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Executives

Doug Shirk – IR, EVC Group

Don Bailey – President and CEO

Dave Medeiros – SVP of Pharmaceutical Operations

Steve Cartt – EVP, Corporate Development

Gary Sawka – CFO and SVP of Finance

Analysts

John Newman – Oppenheimer

Yale Gen – Maxim Group

Questcor Pharmaceuticals, Inc. (QCOR) Q1 2009 Earnings Call Transcript April 28, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Questcor Pharmaceuticals Q1 2009 conference call. (Operator instructions) This conference is being recorded today, Tuesday, April 28, 2009.

I would now like to turn the conference over to Mr. Doug Shirk of EVC Group. Please go ahead, sir.

Doug Shirk

Thank you, operator; and good afternoon everyone. Thank you for joining us today for the Questcor Pharmaceuticals first quarter conference call.

This afternoon at market close, Questcor issued its first quarter 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. The call is being broadcast live today, April 28, 2009. To access the webcast, go to Questcor's website.

Before we get started, I'd like to remind you that during the course of this conference call, the company will make projections or other forward-looking statements regarding future events. 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 questions. In advance, we appreciate everyone's cooperation with this process.

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

Don Bailey

Good afternoon, this is Don Bailey. I have a little condition in my throat, so Dave Medeiros, our Senior Vice President of Pharmaceutical Operations is going to read my prepared remarks. Hopefully, my voice will hold up to help answer questions.

Dave Medeiros

Thank you, Don. Also with me today is Steve Cartt, our Executive Vice President and Gary Sawka, our CFO. Thank you for joining us today to review our business and financial accomplishments for the first quarter.

After my opening remarks, Steve will discuss key business trends, Gary will review our financial highlights for the quarter and then I will provide an outlook for the remainder of the year. We will then open the call for your questions.

During the quarter, we continued to execute our Acthar-centric business strategy and made significant strides in the commercial, operational, and regulatory areas. We generated approximately $23 million in net sales and over $12 million in cash from operations. We completed the previously-announced expansion of our sales force to 30 representatives, focused on the MS market opportunity. We submitted our sNDA to the FDA, seeking approval for a new indication for Acthar in the treatment of infantile spasms. We realigned our medical, clinical, and regulatory departments to correspond to our strategic focus on pursuing Acthar growth opportunities and we invested in new medical research to support the use of Acthar for on-label indications, including nephrotic syndrome.

Overall, it was a very busy and productive quarter. We shipped 1429 vials of Acthar during the quarter, with approximately three fourths of net sales coming from Acthar prescriptions for the treatment of infantile spasms. IS prescriptions increased by about one third compared to the first quarter of 2008. Acthar new prescriptions shipped for MS more than tripled as compared to the year ago period. And we expected due to our focus during the quarter on the hiring and training of our expanded MS sales force and the commensurate reassignment of territories, new MS sales during the quarter were steady versus the fourth quarter of 2008.

Although a majority of our revenue is generated from the sales of Acthar to treat infantile spasms, Acthar is not yet approved for this indication. However, based on the guidelines published jointly by the American Academy of neurology and the Child Neurology Society, and endorsed by the American Epilepsy Society, many physicians routinely choose to prescribe Acthar for their patients with IS. We are pursuing approval to market Acthar directly to physicians who treat IS.

To that end, in mid-March, we submitted our revised supplemental new drug application, sNDA, to the FDA for the approval. Since submitting the sNDA, we have interacted with the FDA on an ongoing basis as they work through their acceptance decision process. We look forward to working with the FDA during the review process and will provide updates on our progress to investors when we have definitive information.

Our previous decision to focus on the potential of Acthar has prompted the creation of a new position, Chief Medical Officer, CMO, and the restructuring of our clinical and regulatory department. While we search for a permanent CMO to join our leadership team, Carol Braun Trapnell, MD joined us this month as acting Chief Medical Officer. We believe Carol is an ideal interim fit for Questcor with her extensive FDA tenure, industry expertise, and diverse regulatory and development experience.

Dr. Trapnell has been a consultant to Questcor over the last several months and has been increasingly involved in our sNDA activities. Dr. Trapnell spent 11 years working for the FDA, reviewing regulatory submissions. In addition, she has served for more than a decade managing the clinical and regulatory organizations for a drug development company and a CRO.

Moving forward, Carol will continue to act as the primary liaison with the FDA regarding our sNDA for IS. Dr. Steven Halladay, our Senior Vice President of Clinical and Regulatory Affairs, who was instrumental in the preparation of our sNDA, will continue to be involved in the sNDA, supporting Carol in our efforts to obtain a favorable outcome on this project. With this team in place, we believe we are well positioned to prepare for the review process, any potential advisory panel review as well as potential approval and commercial launch of Acthar for the treatment of infantile spasms.

Turning our effort to building sales of Acthar to treat MS flares, as I noted earlier, we have completed our sales force expansion and now have in place a full complement of 30 sales representatives and related managers for this market. We realigned territories and hired and trained all the new sales representatives. The marketing effort is in full swing as Steve will review in a few moments. While we are encouraged by the early progress we are seeing in the field, we believe it will take a full 6 to 9 months to realize the full potential of our expanded efforts.

With that, I would like to turn the call over to Steve for a bit more color on our MS commercial strategy as well as our longer-term revenue generation opportunities. Steve?

Steve Cartt

Thanks, Dave and good afternoon everybody. As Dave noted, during the first quarter, we were primarily focused on the realignment of our sales force and on the hiring and training of our new sales reps and sales managers as well as on the development of an expanded marketing plan for the MS flare commercial opportunity. On March 30, our newly expanded sales force hit the streets and began making sales calls on MS treating neurologists across the country. So far, the feedback from these doctors has been positive, insurance coverage has been favorable, and we look forward to seeing the benefits of the increased selling activity as we progress throughout 2009 and into 2010.

In addition to expanding our sales force, we have also developed and are now beginning to execute a marketing plan that is commensurate with this increased selling effort. Components of this plan include a variety of promotional and educational elements geared towards increasing the appropriate and effective use of Acthar in the treatment of MS patients who are experiencing flares.

For example, this week we are exhibiting at the American Academy of Neurology annual meeting in Seattle, where we have the opportunity to speak with many neurologists about how to optimize the use of Acthar in their practices. While some of these neurologists currently use Acthar for treating MS flares, the vast majority are either unaware of the drug, have not received training regarding its use, or have not considered using it for many years due to its lack of availability during the 1990s, when Acthar was not readily available to patients and prescribing physicians. It is important to make these doctors aware of Acthar's availability and to speak with them about the appropriate patient types, where Acthar can truly play a valuable therapeutic role.

In addition, last month, we launched a new educational website, focused specifically on Acthar, which will serve both patients and healthcare professionals. www.acthar.com includes information on multiple sclerosis, as well as nephrotic syndrome and includes specific details for doctors on how to order the drug and get support for working with insurance plans to help ensure coverage.

Soon, we will also unveil a newly updated company website at our current questcor.com site. The new website will be fully up-to-date and will review the key aspects of Questcor's emerging drug story.

Turning to patient assistance, the Acthar Patient Assistance program, which is operated by NORD, the National Organization for Rare Disorders, and is sponsored by Questcor, continues to be very actively used by uninsured and underinsured patients. In fact, to date, Questcor has provided free drugs with commercial value of over $26 million to this and other patient-oriented support programs since September 2007.

Additional financial support is also provided to patients through NORD's co-pay assistance program, sponsored by Questcor. Beyond supporting patient assistance programs, we are also now investing in both clinical and preclinical research to evaluate the use of Acthar and other disease areas with high unmet medical need. These efforts are possible as a direct result of the success we have had with our Acthar-focused business strategy. We are hopeful that they will lead to new patient populations benefiting from Acthar in the future.

One of these new disease areas is nephrotic syndrome, a kidney disorder, which has a variety of causes but few safe and effective treatments. There are a few promising treatments on the horizon for patients suffering from this condition and leading nephrologists have told us that Acthar represents one of the most intriguing treatments now being studied.

I would like to take a minute to review nephrotic syndrome and why we believe this market represents a potentially attractive opportunity for Questcor. First and foremost, nephrotic syndrome is already an on-label indication for Acthar, meaning that unlike the situation with IS, Questcor does not need to gain further FDA approval before being allowed to promote the use of Acthar in this condition.

Nephrotic syndrome is characterized by the excessive spelling of protein from the kidneys into the urine, which is the key marker resulting from the deterioration of kidney functions, seen in patients with chronic kidney disease. Nephrotic syndrome can result in a host of very serious health issues and if it is not managed effectively, patients often end up on renal dialysis or in some cases, having a kidney transplant.

Based on our extensive interactions with leading nephrologists, we are in the process of funding a series of studies to evaluate the therapeutic utility of Acthar in the treatment of nephrotic syndrome. The first study began enrolling patients in March and the second study is expected to begin this quarter. We expect at least one more trial in nephrotic syndrome to begin during 2009.

It is important to note, however, that we are also beginning to look beyond IS, MS flares, and nephrotic syndrome. We believe Acthar may have therapeutic potential in additional medical conditions as well. Working with a number of key medical researchers in the US and Europe, we are in the process of developing a better understanding of Acthar's mechanisms and actions. In other words, we want to better understand exactly how it is that Acthar works so well in these tough-to-treat diseases. By doing so, we may be able to also identify other conditions, where Acthar could play an important therapeutic role.

By investing resources now in new medical research to further identify and validate the true breadth of Acthar's therapeutic potential, we are seeking to lay the foundation for growth for years to come.

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

Gary Sawka

Thanks, Steve. Net income applicable to common shareholders for the first quarter was $23.3 million or $0.11 per diluted common share and our gross margin was 94% for the quarter. Our income tax expense for the first quarter was $4.6 million with an effective tax rate of 37.4% versus approximately 41% for the first quarter of 2008.

Moving to the cash flow statement, we generated over $12 million in cash from operations during the first quarter. Returning value to our shareholders, we used approximately $6.8 million to repurchase 1.3 million shares of common stock under our $7 million common share repurchase program at an average purchase price of $5.04 per share. Today, we have a total of 2.2 million shares remaining under our open-market repurchase program.

At March 31, 2009, we had approximately 55 million common shares outstanding and cash, cash equivalents, and short-term investments of approximately $51 million.

With that, I would like to turn it back to Dave to discuss our outlook for 2009.

Dave Medeiros

Thanks, Gary. We continue to execute our plan to expand the number of patients able to benefit from Acthar. We continue to deliver solid financial performance and we are laying the foundation for growth into the future through our expanded sales force, expanded research support for studying Acthar in nephrotic syndrome and operational efficiency.

Moving forward, we expect sales of Acthar for MS to increase incrementally beginning in the second quarter and continuing into the third and fourth quarters, when our newer sales reps are fully productive and our marketing programs gain traction. We expect to see results from the first of the nephrotic syndrome trials in early 2010 and we will report our progress on the sNDA filing for IS as developments merit.

We will continue to invest in important medical research in 2009 through the funding of at least 12 new clinical and preclinical studies using Acthar to treat IS, MS, nephrotic syndrome, and other on-label disease areas with significant, unmet medical needs. We continue to expect gross margins to be between 92% and 94%, and as we announced on our year end call in late February, in order to accomplish our aggressive growth plan, we expect to significantly increase operating expenses during 2009. The details of this guidance are provided in today's and February's press releases.

Finally, we are solidly cash flow positive and we are using about half of this free cash flow to buy back our stock in open market purchases.

With that, I would like to turn the call back to the operator and we are ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from the line of John Newman with Oppenheimer. Please go ahead.

John Newman – Oppenheimer

Hi, guys. Thanks for taking the question. First one, could you talk a little bit about your plans for stock buyback in 2009 and then I just have one follow-up.

Don Bailey

Sure, John. As we have been saying for the better part of the year, our plan is to split our free cash flow and use about half of it to buy back stock and half of it we are going to keep for opportunistic reasons. We don't need any cash to fund our current growth plan, but one never knows what is out there.

John Newman – Oppenheimer

Great.

Don Bailey

I'm going to check that – continue going forward.

John Newman – Oppenheimer

Great. Thank you. And then as a follow-up, hypothetically speaking, if a (inaudible) approved say sometime this year, could you talk a little bit about your potential marketing approach, assuming that you do get approval in IS, but that it may not come until say, the fourth quarter.

Steve Cartt

Well, John, this is Steve. I will try to spare Don's voice a little bit here and answer this one. Yes, so we are in full swing as far as planning for launch of our new IS indication and obviously we can't engage in any promotional efforts until the FDA gives their blessing on the indication, which we hope will be sometime this year. But obviously, it's fully in their accord at this point. We don't really know the timing on when a approval might take place, it could be later this year, it could be further off in the distance, we just don't know; and we are really planning for our launch, our view is that Acthar is the most effective drug and this is backed up by AAN and CNS guidelines, we have been published out there for quite a while. And nothing has changed in that regard so we are really – we believe we are operating from a position of strength and we have the best drug and the most favorable data and we are really approaching the market from that standpoint. But in the meantime, we are getting ready for a launch and hopefully it will take place later this year.

John Newman – Oppenheimer

Great, thank you.

Operator

Thank you. Our next question comes from the line of Yale Gen with Maxim Group. Please go ahead.

Yale Gen – Maxim Group

Thanks for taking the questions. First question is that this quarter you shipped about 1429 vials and could you give us some breakdown in terms of between that of IS and the MS as well as what will be the sequential comparison quarter over quarter compared to the fourth quarter of 2008?

Don Bailey

Well, as we said in the past, we don't have any specific data on 100% of our demand and the demand doesn't always match exactly the shipping. So we don't ship to sell a specific prescription. We ship to sell demand from pharmacies. So that being said, we have to give you approximations. So approximately three quarters of the prescriptions that we know about in the quarter were for infantile spasms and approximately 20% were for MS and the rest were for (inaudible) and a couple of them for nephrotic syndrome. So that is all we have for Q1.

For Q4, IS was about the same, MS was about the same. What was a little different is resells for MS were down a little bit in the first quarter versus the fourth quarter. And we don't have any really good insight into resells, as to why they would be up or down in any quarter and we only get data for about a third of the resells.

Yale Gen – Maxim Group

Okay, great. Thanks and just another follow-up. I know it is only about a month as your sales force will be so launched for their effort. So far, what is your initial assessment in terms of their performance – was that as anticipated, better than anticipated, or maybe there is more effort to be put into it.

Steve Cartt

Yes, Yale, this is Steve. We are so early in the effort, they just got off the ground about a little over three weeks ago and began making calls and part of the process is getting in and meeting with staff and getting appointments set up with the doctors. So it is still very early in that process and they're beginning to make some calls on physicians now. But the response from – we are calling on a much expanded group of physicians than we were previously with our 15 rep sales force. So the response from the new doctors we are calling on has been very positive and we are not seeing any red flags right now in terms of any problematic areas in what we are doing and we're just getting off the ground with our marketing efforts, which are supplementing what the sales force is doing. So it is going to take some time and we expect the next couple of quarters we will begin to see real benefit from these calls, but so far, the response from the target physicians we are calling on has been very positive and insurance coverage remains favorable in MS so we're hopeful that this is going to be a very fruitful effort.

Don Bailey

We will give you a little bit of a tidbit. April so far is the best month we have had. So as outstretched months, but it is rather early and the other thing is that the percentage of referrals that are getting approved has been gradually improving as we get more experience in dealing with insurance companies.

Yale Gen – Maxim Group

Okay, so that is for both the IS as well as for the MS?

Don Bailey

No, this is just MS. IS is in the normal range. But we are not promoting there, so we don't really have any control over what prescriptions flow in. Our remarks are just with respect to MS.

Yale Gen – Maxim Group

Okay, great. But just to clarify that, when you set April is a good month, is that generally just the seasonality of that or that just happened to be just improving?

Don Bailey

Well, for MS, we don't have any data on seasonality. But typically, the winter months a little lower than summer months, nobody knows why though.

Yale Gen – Maxim Group

Okay great, thanks. I'll get back into the queue.

Operator

Thank you. (Operator instructions) And at this time, I'm showing no questions in the queue.

Don Bailey

Well, thank you everybody for attending and we look forward to speaking with you next quarter. Are you going to give some replay information?

Operator

Yes, sir. Ladies and gentlemen, this concludes the Questcor Pharmaceuticals Q1 2009 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1800-405-2236 followed by passcode 11130428. EVC would like to thank you for your participation. You may now disconnect.

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Source: Questcor Pharmaceuticals, Inc. Q1 2009 Earnings Call Transcript
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