Description

Medicis Converts                                June                 2032                 2.5%                 70 cents

As mentioned in several posts, there are great opportunities in safe bonds created by the disruption in the convert markets. This is another reasonable return opportunity in a cash rich company with a good business. Medicis is a specialty pharmaceutical company that sells dermatological and aesthetic creams and gels, mostly prescription. They have already paid off 99%+ of a convert that was putable to the company earlier this year. The remaining opportunity is in a security that is putable in June 2012.

·         Putable at par in June 2012 for a return of 14%

·         Change in control put, company currently has $140M in net cash (including these converts) and estimated EBITDA roughly equivalent to this $170M convert issue that will be putable in 3.5 years

·         Capital spending and milestone payment schedule still is below likely cash flows, which will leave an even greater cash margin with which MRX can meet the June 2012 put of these converts

·         Possibility for much higher IRR before by a takeout or stock price appreciation

Basic MRX Valuation Metrics:

Why MRX could be a takeout candidate:

·         Stake in Reloxin (Botox competitor) could appear more valuable as likelihood of FDA approval approaches (one year out)

·         EBITDA multiple under 5x is highly compressed relative to specialty pharma peers in part because of consumer spending concerns over the more discretionary nature of the product and generic competitive threats to Solodyn. Company is investigating several patent extension options on Solodyn and may be able to relieve concerns related to that revenue stream.

·         Company has achieved double digit sales growth and 25%+ EBITDA margins on the back of strong trends in the topical dermatology segment

Catalyst