Michael H. Mulroy – EVP, CFO & General Counsel
Questcor Pharmaceuticals, Inc. (QCOR) Goldman Sachs US Emerging/SMID Cap Growth Conference November 14, 2013 11:00 AM ET
Hi everyone! Good morning. Thank you for being here today, third day. So thank you for attending Questcor's presentation this morning. Really quickly we don’t have a break you up session. After this we are going to start over with the presentation from Questcor. Pleasure to introduce Michael Mulroy, CFO of the firm and post presentation, there are few questions beyond that. So Mike.
Michael H. Mulroy
Thank you. That Questcor is on the NASDAQ and we go right into it. Safe Harbor kind of standard encourage you to look at the risk factors in the 10-K our other periodic statement.
Mission statement or defining statement, we are bio pharmaceutical company focused on treatment of patient with very serious diseases pretty core to what we do and the focus is very much on patients. There are some other phrasing in here that’s very important in term of the biopharmaceuticals aspect. There has been a lot of time in resources researching Acthar and other products and the disease stage maybe helpful. These ratio it's typically autoimmune with the inflammatory component.
From an investors perspective we have got several highlight to walk through. So mostly about Questcor is Acthar which is the very unique therapy to grow competitive advantages. It's kind of broad label of 19 approved indications. Many of these are in very large markets. Yet our market penetration remains modest. We are continuing to invest in R&D which has today and we hope to continue diversifying our revenue strength as the different therapy to carry us where we can help patients.
From a financial perspective, we are very profitable. We have strong cash flow, very strong balance sheet and importantly very strong commitment to shareholder value. The next few slides I am going to talk a little bit about the results, both top line and on net income basis. And we will get into kind of what's been driving that and the diversity of the revenue stream across Acthar market.
On a quarterly basis over the last three years, we show up roughly 100% CAGR from Q3 of 2010 to our last reporting quarter, we reported net earnings in late October. So you see from a pretty small modest beginning there in 2010, $31.3 million up to our last net sales figure of over $250 million. On annual basis, the bar graph on the left shows the growth from 2009 to the trailing 12 months through 930 again strong growth and the pie chart is kind of where we are today for the diversity of Acthar net sales.
These are internal estimates. We don’t have perfect visibility on usage. But nephrology or nephrotic syndrome and I will talk about the indications specifically later, is roughly third of the business that’s our largest market today. MS flairs about 25% to 30, our Rheumatology which is quite new for CAGR is already worth 20% which really got out of the gate quickly.
Very important market for CAGR from a patient focus perspective Infantile Spasms we remain dedicated to that market which is running about 10% on net sales. We do not generate much in terms of kind of other indications. Most of that is specific these date called opsoclonus-myoclonus but not on the label. We don’t promote for that.
This slide takes a cut at the diversity of net sales for Acthar historically. So it's very interesting to look at from 2009 to last 12 months. In 2009, we obviously had the Infantile Spasms market. The drugs have been used for that for decades. But we had already grown the MS flair business somewhat and that’s the red bar on the table. But you see that bar growing over the years and then layering on new therapy to carrier so the blue bar which really kicked off in 2011 is nephrotic syndrome. We see the growth there and then more recently, we see Rheumatology coming into the mix. Rheumatology we will talk about this in a bit but Rheumatology is a several indications in the Rheumatology space. I would envision if we continue to see great growth there and seeing – in the not so different future, we see it breaking out the sub component of Rheumatology in our presentation. We will talk about that in a little bit.
On the bottom line, much of them are same. We are very profitable in the growth that 80% CAGR on a both really and net income basis GAAP and non-GAAP. There is a reconciliation table on the back for the non-GAAP measures and this whole presentation is posted to our website as well.
The EPS growth rate on the next slide here is consistent obviously but slightly higher. We have returned a lot of cash to shareholders primarily through share repurchase which would explain the slightly higher CAGR on the EPS line that we also more recently implemented a dividend and we recently increased the dividend to $0.30 a share quarterly.
The most recent results which we announced again in late October show very strong growth. So the net sales line up 68% to again $236 million. The EPS figures came in robust as well. The non-GAAP number of $68 up 73% over year-over-year. And then few notes kind of balance sheet the cash flow statement, very strong balance sheet. The $281 million does include $75 million of restrictive cash which is pledged basically to fund future payments to Novartis for our recent acquisition of Synacthen.
Cash flow strong over $100 million in the quarter. You see the shares outstanding to $62. So we will talk a bit about the product in the markets shifting gears here. Again, broad label with 19 approved indications, the key therapeutic areas nephrotic syndrome that is short hand for the company that the label is actually for protein area from nephrotic syndrome of the idiopathic type quite technical phrase we just shortened that for ease of reference, but there is a reference to this specific label there. MS Flairs importantly we are not on label to treat MS. We don’t compete with the MS companies. It's really when a patient suffers a flair from their MS or relapse or exacerbation would be another term.
Infantile Spasms we actually added to the label in 2010 following a lengthy process with FDA. And then Rheumatology indications which we will get in to in a little bit but these include Rheumatoid arthritis, lupus, as well as the disease that we were more focused on initially Dermatomyositis/Polymyositis which are neuromuscular conditions.
Each of these areas we believe are significant areas of unmet need with large growth potentials. Other than IS, IS we have been added long enough that we fairly penetrated there. Strategy is simple. We seek to expand awareness about the appropriate use of Acthar and the key specialties and our latest commercial endeavors in Rheumatology. We seem to launch another which we will talk about in a little bit in pulmonology.
So we will talk a bit about each of these indications together into a little bit more deeply. So nephrotic syndrome is a spilling of protein in the urine, it's a malfunctioning of the kidney. It is cause by several underlying conditions. Where there is several underlying types of nephrotic syndrome is the better phrase. The cause of each of these underlying diseases stages are unknown. That’s when the phrasing label idiopathic unknown origin but these types of state, disease state can end up in a situation where the patient looking at adrenal disease or dialysis or transplant. There is not a lot of treatments that are out there that are pretty helpful to patients. The pie chart in the left shows the our estimate for the patient population at 35,000.
The MS relapse market is more of an insurance market. These are patients that are suffering from the underlying disease state of MS and they will occasionally flair where their symptoms will suddenly get much worse. We estimate there is about 100,000 of these relapses or flairs per year. Flairs can come in different varieties, different levels of severity ranging from loss of sensation in the extremities to blindness or loss of vision at least during the flair period.
Flairs are serious and they can affect the underlying kind of long term prognosis of the patient. The patient population again more of an insurance number kind of an annual population of 30,000, but in terms of the flairs that we target. Well, actually it's the number of relapses there about 30,000 would be our kind of refractory flair population. I say refractory because the primary course of treatment for flair steroids and we are not out there really competing with steroids. We are out there another alternative treatment.
Infantile Spasms is very devastating form of epilepsy effecting infant, very young children. We have much larger penetration in that market generally recognized as the primary course of treatment there at the golden standard. Rheumatology is a latest kind of driver of growth for Questcor. I mentioned earlier there is several Rheumatology indications and label. They are listed out here. So this DM/PM or Dermatomyositis/Polymyositis, lupus or systemic lupus or erythematosus, RA, Rheumatoid arthritis, Psoriatic arthritis and [Indiscernible].
There is a pie chart here which breaks them out. The big two appear to be RA and Lupus but our initial efforts really are focused on this neuromuscular condition. Pulmonology is an area we’re just beginning to move forward with, we’re on label for the treatment of respiratory manifestation to symptomatic sarcoidosis this is another autoimmune condition with an inflammatory component often manifest itself from the lungs of unknown origin, serious disease it can cause to. We have the label we’re evaluating potential studies to build the body of evidence there.
There is reference as well to another pulmonary condition that we will be doing some clinical work acute respitory distress syndrome notably that is not on label but symptomatic sarcoidosis. The potential addressable market here in symptomatic sarcoidosis we believe is about 20,000.
This is pretty much a summary of the previous slides in terms of addressable market. You will see here that the rheumatology market which again is a composite of several submarkets kind of draws the other markets, we’re very excited about where we may be with our patient in rheumatology spread.
At the beginning of the year we announced the transaction where we acquired Synacthen both in the U.S. and the international aspect of Synacthen there really two separate transactions, in the U.S. it’s really acquiring a development program which we’re commencing usually no work that have been done on Synacthen from a FDA perspective in the past. So we will be moving forward with that development. But importantly we also acquired, will be acquiring it hasn’t closed yet, the international component of the Synacthen is approved and list of countries around the world and we’re very excited about that it’s creating a potential platform for the company to both reinvigorate Synacthen and also to look for other international opportunities perhaps with other compounds but also potential with Acthar. Acthar sales which we walked you earlier entirely U.S. and we can see this building on a platform or we may be able to do something about that. And again it’s further measure of diversification.
The Synacthen deal also bridges nicely when we think about Questcor kind of evolving from a single product company to really myoclonus company on which I’m going to spend the next few slides on and this area of science is one that nothing has been focused on perhaps as much and it should be, we’re very focused on this myoclonus system and how we can help patients to better understanding of it.
The science here is somewhat complicated, I’ll work through as best as I can, but the real point is that drugs like Acthar they are not, they are very different than steroids. So, they are operating myoclonus system which has a number, it was to be your five receptors throughout the body, the second of which if you see MC2R is kind of the steroid or genesis receptor in the adrenal. But its working we believe in these other receptors causing very different reactions within the body and just the steroid or genesis affect.
From getting into the MLA little bit, there are findings out there that Acthar does work differently with the end particle steroid. So whether its increased in AYAS or in certain nephrotic disease states having different affect that I think this reveal paradigm was that may be Acthar was just like steroid I think we’re much moving away from that.
What does this mean, if Acthar is more than a steroid what does this mean. We believe that this Myoclonus and peptides like Acthar they have impact throughout the immune system on diseases with inflammatory components, there may be some direct impact on a saliva level and we also reference the homeostasis with this kind of broad mechanism of action throughout the body we believe that there could be a dozens of medical condition where patients may benefit from Acthar where other myoclonus and peptide such as an Acthar.
So what are we doing about that, we’re focused very much on R&D, we’ve basically been doubling R&D spend over the last couple of years, we’re funding a number of trials both company sponsored and independent physician sponsored studies, the goal of this is both basic science just obtaining a better understanding of Acthar but also looking at safety and efficacy in various disease states.
To summary here of some of the work we’re doing so the studies of the company sponsored trials so idiopathic nephropathy is one of those underlying conditions in the nephrotic syndrome area so that’s on label so that’s the phase IV study. Another phase IV is in lupus and then we have three phase II for indications that are not on label, diabetic nephropathy, amyotrophic lateral sclerosis which is ALS or the various disease and then acute respitory distress syndrome which I mentioned earlier, ARDS you might refer to that.
So AOS study, right now, it’s just a safety study and the goal is really to get a feel for dosing from a safety perspective and really to help us design a pivotal study in AOS. So it’s very early but obviously an exciting opportunity. ARDS is somewhat similar although we’re looking at both safety and efficacy in this phase II study. And it’s pretty large enrollment, we look to enroll over 200 patients across the U.S. But again, similar to the ALS study it’s really designed to drive the child design or a pivotal study.
So we will wrap up here with a couple of slides but looking forward and thinking about it from an investment perspective, Questcor is very committed to creating long term shareholder value we have been or continue to be a steward of Acthar, Synacthen II, we believe demonstrated a great ability to execute, we’ve rolled out these indications quite well. We’ve been doubling our R&D spend as we remain very committed to R&D.
We also have to-date on a couple of deals where we looked at strategically diversify so we acquired one of our suppliers BioVectra in Canada and most recently [Indiscernible]. We’ve also returned significant value to shareholders through both repurchase and the dividend program. Most recently again increasing the dividend to $0.30 per share quarterly.
Looking forward we believe we’ve created a real platform for future growth, penetration remains low, we’re diversifying our therapeutic areas, rheumatology seems very exciting, sarcoidosis on the way, well that’s just a pilot program. We will see how that goes, we often and we’ve done this in the past where we start off very small, the small sales force we went out there almost more about learning the market and generating result. But we’re excited to going in. And we still have other indications on the label, clearing indications in the term area as well as ophthalmology.
And the international opportunity is there for us as well, again, building out a platform to the Synacthen transaction. We’re not limited to the label there and that’s important so some of the indications on that slide, we talked about ALS for example, diabetic nephropathy ARDS and our goal overtime will be to add to the label.
And the business that we built and the strong free cash flow generate enabled us to do all of that and more so we may look at smallest acquisitions in the future and we like to return cash to shareholders as well. Thank you.
Thank you, Michael. So just may be a couple of questions in the interest of time, I think one is, certainly with all the indications that you’re looking at right now and are in right now, can you telegraph for investors sort of where the near term growth comes with Acthar and then may be longer term which might be some growth drivers that may be aren’t fully appreciated at this point.
Michael H. Mulroy
Sure. I would say that MS and NS are still growing, that the growth rates have moderated but the penetration remains low, so we still feel good about those market. In the very near term we expect or hope that the rheumatology will drive growth that it has over the last quarter here. In terms of laying out beyond that our focus right now is on the pulmonary market to sarcoidosis.
And also I know you diversified revenues little bit through the different indications but I think you also in the past alluded that potentially top line revenue diversification beyond Acthar is also potentially something that you’re looking at. What might be a potential timeframe where you might sort of be more open considering transactions of those types where you look at sort of products beyond that or --?
Michael H. Mulroy
That’s a very good question, I don’t if we really identified that, I think it will be more about the opportunity, we’ve had so much opportunity over the past few years with Acthar but the focus has largely been inward. We’ve also been building out the management team and just the general infrastructure of the company. For example, we hired a Senior VP of Business Development. We’ve also been out and this is publicly known we’re looking for another I guess CFO, so I service both CFO and General Counsel, sort of looking to kind of expand the internal bandwidth of the management team. I think, with that we hope to be better situated to take on the challenges of other things. In terms of like a hard timetable we just have in – I don’t think we think like that, I think it will be just opportunity driven.
Thank you very much, bye.
Michael H. Mulroy
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