (dollar amounts in millions):

		2006				2005				$ Change				% Change
Cash (used in) provided by:
Operating activities		$	(41.0	)		$	232.5			$	(273.5	)			(117.6	)%
Investing activities			(216.9	)			188.0				(404.9	)			(215.4	)%
Financing activities			14.3				(5.1	)			19.4				(377.9	)%

		Dec. 31, 2006				Dec. 31, 2005				$ Change				% Change
Cash, cash equivalents and short-term investments		$	554.3			$	742.5			$	(188.2	)			(25.4	)%
Working capital			550.0				692.5				(142.5	)			(20.6	)%
Long-term investments			130.3				—				130.3				100.0	%
2.5% contingent convertible senior notes due 2032			169.2				169.2				—				—
1.5% contingent convertible senior notes due 2033			283.9				283.9				—				—

     The following table highlights selected cash flow components for the Transition Period and the unaudited comparable 2004 six months, and selected balance sheet components as of December 31, 2005 and June 30, 2005 (dollar amounts in millions):

						Comparable
		Transition				2004
		Period				Six Months				$ Change				% Change
Cash provided by (used in):
Operating activities		$	148.0			$	45.5			$	102.5				225.5	%
Investing activities			123.7				76.2				47.5				62.4	%
Financing activities			(2.8	)			(137.4	)			134.6				(98.0	)%

		Dec. 31, 2005				June 30, 2005				$ Change				% Change
Cash, cash equivalents and short-term investments		$	742.5			$	603.6			$	138.9				23.0	%
Working capital			692.5				600.1				92.4				15.4	%
2.5% contingent convertible senior notes due 2032			169.2				169.2				—				—
1.5% contingent convertible senior notes due 2033			283.9				283.9				—				—

     The following table highlights selected cash flow components for fiscal 2005 and fiscal 2004, and selected balance sheet components as of June 30, 2005 and 2004 (dollar amounts in millions):

		Fiscal 2005				Fiscal 2004				$ Change				% Change
Cash provided by (used in):
Operating activities		$	130.0			$	128.0			$	2.0				1.6	%
Investing activities			140.5				(166.3	)			306.8				184.5	%
Financing activities			(139.8	)			40.6				(180.4	)			(444.1	)%

		June 30, 2005				June 30, 2004				$ Change				% Change
Cash, cash equivalents and short-term investments		$	603.6			$	634.0			$	(30.4	)			(4.8	)%
Working capital			600.1				666.7				(66.6	)			(10.0	)%
2.5% contingent convertible senior notes due 2032			169.2				169.2				—				—
1.5% contingent convertible senior notes due 2033			283.9				283.9				—				—

Working Capital

     Working capital as of December 31, 2006 and 2005 consisted of the following (dollar amounts in millions):

		Dec. 31, 2006				Dec. 31, 2005				$ Change				% Change
Cash, cash equivalents and short-term investments		$	554.3			$	742.5			$	(188.2	)			(25.4	)%
Accounts receivable, net			36.4				46.7				(10.3	)			(22.1	)%
Inventories, net			27.0				19.1				7.9				41.6	%
Deferred tax assets, net			23.0				12.7				10.3				80.9	%
Other current assets			16.0				12.3				3.7				30.6	%
Total current assets			656.7				833.3				(176.6	)			(21.1	)%
Accounts payable			47.5				57.7				(10.2	)			(17.7	)%
Short-term contract obligation			—				27.4				(27.4	)			(100.0	)%
Income taxes payable			11.3				31.5				(20.2	)			(64.0	)%
Other current liabilities			47.9				24.2				23.7				(97.6	)%
Total current liabilities			106.7				140.8				(34.1	)			(24.3	)%
Working capital		$	550.0			$	692.5			$	(142.5	)			(20.6	)%