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Executives

Doug Sherk – IR, EVC Group

Don Bailey – President and CEO

Steve Cartt – EVP of Corporate Development

Gary Sawka – CFO and SVP of Finance

Analysts

Han Li

Bud Leedom – California Equity Research

David Lawman [ph] – Jupiter

Questcor Pharmaceuticals, Inc. (QCOR) Q3 2008 Earnings Call Transcript October 30, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to the Questcor Pharmaceuticals third-quarter conference call. (Operator instructions) I will turn the conference over to your host Mr. Doug Sherk. Please go ahead sir.

Doug Sherk

Thank you, operator. Good afternoon everyone. Thank you for joining us today for the Questcor Pharmaceuticals third-quarter conference call. This afternoon as market closed Questcor issued strong third quarter financial results. The release is posted on the company’s web site at www.questcor.com. In addition, we have arranged for a taped a replay of this call which will be made available approximately one hour after the call is concluded and will remain available for seven days. The operator will provide the replay instructions at the end of the call. The call is being broadcast live. An archived replay will also be available. To access the web cast, go to Questcor's website at www.questcor.com.

Before we get started, during the course of this conference call, the Company will make projections or other forward-looking statements regarding future events, including statements about the Company's forecasted operating model for 2008, 2009. We encourage you to review the Company's past and future filings with the SEC, including, without limitation, the Company's Forms 10-Q and 10-K, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

Finally, during the question-and-answer period today, we would like to request each caller to limit themselves to two questions and then re-queue to ask additional questions. In advance, we appreciate everyone's cooperation with this process.

With that now I like to turn the call over to Don Bailey, President and Chief Executive Officer of Questcor Pharmaceuticals.

Don Bailey

Thanks, Doug, and good afternoon to everyone. Thank you for joining us today to review Questcor Pharmaceuticals' third quarter 2008 results.

With me today is Steve Cartt, our Executive Vice President of Corporate Development; Gary Sawka, our CFO; and Dave Medeiros, our Senior Vice President of Pharmaceutical Operations; and Eldon Mayer, Vice President of Commercial Operations. After my opening remarks, Steve will review key business trends and Gary will cover our financial highlights. We will also provide an update on our outlook for 2008 and then we will open the call for your questions.

During the third quarter of 2008, we continue to focus on building shareholder value in two key ways. First, by mining the extensive on-label indications for Acthar and second by returning cash to shareholders through our buyback efforts. I think we made solid progress on both counts.

Our Acthar business growth initiatives are currently centered on infantile spasms, multiple sclerosis, and nephrotic syndrome. Steve will talk about each of these in more detail in a few moments but let me summarize these opportunities for you now.

In infantile spasm we’re close to having our submission package for the FDA finished. We maintain our goal of completing this effort by yearend. Meanwhile sales to treat IS remain the bulk of our business and end user demand has being very steady during 2008.

For MS, our commercial expansion activities are showing early positive signs. While it is not possible to give you exact numbers because our reimbursement support center does not see every prescription we believe MS is clearly more than 10% of our net sales now with new prescriptions showing a steady upward trend. The number of new prescriptions filled at our support hub are up over 100% from the first quarter with October showing continuing gains.

These growth numbers are impressive but the denominator here is small. So we want a little more evidence before declaring this a definite success.

Earlier this year, we systematically reviewed our label for promising additional therapeutic areas for Acthar and earlier this week announced our pursuit of nephrotic syndrome as our next indication to focus on. We will continue to look for other therapeutic uses for Acthar, to invest in appropriate studies, to give back to the Healthcare communities we serve by funding research projects, to take QSC-001 to its logical conclusion, and to consider other projects that fit our core competencies and resources.

While the bulk of our energy is spent on growing shareholder value by building our business we have also returned a significant portion of our free cash flow to investors. In the last twelve months we have generated over $75 million in cash from operations and returned $46 million of that cash to shareholders through our preferred and common share buyback programs.

I now like to turn the call over to Steve Cartt.

Steve Cartt

Thanks, Don, and good afternoon everyone. I will begin by providing an interim update on the progress of our six month exploratory selling effort in the MS market. As you may recall at the end of July we expanded our sales force to 15 representatives. Starting August 1 they began to make regular sales calls on a very targeted group of a few hundred MS treating neurologists across the country. The plan is then to give our small sales force a full six-month period to see if they might be able to begin generating new prescriptions from this subset of doctors. I’m pleased to report that as of today exactly half way through this exploratory period the results are encouraging. With the effort beginning August 1st we observed a 50% increase in MS related prescriptions in the third quarter over the second quarter. Specifically 56 new prescriptions for MS patients were processed through our reimbursement center and shift in the third quarter up from 37 in the second quarter and 28 in the first quarter. As a result we estimate that more than 10% of total end user demand for Acthar is now coming from MS.

This positive trend in new prescriptions has continued in October. Now I would like to move to the newest potential growth area we have identified for exploration, nephrotic syndrome.

As Don mentioned, we announced earlier this week that we have identified nephrotic syndrome as a potential new growth opportunity for Acthar. Already an on-label Acthar indication nephrotic syndrome is a disorder characterized by extensive urinary excretion of proteins known as proteinuria, which can result in a host of very serious health issues. If not adequately managed nephrotic syndrome often leads to end stage renal disease, which is typically managed by kidney dialysis and transplant.

According to the experts in the field that we have been speaking with current treatment approaches are effective in some patients but are often associated with the high relapse rate and significant side effects. We have been encouraged in recent months by extensive discussions with a number of the world top nephrologists who study and treat this condition.

Based on what we have learned from these discussions nephrotic syndrome is clearly a condition warranting clinical exploration with Acthar. The researchers advising us have indicated that it will be very important to conduct new modern studies of Acthar in patients with nephrotic syndrome in order to fully assess the drug potential value in treatment [ph] conditions. The first of these studies is expected to begin enrolling patients in early 2009.

Since we last spoke with you during our second quarter conference call, we’ve continued to see excellent overall insurance coverage for Acthar. During the third quarter only about 5% of all patients were denied Acthar coverage, most of these were Medicaid patients.

For patients denied coverage we continue to see active utilization of the Acthar Safety net programs operated by NORD, the National Organization for Rare Disorders. Since September, 2007, Acthar vials totaling nearly $17 million in commercial value have been provided free of charge to uninsured and underinsured patients through the patient assistance program. We continue to know of no patient requiring Acthar who is being denied access to this important drug.

And finally I will briefly touch on QSC-001, Questcor’s proprietary orally dissolving tablet formulation of hydrocodone and acetaminophen for the treatment of moderate to moderately severe pain. This program has continued to progress well. We have no completed formulation development and expect to start the pivotal bioequivalence trials for QSC-001 in the second quarter of 2009.

And with that I would like to turn the call over to our CFO, Gary Sawka, to review the financial highlights for the quarter. Gary.

Gary Sawka

Thanks, Steve. My remarks are very brief as we have provided extensive details in the press release.

Net sales for the third quarter were $24.2 million and EPS was $0.13. Net income was not that much different than the third quarter in 2007, but we were not a taxpayer during last year’s third quarter.

Comparing pretax income is more meaningful. Pretax income has increased 78% this third quarter versus the 2007 third quarter. Due to the stock buyback, our outstanding shares have dropped to 65 million shares. Therefore undiluted and diluted shares outstanding should be lower in 2009 than in 2008.

Switching to our balance sheet, as of last Friday, we had cash, cash equivalents, and short-term investments of approximately $45 million. We expect to maintain a very strong and uncomplicated balance sheet for the foreseeable future.

Due to the high demand for Acthar we’re noting that we expect to be at or above the high end of our previously provided net sales guidance of $82 million to $91 million for the full year. We’re also reiterating the other key previously provided components of our guidance for the full year 2008 including gross margins of approximately 91%.

Total SG&A spending including FASB 123 R expenses of between $28 million and $32 million. Fully diluted share count for the year between 70 million and 72 million. This will be reduced in 2009 due to the sizable share repurchases earlier this year.

That concludes my prepared remarks. Operator we’re now ready to answer any questions.

Question-and-Answer Session

Operator

Our first question is from Han Li. Please go ahead.

Han Li

Hi, good afternoon everyone. Thanks for taking my questions. In the press release you mentioned there is a fluctuation in channel inventories, Acthar, can you provide some color on the inventory level and amount of vials in the distribution?

Don Bailey

Sure Han Li. This is Don. We typical we think that is approximately three to four weeks worth of inventory in the channel. So, since our sales are in the neighborhood of 1500 units a quarter that means there is approximately 300 or 400 units of inventory in the channel somewhere. So it could be at a distributor or it could be at any one of the specialty pharmaceutical hospital pharmacies. So our typical orders when they come in are in the 50 to 80 to 100 units at the time. So depending on the timing of an order at the end of the quarter or beginning of a quarter it can change the report that we put out. That is why at the end of Q2 we had 1560 units and at end of Q3 we had 1500 units for the quarter, but we actually think demand was up in Q3 over Q2. So, just slight differences in the inventory in the channel.

Han Li

So since you mentioned there, there could be a potential deplete – a partial deplete of inventories. Also should we expect some pickup in the next couple of quarters?

Don Bailey

Well these are – this is in the neighborhood of approximately 100 vials. I mean if we gave you all the statistics you will see that the demand versus the shipments can vary by about 100 vials. That is the extent of it. Over any reasonable time period it is insignificant.

Han Li

Okay. And also quickly on the new indication the nephrotic syndrome, can you give us some sense of how big the study is going to be, the treatment duration, and potential costs of running a trial?

Don Bailey

What we are hopeful for here is a series of trials. The first trial is even though we’re on-label is basically a proof of concept. A proof that Acthar works in the treatment of nephrotic syndrome and specifically in the treatment of disease called membranous nephropathy. So the details of that, the trial is still being worked out but it’ll be very small less than two or three of those inpatients, should cost less than a million dollars, and should be able to be completed during 2009 at least the trial part of it.

Han Li

Can you give us the likely sense what is the market like in the number of patients, potential market size?

Don Bailey

We’re still working on that and very little preliminary numbers say that the market size for membranous nephropathy is in the neighborhood, about the same size of our infantile spasm market or multiple sclerosis market.

Han Li

About 200.

Don Bailey

Several hundred dollars million range at Acthar pricing. If we also have application. If Acthar looks like it is also efficacious in the treatment of some of the other forms of nephrotic syndrome that we listed in a press release, one called FSGS, we won’t try to pronounce what those initials stand for or diabetic neuropathy. Then of course each one of those markets would add to our potential.

Han Li

So, the indication you mentioned all have potential to be an orphan drug indication?

Don Bailey

Yes it could be the often drug education, yes.

Han Li

And the last, go ahead.

Don Bailey

Steve.

Steve Cartt

Yes I will just touch on that. These are all patient populations that clearly fit the definition of orphan, which by FDA standards is 200,000 patients or less in the U.S. and these are all populations that they are well below 200,000. Now, we already have the indication of nephrotic syndrome. That is on our label. So we wouldn’t expect any opportunities for additional exclusivity or any thing like that related to the –

Han Li

And lastly you bought back a lot of shares early this year. I saw average like $4 or $5 a share and now the stock is $7 a share. What are your thoughts going forward in terms of share buyback?

Don Bailey

Well, the overall plan is for us to spend approximately half of our free cash flow in a share buyback program. Well that half is a very rough number and it is measured over a several year period. And I had some experience with doing this at the prior company. So I know there are some time periods where we get shut out. We get blacked out pretty easily here from buying anything or selling anything. So, we have to take advantage of our open periods and by when we can. And naturally we do our own analysis of the relative value of the stock price at the time versus what we think the value is. And of course that analysis always shows that the stock price is too low, but I think that is true for every company.

Han Li

Got it. Thank you very much. Congratulations on a good quarter.

Don Bailey

Thanks, Han Li.

Operator

Thank you. Our next question is with Bud Leedom, California Equity Research. Please go ahead.

Bud Leedom – California Equity Research

Hi guys. Just a couple of questions here. You know, I appreciate your comments on the sort of lack of seasonality that we saw in Q3, I’m just wondering if you could characterize maybe some of the things that you are seeing. Have you seen any push back maybe as a result of the JEC hearing on docs? And maybe on the hospital market because this is an expensive drug, you know, are you seeing some push back and some channel tightening just in terms of inventory it may be relative to what we’re seeing in the market right now?

Don Bailey

Well first of all on the seasonality what we said in the release is pretty much it. You know we did put out some information in March that the historical pattern showed – shows seasonality by quarter but for the nine months of 2008, eight of the months have been within a very tight range and February was quite low. So we don’t know if we are still experiencing seasonality or not. We don’t really know how to interpret that data. So we’re providing it to you. As far as backlash, we haven’t really seen any backlash. The Senate hearing came and went and frankly we never heard another word from anybody about it after the July 24th hearing. And as far as hospitals, we believe there is very little inventory at hospitals. There are approximately 100 hospitals or 150 and many of them have zero and some have one. We doubt that there are very many hospitals that have more than one or two vials.

Bud Leedom – California Equity Research

Okay great. And just in terms of 2009, thinking about sales currently you have 15 people in the sales force and you know they are partitioned somewhat with the MS effort that you are putting, but just assuming that we see FDA approval of Acthar for IS sometime in the 2009 time frame and you move forward in terms of sales with the nephrotic syndrome. What should we think about in terms of sales, will you add sales people or will you continue to partition them just in terms of spending different time calling on different docs out there. How should we look at that in the 2009 time frame?

Don Bailey

That is an excellent question Bud. First of all, the immediate decision that we are facing is do we ramp up the sales force because of the initial success with the MS market and we want to give that a little bit more time. But we’re pretty encouraged by what we have seen so far. For example, in October the number of prescriptions filled from our hub was greater than the total number for the first quarter. So, clearly the sales efforts – the sales efforts seem to be having a positive effect. We would like to see a little bit more evidence to drive our division but the economics are quite positive as far as the revenue versus the expense. So, we will be trying to make a decision on ramping up the sales force as it relates to MS in the very near future. And if we do that we’ll be trying to put that in place, you know, for 2009 or early in 2009. That sale force should be able to service IS during 2009 as well because the salespeople have those relationships from prior time periods. So – and nephrotic syndrome we don’t expect to see that as a selling effort probably until late 2009 and early as 2010. So that really won’t affect our sales force thinking at this time.

Bud Leedom – California Equity Research

Okay that is helpful. And if I could just sneak in one last question there. In terms of your exploratory research in some of the other indications that you mentioned, I know we have talked about three in the past. Could you provide any color on those other two at this point?

Don Bailey

We’re not ready to identify the other two yet, but what we’re seeing is that we’re trying to identify as many of these indications that are on-label and uses of ACTH in Acthar that we have seen off label that we can reasonably do it. Our criteria, just to repeat, we’re trying to find markets that have a high unmet need and where they use of Acthar, the economics of the use of Acthar would make sense. In addition, we want to find studies where we can attract the top thought leaders for that therapeutic area, before we do a study. Our goal is to have as many as a dozen studies going next year which – and the total cost of those would be modest because the average study probably costs less than a quarter of million dollars.

Bud Leedom – California Equity Research

Okay. Thanks very much and congratulations on the quarter and the new indication.

Operator

Thank you. Our next question is with David Lawman [ph] with Jupiter. Please go ahead.

David Lawman – Jupiter

Hi good afternoon guys. Question for you about translating the kind of the NRx [ph] number that you provided for MS for vials and maybe you provided the vial numbers for MS this quarter but I think I missed it. If I had 56 new prescriptions in 3Q08, I was just wondering how should I think about, I guess that is not NRx but how do I translate that into vials, MS vials for the past couple of quarter?

Don Bailey

Well that is a very tricky area and we don’t know exactly. Typically for a new prescription we think it translates into 1.5 vials but some are one, some of two. There is typically an equal size refill somewhere along the way down the road. Sometimes within that quarter, sometimes several quarters later. So and we don’t see that information. We don’t see the refill. We don’t see the totality of the refill on finishing. We get partial information there. Because we only get partial information on the refills it makes it very difficult for us to give out the vial count because there is no retail element here. We don’t get that kind of data. But we know for sure we’re up over 10% at this point.

David Lawman – Jupiter

Great. And any estimate all as to what percentage of the 1500 is represented by MS?

Don Bailey

Well over 10%.

David Lawman – Jupiter

Over 10. Great. All right, thanks.

Operator

(Operator instructions) Management, as there are no further questions, please continue.

Doug Sherk

Okay. Thank you, operator, and thank you all for participating on today’s call. We are available here at the headquarters for any follow-up questions you may have and we are look forward to updating you on our progress as developments occur. Bye-bye.

Operator

Ladies and gentlemen, this concludes the Questcor Pharmaceuticals third quarter conference call. Once again, we'd like to thank you for your participation. You may know disconnect.

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Source: Questcor Pharmaceuticals, Inc. Q3 2008 Earnings Call Transcript
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