Don Bailey - CEO
Akiva Felt - Oppenheimer
Questcor Pharmaceuticals, Inc. (QCOR) Oppenheimer 24th Annual Healthcare Conference December 11, 2013 8:20 AM ET
Akiva Felt - Oppenheimer
Welcome to another session here at the Oppenheimer Healthcare Conference. My name is Akiva Felt; I'm the Senior Biopharma Analyst on the team. And I'm very happy to introduce Questcor Pharmaceuticals; this is a company that I covered here at Oppenheimer and who announced some update this morning. So there should be some good presentation materials in discussion today. We have Don Bailey, Chief Executive Officer presenting for Questcor. And so with that, I'll turn it over to Don.
Good morning, everybody. Happy to be here. Bright and early. So we're here to talk about Questcor. First, of course, I have to show you our Safe Harbor statement. Please read all of our statements or all of our risk very carefully, the key ones relate to typically competition and government action but there's others. So please understand those carefully.
Questcor is a company focused on treating people with devastating medical conditions typically people with autoimmune conditions and sometimes they have an inflammatory component. We'll be talking about which ones those are and our key product in this area.
From a overview point of view, Questcor's flagship product Acthar; it seems to have unusual therapeutic value and sustainable competitive advantage we think. So at least it has a unique therapeutic role in some of the conditions. So Acthar is approved for 19 indications, many are in markets with sizable unmet need; we're going to talk about those markets and talk about what we think are the adjustable market sizes for us.
Market penetration, as we'll show, remains rather modest and sales have been increasing very significantly over the last few years. We've been increasing our investment in understanding Acthar more and more and in developing other products and looking at other indications for Acthar.
And finally, Questcor is profitable, cash flow positive and we have been returning a good portion of this cash to shareholders using both buybacks and dividend.
So this chart shows three years of history of quarterly sales and you can see a nice upward trend. We announced today and it shows on chart 11, we'll get to that in a minute and then on chart 18. The fourth quarter is somewhat just, slightly probably just flat to Q3; which is currently still well up over the prior year, might be down a little bit from Q3, so really hard to tell. We're subject to getting large orders, our drug gets ordered in large quantity. So it's sort of just the timing at the end of the year even one way or the other it could move the net sales quite a bit, which is why we really recommend people to look at our results over several quarters.
We've been focused on diversifying the sources of Acthar revenue and as this chart shows we now have significant revenues in rheumatology, which you'll see in just a minute on the next chart is a fairly new area for Acthar. And the biggest source of sales is still nephrology but you can see you get almost equal participation from rheumatology, nephrology, and MS.
This chart shows the progression of sales contribution by therapeutic area. And if you go back in time here you can see in 2010 is really when MS started to kick in and then nephrology came in, in 2012, and now rheumatology is starting to contribute. So we expect rheumatology to grow quite a bit and we'll explain why in a little bit.
Our net income has been increasing along with net sales. Margins have stayed roughly the same during this time period. Here's a five-year of both GAAP and non-GAAP net income; they're pretty much the same. And the non-GAAP net income is a pretty good marker for free cash flow. So if you're looking at what the business is throwing off and available to for other purposes, that's a pretty good marker.
EPS is also tracking right along with net income not surprisingly and you can see that the compounded annualized growth rate there is a little higher for EPS and that's showing the benefit of effective share repurchase program.
Our Q3 was reported quite a while ago, but I put it in presentation for completeness here. You can see sales and earnings were up 67%, 70%, and cash generation in the quarter was about $100 million and at the end of the quarter we just had under $300 million in cash, no debt.
So this chart is talking a little bit about some of the announcements we made this morning and what we're seeing in Q4. So first, we announced the dividend, another dividend. So this is just the same level of dividend we had in the last quarter; we've had two increases in the dividend this year. So we stuck with $0.30 record date in January.
In addition, we announced that we did buyback some shares during the fourth quarter and then also kind of significantly we formed two new committees, really one new committee. We had the Science Committee in an informal way, but we formalized the Science Committee and formed a Strategic Advisory Committee.
We've added couple key board members this year, Angus Russell and Kelly Martin, and I wanted to find a way to let them participate in helping the management team, advising us on how to best position Questcor and use for cash flow. So we formed this committee and we'll be looking at normal strategic choices that one has for a company like us.
Then over here on the right you can see a looks like a three year, two-and-a-half to two year trend. Now, this is total paid prescriptions, doses prescriptions across all therapeutic areas and you can see it jumps around quite a bit quarter-to-quarter, but the trend line is certainly quite positive. The number for the fourth quarter is just slightly under third quarter. But as we look at this mix quarter-to-quarter, comparing Q3 to Q4, nephrology and rheumatology are up and MS is down and IS is down sharply. IS just bounces around so it's Infantile Spasms, Acthar's mature in that market, very small market.
So let's just talk briefly about Acthar and then we'll talk about the indications and going to R&D just a little bit. So Acthar is approved for 19 indications, but the key ones are listed here. We've now added Sarcoidosis because that's a market we will be starting to promote in next year. And our strategy is to find, promote in these indications for perpetuations for on-label indication and we're a bit more focused on rheumatology right now because it's new.
So let's talk about nephrotic syndrome, MS and rheumatology. So nephrotic syndrome this condition is characterized by an excessive amount of protein in the urine. This can lead to problems for the kidney, can result in end-stage renal disease and patients can end up in dialysis. And Acthar is approved for trying to reduce this level of protein in the urine. There is a significant unmet need. We think there's approximately 35,000 patients in this market and we'll talk about our penetration in just a minute. But it's probably in the 10% range roughly. And the level of sales in nephrotic syndrome is about $325 million right now.
In MS where our level of sales on an annual basis is running about $250 million, MS I think you're really familiar with the disease. Acthar is approved for treating relapses or exacerbations that MS patients have. We estimate there's probably 100,000 of those relapses a year. The other drug that's approved for treating relapses are steroids and typically insurance companies require patients to try steroids first. So that's why we have the addressable market for us as being a little bit lower than the 400,000 that are on label here, but realistically insurance companies are probably not going to approve Acthar first line. Relapses can cause severe and in some cases permanent or semi-permanent loss of functionality for people. So it's a very serious condition.
Moving on to Infantile Spasms, this is a situation where Acthar has been used for decades. It's been developed kind of on its own as the gold standard. We don't really do much promotion in this area, and our penetration rate is probably over 50% here. Small population, fortunately this is very, very devastating disease if babies don't get improvement from the treatment.
In rheumatology, this is probably our biggest market opportunity, the biggest opportunity for Acthar. You can see the numbers here of 250,000, much larger than the others. But underneath that there is really several different conditions. And in each case we are -- over here we've limited or indicated the details for what Acthar is approved for, but you can read the label and get more details here; we encourage you to do that. Each of these conditions typically have a number of patients that have a severe form of that condition and those would more likely be the patients that would be prescribed Acthar.
Many of these cases are difficult to manage. In some cases, there is quite a few therapeutic choices like in rheumatoid arthritis and in others like Lupus and PM/DM Polymyositis and Dermatomyositis; there really are very few approved therapeutic uses or therapeutic options.
We started marketing in rheumatology really in earnest earlier this year and the annualized run rate for sales is now about $200 million. We have 60 reps in this area, which is -- that's about the same number of reps we have in nephrology. We have a little bit over 100 reps in calling on doctors in MS.
Then the final therapeutic area we're going to talk about here is pulmonology. We have -- we're in the middle of launching an effort calling on pulmonologists and we think the market is in the neighborhood of 20,000 patients that have symptomatic sarcoidosis. There is another group that we would not be -- that Acthar wouldn't be suitable for and is not on the label also. So we're really talking about this wedge up here.
So this is a new chart and I wanted to spend just a minute on this chart because I think we don't have it a too complicated fashion here. There is just the number of patients that we think are in the Acthar addressable area. And in some cases, the labels maybe is covering more patients than this. For example, in MS, it covers more patients than this. But we just think this is the reasonable patient population that could, for whom Acthar might really be considered seriously by a physician. So you can see some decent sized market share.
And if you look maybe more importantly at the right hand column and see the penetration, IS where Acthar has been used for over 40 years, the penetration is in the 50% range, MS where we've been in for four years it's a -- we think it's in the reaching 20% range, just under 20%. But you can see in rheumatology all these numbers were just getting started and of course sarcoidosis, we haven't enrolled and started yet. Nephrotic syndromes are a little harder to measure but our best estimate -- these are all our best estimates, please take them with a, do your own analysis, if you will, because this is very difficult to figure out exactly what these numbers are. But this is a concerted effort on our part to give you some information that we haven't given you before.
Talk briefly about Synacthen. This is a product we have acquired from or licensed in from Novartis. We have acquired the license to develop Synacthen and are in the process of starting that process. Our idea is to bring Synacthen to the U.S. for an indication where we think it might be suitable. Synacthen is like a second cousin to Acthar. So Synacthen has -- it's a part of the peptide that is found in Acthar but Synacthen is not -- itself is not naturally found in any -- in the body. So it's a synthetic form of -- a part of the ACTH peptide.
So we also acquired or in the process of closing a licensing deal with Novartis to sell Synacthen in I think it's 44 countries around the world and we should close that during the first half of 2014. And that expands our presence and provides us a platform to look at expanding our business internationally both with Synacthen and then, our plan would be to look at opportunities for Acthar around the world as well. And clearly, it further diversifies the business from just being an Acthar company. We also have acquired a manufacturer which represents -- and their sales represent about 5% of total Questcor sales.
We are also spending quite a bit of energy trying to understand this whole melanocortin system better and the -- it all starts with the pituitary gland, which secretes nine families of hormones, one of which are the melanocortin hormones and Acthar resides in that area. And where we believe this part of the hormonal system operates through five receptors that are located on various organs throughout the body and different melanocortin peptides you're going to have different affinities to these receptors, which then have a cascading effect in the biology, chemical biology inside the body and hopefully are helpful in some therapeutic way. And so we now have two melanocortin peptides Acthar and Synacthen and a lot of research effort in this way, in this area.
So Acthar, in as far as what's been observed clinically, clearly Acthar has been shown to have increased efficacy, significantly increased efficacy versus corticosteroids, and it's also been successfully used to induce proteinuria in nephrotic syndrome. And there's many preclinical observations that show that there is a steroid independent activity with ACTH and other melanocortin peptides.
So the implications of this we believe that there can be a positive therapeutic benefit in these areas on the immune system, on inflammation, inflammation processes, and that patients who are having a need or in need of another therapeutic option this may be helpful to them. And we seem to have -- there seems to be dozens of conditions that fit in these areas and some of which are on the label and others we're taking a look at to -- you can see what else might be suitable for Acthar, and we'll talk about a couple of those in a minute.
We have been increasing our investment in R&D. These figures include what would be classic R&D and also include other things that GAAP requires to put in R&D. If you want to look at pure R&D it's probably 75% of these numbers as far as pure research and trials the company sponsored types of events, activities.
We have five trials underway with Acthar. Two are Phase 4 and those are in the membranous nephropathy and systemic lupus erythematosus and we have three in Phase 2 including ALS and ARDS, I'll talk about those in just a minute here.
So let's talk about ALS. We started a Phase 2 for both ALS and ARDS. The first step here is to look at the safety and toxicity of Acthar and tolerability. And so there is 40 patients enrolled about almost half of the patients are already on drug right now. So we expect this trial to probably read out -- finish up this year and read out by the end of 2014 or early 2015. We'll get some interim information some time during the year.
The idea here is to help us see first of all is Acthar tolerated by ALS patients and give us some information that might help us design a registration study. Probably given the nature of ALS and the nature of -- the fact that Acthar is already approved, we probably only get an opportunity to run one registration trial here.
Very similar situation with ARDS, this is a respiratory disorder, typically these patients are in intensive care. So this study is going to be performed mainly with patients that are in the ICU. A little bit larger number of patients, so this trial has not -- is just getting underway right now, sites are getting signed up, but we do have an okay from the FDA to move forward.
Questcor has had a long-term commitment to return cash to shareholders and to invest in the business. We have been -- we believe good stewards of Acthar, which was a neglected drug and our plan is to do a similar thing with Synacthen, which has also been pretty much a neglected drug, neglected from the point of view that there really hasn't been any money spent in R&D and with those drugs by their previous owners.
We have, as you could see from the performance of sales and net income and free cash flow, we have demonstrated and willing to execute. We're committed to investing in R&D and just core research understanding this whole area better. We have now decided to just recently to start looking at diversification. We think that's probably important in order to increase some longer-term shareholder value. We returned approximately 60% of our free cash flow so far to shareholders. We're not committing to a 60% number. Our payout ratio for dividends is in the neighborhood of 20%, but we have done quite a bit of buyback over time and we did buyback a few shares this quarter.
Finally, this just summarizes the overall situation for Questcor. We have a strong -- we have an increasing penetration but we believe we're still early on in some of these key approved indications for Acthar. Rheumatology, we expect will one day -- could one day have the potential to be -- generate more than half of our sales. We're beginning the pilot effort in pulmonology fairly soon, and there's some other indications on the market -- on the label that we have not really investigated too much yet.
We have a totally untapped international market opportunity for Acthar and we believe Synacthen has a nice role to play there in potential. Our current sales for Synacthen are probably under $10 million. So we think there's opportunity to increase that. That was just -- we don't have those sales; we won't have any of those sales till after the deal closes.
And we are developing new indications for Acthar; we're developing new indication for Synacthen in the U.S., and we're interested in other melanocortin therapeutics. And finally, our financial dynamics are excellent and give us opportunity to look at other possible strategic activity.
Akiva Felt - Oppenheimer
Thank you, Don. So we've got a couple of minutes here. I just wanted to ask a few questions. I know it's early in the process, but could you give us a sense of may be the target profile of the indications you would look at to pursue for Synacthen?
Well, yes, I can give you an idea and we have a number of candidates we're looking at. So in thinking about Synacthen the first thing we need to understand is how it differs from Acthar and we believe that Synacthen has a higher stereogenic effect than Acthar. That's what our studies are showing us. If that research effort continues to give us that type of conclusion then we will be looking for indications where higher level that have -- may be those conditions that have a higher level information and you might need a little bit more of a steroid effect. So we think that that may be a better place for Synacthen. We likely would be looking at orphan indications as well.
Akiva Felt - Oppenheimer
And how do you see R&D spend breaking down between Acthar and Synacthen?
That's a good question. Well the lion share of it right now, so we had $50 million run rate for last run rate trailing 12 months. We'll probably be spending in the neighborhood of $100 million in 2014. Probably, like I said, three quarters of that is traditional R&D. So of that amount, I would think next year probably the lion share is still going to go to Acthar. We may be starting to get 5% or 10% for Synacthen. That will grow over time; would be my guess, especially as we -- when we get to a trial.
Akiva Felt - Oppenheimer
Okay. And then I wanted to ask about copay assistance. We see, virtually with all the high-price drugs, it's in some form of copay assistance. There's been some controversy recently over this Chronic Disease Fund, which provides copay assistance for Acthar. There are other -- what's the landscape like of companies that are involved? And is that something that Questcor continues to evaluate?
Yes, so sure. What we're talking about here is basically, typically with higher price drugs, specialty therapeutics companies offer what you might call a safety net for patients. So there are those patients who are uninsured or underinsured. The uninsured typically are going to need to be able to get access to free drug and the underinsured are people that are in lower financial bands, are going to need some help with their copay. So there is a quite a few non-profit organizations have sprung up around the world, probably most famous one is NORD, and we use several of these. And I think if you look at other specialty pharmaceutical company they do the same thing. The one you mentioned I think is a provider of that kind of service for half dozen or dozen -- in fact some pretty big names.
So I think all of these non-profits are trying to help out these financially needy people and get the helpline get access to these drugs that are in many cases going to be helping them with serious life threatening diseases. As far as our programs are, we think we're doing exactly the same thing, everybody else is doing but whatever, the short seem we will be able to make a big deal about it so.
Akiva Felt - Oppenheimer
Okay, well, I think we're about out of time here.
Akiva Felt - Oppenheimer
So, I just want to thank you again for the presentation and update.
Thank you, Akiva.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!