Connetics Reports Third Quarter Financial Results

Business Wire, Nov 8, 2006

PALO ALTO, Calif. -- Connetics Corporation (Nasdaq:CNCT), a specialty pharmaceutical company that develops and commercializes dermatology products, today announced financial results for the three and nine months ended September 30, 2006. All prior-year revenues, net income and per share figures reflect the restated results contained in Connetics' Form 10-K/A for the year ended December 31, 2005, filed with the Securities and Exchange Commission on July 25, 2006.

On October 23, 2006, Connetics announced it had signed a definitive merger agreement with Stiefel Laboratories, Inc. Upon closing of the transaction, holders of Connetics common stock will receive $17.50 per share in cash. The two companies anticipate closing the transaction in late 2006 or early 2007. The closing is subject to approval by holders of a majority of Connetics common stock, antitrust clearance and other customary closing conditions. The transaction was unanimously approved by Connetics' Board of Directors.

Connetics reported a net loss for the third quarter of 2006 of $27.4 million, or $0.81 per share, compared with net income of $11.0 million, or $0.29 per diluted share, for the third quarter of 2005.

Total revenues for the third quarter of 2006 were $19.7 million, reflecting Connetics' previously announced decision to reduce wholesaler inventories by shipping product below estimated unit demand. The Company estimates that unit demand exceeded product shipments by approximately $31.4 million during the third quarter of 2006, and had Connetics shipped to total estimated unit demand, total revenues in the quarter would have been approximately $51.1 million. Third quarter 2006 product revenues include Soriatane[R] sales of $10.4 million, OLUX[R] sales of $4.3 million, Evoclin[R] sales of $2.3 million and LuxE q[R] sales of $1.8 million.

Connetics reported that wholesaler inventories as of September 30, 2006 represented six to seven weeks of sales. Connetics now expects to maintain wholesaler inventory levels of its four current brands at approximately four to six weeks of sales. This level is expected to be achieved during the fourth quarter of 2006. The estimated wholesaler inventory levels for Connetics' products are shown in the table below:

[TABLE OMITTED]

Connetics currently anticipates that the reduced wholesaler inventory will correlate to lower product returns in the future. If, as anticipated, Connetics' on-going product returns experience and additional information from wholesalers indicate a significantly lower rate of product returns in the future, the Company will determine a more appropriate accrual for returns, and could potentially release a substantial portion of its product returns reserve.

Selling, general and administrative (SG&A) expenses for the third quarter of 2006 were $31.6 million, including non-cash stock-based compensation expense of $1.0 million. Expenses in the third quarter of 2006 reflected non-recurring expenses for audit, consulting and legal fees of approximately $2.0 million related to the Company's financial restatement and to the ongoing SEC investigation; and payments and fees related to the note holder consent of approximately $3.3 million, of which $1.3 million was included in interest expense. Research and development (R&D) expenses for the quarter were $10.0 million, including non-cash stock-based compensation expense of $0.3 million.

As of September 30, 2006, Connetics had cash and investments, including restricted cash, of $245.7 million.

Business Highlights

"Our results reflect the anticipated reduction of inventories, and we are pleased to report that this effort has been largely completed, having achieved levels even lower than we forecasted a few months ago. With more detailed and reliable inventory reporting recently available from our wholesalers, we believe we can operate efficiently at these reduced levels," said Thomas G. Wiggans, Chairman and Chief Executive Officer of Connetics. "Connetics' Board of Directors and our executive management believe that the agreement to merge with Stiefel Laboratories delivers significant value to our shareholders, and that the combination of Connetics and Stiefel will create the world's premier dermatology company."

Additional significant developments in the third quarter of 2006 and subsequent weeks included:

* Receiving FDA approval for Verdeso (desonide) Foam, 0.05%, for the treatment of mild-to-moderate atopic dermatitis. Verdeso is a low-potency topical steroid and is the first approved product formulated in Connetics' proprietary VersaFoam([R])-EF emulsion formulation foam vehicle. Verdeso was launched in late October.

* Announcing that Pfizer Consumer Healthcare's new Men's Rogaine([R]) Foam, utilizing Connetics VersaFoam technology, became available wherever Rogaine is sold.

* Reporting positive results from the second Phase 3 clinical trial for Extina([R]) (ketoconazole) Foam, 2%, for the treatment of seborrheic dermatitis.

Year-to-Date Results

The net loss for the first nine months of 2006 was $28.1 million, or $0.83 per share, compared with net income of $12.6 million, or $0.34 per diluted share, for the comparable period last year.