RBC Capital Markets upgraded its rating on shares of Medicis Pharmaceutical Corp. (NYSE: MRX) to outperform with above average risk from sector perform and increased its price target to $32 from $30, as Solodyn de-risking warrants higher multiple.

We are upgrading Medicis based on significant de-risking of core Solodyn franchise and attractive underlying multiple excluding substantial net cash position. Continued use of copay card and Teva settlement almost completely eliminate both near- and long-term generic Solodyn threat, which accounts for about 84 percent of 2012 EBITDA, until 2018, said Shibani Malhotra, an analyst at RBC Capital Markets.

Nearly two years since generic companies launched at-risk on Solodyn and still generic supply sits in the channels, occupying about 10 percent of the market. With limited near-term pressure on copay cards from a legislative, judicial, and payer viewpoint, Malhotra believes consensus is overestimating the near-term generic threat to Solodyn franchise.

Medicis announced late on Friday that it had reached a settlement with Teva for 65mg and 115mg strengths of Solodyn, which Malhotra estimates accounts for 73 percent of Solodyn sales and 64 percent of group EBITDA in 2012.

As Teva is first to file on both strengths, the settlement effectively blocks generics until February 2018. Malhotra noted that under recent settlements 92 percent of the newer Solodyn strengths will be protected from generic threat until around 2018, allowing Medicis time to reformulate or develop next-generation products.

While the bears are concerned about the potential for R&D (research and development) expenses to blow out, particularly if Medicis exercises its option agreement with Revance, Malhotra noted that a Phase III program likely to total around $25 million would likely be spread over an 18-month period and unlikely to significantly impact 2011 R&D by more than $8 million.

Furthermore, Malhotra would view the exercise of the Revance agreement as a positive for the aesthetic franchise.

The brokerage lowered its 2011 adjusted EPS estimate for Medicis to $2.47 from $2.57, while maintaining its 2012 estimate of $2.57. The brokerage reduced its 2010 revenue estimate to $700 million from $704.9 million and its 2011 estimate to $750.5 million from $804.8 million.

With net cash of $437 million and assuming conservative Liposonix sale proceeds of $50 million, Medicis is trading at an underlying multiple of 6.8 times of 2011 EPS. Given the recent de-risking of Medicis’ Solodyn franchise, we believe the stock deserves to trade at a premium, said Malhotra.

Medicis shares jumped 23.93 percent to $32.00 on the NYSE at 10:11 am EST.