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Executives

Don Bailey – President, Chief Executive Officer

Stephen Cartt – Executive Vice President Commercial Development.

Gary Sawka – Chief Financial Officer

Analysts

[John Newman – Oppenheimer]

Yale Gen – Maxim Group

[Wayne Moore – Wyatt's Funds]

[Kevin Kang – Kang Capital]

William Strong – Strong Management Company

[Dan DePitro – Deseris Biomedical]

[Barry Goddins – OFI Institutional]

Questcor Pharmaceutical, Inc. (QCOR) Q4 2008 Earnings Call February 24, 2009 4:30 PM ET

Operator

Welcome to the Questcor Pharmaceutical Incorporated fourth quarter and year end earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Doug Shirk of EVC Group.

Doug Shirk

Good afternoon everyone. Thank you for joining us today for the Questcor Pharmaceutical's fourth quarter and year end results conference call. This afternoon at market close, Questcor issued its fourth quarter and year end financial results. The release is posted on the company's web site at www.questcor.com. In addition, we've arranged for a taped replay of this call which will be available approximately one hour after the call's conclusion, and will remain available for seven days.

The operator will provide the replay instructions at the end of the call. This call is being broadcast live and an archived replay will also be available. To access the webcast, go to Questcor's website at www.questcor.com.

Before we get started, I'd like to remind you that during the course of this conference call, the company will make projections that are forward-looking statements of future events including statements about the company's forecasted operating model for 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'd like to request that each caller limit themselves to two questions, and then re-queue to ask additional question. In advance we appreciate everyone's cooperation with this process. With that, let me turn the call over to Don Bailey, President and Chief Executive Officer of Questcor Pharmaceuticals.

Don Bailey

Good afternoon everyone. Thank you for joining us today to review our business and financial accomplishments for 2008 as well as our plans for 2009. With me today is Steve Cartt, our Executive Vice President of Corporate Development, Gary Sawka, our CFO, Dave Mederios, our Senior Vice President of Pharmaceutical Operations and Alvin Mayer, our Vice President of Sales and Marketing.

After our opening remarks, Steve will review key business trends. Gary will cover our financial highlights for the quarter and the year. [audio break] Finally, I will address future trends and financial guidance for 2009. We will then open the call for your questions.

2008 was a banner year of Questcor. It was the first full year executing our Acthar Centric business strategy. We achieved substantial growth and sales and identified new key markets for Acthar.

Today, we are executing a plan designed to systematically build share holder value by investing in important medical research to demonstrate the value of Acthar and therefore expand the number of patients who can benefit from Acthar.

While we don't provide guidance on a quarterly basis, for the full year exceeded the guidance we provided for 2008. For that full year 2008, net sales were $95 million; almost double our net sales of 2007 and earnings per share were $0.49 per share.

In addition, we generated approximately $64 million in cash from operations. While over 75% of our sales during this year were to supply Acthar to patients with infantile spasms, we substantially grew sales of Acthar to treat multiple sclerosis flares. In addition, we've identified nephrotic syndrome as a third market for Acthar which our initial trials show that Acthar is effective in treating nephrotic syndrome, this could be a significant growth engine for us in 2010.

We plan to continue this Acthar mining strategy and intend to select at least one additional disease area for exploratory clinical work with Acthar during 2009. In doing this, we would be looking for a fourth market focus for Acthar adding to our existing triad of markets, IS, MS and nephrotic syndrome.

Steve will go through these areas of focus in more detail, but I'd like to provide some highlights for each. In the IS market, Acthar continues to be prescribed by physicians across the country with very good results. While shipments in November and December were lower than our historical average, shipments since then have rebounded and are trending about average for the first two months of 2009.

I've discussed on previous calls such month to month variation has been the norm historically and we believe this is principally due to the very low incidents of infantile spasms. A relatively small number of cases can create meaningful fluctuations in sales.

The usage in the IS market occurs without any selling or marketing activity on our part. Despite usage in the IS market, Acthar is not currently approved for IS. However, we are pursuing approval from the FDA with an IS indication for Acthar. We have been working with the FDA to complete our submission of our supplemental new drug application for SMDA and continue to do so.

The process has taken longer than we expected due to the original format of some of the data and the overall complexity of our submission. We will keep you apprised of any milestone accomplishments regarding this effort.

A key part of our strategy is to continue to build our sales effort in the MS market. During the third and fourth quarters of 2008 we expanded our sales force into the MS market. As a result, sales increased. For example, in the fourth quarter, MS sales grew to over 20% of Questcor's net sales.

The treatment of MS flares is one of the numerous labeled indications for Acthar. We believe that the long term market opportunity for use in this condition is considerably larger than the market potential in IS. Because of the success in later 2008, earlier this year we announced plans to increase our sales force from 15 to 30 sales representatives.

This ramp up will be somewhat disruptive to our sales momentum in the short run. Sales territories are being realigned around our new hires. The new sales reps are being trained and in many cases, target doctors are being transferred to these new sales reps. We expect to regain momentum as the year progresses and the new reps become as effective as the existing sales force.

A key element of our growth strategy is to identify additional fruitful markets for Acthar, preferably ones for which Acthar is already on a label indication. When we talked last with you in October, we discussed the opportunity for Acthar in the treatment of nephrotic syndrome, already an approved Acthar indication.

To build the foundation for potential sales efforts in nephrotic syndrome, we are funding a series of studies that will evaluate Acthar in treating this condition. Currently, there are few therapeutic alternatives for treating nephrotic syndrome.

Very importantly, recently we have received a small number of prescriptions from nephrologists for the treatment of patients with nephrotic syndrome. While it is very early in our efforts in this new field, we are anxious to see how these few patients respond to Acthar. Also, we will follow the nephrotic syndrome trials and look forward to keeping you apprised of our progress.

Finally, over the course of the year, we strengthened our balance sheet significantly and committed $46 million to build shareholder value through a preferred and common share buy back program. Our balance sheet is clean and strong with over $65 million in cash and no debt, and our ongoing business is nicely cash flow positive, even with expanded investment in IS, MS and nephrotic syndrome.

At this time, I'd like to turn the call over to Steve Cartt.

Steve Cartt

Good afternoon everyone. I'd like to begin by providing you with a competitive assessment of Acthar in the treatment in infantile spasms. We realize that many of you have questions on this subject. At this time there are many unknowns and many questions will likely remain given that key variables are controlled by other parties, including decision makers at governmental agencies.

However, we can definitely tell you that today no drug is approved for the treatment of IS including Acthar. However based on guidelines published jointly by the American Academy of Neurology and the Child Neurology Society, and endorsed by the American Epilepsy Society, many physicians regularly choose to prescribe Acthar for their patients with IS.

We estimate that Acthar is used by pediatric neurologists for the treatment of infantile spasms in about 40% of all IS cases. It has been a mainstay in the treatment of IS for many years. Doctors continue to write prescriptions. Payers continue to pay and patients continue to derive significant benefits from Acthar.

Given decades of experience with both Acthar and the alternative treatments, as well as decades of published studies and review articles evaluation Acthar, and these alternatives, child neurology experts continue to tell us that they view Acthar as a critically important product for the treatment of infantile spasms.

Why do they continue to do so? Let's allow the medical experts themselves provide that answer. The IS treatment guidelines I mentioned earlier which were published jointly by the American Academy of Neurology and the Child Neurology Society and endorsed by the American Epilepsy Society look at the available data for all IS treatment alternatives.

Among other things, this pivotal paper, gave ACTH the primary pharmaceutical ingredient in Acthar the highest rating of any IS treatment based on an intensive, independent review of the published literature. The paper represents the definitive guideline endorsed by the top medical societies involved in the treatment of IS.

Combine with their own practice experience many doctors use these guidelines as a rational behind their decision to so frequently choose Acthar for their patients with infantile spasms.

The top experts who wrote the IS treatment guidelines and more recently the FDA as well, have focused on one particularly well designed and well documented randomized controlled trial for Acthar that was conducted by highly reputable independent researchers. This trial compared Acthar with Oral Prednisone in the treatment of IS. The study found an 87% efficacy rate for Acthar and a 29% efficacy rate for Prednisone. Efficacy was measured in terms of not only stopping the spasms but also importantly, resolving the underlying irregular EEG pattern or hips arrhythmia that commonly accompanies IS. If not addressed, hips arrhythmia is believed to be responsible for much of the damage in patients with IS.

The study as I mentioned, found a dramatic effect in terms of stopping the spasms as well as resolving the hips arrhythmia. This study was considered highly statistically significantly in favor of Acthar.

In no other study looking at these two critical treatment end points has any drug to be as effective for IS. It is also important to note that Acthar is a very potent drug, necessary for treating such a devastating disorder such as IS and as such, can cause side effects; most commonly hypertension, weight gain and irritability in the children that are treated with it. However, and very importantly, these side effects are fully reversible upon completion of treatment which for Acthar only typically last for four to six weeks.

I hope that this gives all of you a better feel for how we and also many child neurologists view Acthar's place in the treatment of infantile spasms.

Now let's move on to our efforts in the MS market. We are pleased with the results of the test sales effort that we conducted in the third and fourth quarters of 2008. During this time, the number of new prescriptions shipped to MS patients rose steadily.

In the fourth quarter we saw a greater than [15%] increase in estimated number of vials shipped for use in MS patients compared to the third quarter. This was due to an increase of new prescriptions coupled with a higher rate of refill prescriptions than we expected.

The increased usage in MS combined with a significantly lower level of Medicaid usage among MS patients compared to IS patients resulted in over 20% of fourth quarter Acthar net revenues being attributable to the MS market.

As you know, we're currently in the process of expanding our sales team to 30 representatives in order to build on our success to date. We expect to have all 30 territories reconfigured and all new representatives hired and transitioned into their new territories as well as fully trained by the end of March. They will begin making sales calls at the very beginning of April.

As part of this restructuring, some of our top representatives have moved into sales management positions, requiring their territories to be back filled by new hires. And some of our other sales people are involved with training the new hires. As a result it is important for our investors to understand that the first quarter of 2009 is truly a transition quarter for our sales force and will largely be focused on the creation of new sales territories and the hiring and training of the new representatives.

Realistically, we do expect there to be some disruption in our sales momentum for MS during the first quarter of 2009, but as Don mentioned, we also expect our new sales representatives to be fully productive within a six to nine month time frame from their hire date, and as such, we believe we should expect to see the full sales impact from this most recent expansion later this year.

Depending on the uptake of Acthar in the MS market during the course of the year, and the possible approval and launch of the IS indication, we may consider an additional phase of expansion to approximately 40 representatives sometime in the second half of this year.

Now, I think it's important to touch a bit on our patient support programs for Acthar. Our reimbursement support continues to be very effective. We routinely get Acthar approved for insurance coverage in over 95% of IS cases.

In addition, due to the significant patient assistance programs that we sponsor, we continue to be pleased to report that to our knowledge no patient in need of Acthar has been denied access to the drug.

In fact, since the program's inception in September 2007, the Acthar patient assistance program which is operated by NORD has provided free drug with commercial value of over $20 million to uninsured and underinsured patients. Additional financial support is also provided to patients through NORD's co-pay assistance programs that we sponsor.

Beyond supporting patient assistance programs we are now also actively supporting the medical and patient communities in other important ways. We have recently accelerated our support of important new medical research in IS, MS, nephrotic syndrome and other therapeutic areas and expect to fund more than a dozen clinical and pre-clinical studies over the course of 2009. This research is intended to better understand these disease states and Acthar's role in treatment.

Let's take a moment to briefly focus on one of these areas, nephrotic syndrome. Nephrotic syndrome is a condition which can result from a number of different disease states such as diabetes and member distithrophy[ph] where kidney function deteriorates causing the patient to lose large amounts of protein from the kidneys into the urine.

If not adequately treated, these patients will very often progress to kidney failure and dialysis or in some cases will receive a kidney transplant. Today, while there are assorted drug combinations that doctors will employ in an attempt to slow the worsening of the condition, there is no well established treatment for nephrotic syndrome.

We are funding the first study evaluating Acthar in nephrotic syndrome and the first patients are expected to be enrolled shortly. Initial results of this first study are expected in the fourth quarter.

In addition to nephrotic syndrome during 2009 we will continue to evaluate other potential new therapeutic applications and by late 2009 we expect to have identified a fourth area of focus for Acthar. We look forward to keeping you apprised of our progress.

I'll now take a moment to touch on QSC-001, our proprietary fast melt formulation of hydrocodone plus acetaminophen for the treatment for moderate to moderately severe pain. During the fourth quarter of 2008 we completed formulation development of this product. Ideally the next step would be to conduct fairly costly pivotal bioprivalent[ph] studies with the product.

However, based on the intriguing growth opportunities that we have identified for Acthar over the last several months as well as the changing regulatory environment for pain therapeutics, we have recently decided to fully focus our personnel and financial resources on Acthar rather than complete the development of the QSC-001 product.

We feel strong that QSC-001 will have significant revenue potential if it were to be eventually granted FDA approval and marketed by a company with a pain focused sales force. We also believe just as strongly that the numerous new growth opportunities for Acthar take priority over QSC-001 with the allocation of Questcor's limited research and development and personnel resources. Therefore, finding a partner for the QSC-001 project at this time would seem to be a prudent course to follow.

Now, I'd like to turn the call over the Gary Sawka, our CFO to review the financial highlights for the quarter and the year.

Gary Sawka

Net income applicable to common shareholders for the fourth quarter was $16.2 million or $0.24 per diluted common share. For the full year 2008 net income to our common shareholders was $35.3 million or $0.49 per diluted common share. Our gross margin was 93% and 92% for the quarter and year respectively.

Our net income for the fourth quarter and full year included a one time tax benefit of $4.4 million and $5.2 million or $0.06 and $0.07 per diluted common share respectively. In addition, other ongoing tax benefits related to state income taxes and tax credits helped our tax rate for 2008. These state tax and credit items will also benefit us in 2009 and beyond.

As a result, our income tax expense for the fourth quarter and year ended December 31, 2008 was $1.5 million and $18.2 million respectively, and our fourth quarter effective tax rate for financial reporting purposes was only 9%.

Moving to the cash flow statement, over the course of 2008 we generated over $64 million in cash from operations. Returning value to our shareholders we used approximately $46 million to repurchase all outstanding Series A preferred shares, 3.5 million shares of common stock in open market transactions under our repurchase program and 4 million shares of common stock in directly negotiated transactions. We continue to have 3.5 million shares remaining in our open market repurchase program as there were no shares we repurchased during the fourth quarter of 2008.

As a note, our short term investments are comprised of high quality credit instruments including U.S. government agency securities and commercial paper.

At December 31, 2008 we had approximately 66 million common shares outstanding. With that, I'd like to turn it back to Don to discuss our outlook for 2009.

Don Bailey

2008 has been an extremely productive year for Qeustcor. In summary, for 2009 we expect to continue our momentum generating incremental increases of Acthar sales. We expect to complete the filing of our SMDA for Acthar and IS in the near future and complete expansion of the sales force during this quarter as well.

We will continue to invest in important medical research through funding of at least 12 new clinical and pre-clinical studies using Acthar to treat IS, MS, nephrotic syndrome and other on label disease areas with significant and medical needs.

In order to accomplish our aggressive growth plan, we expect to significantly increase operating expenses during 2009. However, our plan calls for sales and operating income to grow as well. We have provided some specific guidance where we can in our release earlier today.

This guidance includes a target overall gross margin of 92% to 94%, SG&A expenses including all marketing expenses of approximately $32 million to $34 million, R&D expenses in the neighborhood of $11.5 million o $12 million, non cash 123R stock based compensation expenses of approximately of $3 million to $4 million.

Our income tax rate for reporting purposes we think will be in the 36% to 40% range. Finally, we expect fully diluted average shares of 69 million to 72 million shares absent any further repurchases using our stock repurchase plan.

With that, I'd like to turn the call back to the operator, and we're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [John Newman – Oppenheimer]

[John Newman – Oppenheimer]

Could you talk about your expectations in terms of the percentage of sales that are going to Medicare rebates going forward? Also, do you have any plans to expand the share repurchase program for 2009 and in terms of the additional reps, will those be added immediately?

Don Bailey

As far as our percent of Medicaid going forward, it's really difficult to predict especially with the expansion of various programs. CHIP has now been passed. We expect the big bill that just passed Congress has some additional health care provisions in it, so it's a little difficult to predict.

Absent those things, we would think that the infantile spasm rate in the 30% area would continue. MS, the Medicaid's rate us under 10%. We're really just dealing with Medicaid here not so much Medicare. We get a little bit of Medicare but not too much.

On a mix basis, as we grow sales of MS which we expect sales of MS to grow this year with the expanded sales force, we expect IS sales to stay the same or probably go down some because of we do expect [Argotch] to get approved and take a little market share.

As far as expanding the share buy back program, we have 3.5 million shares left on the program and we don't need to increase that right now. If we use the 3.5 million I would say it's certainly possible we would expand. The reps have all been hired.

Stephen Cartt

We're expanding to 30 reps at the moment. We expect to have all of them on board and fully trained and hitting the streets the first week in April. And then there could be a future expansion. We may go up to 40 but that wouldn't be until late in the year. That would depend on two things; either we do see some significant MS growth as we expect or that the IS approval comes and we're able to launch the new indications.

That's really contingent. Going up to the full 40 is contingent on things that happen later in the year. But we are ramping up immediately to 30 and expect to have them in place shortly.

Operator

Your next question comes from Yale Gen – Maxim Group

Yale Gen – Maxim Group

For the nephrotic syndrome study, do you have any insight in terms of what that study design looks like and what was anticipated, the outcome so far in terms of these clinical information.

Stephen Cartt

There will actually be a series of different studies done during the course of the year and the studies right now are confidential so we really can't talk about them in any detail, but we hope to have much more information available on them during the course of year, probably the later part of the year.

These are going to be smaller studies. We're talking in the range of a couple dozen patients typically, and the cost for these is generally pretty low, in the half million dollar range.

Yale Gen – Maxim Group

Was there a description in the label in terms of this specific indication given from the original approval?

Stephen Cartt

Yes. I do want to remind all our listeners that nephrotic syndrome is already on label and the specific description is actually in the press release. It's in the tag line of the press release about Questcor and it's rather a mouthful so I won't read it, but it's in there for you to take a look at.

Yale Gen – Maxim Group

In terms of your expanding sales force that will be the second half of this year more likely do you think when this decision might be made?

Stephen Cartt

Realistically it's probably a fourth quarter decision, but it could depending on what happens, it could happen earlier. But again, it's contingent on either an IS approval and launch later in the year or if we see significant growth from MS sustained.

Yale Gen – Maxim Group

For the IS supplement FDA implications, was there an approval in this, in other words an additional four months before that could happen or is there a different time line we should look for if the FDA accepts the application.

Stephen Cartt

Our understanding is that we will receive priority review which is six months.

Operator

Your next question comes from [Wayne Moore – Wyatt's Funds]

[Wayne Moore – Wyatt's Funds]

I wanted to spend a little bit of time on your outlook. Given the dramatic increase in SG&A year over year and the required increase in sales to cover that, one of the lines in your 2009 outlook is that you expect operating income to be in line with 2008. Can we get a little bit of specificity in that in terms of are we going to see it be completely flat? Right now the street estimates are for EPS to be up 33% so flat versus '08 would be 33% below what the expectations were.

Don Bailey

First of all, I'm not sure what street estimates you're looking at but I don't think they show quite that dramatic an increase.

[Wayne Moore – Wyatt's Funds]

The first call is for '09 to be $0.56?

Don Bailey

Well we did $0.49 this year.

[Wayne Moore – Wyatt's Funds]

Right. But a portion of that is lower income tax which you need to take out and then effectively you're at a 33% increase in earnings for first call.

Don Bailey

You also have to add back in there's, there's another $0.07 that you have to add back in from Q1. So the Q1 and Q4 add in, add back kind of cancel. You may not be aware of what happened in Q1, but when we bought back the preferred shares, we had to take the payment in excess of the book value as redeemed dividend which hurt our earnings almost to an equal amount with the tax benefit in the fourth quarter so those two things really do offset each other and the true earnings for the year are probably pretty darn close to $0.49.

So we've had some success in the MS market. There's nothing to push IS sales up next year absent an approval and in fact we could see some IS decrease. We just don't know what's going to happen this year. So it's always easier to predict cost than to predict revenues. But what we will try to do is manage the operating income line, and we've indicated in the release that we expect operating income to be up this year. We didn't say flat, we said up.

So I can't really give you numbers. If we thought we had enough visibility to give you numbers, I would have done so.

[Wayne Moore – Wyatt's Funds]

Maybe we can talk about, and this was one of the questions I asked previously and maybe I could get a little bit more detail on it in terms of, it sounds like the ramp up in SG&A is going to be a higher ramp up in Q1 and Q2 and then kind of flat line after that. Is that the right way to think about it or will it be pro rated over the rest of the year?

Stephen Cartt

We're obviously ramping up or sales force so there's a significant uptick there in doubling the size plus adding some sales managers. So I think that will be the general profile. We're also initiating plans for an IS launch but no spending for promotion will happen until the label comes through hopefully later in the year.

So I think overall, there will be an uptick generally in the first couple of quarters and then things will kind of stabilize at that point.

Don Bailey

Unfortunately, all we can do is give you what we know, and what we know is that we have a plan and our whole operating expenses are up approximately $18 million from a plan perspective year over year. We expect operating income to be up more than that. Whether it's up 1%, 10%, 30% that's really very difficult to predict.

We've got an MS market that's quite large and untapped and an infantile spasm market that's actually very mature and there's lots of competitors in that market. So it's hard for us to predict what will happen, particularly if we can get traction in the MS market. So we wanted to give you all the facts we have. We think its' definitely worth the investment.

We will manage the operating line as best we can and if sales are not picking up and we think that the marketing and sales efforts aren't working, we'll slow them down or decrease them. We're unemotional about what we have to do here, but we're very emotional, very optimistic about the outcome.

[Wayne Moore – Wyatt's Funds]

You mentioned in the press release MS, roughly $5 million in sales during the quarter and you also talk about that increase. Can we expect that the price per vial that is sold at MS matches what is sold for the IS indication?

Don Bailey

Yes.

[Wayne Moore – Wyatt's Funds]

On a unit basis, one of my questions is, for the fourth quarter of '08 then because it's not exactly broken out and I'm trying to work the math, just directly speaking about the IS indication, given $5 million in MS sales, how much, what was the resulting vial ship for IS during the quarter?

Don Bailey

I wish we could give you a precise but we don't have that data. We get some data. There are 55 specialty pharmacies that order Acthar and we only get information from six of them. So the other 50 or so we do not get any diagnosis information. We get a little bit from referrals that start with our reimbursement center but we learn very little about refills that are going to these 50 specialty pharmacies.

So any numbers we give you, you'll always see the word approximate. That being said, probably at the net sales line revenues is a pretty good surrogate for the number of vials since we have 1,510 vials and we had a little bit over 20% of our sales in MS, we can say there were approximately 300 vials for MS and most of the remainder of course would be infantile spasm. We do have some vials in there for opsiclonis[ph], myoclonis[ph], and some vials in there for assorted other prescriptions that we get.

Operator

Your next question comes from [Kevin Kang – Kang Capital]

[Kevin Kang – Kang Capital]

I just wanted to get clarity on the regulatory situation. Did you get a refusal to file on the FDA that you filed on December 2?

Don Bailey

I'm not sure what a refusal to file is.

[Kevin Kang – Kang Capital]

The FDA is to either accept or reject your filing for review and start the time line.

Don Bailey

The FDA indicated to us that they were unable to navigate through our file due to the nature of our submission and asked us to reform the file. So we have been reformatting the files since then and communicating with them frequently, regularly to find out exactly how they want this data package submitted. So that's what's been going on.

[Kevin Kang – Kang Capital]

Others call that a refusal to file so when do you plan to resubmit and start the clock?

Don Bailey

We plan to submit this in the very near future.

[Kevin Kang – Kang Capital]

Is that this quarter?

Don Bailey

That's as specific as I can be.

[Kevin Kang – Kang Capital]

Can you characterize the issues a little bit more, the formatting issues?

Don Bailey

This has nothing to do with content. It's strictly readability, navigatability. They need to be able to key word search the document for example. There's a lot of hand written notes in the document because patient files, preview of patient files are in the safety data. It mostly relates to the nature of the data that was in the safety files.

[Kevin Kang – Kang Capital]

So you expect to resubmit shortly and then in 60 days from then you would hear whether it's acceptable for review and that would start the clock, is that right?

Don Bailey

This is a good assumption. The FDA hasn't told us anything along those lines. All I know is that they're having trouble reading and we're getting the file back to them as quickly as we can.

Operator

Your next question comes from William Strong – Strong Management Company.

William Strong – Strong Management Company

I'm a little chemist and I would like to get a basic idea of the strategy of your company. Is Acthar the only product that you're working with? Do you have multiple uses for it? Is that the idea?

Don Bailey

That's very correct. Acthar is currently approved for over 50 indications. It's an old drug. It's porcine based drug.

William Strong – Strong Management Company

Is it regarding as GRS or something like that for some of these uses? Why do you have to get, are you getting another FDA approval?

Don Bailey

We're adding an indication that's not currently on the label.

Operator

Your next question comes from [Dan DePitro – Deseris Biomedical]

[Dan DePitro – Deseris Biomedical]

Regarding the use in MS, I'm just curious, what does it end up costing? I'm not sure if it's given chronically in MS or sort of on an annualized basis what would it cost a typical adult receiving Acthar for MS?

Stephen Cartt

It's not used chronically in most cases. The product is indicated for the treatment of MS exacerbations or flares which is a short term condition and it's usually in the neighborhood of two weeks to three weeks of treatment. But then sometimes you'll see patient's get refills. They may have a further break out of a flare. They may get a refill two, three, or four months down the road.

Typically when we see a new prescription, initially it's worth about one and a half vials of Acthar, but over time it's worth two and a half to three, in that range because of the refills for some patients.

[Dan DePitro – Deseris Biomedical]

Is there any to say how many a patient takes or anything like that?

Stephen Cartt

These are all adults. Unlike IS where dosing is based on body surface area which is weight based. In MS it's dosed just on a unit basis.

[Dan DePitro – Deseris Biomedical]

So if a patient takes it, what is the potential for the flares to come more than once a year, there's a potential for them to be taking it for multiple weeks in the year I would imagine. What's typical;?

Stephen Cartt

There's a possibility of that. The average time between flares is generally more than a year.

[Dan DePitro – Deseris Biomedical]

How much would it cost then for an annualized basis for a patient to be treated with Acthar?

Stephen Cartt

You figure if they're having one flare per year and they go through two vials, about $46,000.

[Dan DePitro – Deseris Biomedical]

As you expand into that market, do you think ultimately there's going to be some formulary push back?

Stephen Cartt

We see a higher rate generally of prior authorizations now than we did a year ago, but we're still getting very good coverage and we actively use our patient assistance program that's operated by NORD so there's a lot of free drugs that's shipped to patients.

Most of the prescriptions are covered by insurance, but we do see a few that aren't covered, and for those patients, they get free drug.

Don Bailey

I want to mention one thing here. We have this drug at a very high price right now because really our principal market is infantile spasms, and we only have about 800 patients a year. It's a very, very small tiny market. There are subsidies from the government. There are no subsidies from other companies. Unfortunately the diseases that use a drug have to pay for it.

I just want to make sure that people on the call understand that some of these numbers sound pretty high in the course of treatment, but it's really driven by the small population of patients that need the drug. It's unfortunate. We'd love to have some subsidies that we could have a lower price.

[Dan DePitro – Deseris Biomedical]

That was just a question I had as you push into a larger market like MS.

Stephen Cartt

I'll piggyback on Don's comment in that we're not going after the entire MS market. It's a very small sub set of patients who basically they've had break through flares which is in fact a failure of the disease modifying drug and they've also failed first and sometimes second line therapy.

[Dan DePitro – Deseris Biomedical]

These are patients who have failed with prednisone, failed with disease modifying drugs?

Stephen Cartt

Exactly, in most cases. So these are really having trouble with controlling their disease and Acthar is an effective and useful alternative for them.

[Dan DePitro – Deseris Biomedical]

I had another question on the reimbursement issues. I understand that you're supplying free drug for patients that are either underinsured or uninsured. How do you handle some of the private players that are charging more of a co-insurance than a standard co-pay?

Stephen Cartt

We've probably set the industry standard for establishing a very aggressive co-pay assistance programs with NORD. We actually fund four different co-pay assistance programs based on disease state through NORD. Most patients actually believe it or not have a pretty low co-pay. It's under $100.00.

But in those cases where they may have a co-pay that's a percentage of the drug cost, then in virtually all the cases, they're transferred over to NORD for assistance. We fund those NORD programs very, very actively.

[Dan DePitro – Deseris Biomedical]

What does that end up being typically? 5%, sort of like the Medicare equivalent?

Stephen Cartt

It can be as high as 20% as a co-pay. We see $5,000, $6,000, $7,000 co-pays come through occasionally and virtually every one of those is transferred to NORD and NORD does their assessment of the financial capabilities of the patient and at that co-pay level, virtually all of those patients get assistance.

[Dan DePitro – Deseris Biomedical]

So you're picking up the tab on the co-pay?

Stephen Cartt

Yes. Through our support and our grants to NORD, we're effectively covering that co-pay.

Don Bailey

Interestingly, before we took the price increase, those uninsured and underinsured patients either went without the drug or without treatment and had possibly some pretty bad outcomes or were financially really disadvantaged.

[Dan DePitro – Deseris Biomedical]

In the infantile spasm cases you don't run into this, but I'm wondering if when there's a lifetime cap on insurance, I guess some of that is based on the family coverage which you could run into with the infantile spasms, but do you ever run into hitting that cap, and if so, how do you handle that?

Stephen Cartt

If a cap is ever hit, it's again that a situation where they're underinsured and they're transferred to NORD for free drug.

Don Bailey

We're happy to say that we don't know of any patients where a doctor has written a prescription, and the patient wanted the drug, the patient didn't get the drug.

Operator

Your next question comes from Yale Gen – Maxim Group.

Yale Gen – Maxim Group

Could you do a break down of the revenue of Acthar versus the Doral for the fourth quarter of '08?

Don Bailey

Doral would have been less than $200,000 in the fourth quarter.

Yale Gen – Maxim Group

In terms of the insurance coverage, when you're looking into the nephrotic syndrome, was that potentially could be an issue or do you think that's also an area that you will have a freer hand to operation once you complete a study and present those data's?

Stephen Cartt

That's a great question. That's something we're looking into in depth right now. If you look conceptually at these patients, many of them or even most of them over time are progressing to end stage renal failures and they will end up on dialysis. And even in a kidney transplant which those are very unfavorable situations cost wise as well as heath wise, so we feel we can provide a drug that staves off either of those outcomes. It will provide a real benefit to the health care system

Operator

Your next question comes from [John Newman – Oppenheimer]

[John Newman – Oppenheimer]

Do you have any idea as to the potential approval time line for Vigadrin[ph]? I've been hearing different things in terms of length of time that's going to be required by the FDA to put together around this program. And also could you talk about the potential market opportunity in the future for Acthar in nephrotic syndrome?

Don Bailey

As far as Vigadrin[ph] we have absolutely no information, no insight. We really can't help you there. We just don't have any source of information.

The nephrotic syndrome is very interesting because with the exception of diabetic nephrothopy[ph] causing nephrotic syndrome, the market looks quite a bit bigger than the niche market that we're looking for in MS, maybe three or four times bigger than the MS market.

The diabetic nephrothopy induced nephrotic syndrome is substantially larger and there's 1.5 million people kidney problems resulting from diabetes and we're intrigued by how many, and I guess there's not a very good treatment for them at the moment so we're intrigued about the size of that market and at least some data is showing efficacy so if we could translate that into business, then we'll have a different situation.

[John Newman – Oppenheimer]

Could you briefly comment on the amount of remaining NOL's that you might utilize in 2009 and going forward?

Gary Sawka

For financial reporting purposes, we've now used them all up. We took all the remaining evaluation allowance so this would be just for cash, approximately $9 million next year.

Don Bailey

We have a $9.9 million of NOL's that we'll be able to take on our tax return over the year from 2018. For 2009 and 2010 we'll be able to take $2.2 million each.

Operator

Your next question comes from William Strong – Strong Management Company.

William Strong – Strong Management Company

Do you make your own product and what about quality control and risk with regard to problems that might come up from a manufacturing standpoint?

Don Bailey

Our product is managed from here and it's made by a series of contractors. We own all the equipment. We own all the processes and we own all the commercial property associated with those processes. That's how it's made. It's discussed in some detail in our 10-K.

William Strong – Strong Management Company

It's basically under your control.

Don Bailey

Correct. Completely under our control.

William Strong – Strong Management Company

What do you think about the current administration's plan? Will it be helpful or harmful with regard to the stimulus and medical stuff?

Don Bailey

The CHIP was just passed, the Children's Health Insurance Program and we had some announcements when that got done and that program which will enroll an additional 4.5 million children into various state program should on balance help us because it will take children from the uninsured and put them into an insurance program.

11 states use Medicaid. 18 states use a private system, private insurance and the remaining states use a combined Medicaid and private. When we break that down by percentage, it looks like something in the neighborhood of 50/50 percentage wise will come through Medicaid and 50% will come through private insurance.

Of course, for Medicaid, we actually have rebates that are higher than the Medicaid pay, so we're actually funding the Medicaid program through its usage, so we think on balance, we'll have a net benefit of some small amount.

William Strong – Strong Management Company

So there's no real bad situation that you see coming up because of it. It will be equal or better than what you've had in the past.

Don Bailey

With today's visibility, we're just looking at paper documents and until it's implemented, we really can't. There's dozens of programs running their way through Congress and I can't tell you about all of them.

William Strong – Strong Management Company

I would guess that probably with the current focus of the administration that would be helpful because that's one of their big pushes is Medicare.

Don Bailey

That's really hard to tell.

Operator

Your next question comes from [Barry Goddins – OFI Institutional]

[Barry Goddins – OFI Institutional]

In the release the SG&A level was put at 33% to 36% X the FAS 123, and then when you were going through it, I think you referred a little bit lower. I think it was 32.5% to 34%. Does that include the option expense or not.

Don Bailey

Whatever is in the release is accurate.

[Barry Goddins – OFI Institutional]

Looking forward, within 2010 if some of these programs are positive would we expect significant operating leverage going forward?

Don Bailey

I'm sorry, say that again.

[Barry Goddins – OFI Institutional]

Would you expect significant operating leverage in 2010 providing some of these program go forward, be it is IS, NS?

Don Bailey

It's certainly possible. We already have very high margins, operating margins. It's certainly possible. It just depends on how much money we have to spend on sales and marketing to drive business. Certainly if we're successful, we'll be expanding those efforts and we'll be expanding our medical fairs effort, doing more and more trials.

In every case with ever expenditure we make a very clear decision on is it better to not spend that money or make the investment. But all in all, if we have some traction I think the answer to your question should be yes.

Operator

There are no further questions as this time. I would now like to turn it back to management for any closing remarks.

Don Bailey

I want to thank everybody for listening in and asking questions. We look forward to reporting in Q1.

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Source: Questcor Pharmaceutical, Inc. Q4 2008 Earnings Call Transcript
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