Questcor Pharmaceuticals, Inc. (QCOR) Q3 2013 Earnings Conference Call October 29, 2013 4:30 PM ET
Doug Sherk - Investor Relations
Don Bailey - President and Chief Executive Officer
Steve Cartt - Chief Operating Officer
David Young - Chief Scientific Officer
Mike Mulroy - Senior Vice President and Chief Financial Officer
Eldon Mayer - Senior Vice President, Commercial Operations
Steve Byrne - Bank of America Merrill Lynch
David Amsellem - Piper Jaffray
Mario Corso - Mizuho USA
Gary Nachman - Goldman Sachs
Tim Chiang - CRT Capital
Biren Amin - Jefferies
James Molloy - Janney
Good day, ladies and gentlemen and welcome to the Questcor Pharmaceuticals Q3 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference, Doug Sherk. You may begin.
Thank you, operator, and good afternoon everyone. Thank you for joining us today for Questcor Pharmaceuticals’ conference call to discuss the third quarter 2013 financial results. This afternoon after the market closed, Questcor issued its earnings release which is posted on the company’s website at www.questcor.com. Today’s call is also being broadcast live via webcast, which is available at the Questcor website. A slide presentation will accompany today’s remarks by management. To access both the webcast and the presentation slides, go to the Questcor website, click the Investor Relations link and then click on Events & Presentations.
For those of you listening to today’s call via telephone, you can review the accompanying presentation slides on the webcast, as I have just reviewed. Just make sure you choose the “no audio/slides only” option. There will be 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 today’s call.
Before we get started, we’d like to remind you that during the course of this conference call the company will make projections and 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-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors include Questcor’s reliance on Acthar for substantially all of its net sales and profits, its ability to receive strong levels of reimbursement from third-party payers and risks associated with Questcor’s R&D program.
The company will also make statements relating to non-GAAP financial measures, including non-GAAP earnings per share. Investors should refer to the Regulation G non-GAAP reconciliation table included as part of the company’s earnings release today. The company will also make comments about the level of net sales in the therapeutic areas in which Acthar reviews and treats patients. Please note that the commentary regarding this subject is also based on general company estimates and these estimates could turn out to be incorrect. During the question-and-answer session today, please keep your questions to two and then re-queue for any additional questions.
We would like to also let you know that Questcor has been verbally informed by the U.S. Attorney’s office in Philadelphia that the USAO for the Southern District of New York and Los Angeles office of the Securities and Exchange Commission are also participating in the ongoing investigation by the USAO in Philadelphia. Questcor is cooperating with these groups and understand that this type of development is not uncommon in investigations like these. Questcor’s Form 10Q is scheduled to be filed tomorrow; we will also disclose this development. Finally consistent with Questcor’s previously announced policy the company will not respond questions about its trading window, stock repurchase blackout policy, potential or pending government investigations or merger and acquisitions matters. With that I will turn the call over to Don Bailey, President and Chief Executive Officer of Questcor.
Thanks guys. Good afternoon everyone. With me today are Steve Cartt, our Chief Operating Officer, Dr. David Young our Chief Scientific Officer and Mike Mulroy our Chief Financial Officer and General Counsel. They will each make prepared remarks then I’ve some important remarks about our future and then we will take your questions.
Our revenue continues to expand with Acthar indications of Acthar indications that we currently promote in participating in the year-over-year growth. In particular our increased focus on educating rheumatologist about Acthar and it's availability for treating patients suffering from dermatomyositis, polymyositis and certain other rheumatology indications for which Acthar is FDA approved continues to produce results. In the third quarter our strong performance was primarily driven from rheumatology with assistance from nephrotic syndrome as well as record paid prescriptions in MS.
During the quarter we shipped 8132 vials of Acthar up 45% compared to 5595 vials in the year ago quarter. Our commercial team delivered another quarter of strong execution which resulted in third quarter net sales of 236.3 million up 68% from a 140.3 million in the third quarter of 2012.
Revenue consisted of Acthar sales of 227.3 million and BioVectra sales of 9 million. In a few minutes Steve will provide more detail on our commercial results and activities including progress on our new pilot commercialization effort respiratory manifestations of symptomatic sarcoidosis, a potentially serious difficult to treat disorder already on the FDA approved package inset for Acthar.
The overall increased demand for Acthar has encouraged us to further increase our R&D investments as represented by more than doubling of R&D spending year-over-year. We continue to actively support the evaluation of Acthar when other serious difficult to treat autoimmune and inflammatory disorders currently on the Acthar label as well as in potential new indications. Last week we announced client [ph] to commence this year another new company sponsored Phase II study which will explore the efficacy in safety of Acthar for acute respiratory distress syndrome or ARDS. An acute life threatening lung condition having an estimated mortality rate of 25% to over 40%.
The first Phase II study we initiated this year is designed to investigate the safety and tolerability of Acthar in the treatment of amyotrophic lateral sclerosis or ALS. ALS is often referred to as Lou Gehrig's disease and is a progressive degenerative disease affecting motor neurons.
In addition a significant focus of our R&D effort is also on developing a deeper understanding of melanocortin biology which could significantly influence our long term R&D strategy for both Acthar and Synacthen our newest compound that we licensed in June.
Later on the call David will review the clinical studies for ALS and ARDS the potential role of Acthar in the treatment of these diseases and our additional progress on the scientific front. Now let me turn the call over to the rest of the team to provide more detail on our results and activities. I’ll get back on the call at the end to provide an update on our outlook. Steve?
Thanks Don and good afternoon everyone. I will be reviewing the third quarter results for our key markets of nephrology, MS relapse, rheumatology and infantile spasms. I will also comment briefly at our early international activities. Prescription trends in the third quarter reflect continued strong demand and favorable insurance coverage for Acthar across all of our markets. There were nearly 2,500 new paid prescriptions for Acthar during the quarter about a 30% increase from the year ago third quarter.
In our newest market, rheumatology, we are continuing to experience strong early uptake of Acthar in the on-label indications, dermatomyositis, polymyositis, rheumatoid arthritis and lupus. There were a total 450 to 460 new paid Acthar prescriptions for these FDA approved rheumatology indications during the third quarter, up about 43% from the second quarter. Our rheumatology effort only began in earnest about eight months ago, yet rheumatology already represents nearly a quarter of our Acthar business. Despite it being only our second full quarter of rheumatology promotion, we estimate that net sales from rheumatology reached an annualized run rate of about $200 million during the third quarter. Notably in the third quarter, we saw significantly more paid prescriptions for our other rheumatology indications, in particular, lupus and rheumatoid arthritis and prescriptions for DMPM.
We believe this illustrates the fact that there are many rheumatologists who recognize the need for additional treatment alternatives in patients suffering from these often debilitating auto immune diseases. We believe that this early stronger than expected prescribing in lupus and rheumatoid arthritis bodes well for Acthar as long-term potential in rheumatology. So far based on internal analysis of a small percentage of prescriptions, we are seeing an average of about 5 vials per prescription in rheumatology. These vials are usually dispensed to patients over a three-month period or so, but in some cases rheumatologists appear to be maintaining patients on Acthar for longer than this. We are working to better understand the vial usage patterns in the Acthar rheumatology indications. And given that the market is so new for us, we expect to understand vial usage patterns much better over the next several quarters than we do now. Importantly, like in our other approved indications, insurance coverage for Acthar in our rheumatology related indications have been favorable. Overall, we are very encouraged by our early performance in this important new market and believe Acthar prescribing by rheumatologists will continue to increase.
Moving on to our nephrology business, there were 370 to 380 new paid prescriptions for NS in the quarter, up about 7% year-over-year. We believe this growth was due to nephrologists recognizing the need for additional treatment options in nephrotic syndrome patients, particularly those who have already tried first-line therapy or even second or third-line therapy and are in need of another FDA approved treatment alternative. We believe that the average patient with nephrotic syndrome uses around 7 to 8 vials for their course of therapy. Nephrology is presently our largest market and NS prescriptions currently account for around a third of Acthar net sales. As a reminder, nephrotic syndrome that is not well-controlled can also lead to end-stage renal disease, which requires lifelong renal dialysis for a kidney transplant.
Turning to our neurology business, we are particularly encouraged with the record level of Acthar prescriptions for the treatment of MS relapses despite this being a relatively mature market for us. During the third quarter, there were 1370 to 1400 new paid prescriptions for MS, up about 4% year-over-year. On average, we believe that there are about 1.5 vials dispensed per Acthar prescription for MS relapse. MS prescriptions currently represent over a quarter of our Acthar business. I will now turn to infantile spasms.
New paid prescriptions for IS were also up in the third quarter reaching a total of 225 to 230, an increase of 33% year-over-year. Now, it’s important to note that we have significant quarter-to-quarter variability in paid IS prescriptions due to fluctuations in the incidence of this very rare and devastating disorder. As a reminder, a typical course of therapy for IS is roughly 3.5 to 4.5 vials over the course of two to four weeks. We continue to be fully committed to providing rapid access to Acthar for this vulnerable patient population and also to support a continued research and educational efforts related to IS patient care. Slide six illustrates the continued diversification of our Acthar business across multiple therapeutic areas. As we have discussed previously our next commercialization effort for Acthar will focus on the field of pulmonology which involves the study and treatment of lung disease. The National Sales Director for a pilot pulmonology field force is now in place and has recently began hiring personnel for our initial pilot sales force. We will be educating pulmonologist about Acthar and it's availability for the treatment of respiratory manifestations of symptomatic sarcoidosis and is often an inflammatory disease with high unmet medical need for which Acthar is FDA approved. We expect to see in higher and trained the full pilot sales team of 5 to 10 sales representatives who begin delivering initial Acthar sales calls to pulmonologist for the end of the fourth quarter.
Before I provide an update on our international efforts in Synacthen I want to take just a minute to provide a brief overview of the available Acthar patient support programs which are very important for those patients who are in need of help in affording the Acthar treatment as their doctor has prescribed for them. Due to socioeconomic status or the lack of insurance coverage.
As a company we have always believed that Acthar should be available to as many patients who needed as possible regardless of insurance coverage, socioeconomic status or ability to pay. Given this we support a patient assistance program administered by the National Organization for Rare Disorders which provides free Acthar for qualified patients who are either uninsured or underinsured.
In addition we provide free Acthar to children’s hospitals so that babies with infantile spasms can have immediate access to Acthar for the emergency treatment of this devastating neurological disorder. We also provide support to the chronic disease fund which is a charity organization providing co-pay assistance through eligible patients in need of financial help for their insurance co-payments. These programs are used by many types of patients, an MS patient partially blind due to an ongoing relapse, a polymyositis who can no longer work or even walk as a result of their worsening disease, a patient with advanced kidney disease who has failed standard treatments and now might progress to dialysis and the reduced life expectancy and quality of life that comes with it or a baby with IS who is young, both parents want their child to have the best chance possible for a normal life.
These are just examples of real world patient stories that we hear about every day and to illustrate the kind of patients who are in need that benefit from the assistance programs that we support. Regardless of the patient these separate and distinct programs have each come into being overtime in response to the series needs of the various patient communities that we’re privileged to serve.
Turning now to our international activities, we’re in the process of transferring critical data information from Novartis and have begun initiating contact with some of the current Synacthen distributors. We have also recently hired a general manager to lead our international business which will be based in Ireland. Our new general manager is actively recruiting staff who will coordinate the transfer of dozens of Synacthen marketing authorizations around the world starting in the second quarter of next year. And we will also begin discussions with potential partners who can handle Synacthen distribution.
Like Acthar was when we first acquired in 2001, Synacthen has been a severely neglected product for many, many years and we look forward to both reenergizing it outside the U.S. and hopefully someday may see it available to American patients for the first time. I will now turn the call over to Dr. David Young, our Chief Scientific Officer who will bring you up-to-date on our scientific efforts and company sponsored clinical programs. David?
Thanks Steve. Good afternoon everybody. I’m pleased to provide you with an update on our R&D efforts. Overall activity continues to grow in our R&D programs through company sponsored and investigative and initiated studies. As we have done on prior calls I’ll focus my comments largely on our company sponsored research programs. As a reminder the purpose of the company’s sponsored research has been and will be, one, to better understand the difference and potential therapeutic benefit of various melanocortin peptides; two, to better understand the benefit of Acthar on devastating medical conditions for which patients need another treatment option; three, to build on the body of evidence surrounding the efficacy and safety of Acthar for on-label indications; and four, to develop the evidence to demonstrate the clinical benefit of Acthar and Synacthen in new indications.
Our melanocortin peptide non-clinical research efforts continue to grow and the results have provided us with a better understanding of Acthar’s potential role in the treatment of our neurology, nephrology, rheumatology and more recently, pulmonary indications. We have investigated the effect of Acthar on immune cells and have found effects different than that seen with steroids and synthetic melanocortin peptides. In studies looking at Acthar’s direct effect on cells, we have again found that Acthar can act differently than steroids or synthetic melanocortin peptides. This non-clinical research continues to add to the body of evidence that Acthar is unique and different than steroids or Synacthen.
Let me update you on our company-sponsored clinical studies related to the on-label Acthar indication. Our idiopathic membranous nephropathy Phase 4 study is ongoing. As a reminder, this is a randomized placebo-controlled trial enrolling treatment-refractory patients, which we define as patients non-responsive to other therapy or as having relapsed after partial remission on other therapy. We recently altered the study protocol to expand the pool of patients qualified for this study. Our most significant changes were modifications in the inclusion exclusion criteria. For example, we now allow progressive membranous nephropathy patients to enroll in the trial. With the modification of these criteria, most sites suspended screening for a couple of months to obtain new IRB approval. As each site has received IRB approval, we have made an assertive effort to reengage the investigators and research coordinators.
As a result of the protocol change, we are experiencing an increase in patients being screened for activated site, which we hope will lead to the increase in the enrollment rate. At this time, about 25% of the patients have been randomizing the study. While we are working towards picking up the pace on enrollment, the study will most likely extend into 2015. We also have a Phase 4 randomized placebo-controlled trial underway looking at persistently active systemic lupus erythematosus, or SLE. This study was initiated in the fourth quarter of last year. Although conventional treatment for SLE usually includes corticosteroids and other treatments, there is a need for alternative therapeutic options, particularly in those lupus patients who are unable to control their symptoms. We now have almost all of our sites up and running and enrollments picking up with about a third of the patients now randomized. We still expect to have top line data in 2014, and the study should complete in 2015. Besides these two Phase 4 randomized controlled trials, we are evaluating our other on-label indications to determine if and when additional on-label trial should be conducted. Based on our knowledge of Acthar’s biological activity, we are also evaluating through company-sponsored IND trials, Acthar’s efficacy and safety and other indications not currently on label.
Our diabetic nephropathy Phase 2 proof-of-concept study, which is a randomized placebo-controlled trial, continues to actively screen and enroll patients. Just over half of the 40 planned patients are now enrolled with three new sites getting activated we expect to complete enrollment by the first half of 2014.
Let me now address our newest IND studies both of which became active this year and Don mentioned earlier. Our first two, excuse me, our Phase 2 study of Acthar in patients with ALS or Lou Gehrig's disease is actively enrolling patients. This is a randomized open-label eight-week safety tolerability study that will help us assess appropriate dosing and endpoints for future study. Patients who successfully conclude the initial eight-week trial will then have the option to participate in a 28-week open-label extension with a three-week taper and one-week follow-up period. We are pleased to report that more than half of the study sites have been initiated and patients are actively being screened and randomized. It’s still too early to project when we might have the study fully enrolled and ultimately completed. As a reminder, the study will seek to enroll up to 40 patients. And although it is too early to value the safety of Acthar in ALS patients, some ALS patients have been receiving Acthar for a number of weeks.
Our newest IND study which we announced last week is an acute respiratory distress syndrome or ARDS. To give you a little background on ARDS within one of those conditions that often manifests itself in patients that are already hospitalized or under conditions. As it may be directly or indirectly exposed to respiratory of infection or suffered a trauma or had a reaction to a infusion. ARDS is a devastating condition because of it's high mortality risk. It can come on quickly and aggressively and in a moderate to severe cases, a lack of oxygen in the blood can lead to organ failure and death in 25% to over 40% of patients. Patients with ARDS are typically in the intensive care unit of the hospital which indicates the seriousness of the condition and also create some challenges for conducting a trial.
Based in our knowledge of Acthar’s (indiscernible) for pharmacology and indirect steroid pharmacology if you use cortisol. We believe Acthar may be beneficial in ARDS patients. We have potential anti-inflammatory and immunomodulatory properties that can reduce lung inflammation and injury they ARDS is a compelling area to investigate further.
The present treatment for ARDS is mechanical ventilation and supported care. Since there are no drugs in preventive therapies available to directly treat ARDS. Essentially patients are on a ventilator support with a hope that treatment for their other conditions was also helped resolve their lung problems. We’re now beginning to identify and test sites for the study.
The study will seek to enroll upto 210 patients in a four week randomized placebo controlled efficacy and safety trial and patients with moderate to severe ARDS. In studies design to look at several dosing regimens of Acthar with a (indiscernible) being the number of ventilator free days during the 28 day treatment period.
Cases will be followed for a total of 60 days post randomization. Secondary endpoints include whether Acthar therapy diminishes mortality, organ failure, the length of hospital stay or the length of the ICU stay.
As for Synacthen our other melanocortin and peptide product planning activities related to an issuance of valuation or select group of potential Synacthen indications are in progress. As we have stated before we have been investigating the basic pharmacology of the synthetic peptide Synacthen of at least two years. Since licensing Synacthen however we have begun to expand our non-clinical research in order to understand it's pharmacology relative to the potential Synacthen indications we’re considering. The level of non-clinical and clinical research underway continues to expand as we systematically build the body of evidence for Acthar and gain the deeper understanding of melanocortin biology. We look forward to keeping you posted on the progress of these programs and share new programs.
Now Mike Mulroy our CFO will discuss our financial highlights. Mike?
Thanks David. Good afternoon everyone. Please note that I will reference various non-GAAP financial measures in my remarks. Our earnings release that went out just after the market closed today we provided a reconciliation table and that table is also provided in the slides the company in this call. Investors are encouraged to refer to the table. Total net sales for the third quarter were 236.3 million up 68% from 140.3 million in the third quarter of ’12. The increase was driven by the expanded use of Acthar in multiple therapeutic areas as Steve previously discussed.
BioVectra, our specialty manufacturing subsidiary that we acquired in January had net sales of 9 million in the third quarter of 2013. We continue to see growth in OpEx with the third quarter reflecting the addition of the newly expanded rheumatology field force a substantial increase in R&D investment and the inclusion of BioVectra's operating expenses.
R&D investments in the third quarter more than doubled to 17.1 million as compared to the 8 million for the year ago period. We expect to continue to grow our R&D efforts and other important programs and expect to see OpEx grow by 5 million to 10 million in the fourth quarter over the level in the third quarter. For the third quarter, operating income was at 142.1 million compared to 83.4 million for the third quarter of '12 resulting in an operating margins of 60%.
Turning at the bottom-line, GAAP earnings per share for the quarter were $1.52 diluted based on 62.1 million diluted shares outstanding, up from $0.91 in the year ago period. Non-GAAP earnings per share for the quarter were $1.68 diluted up from $0.97 in the year ago period. While we have made important investments in 2013 in both BioVectra and Synacthen, our balance sheet remained strong. We have post-closing payment obligations in both transactions, but expect to fund these obligations out of working capital.
At October 25, we have $324 million in cash, which included $75 million in restricted cash. We also continue to generate cash. Operating cash flow during the third quarter was $108.9 million driven primarily by net income of $94.4 million in the quarter. Return on equity was 116.8% in the third quarter. We do not repurchase any shares in the quarter. Questcor issued its third quarter cash dividend of $0.30 per share to all shareholders of record at the close of business on October 22. That dividend is scheduled to be paid out tomorrow.
Now, I will turn the call back to Don for summary and some comments on our future prospects. Don?
Thanks Mike. So to summarize, our expanded commercial effort drove another strong quarterly performance as we continue to experience positive momentum in the business. Before opening up the call to Q&A, I’d like to take a few minutes to put Questcor’s future prospects in the perspective.
As Slide 14 shows, Acthar sales have grown dramatically in fact over seven times in the last three years while maintaining solid operating margins, a superb achievement for any business.
Turning to Slide 15, Acthar sales have grown dramatically as you can see in this diagram. This shows the net progression of Acthar sales by quarter over the last three years. While past performance is no guarantee of future results, in many ways we are more excited about our future prospects than these past achievements. Let me explain why by putting our current situation and opportunities and perspectives. These remarks fall within the balance of forward-looking statements and should be considered along with the risk discussed in our SEC filings. Questcor’s opportunity for future growth will be driven by four areas: one, increasing Acthar U.S. sales for inpatients currently on the label; two, new areas of U.S. sales from Acthar and Synacthen; three, globalization of Synacthen and then Acthar; and four, the appropriate deployment of the growing levels of cash that we believe will be generated from these activities.
Now, I will give a little more detail on each of these four shareholder value growth opportunities. First, Acthar sales are approaching $1 billion on an annual basis. Current sales are being generated from the use of Acthar to treat six approved medical conditions, nephritic syndrome, MS flares, dermatomyositis, polymyositis, infantile spasms, rheumatoid arthritis and lupus. With the exception of IS, we believe our penetration of our estimated addressable market for Acthar in each of these areas is less than 20% and well less than that in some of the newer areas. By comparison, market penetration for IS is likely over 40%.
Further, we believe that Acthar has the potential to help patients and other on-label indications in pulmonology, ophthalmology and dermatology. So just looking at the U.S. market for the current on-label indication, we are excited about the prospect of achieving further sales growth of Acthar. Second, recently we announced our plan to start another Phase 2 trial meaning that we now have Phase 2 trials and acute respiratory distress syndrome, ALS and diabetic nephropathy. If any of our current Phase 2 trials are successful, there is the potential to pursue a development program with the objective of adding yet another commercially attractive indication for the current Acthar label and help even more patients suffering from devastating medical conditions. These trials are just a portion of our overall effort to build the body of evidence regarding Acthar’s efficacy and safety as well as deepen our knowledge of the biology of the melanocortin system. In addition we are also now in the early stages of developing Synacthen for the U.S. market. Third, our plans are also now underway to develop ex-U.S. markets that is to globalize both Synacthen and Acthar.
We will start with Synacthen for which we currently expect to have marketing rights in over 40 countries. Once we have concluded the transition of Synacthen international markets from Novartis to cost for our control, we will work to reenergize the Synacthen business. In a few years, we will begin to explore the possibility of getting Acthar approved in other countries, possibly using infantile spasms as the lead indication. This globalization could be another growth engine for sales and hence shareholder value.
Fourth, the business is generating a substantial amount of cash and if we continue to be successful, this cash generation will increase. We currently intend to return a portion of that cash to shareholders via dividends and share buyback and we'll consider using some portion of the balance of the cash to grow shareholder value through acquisitions or partnering on other promising drugs.
While we continue to confront risks and uncertainties including those discussed in our SEC filings, the prospects for Questcor from expanding our commercial effort in the U.S. the possible addition of indications to the Acthar label, the possible approval of Synacthen in the U.S. globalization of Synacthen and then Acthar and using our cash to add more products to our portfolio is very exciting to all of us here at the company.
Operator we can now open up the call for questions.
(Operator Instructions). Our first question comes from the line of Steve Byrne of Bank of America. Your line is now open.
Steve Byrne - Bank of America Merrill Lynch
I wanted to drill into some of the fundamentals of your business by indication. With respect to the strong sales in MS, do you think that that's again a kind of a seasonal uptick that maybe just kind of the reverse of what was observed last summer and therefore could be a decline in the next quarter?
Okay. I will take this is Don. I'm not sure what happened to Steve. So we can never be assure, we think that we have seen some seasonality in MS but we believe we are making progress with physicians who are prescribing MS, maybe prescribing little bit more MS and possibly penetrating some new accounts. So, it's always difficult to tell seasonality from the data, Steve. So, we're hopeful that this is a trend that we will continue to grow. Anything is possible.
Steve Byrne - Bank of America Merrill Lynch
And just switching over to the rheumatology indication, you certainly had a surge of new scripts there. What are your thoughts about whether that warrants another tranche of reps or maybe moving some reps out of nephrology? What are you thinking down the road on that?
Okay Steve. So Steve Byrne’s question had to do with the ramp-up rheumatology where we add more reps and so just to set the stage here. We have 62 reps scheduled here in rheumatology and that was an increase from 55 which was an increase from 12 and all that's happened within just about a 12 months period. So I don't think we will be adding anymore in the near term but Steve, maybe you can provide little color on why rheumatology is doing so well?
Yeah that’s, we have been very encouraged by the early uptake there. We think it's really due to the fact that there is a very high unmet need in many of the Acthar rheumatology related indications. DMPM for example is an (indiscernible) condition, but it's also very neglected field of medicine, there is very little research going on, by industry. There are virtually no new treatments being made available or on the horizon. So and we come along with Acthar that provides rheumatologists a new tool to help manage their DMPM patients and RA is a different case, very large rheumatology market, there are roughly 1.3 million patients. But there seems to be in each of these dermatology offices relatively small cohort patients that they tried a lot of different treatment approaches and patients needed an additional treatment options. And so Acthar appears to be a viable option for a lot of those patients as well. We think there could be as many as 60,000 or even more in RA that might be appropriate to small percentage of the population there, but perhaps it’s very, very meaningful. Also have Eldon Mayer here as Senior VP of Commercial Operations. He just came back from the American College of Rheumatology Annual Meeting and he might be able to shed some light on what we are hearing from doctors who are actually using the drug.
Yes. Thanks Steve. Yes, we have been hearing just as a little background, we have been hearing consistently positive overall anecdotal feedback on the clinical experience that rheumatologists have had since we feel that our sales force and we have sales folks educating doctors about all that. And it was nice to hear that firsthand at the ACR meeting. And I had the opportunity to speak with quite a few rheumatologists and the feedback continues to be just that, which is especially encouraging given that typically one of new drug like Acthar comes out and we enter these new markets, the drug is typically used in patients as a lifeline therapy and these are often some of the most difficult-to-treat patients. So I think that underscores the positive message there, the positive experience that we are hearing about good results even in these more typically more difficult-to-treat patients. And we are hearing that over a number of the indications that we have what doctors are using it in the rheumatology market.
Thank you. Our next question comes from the line of David Amsellem of Piper Jaffray. Your line is now open.
David Amsellem - Piper Jaffray
Thanks. I wanted to come back to the comments on your uses of cash and maybe if you could elaborate on what kind of thought you have given to uses of cash for strategic purposes beyond Acthar, what kind of product opportunities, therapeutic opportunities would you potentially look at? And I guess as a follow-up to that given the persistent volatility in the stock, do you as a result of that have a bigger appetite for potentially diversifying transactions? Thanks.
Well, certainly, we are very pleased to have just building body of cash. It seems that the cash from operations is running around 40% of sales. So far it has been in recent time periods. So if it were to continue at that level and sales continue to grow, we would build up over several years, quite a bit of cash. So up to now, we have been returning virtually three quarters of all that cash to shareholders. We still have a pension for giving a good portion of it back to shareholders through dividends and buybacks. But I think there comes a time when we need to take a look at shifting gears a little bit and more at that inflection point now in our opinion. We probably won’t be acquiring anything substantial for a while. We have to kind of get our structures in order internally, but initially we are interested in anything in the melanocortin biology area. There is not a lot of assets out there like that, but we are just covering the world for those and with the interest in any technology in that area. But once we get past that, then I think we would be looking for the natural types of diversifying, M&A activities mainly acquisitions, we’d be looking to in license commercial products or nearly commercial products. That said, the model that we have with Acthar that is difficult to sell specialty drugs in the therapeutic areas, where we already have a sales force. So that would be a natural place to go. But it all depends on what opportunities are out there when we get there. And so that's the initial activity, yes we would be interested in diversifying; we think that's probably relevant at some point of time.
David Amsellem - Piper Jaffray
And just as a quick follow-up Don to that, I mean you alluded to multiple sclerosis as being your most mature, one of your more mature segment. So, given the size and scale of your neurology focused organization I mean is neuro an area where you feel like the sales force really has capacity for another product or two? How do you think about that?
Well, I think that there will come a time where that's the case. I don't know that we're there yet. But if we want to make an acquisition two years from now or a year from now and we need to get started now or in the near future. So, M&As are necessarily something you will see us do during 2014 but possibly the year after that.
And I think all of our therapeutic options; all of our therapeutic areas are potentials and we'll take into account the bandwidth for our commercial team at that point. So, I don't think we can quite answer that question. I think David you're probably right. Neurology is maybe the leading candidate. And there is a lot of assets there, drugs there they maybe potential. But nephrology and rheumatology will also be interesting to us.
Thank you. Our next question comes from line of Mario Corso of Mizuho USA. Your line is now open.
Mario Corso - Mizuho USA
In terms of rheumatology, can you talk a little bit about the different indications there and where there might be faster versus slower growth in terms of and the proportion of between RA, lupus and DMPM and then on sarcoidosis how do you think we should be thinking about this launch? I think there was ahead of the rheumatology launch on the Investor site perhaps some trepidation that it could be a launch that was even as good as nephrology and it's an surpassed all expectation. So, I am wondering if we should be thinking of sarcoidosis in same vein or you think it's going to be a very different trajectory? Thanks very much.
Okay, so let me give some a little bit overview on each of these two questions and then Steve can add some color. So in rheumatology as I think Steve mentioned, our total sales they are roughly at a run rate of about 200 million, so we did about 50 million in the quarter. Half of that was DMPM and the other half was probably close to 2 to 1 RA and lupus.
So maybe roughly $25 million room [ph] and 15 million RA and 10 million lupus you know very, very rough number just to give you an idea. So times four, that says our run rates are 100/50/40 roughly, /60/40 I am doing the math in my head here. So, Steve can provide all the more color about the growth engines there. And as far as sarcoidosis, this is a project that is now underway and we think the market size is similar to the other market sizes of each of these other commissions especially that it's the same about the market size as PMDM. So, Steve you want to add little color on both of those?
Sure, so rheumatology I think Don went through sort of the proportions that we are seeing. Of course we launched this effort in the middle of Q1 with our 55% sales force and the initial plan really was to be out talking to doctors about Acthar in DMPM. What we have been finding now is that while they may be interested in DMPM, in their practice the most typical rheumatologist only has a few of those patients. So they tend to naturally gravitate, when they look at the PI they gravitate more to RA and even lupus and that's were our interest level is because well they may have had a few DMPM patients, those other two are much bigger parts of their practice.
And so they have some of these doctors they try it and try Acthar at a DMPM patients, they may see good results and then immediately start dabbling so to speak and using it for RA and lupus. That’s what we have been saying, that’s probably been the biggest surprise in rheumatology is that we have seen much more early use in RA and lupus that we expected upfront. DMPM has been great, but it’s kind of natural gravitation by the rheumatologists, these other conditions have been a welcome surprise. And we are also hearing a lot of very, very positive feedback in these two conditions, I mean, very encouraging stories about patient successes on the drug. So that bodes well for the future.
As far as sarcoidosis, I think Don laid it out pretty well in that. This is really a pilot effort that’s similar to what we did several years ago in MS and what we did with nephrotic syndrome and even more recently with rheumatology just hiring a small group of sales reps turning them loose for two or three quarters and seeing what level of interest there is. Based on some interviews with pulmonologists, we think there could be some decent interest there, but until the reps are out talking with them regularly and educating them about Acthar, it’s availability for their patients, we won’t know for sure, but we have a pretty good track record. So time will tell and we make sure we keep everybody updated on progress there.
Thank you. Our next question comes from the line of Gary Nachman with Goldman Sachs. Your line is now open.
Gary Nachman - Goldman Sachs
Hi, good afternoon. Another one first on rheumatology, Steve, I guess it’s for you. How much are you expanding the prescriber base here or is it extremely concentrated at this point? So how much of a reach you are getting with the 62 reps and I guess if you get such a great return, I am curious why you wouldn’t want to increase that number?
Yes, Garry. We are probably calling on about 2,000 doctors and getting around and getting into see them at various frequencies, but there is lot of just basic education about the drug going on right now. As far as the concentration of the usage, it’s pretty well spread out. We have very few doctors that are using much more than just a handful or one or two. So the usage right now is very diluted. Most of the use is in doctors writing for first patient or even two patients. There are some very limited exceptions to that, but it’s quite spread out at this point in time.
Gary Nachman - Goldman Sachs
Okay. And then my next question, just what portion of the business comes from government accounts and just if you could describe I guess how that’s been trending over the last few quarters? And with the increased restrictions, I guess that we just saw recently at Tricare as an example, just talk about how you view the risks with respect to that portion of the business? Thanks.
Okay. So just to set the stage here so, it’s a little tricky because of IS. So within IS, Medicaid is probably close to half of our sales and that’s why we don’t see too much Medicaid in the rest of the indications a little bit. Medicare is about a third of the rest of the business roughly and that’s pretty stayed, both of these are fairly stable and Tricare has been just specially in rheumatology just 1% or less than 1%.So Steve, you want to provide any additional color there?
Yes. I think Tricare prescriptions have been a very, very small part of the business. Particularly as Don noted in rheumatology, it’s less than 1%. And our understanding is that the recent news on Tricare was the recommendation of a PNT committee. We don’t know if it’s being adopted or not. We haven’t seen any impact on coverage at this point. And of course, Questcor has observed over time that Acthar coverage is really determined on a case-by-case basis. So that could be the case hear as well regardless of the policy laid out. We will just have to see, again very, very small part of our business but we will continue to monitor the situation.
Thank you. Your next question comes from the line of Tim Chiang of CRT Capital. Your line is now open.
Tim Chiang - CRT Capital
I did just did some basic calculations in terms of the number of vials you guys are shipping per new paid prescription , it seems like it's over 3.2 vials to 3.3 vials. Is this is a trend that you think will continue to steadily increase?
Well, we have noticed it's being going up. And that's probably because MS while it grew in the quarter, it uses less vials and rheumatology which uses more vials grew faster so, that's probably what's causing that overall that number to go up. And we would expect it to go up because we expect rheumatology to continue to grow in all things being equal I mean this is clearly our best guess. A rheumatology will tend to grow where as some of the others are you know maybe more slower growers or as Steve said they can bump along. So we would expect the number of vials maybe on average over total to go up just a little bit. And your number is roughly correct.
Tim Chiang - CRT Capital
And just one follow-up Don I noticed that the MS market continues to grow for you. I mean could you talk a little bit about what's going on there I mean is there anything and there have been any changes since the first quarter?
That's a good question. And as Steve wasn't here when I took a crack at that so let me let Steve provide some color to that question.
Yes. Sure Tim so unfortunately I got kicked off the call so now I am back. So MS is definitely a more mature market for Acthar and so we see periods in markets that are more mature we generally see periods are flatter and some periods resume growth. If you look year-over-year, taking a look at Q3 '13 versus Q3, 2012, things get maybe a little more interesting. Prescription did increase over that period modestly. But if you look at the pattern over the course of the year, they actually declined a bit between the fall of 2012 and on the middle of Q1 where they seem to bottom out. But since that time, they have been growing pretty steadily which is quite encouraging.
Our neurology sales force has been working hard and doing a great job. They have been driving growth throughout the course of the year pretty steadily and we saw a measurable decrease in turnaround times for MS scripts during Q3 as well which is quite helpful. Since MS relapses are an urgent care situation, they are particularly sensitive to turnaround times and getting the drug to patients quickly. So we think there has been a benefit to that as well. So overall, although we thought kind of some an extended period of somewhat flatness in that mass, we think we are back on more of a growth trajectory long-term.
Thank you. Our next question comes from the line of Biren Amin of Jefferies. Your line is now open.
Biren Amin - Jefferies
Don, I guess on neurology, I noticed that you saw a slight sequential decline in prescriptions. Is that something that's seasonal or are there other factors that you would attribute that to? Thanks.
While they did so the history here is that on a shift basis we saw year-over-year increase in nephrology but we saw a sequential decline from Q2. However, we saw an increase in prescriptions written during Q3 over Q2 and since there is a substantial lag that may bode well. Steve you want add any color there?
Sure. So this kind of a pattern isn't unlike many steadily growing products in pharma. As you probably recall we had an exceptional growth period in nephrology during the launch phase in 2011, 2012. And we believe the use of Acthar in nephrotic syndrome will continue to grow but it might not be the type of a very rapid growth curve that we saw during launch. Going forward it might be more modest maybe similar somewhat to what we have seen in MS while occasionally we'll see a down quarter sequentially. Of course with MS we bounce back pretty nicely from that.
So we expect there is a quite a bit of growth potential left for Acthar in nephrology, this is one measure. We estimate there are probably less than 3,000 total patients that have been treated out of estimated maybe 30,000 to 35,000 potential Acthar patients in nephrology. So we think there is still a lot of room to grow. So I wouldn't be too concerned about one down quarter. And to Don’s point, we have seen an uptick already early in Q4 compared to Q3. So one quarter it's interesting, but I don’t think it’s any kind of a signal for the long-term.
Biren Amin - Jefferies
Okay. And maybe if I could get a follow-up, I know you said that you wouldn’t comment on this, but given that your stocks off aftermarket and I am hoping I guess you could provide some color. Do you believe that USO and the New York and the LA office of the SEC are focusing on the same issue as the USAO in Philadelphia?
I will let Mike not comment to this question.
Yes Biren, I am not going to comment on this question. We just – we are going to maintain the policy of not commenting.
And our next question comes from the line of James Molloy of Janney. Your line is now open.
James Molloy - Janney
Hey guys. Thanks for taking my questions. And maybe as the question for Steve, I was going to ask that very question that was just not answered as well. Steve, could you walk through the sort of the sales pitch and the new RA indications, I know in the past, what’s driving, given sort of the issues, the history with the drug and weather there is recent data. Can you walk through the sort of sales pitch that you are seeing your reps have success with it and driving the growth in the RA indications?
So that’s a good question. We don’t know how much data there, but they are typically kind of leading the discussion with DMPM, where we do have a small amount of data on Acthar. Then the discussion kind of it’s naturally branches to the PI and other indications and that’s where doctors get interested, but I have Melvin [ph] here and he just got back from the meeting where he has been speaking with a lot of the doctors and the reps so I will let him comment further.
Well, it depends as Steve said from the experience that not only they are having with Acthar in treating dermatomyositis and polymyositisis, where they are seeing responses where Acthar patients have not been responsive to prior therapies. Additionally, many rheumatologists remember ATTH or Acthar from using it in the past for GALV, although that's not on the current indication. Rheumatologists do often remember that and quickly understand given their pretty strong background in immunology that they are connecting the dots that Acthar apparently has mechanisms that go beyond steroids.
So when they see the other indications as Steve mentioned, such as rheumatoid arthritis and lupus and they know that they have a large need for therapies, where patients have not done well on steroids or are not tolerating steroids although we have no data there yet and we can't – our reps are making any claims there. The doctors are adopting the drug on their own in those indications and getting good responses based on what I mentioned before about what they understand about the mechanism and their prior experiences in DMPM. So also we are able to support those indications with our patient assistance programs and knowing it available that they have a need, that they believe it will work and that we can support those from a reimbursement and distribution perspective. And also there is word is getting out among the rheumatology community. So there was information that are being shared and we are seeing an increase in demand there.
James Molloy - Janney
Thank you. Maybe my follow-up for Mike, any price increases in the quarter we should know about, any stocking current level stocking issues? And then – and lastly, I know you are doing work as CFO, how is the search for new CFO going?
Thanks, Jim. Yes, we did not have a price increase in the quarter. On stocking, based on visibility we have in the channel, we believe we entered the quarter and left the quarter with a normal level of inventory in the channels. So we didn’t see any big movement there in either direction. Regarding the CFO search, I think I hand it over to Don really. I don't know I mean the search is ongoing. I think it's going well but--
Yeah. Search is going fine. We are very happy with our current CFO. So, we are not in any great rush but we’re still at it. So, we want to just wear one hat and so we’re talking to some candidates and the process is moving along.
I'm showing no further questions online. Now I will turn the call back over to management for any further remarks.
Well, thanks everybody for attending the third quarter earnings call. And we look forward to talking you either individually or at the next earnings call. Bye-bye.
Ladies and gentlemen, thank you for attending today's conference. The replay for this conference will be available October 29th at 07:30 PM Eastern Time and end on November 5th at 11:59 PM Eastern Time. You may access this replay by dialing 800-585-8367 or 855-859-2056 or 4040-537-3406. Enter the conference ID of 76004546 to gain access to the replay. This does conclude today's program. You may all disconnect. Have a great day everyone.
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