Steve Cartt – COO
Dewey Steadman – JP Morgan
Questcor Pharmaceuticals, Inc. (QCOR) The 31st Annual J.P. Morgan Healthcare Conference Call January 10, 2013 12:00 PM ET
Dewey Steadman – JP Morgan
Hi, good morning. I’m Dewey Steadman with the pharmaceuticals team here at JP Morgan, and we’d like to welcome Questcor to the 31st Annual JP Morgan Healthcare Conference. And with Questcor today, we have Steve Cartt, the Chief Operating Officer of Questcor. And just as a side note, we will not have a breakout session following this presentation. Thank you.
Thanks Dewey, and good morning, everybody. So, you could read our Safe Harbor statement at your leisure here. Questcor, for those of you who are not as familiar with the story, is a biopharmaceutical company focused on the treatment of patients with serious, difficult-to-treat autoimmune and inflammatory disorders.
We have an extensive label of 19 approved indications on Acthar Gel, which is our flagship product. Our key therapeutic areas are nephrotic syndrome, relapses and multiple sclerosis, infantile spasms, which is a very rare and highly refractory form of childhood epilepsy, and two very rare and related neuromuscular disorders, dermatomyositis and polymyositis. We believe that on our label of 19 approved indications that there are significant areas of unmet need and large growth potential.
Our strategy is to continue to expand awareness of Acthar and the appropriate use of Acthar in key specialties of nephrology and neurology, as well as develop fully our rheumatology indications, which we have several, and our other on-label indications. We’re also beginning to look at possible future new indications for Acthar, but that’s very early stage. As far as financials go, we’re profitable, have strong positive cash flow and a strong balance sheet.
This just highlights again our key areas of commercial focus right now out of our 19 indications nephrotic syndrome, MS relapses, IS and the rheumatology conditions. So, Acthar usage has been expanding rapidly over the last couple of years. This shows our vial shipments per quarter. We had a pretty sustained upward growth curve since the fourth quarter of 2010.
And accordingly, net sales have been growing rapidly and consistently as well, up through third quarter of 2012 here. And we just put out an 8-K yesterday indicating we hit yet another record in terms of vial shipments for the fourth quarter, and we’ll be coming out with net sales numbers and EPS next month on our earnings call.
So, this is our estimated allocation of net sales by therapeutic area. Nephrotic syndrome appears to be in the lead now; in terms of overall net sales, was somewhere around the range of 45% to 47% of our net sales. MS relapse is slightly below that now, and infantile spasms is around the 9% to 10% range. There is a high Medicaid reimbursement component of IS, which lowers that, so that’s why it’s down around that range; and then other prescriptions other – prescriptions for other indications are around 3%.
So, we have a stable reimbursement environment for Acthar. It’s typically used in a secondary position by most doctors. They usually reserve it for when another FDA-approved treatment alternative is needed, usually after first-line, sometimes after second-line, and it’s virtually always used in serious, difficult-to-treat medical conditions
Coverage decisions, as we’ve mentioned quite a bit over the years, are determined really on a case-by-case basis based on the individual merits of the case, the patient’s condition, the disease severity and the patient’s treatment history. We’ve had a consistent level of insurance coverage over the last few years. For this drug, prior authorizations are the norm. They’re not the exception; they’re definitely the norm. And each prescription is closely scrutinized, and that has been the case and that continues to be the case.
And as our revenues have grown, we’ve actively sought to expand our research efforts and we now have 65 clinical and preclinical studies, both internal projects and outside independent research programs that we’re funding. That’s a significant increase over 2010, 2011; and accordingly, our R&D spend is up significantly as well. Probably be close to a double this year over 2011, and in 2013, we expect it to expand more as well.
So I’ll step through quickly each of the indications that are our primary focus of our commercial efforts. Nephrotic syndrome is a kidney disorder characterized by excessive spilling of protein from the kidneys into the urine, which is referred to as proteinuria. It’s caused by a number of underlying kidney disorders, inter idiopathic membranous nephropathy, FSGS, IgA nephropathy, and there are a couple other smaller ones.
These conditions, if not properly treated, can result in end-stage renal disease and the patients typically end up on dialysis or having a transplant. There’s significant unmet need here. There are very few treatment options, and Acthar is indicated in nephrotic syndrome in these patients; and the last bullet outlines the specific indication we have.
So in MS relapse, MS is a neurodegenerative disease occurring in an estimated 400,000 Americans, and we estimate there are about 100,000 relapses or more per year in the U.S. And relapses can range from mild to severe and cause a constellation of symptoms, including tingling and numbness in the extremities, loss of sensation, loss of vision and difficulty walking among other things, pain for example.
And the research that’s out there indicates that relapses have a measurable and sustained effect on disability in MS patients. So, it’s important to treat them. And Acthar is indicated for the treatment of acute exacerbations or relapses of MS in adults. It’s typically employed in a secondary position. Doctors will usually use steroids first, and if the patient is in need of a second treatment alternative, they’ll often go to Acthar.
IS, as I mentioned earlier, it’s a devastating form of childhood epilepsy and can cause permanent disability in children who are not treated adequately, and Acthar has been the gold standard in this condition for quite some time. We estimate we’re being used in 40% to 50% of IS patients. Rheumatology is our newest area of focus commercially, and we have four key indications on the label dermatomyositis and polymyositis, which I mentioned; lupus, psoriatic arthritis and rheumatoid arthritis. And each of these can be serious health problems if they’re not adequately controlled.
Some cases are difficult to manage. We’re beginning to see usage by doctors in the tougher to treat cases where they need an additional treatment alternative. We’ve had some positive initial uptake from a pilot selling effort of 12 reps that we started in the second quarter of 2012; and so consequently, we’re expanding our sales force for rheumatology up to around 50, and that should be completed next month.
So, how does Acthar work? Well, it’s a – the science around Acthar is emerging, but all indications at this point are that it treats autoimmune conditions across a variety of organ systems; hence, our extensive label. It appears to modulate the immune system and associated target tissues through binding to melanocortin receptors, and it’s beyond steroidogenesis.
The historical view of Acthar was it stimulated the adrenal glands to produce cortisol, and that was how it’s working, but it’s much – much broader than that. It actually binds to all five melanocortin receptors. These are found on immune cells and cells of many of the targeted tissues that we are working on, such as the podocytes in the kidney.
And amongst those five melanocortin receptors is melanocortin-2, which is found on the adrenal gland, and that’s where Acthar binds to produce cortisol secretion. So Acthar components, there appear to be many of them beyond just the ACTH 1 through 39, which is the primary component, and we’re working actively to fully characterize the formulation. The mechanisms of action, as I mentioned, there’s a lot of science going on around fully elucidating how the drug works through these various receptors. But as of yet, it’s not completely understood.
And this slide just lists out the five receptors and some of the target tissues where these receptors have been found. So the key areas we’re focusing on, to better understand the science behind Acthar, we’re working to grow the body of evidence for Acthar on-label indications. Some of the projects we’re focused on are in lupus, dermatomyositis/polymyositis, and we have a company-sponsored trial ongoing in idiopathic membranous nephropathy.
We’re also working to better understand the biological properties of Acthar; understand the specific biochemical pathways involved in how the drug works; the cells it works on, the tissues it works on; and fully understand the immunomodulatory and anti-inflammatory effects. We’re also beginning to look, as I mentioned, at possible future indications. We have a study ongoing in diabetic nephropathy. We’re considering ALS as a potential new target for development; that evaluation is in progress right now. And we’re looking at possible other autoimmune and inflammatory conditions to study Acthar.
So thinking about biosimilar pathways, where people could contemplate pursuing a new version of Acthar, we think that’s a very challenging pathway. This is a complex formulation and it has not been well characterized. The pharmacology is complex with multiple receptors Acthar is binding to and that has not been well characterized. It also has a slow release gel formulation as part of the mix.
There are quite a few formulation and manufacturing trade secrets inherent in Acthar and how it’s formulated, and there could be a potential synthetic competitor down the road at some point theoretically in a specific indication. We expect that that would require clinical trials and other development work before it could get FDA approval. And we believe this is a multi-year pathway, if somebody were to pursue this. These synthetics were also very old drugs, so the IP pathway for anybody coming to the market are not clear.
So I mentioned financial trends are strong. Sales in the first nine months of 2012 were $349 million. This compares to a full-year 2011 sales of $218 million. And as I mentioned, we’ll be reporting fourth quarter sales next month. EPS in the first nine months of 2012 were $2.12. This compares to full-year 2011’s earnings per share of $1.21. We have a quarter to go. This highlights the strong cash flow; $135 million in cash flow in the first nine months of 2012. ROE was 106% in the first nine months, so it went up significantly.
In the third quarter, we had net sales of $140.3 million, which is more than a double from the same period in 2011. Gross profit, $132.8 million; operating income, $83 million; fully diluted earnings per share, GAAP earnings per share were $0.91 versus $0.35 in third quarter of 2011, so a significant increase there. Cash flow, as I mentioned, very strong at $135 million, and our share count went down. We’ve had a very active – very active stock buyback program over the last few years and that has continued through the third quarter.
So, one thing that Acthar management is as committed to creating long-term value for shareholders; we’ve been identifying and expanding Acthar’s therapeutic role in existing and new indications. That’s an active effort, a major effort of ours. We’ve been significantly increasing our investment in R&D for the long-term. R&D spending essentially doubled year-over-year.
We are now contemplating highly selective and strategic diversification opportunities as they come up, and I’ll mention one that we announced earlier in a couple of minutes. We’ve already returned $322 million to shareholders through share repurchases, of about 21 million shares since early 2008. And we further expanded our repurchase program, which includes 7 million shares now. And recently we initiated a quarterly dividend of $0.20 a share, which we paid out for Q4 as well as for as Q1. Thanks Mike.
We recently announced strategic acquisition. This was of our – manufacturer of our Active Pharmaceutical Ingredient, BioVectra, and they’re located on Prince Edward Island in Canada. They’ve been making Acthar API for about a decade and we had a longstanding relationship with them. And this acquisition, which was C$50 million upfront, with potential earn-out of an additional C$50 million depending on their performance over time. This really helps to further secure our API supply for the long-term and as well as our Acthar manufacturing trade secrets. And it also provides us with third-party manufacturing should we need that going forward, and we expect this to be accretive.
So summarizing Acthar, we believe Acthar is a sustainable growth engine for the future. We’re going to continue to expand usage in MS relapse and nephrotic syndrome; build and expand our rheumatology franchise, which is just getting underway. We’re planning to continue to serve the IS patient population, which is a very important population to us, as well as child neurologists, and evaluate therapeutic potential in our remaining on-label indications as well as explore our potential new indications going forward.
Also, very importantly we need to fully characterize the components of Acthar, the various mechanisms of action, get a clear understanding of how the drug is working. This could open up new ideas and new opportunities for us. Longer term, we’d like to potentially look at new formulations, use Acthar almost as a platform technology. There may be components that have purified, could be highly interesting in other indications and – or there could be compounds that we look at bringing in down the road. This is a long-term proposition though.
So in summary, Acthar has a unique therapeutic role in a variety of indications and sustainable competitive advantages. It’s approved for 19 indications. Many of these are in markets with a high-level of unmet need and significant growth potential. Sales in nephrotic syndrome and MS have increased, although our market penetration remains fairly low. So we think there’s a pretty good runway in each of these indications still to go. We’re significantly increasing our funding in R&D investments. This is directly as a result of our significant growth in revenue over the last couple of years. And again, we’re profitable, have strong cash flow and a very strong balance sheet.
So, thank you very much.
[No Q&A session for this event]
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