Looks like Medicis (NYSE:MRX) is going to need some of its own acne medication; its financial statements have blemishes all over them. But should its investors break out in spots, too?
Yesterday, the dermatology expert announced that it will have to restate its earnings from 2003 onward. The company was recording returns at the replacement cost, rather than the cost the product sold for. That's one way to boost earnings.
The news caused its stock to drop 13%. That seems a little severe, but investors are probably fearful of other accounting issues that haven't been detected yet, not to mention lower confidence in management.
Some of the drop could also be from investors' general anxiety that the company's wrinkle-remover products, Restylane and Perlane, aren't going to be flying off the shelves, given the lackluster economy.
Further downward pressure on the stock came from the company's move further into the aesthetics business as it purchased LipoSonix, developer of a machine that uses ultrasound combined with liposuction. The instrument isn't expected to be on the market until 2011 and is still awaiting FDA approval. Cosmetic drugmaker Allergan (NYSE:AGN) and laser maker Palomar Medical (NASDAQ:PMTI) have also had a hard time lately as the economy continues to struggle.
Medicis says it correctly recorded its cash flows and cash balances, so investors who were basing their valuations of the company on its cash flows -- something we strongly encourage at the Fool -- don't have as much to worry about. Cash is still king.
Whether it's ConAgra Foods (NYSE:CAG), Nortel Networks (NYSE:NT), or Blockbuster (NYSE:BBI), having to restate earnings is rarely a good thing for companies. It makes management look incompetent at best and criminal at worst. That being said, Medicis deserves one do-over. Investors should forgive, but they shouldn't forget.
