Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR)

Q4 2009 Earnings Call Transcript

March 1, 2010 5:00 pm ET

Executives

Doug Sherk – IR, EVC Group

Don Bailey – President & CEO

Steve Cartt – EVP, Corporate Development

Gary Sawka – SVP of Finance & CFO

Dave Medeiros – SVP, Pharmaceutical Operations

Eldon Mayer – VP, Commercial Operations

Analysts

Yale Jen – Maxim Group

Chris Holterhoff – Oppenheimer Funds

Tim Lynch – Stonepine Capital

Tim Chiang – CRT Capital

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Questcor Pharmaceuticals fourth quarter 2009 financial results conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator instructions) This conference is being recorded today, Monday, March 1st, 2010. I would now like to turn the conference over to our host, Mr. Doug Sherk of the EVC Group. Please go ahead, sir.

Doug Sherk

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the Questcor Pharmaceuticals fourth quarter and year-end results conference call. This afternoon at market close Questcor issued its fourth quarter and year-end financial results release. The release is posted on the Company's website at www.questcor.com. In addition, we have arranged for a taped replay after this call, which will be available approximately one hour after the call's conclusion and will remain available for seven days. The operator will provide the replay instructions at the end of the call. The call is being broadcast live and an archived replay will also be available. To access the webcast, go to Questcor's website at www.questcor.com.

Before we get started I would 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-Qs, which identify specific factors that may cause actual results or events to differ materially from those prescribed in these forward looking statements.

With that let me turn the call over to Don Bailey, President and Chief Executive Officer of Questcor Pharmaceuticals.

Don Bailey

Thank you, Doug, and good afternoon, everyone. With me today are Steve Cartt, Executive Vice President and Chief Business Officer; Dave Medeiros, Senior Vice President of Pharmaceutical Operations; Dr. Jason Zielonka, Senior Vice President and Chief Medical Officer; and Gary Sawka, Senior Vice President of Finance and Chief Financial Officer.

We will review Questcor’s highlights from 2009, after which Steve will review key business trends. Gary will cover our financial highlights, and finally I will address our strategy for 2010. We will then open the call for your questions.

When we talked with you last on November 1st, we did so after a confluence of events resulted in an unusually challenging quarter for the Company. We said at that time that despite the quarter’s disappointments, we were excited about the direction of our Company. Today, I believe you can see some of the reason why we held such a strong conviction about our direction and opportunities.

Highlights of Questcor’s fourth quarter are

sales to treat multiple sclerosis, or MS, grew by over 200% year-over-year and over 50% sequentially; sales to treat infantile spasms, or IS, rebounded significantly increasing 56% on a sequential basis; use of Medicaid dropped in the fourth quarter; also, we shipped 17 prescriptions for the treatment of nephrotic syndrome, or NS, our third therapeutic area.

The FDA accepted for review our sNDA for the treatment of IS, and we improved our going forward pricing with Tricare and VA after fully reserving for all historic liabilities. All in all, we had a very good finish to 2009.

Before discussing these key trends and developments in more detail, I want to focus on a very intriguing possible parallel between MS and nephrotic syndrome sales. You may be able to spot this parallel if you examine the prescription sales table we provided in the heart of the press release.

In early 2008, we noted that doctors were writing spontaneous prescriptions for Acthar for the treatment of exacerbations from MS. These were a handful of prescriptions, but they were important. By spontaneous, I mean that the prescriptions were not the result of any promotional effort by Questcor.

In the second quarter of 2008, two years ago, we started a pilot promotional effort with a few sales people and experienced growth in the number of our MS prescriptions. Subsequently, as our MS sales continued to grow, we made three increases in the size of Questcor sales force. Today, we have a fully productive sales force for MS totaling 38 sales people. Interestingly, we now estimate that net sales from IM from MS, so that net sales from MS in the fourth quarter were approximately equal to our IS net sales. So MS is now right equal to IS.

Well now for the possible parallel to nephrotic syndrome. That is, we may experience a similar pattern of growth for Acthar prescriptions to treat nephrotic syndrome, or NS. In late 2009, and through the first two months of 2010, we have received and shipped over two dozen spontaneous prescriptions for NS, nephrotic syndrome. Since many more people have nephrotic syndrome than refractory MS exacerbations or IS, and significantly more vials of Acthar are needed to treat each NS patient, Questcor’s shareholder value may be significantly positively impacted by the use of Acthar to treat MS.

During the second quarter of 2010, starting next month, we will start a pilot sales effort for Acthar in the treatment of nephrotic syndrome, similar to the pilot effort carried out two years ago in the second quarter of 2008 for MS. We are very intrigued by the prospects here.

Many investors have asked how effective is Acthar in treating nephrotic syndrome. While it is very, very early in the treatment of these few Acthar NS patients, one key nephrologists, who has used Acthar to treat about a dozen patients, says he is, “guardedly optimistic,” about Acthar being useful in controlling this hard-to-treat decrease. And that optimistic comes from the treatment of his patients. And this doctor has only been using Acthar for those patients who have failed two other therapies, that is very refractory cases.

Now, I will review our MS sales progress. Clearly, our key focus during 2009 was to grow MS sales. As the table in the press release shows, new commercially paid shipped prescriptions increased 218% in 2009 over 2008. We grew from 175 prescriptions to 557. With our current sales force, we are now able to call on 2000 of the estimated 2500 core MS specialists in the U.S. Importantly, given that there is a growing number of doctors who believe that Acthar is an effective treatment for those MS patients who fail to respond to IV steroids, we believe that we have ample opportunity to further meet patient needs in this market sector in 2010 and beyond.

Turning to IS, we reviewed with you what we saw as factors impacting Q3 IS net sales, most notably the easing of Medicaid eligibility standards by several sizable states; the relatively small patient population afflicted with the decrease; the consistent loss of private insurance coverage by families during the recession; and a lower national birth rate.

Fortunately, as you can see in the press release table, in the fourth quarter of 2009, IS commercially paid prescriptions returned to the middle of the historic quarterly shipment range. So it appears that the outcome of the third quarter was an isolated event. However, the volatility of IS shipments underscores our need to expand Acthar usage into new areas. And we believe we are successfully executing our plan to achieve that end.

In keeping with our commitment to create shareholder value, we repurchased 2.5 million shares of our common stock during the fourth quarter. Since implementing the plan in 2008, we have invested $67 million for the repurchase of 14 million common and preferred shares.

At this time, I would like to turn the call over to Steve Cartt, who will discuss our commercial operations in more depth. Steve?

Steve Cartt

Thanks, Don, and good afternoon everyone. I’d like to focus my comments today on our continuing efforts in the MS market, our increasing activity in the nephrotic syndrome market, and the importance of our sNDA for infantile spasms. In addition, I will provide an update on Acthar insurance coverage, as well as pricing for Acthar in the VA and Tricare programs. Finally, I will comment very briefly on what we’ve been seeing so far very early here in 2010.

As Don noted, we are quite encouraged by the 218% growth in MS prescriptions during 2009, and by the particularly sharp jump in usage during the fourth quarter. We are continuing to promote Acthar specifically for the treatment of those patients suffering from MS exacerbations who are not well served by IV steroids. This effort continues to be well received by a growing number of neurologists. While the growth is no doubt encouraging, we know that we still have a lot of work to do in 2010 and beyond to fully establish Acthar as a key therapeutic option for neurologists in the treatment of MS exacerbation.

Shifting to the nephrology market, as Don mentioned, we shipped 17 prescription for nephrotic syndrome in the fourth quarter. Nephrotic syndrome is a kidney disorder, which often results in End-Stage Renal Decrease, and affects as many as 50,000 people annually in the United States. There are a number of different underlying kidney decrease processes that can result in the nephrotic syndrome, which is characterized by excessive loss of protein in the urine. This excessive loss of protein in the urine is known as proteinuria.

I would like to reiterate here that nephrotic syndrome is already an on-label indication for Acthar. Specifically, Acthar is indicated to induce a diuresis or remission of proteinuria in the nephrotic syndrome without uremia of the idiopathic type or that due to lupus erythamatosus. We should note that we are encouraged by the positive early feedback provided to us by physicians who are prescribing Acthar to treat these patients.

Interestingly, a number of highly refractory patients have been started on Acthar treatment. These are patients who have failed multiple other treatment approaches to manage their worsening kidney decrease and their doctor has decided to now try on them on Acthar as a newly emerging treatment alternative. In many cases, even these patients who have not responded to other treatment approaches are responding favorably to Acthar treatment. And in some cases, we are even now beginning to get additional new prescriptions from a few doctors after they see initial results from their first one or two patients.

We believe that the market for Acthar and nephrotic syndrome could be quite large, much larger in fact than the potential for Acthar in the MS market. The average prescription size so far has been eight to 10 vials used for a course of treatment lasting six months or more. This represents about double the value of the average IS prescription for Acthar and four to five times the value of the average MS prescription.

Given the significant revenue potential for each prescription for nephrotic syndrome, and the relatively large number of patients, we currently estimate that the market potential for Acthar in the nephrology could well exceed $1 billion annually. Of critical importance, seeing that we are on-label for the condition and there are no other approved treatments, we are currently experiencing very good insurance coverage for Acthar in nephrotic syndrome.

Now, I would like to turn our attention to the market for Acthar in the treatment of infantile spasms. While Acthar prescriptions for IS during the quarter returned to the middle of the historic range after a slower third quarter, the most significant news during the fourth quarter was that FDA accepted for review our supplemental New Drug Application seeking approval to market Acthar for the treatment of IS. Since then, the FDA has notified Questcor that an Advisory Committee meeting will be held to discuss the possible approval of Acthar in the treatment of infantile spasms. The FDA also notified Questcor that it has set up a PDUFA date of June, 11, 2010 for our supplemental New Drug Application.

It is very important to keep in mind though, that there is never any assurance that the target PDUFA will be met although of course we are hoping that Acthar is approved for IS based on the schedule. Approval of our application by the FDA would allow Questcor for the first time to actively market Acthar for the treatment of infantile spasms. Importantly, we can then also broaden our public education efforts regarding the importance of early diagnosis and effective treatment of IS with Acthar.

Another IS related topic that is of interest to many investor is the impact that the market introduction of vigabatrin might be having on the use of Acthar in IS. We are now a full five months along since the September 2009 introduction of this new competitor. And we can report that so far we have seen virtually no impact on the use of Acthar in IS as a result. We will continue to monitor the situation very closely and will inform you if we notice any effect on our IS business in the future.

Finally, on the IS front, it may be of interest to investors that a major IS satellite symposium was held during the fourth quarter at the Child Neurology Society 2009 Annual Meeting. During this symposium, the role of Acthar in the treatment of IS was discussed in depth by both the expert panel members and audience participants. The report and recommendations emanating from this symposium can be viewed at the Child Neurology Society website, www.childneurologysociety.org/education, where you can read feedback regarding IS treatment preferences from the nearly 200 child neurologists participating in this symposium.

Overall, insurance coverage for Acthar continues to be very strong with over 90% of prescription and 95% of IS prescriptions being approved by payors. In addition, we remain very pleased with the performance of our extensive patient safety net program, which continue to provide free drugs to many under insured and uninsured patients needing Acthar.

As I noted earlier, there is new pricing for Acthar in the government-funded VA and Tricare program. Acthar was provided to these programs up through December 2009 at a nominal cost. Effective January 1st, 2010, the new selling price for Acthar to these customers is in excess of $17,000. Therefore, any vials that continue to be supplied to VA and Tricare programs will increase overall Acthar net sales in 2010. This is important in that the new pricing has the potential to positively impact 2010 total net sales by as much as 10%.

Before turning it over to Gary Sawka, our CFO, I’ll briefly comment on the start of 2010. We are seeing similar MS and IS new prescription activity at the beginning of 2010 as we did at the end of 2009. Nephrotic syndrome prescription activity is also similar so far to the fourth quarter 2009 numbers. However, to more proactively explore the potential for Acthar in nephrotic syndrome, we are now kicking off a pilot selling effort with a small numbers of our sales people to see if incremental Acthar prescriptions can be generated in this potentially lucrative on-label indication.

Interestingly, this pilot effort in nephrotic syndrome is quite analogous to the pilot selling effort we conducted in the MS market in early 2008. Of course, that pilot MS effort, as we all know now, resulted in MS becoming a core and nicely growing part of our Acthar business. We look forward to providing all of you with further updates on these efforts in nephrotic syndrome as we progress through 2010.

Let me now turn the call over to Gary Sawka, our CFO, to review the financial highlights for the quarter and for the year as well as the Medicaid program. Gary?

Gary Sawka

Thanks, Steve. Net income applicable to common shareholder for the fourth quarter was $8.4 million, or $0.13 per diluted common share. For the full year 2009, net income to our common shareholders was $26.6 million, or $0.40 per diluted common share. At the end, our gross margins remain in the low 90% range. At the end of December 2009, Questcor’s cash, cash equivalents, and short term investments totaled approximately $81 million.

Moving to the cash flow statement, over the course of 2009, we generated about $40 million of cash from operations. Returning value to our shareholders, we used approximately $57 million to repurchase 14 million common and preferred shares during the last two years. We continue to have 5.1 million shares authorized for repurchase under the revived common share purchase program. At December 31st, 2009, we had approximately 61.7 million common shares outstanding.

With that, I would like to turn it back to Don. Don?

Don Bailey

Thanks, Gary. I would like to just take a few moments to set the stage for 2010. We made a lot of progress in 2009 and we’d expect to make further progress in 2010. We understand that investors would like for us to provide financial performance guidance. As we have discussed today, there are unusual factors impacting our net sales in all three of our markets, MS, nephrotic syndrome, and IS. Therefore, we have made the decision not to provide any specific guidance for 2010. However, I can assure you that everyone at Questcor understands clearly that our plan for 2010 can by summarized in three words

‘Sell More Acthar.’

To expand slightly, we have four goals for this year. The first is to increase year-over-year revenue for MS. Second, we expect to increase sales in nephrotic syndrome as we implement our pilot effort to educate the market about the use of Acthar in this condition. Third, we expect to make progress with our sNDA for IS gaining IS market clearance. And fourth, if conditions allow, we will continue to execute our share repurchase program.

Operator, you may open up the call for questions now.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Yale Jen with Maxim Group. Please go ahead.

Yale Jen – Maxim Group

First of all, congratulations, Don and the team, on a very good quarter.

Don Bailey

Thank you, Yale.

Yale Jen – Maxim Group

And just a few questions here that the first one is in terms of the nephrotic syndrome. I know there is clinical study that’s ongoing; would you be able to shed any light in terms of how you see that going forward?

Don Bailey

Sure. Steve, how about answering that question?

Steve Cartt

Yes, Yale, so there are several studies that are in progress right now, some are advancing more rapidly than others. Certainly in 2011 we’ll see data and we would expect we’ll see some data hopefully by the end of this year. We also have preclinical studies that we are funding that are exploring the mechanism of action, which is very different from steroids. And we hope to have some data from those projects as well this year.

Don Bailey

Interestingly, when we talked to all of you last, we felt that obtaining this data was on the critical path to our obtaining any meaningful sales. We may adjust our thinking on that based on these spontaneous prescriptions that have come in and of course more importantly based on the modest sales pilot effort that we are going to undertake in Q2. We still think that date is very important to our growth of the NS market, but it may not be necessary to wait.

Yale Jen – Maxim Group

Sure. I – that’s good to hear. And secondly, in terms of NS pilot programs, would you shed a little bit – lot more light on that in terms of whether you were happy with the current sum of the sales sort of a cover more different sort of type of physicians or how should we see that effort and what will be the I guess assessment of their success or progress?

Steve Cartt

We are taking, Yale – this is Steve again – we are taking a small number of our sales people and we are going to have them spend maybe a third of their time on calling on nephrologists, targeted number of nephrologists. We don’t want to distract our entire sales force from MS at this point. But we do see there is a very, possibly lucrative opportunity in nephrology, so we are going to be running this pilot program over the next several months and with a handful of our reps to see if they can generate incremental prescription.

And at that point, if we get into – through this summer and we start seeing an impact, positive impact, we may decide to ramp up that effort. That’s all – that’s why we – similar to what we did with MS in early 2008, we want to pilot this first and if we get a positive response, we’ll expand it.

Yale Jen – Maxim Group

And I also noticed that quarter-over-quarter, if we look at the (inaudible) growth in sales and in terms of scrip numbers that has – each quarter has essentially triple digit increase, how would you see 2010, (inaudible) in the very rapid growth trajectory, would you anticipate that at least for 2010 maybe part of 2011 to be this rapid growth phase?

Don Bailey

Now, Yale, that’s a very good question. And unfortunately we don’t have a very good answer for you because frankly we just cannot find another situation, another drug that’s been through this type of market change. So, we’ve been expecting some pullback, we expected some pullback in Q4 and obviously we continued up strongly. As Steve mentioned, the first couple of months of this quarter had been about flat to Q4, but often our third month of the quarter is our best month. So, frankly, we don’t – we really can't give you any guidance as to what type of increases to expect here. What we can tell you is that we think we’ve only penetrated this market segment in the 4% to 5% range, may be 10% at the highest. And we have no competition in this market segment.

Yale Jen – Maxim Group

So and – so far you have felt [ph] that you are very encouraged by your sales force staff in the sense that you consider them doing a similar very good job so far?

Don Bailey

Yes, so, you know as I mentioned, MS net sales at the net sales line as best we can estimate, we can't do it exactly, but our approximate estimate is that MS sales now equals IS sales.

Yale Jen – Maxim Group

Okay and—

Don Bailey

And that’s all the result of the sales force.

Yale Jen – Maxim Group

Sure. And you mentioned that eight to 10 vials per patient for the MS and the – is that the average – you know is this average is likely going forward in this indication as you see it?

Don Bailey

It is because I mean it’s still early and the doctors are trying to figure out what’s the best protocol or regimen is here. But patients who have nephrotic syndrome have been in that condition for ten years or more. So, it’s a little different than an MS exacerbation or an IS situation where the patient has just started that condition. And it may take more Acthar to break through that build-up of ten years worth of decrease build-up.

Yale Jen – Maxim Group

Okay, great. And the last question about infantile spasms, and I notice that the overall scrip – I mean scrip number quarter-over-quarter is – set aside the third quarter of last year I should say, the rest of it (inaudible) for 140 if not – so it seems that the overall scrip number is reasonably stable given that the lumpiness of the (inaudible) the incidence per quarters. Is that a fair assessment?

Don Bailey

I think that is a fair assessment. I mean Q3, when you look at this data of eight quarters, it looks like it’s the anomaly, and we certainly all hope so. We can see that in 2009 scrip numbers are down a little bit from 2008, but that does makes sense given the factors I laid out in my little talk.

Yale Jen – Maxim Group

Sure. And lastly, in terms of the Medicaid, I noticed that the last quarter, fourth quarter, you had the least amount of the quarters of the years. Would that be possible that still little bit again not necessary a normalized number going forward or how do you see that, the Medicaid portion of the revenues of the entire infantile spasms?

Don Bailey

Well, I can make two comments. Number one, we do not expect any more states to ease their eligibility –

Yale Jen – Maxim Group

Right.

Don Bailey

Because virtually every state is in some type of a financial crisis.

Yale Jen – Maxim Group

Right.

Don Bailey

Or at least under pressure. Second, there were three states, which in the fourth quarter started denying Medicaid –

Yale Jen – Maxim Group

Okay.

Don Bailey

– prescriptions, which of course what we do in that situation is we fill those prescriptions through our free drug program.

Yale Jen – Maxim Group

So, overall that you anticipate that you seem so in a way to put it in, may be the worst is over, probably stabilization, probably you will. What will more likely going forward and potential some increase, if you will be able to more actively promote your drug although I guess based on the comments from the symposium that most nephrologists – neurologists continue to do the thing; this is the treatment for the right patient population.

Don Bailey

No, I certainly think the outcome of that symposium that Steve mentioned, that you can see at the website he discussed.

Yale Jen – Maxim Group

Right.

Don Bailey

– is very helpful. As far at the Medicaid piece of this, I can't say that it’s – to quote a new board member we have, one quarter does not a trend make.

Yale Jen – Maxim Group

Right.

Don Bailey

So I would like to see a couple of more quarters in the Medicaid column. But I think in the paid commercial column, that probably looks like it’s – the 95 was more of a reasonable number, and that has maintained – that pace has maintained in Q1, We have less working days in Q1 versus Q4, but that can affect things by about 5%,

Yale Jen – Maxim Group

And just final last one, I just want to confirm. You said from the VA or Tricare will be $17000 per vial going forward, is that right?

Don Bailey

That’s correct.

Yale Jen – Maxim Group

Okay, great. Okay, great, thanks a lot and again congratulations on the team doing a great job.

Don Bailey

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Holterhoff with Oppenheimer Funds. Please go ahead.

Chris Holterhoff – Oppenheimer Funds

Hi guys, thanks for taking the question. Can you just comment on the current inventory levels of Acthar in the channel and how that might have changed over the last couple of quarters?

Don Bailey

There was a significant build-up in inventory at our distributor where – and the distributor probably has about close to half of inventory in the total channel. There was big build-up right at the end of the year so that they were holding probably 50 to 100 vials more than they normally do. So, I think that that’s just generally protective defense on their part because of the holiday season and especially where the holidays fell this year. Outside of that let’s say everything in the inventory channel is pretty normal. We expect about three weeks of inventory in the channel, total channel.

Chris Holterhoff – Oppenheimer Funds

Okay, great, that’s helpful. And then with regard to the MS sales reps, I think you said you are at 38 right now. Can you talk about when you might think of increasing them up?

Don Bailey

Yes, that’s a – this is Steve – that’s a great question. So, we are looking at the growth in MS, we are looking at a potential approval and launch of the IS indication, and we are conducting this pilot in nephrotic syndrome. Any one of those things could really cause us to consider expansion of the sales force as we go through 2010. Of course, if all three go well, I think it’s guaranteed that we would expand. So we will do whatever makes sense from a business perspective and expand to launch IS or to further capitalize on the MS growth trends or to penetrate this new market in nephrology and we may be doing all three. So it’s hard to tell what the sales force may look like right at the end of the year, but it probably may look a little bit different than it does now.

Chris Holterhoff – Oppenheimer Funds

Okay, great. And just finally on the Acthar resubmission, can you talk about any changes you might have made to the filing since you first got the FDA reaction and then you resubmitted in January this year – or excuse me, December of last year?

Don Bailey

Sure, Chris. The principal changes we made to the filing were the result of specific questions or request from the FDA and the major change of course we made was to include a handful of patients in one trial in the analysis, patients who started but did not finish the trial. Because our filing is based on a historic non-company sponsored trials and patients who were treated just in the normal course of business in hospitals, we have a very unusual filing. So we expect a high level of interaction with the agency in answering questions and that has been the case so far.

Chris Holterhoff – Oppenheimer Funds

Okay, great. Thanks for taking the questions and congrats on a good quarter.

Don Bailey

Thanks, Chris.

Operator

Thank you. Our next question comes from the line of Tim Lynch with Stonepine Capital. Please go ahead.

Tim Lynch – Stonepine Capital

Yes, hi guys, great quarter and it sounds like a fantastic start to the first quarter 2010. The – thanks for the detailed information on the Tricare DoD catchup charge. In relation, if you compare that to what’s been happening on your Medicaid reserves lately, how do you feel about those reserves as of the end of the year versus the additional catchup you had to do on Tricare? Do we feel like we are reserving at a sufficient that it’s unlikely we’ll have catchup charges going forward for Medicaid rebates?

Don Bailey

Tim, to make an unbelievably complex and long possible discussion simple, the answer is yes, we think we’ve got it.

Tim Lynch – Stonepine Capital

I’ll take a simple answer, I am happy with a simple answer.

Don Bailey

So, if you like more details, call me offline or call Gary Sawka, our CFO, but the answer is yes we think we’ve got Medicaid historic liability now very well understood. And that possibility of another surprise is extremely low, and we have Tricare 2008-2009 liability 100% reserved, so there is only one direction that can go, which is to improve.

Tim Lynch – Stonepine Capital

Great. Yes is good enough for me –

Don Bailey

Okay. That’s good enough for most people.

Tim Lynch – Stonepine Capital

I know how complicated it is, so I don’t think I can recreate the wheel and set things up. Thanks for that. On – how much is that ’08-’09 liability on the balance sheet?

Don Bailey

$3.5 million.

Tim Lynch – Stonepine Capital

Okay. And that’s under dispute. There is always a possibility that that can come back to us.

Don Bailey

There is three ways that can get resolved, which would be all – which would be improvements [ph]. One is the industry could win the dispute. Second, we’ve requested, we formally requested a waiver from whatever decision that could grant some waive. And third, we may be – we can go in and negotiate a settlement while they are in – messing around with the industry.

Tim Lynch – Stonepine Capital

Okay, great. It’s great detail. And the next question is a little bit esoteric, but if you get the – is that a sNDA that you have for the – for IS application?

Don Bailey

Yes.

Tim Lynch – Stonepine Capital

And right now is the current label for Acthar, am I correct in that it’s not under the NDA system – the pre-NDA system the DESI system?

Don Bailey

I am going to Dave Medeiros answer that question.

Dave Medeiros

Yes, good afternoon. The review of the current label was through a DESI review back in the late 1960s, and early 1970s. So, you are correct on this.

Tim Lynch – Stonepine Capital

Okay.

Dave Medeiros

The only exception is the addition MS – treatment of the MS whereas come in 1978 through a separate [ph] sNDA.

Tim Lynch – Stonepine Capital

Okay. So, I was just curious and haven’t really thought about as much, but I think you may just answer my question, if we go the sNDA approval for IS, that doesn’t impact anything else on our label. It’s going to sound like it’s – because it already happened in 1978 and impacted then in terms of getting one indication approved under the NDA system, it doesn’t affect anything else under the DESI labeling that we have.

Don Bailey

We certainly hope that’s the outcome in dealing with the FDA. I certainly wouldn’t want to predict what they might do or how they might do it.

Tim Lynch – Stonepine Capital

Right.

Don Bailey

So, it’s certainly possible they would want to talk to us about the current label.

Tim Lynch – Stonepine Capital

Okay, okay. It sound like they were successful in 1978 with MS in not having any negative repercussions that were unintended as a result of adding the MS label under the NDA system. So—

Don Bailey

My God, there is too many little who have been there for 32 years for us, so it may not be too relevant.

Tim Lynch – Stonepine Capital

Okay. That’s all I have. Thanks. All my other questions were answered by other people asking them and really encouraging last five months guys that you comment on. So thank you again.

Don Bailey

Thanks, Tim.

Operator

Thank you. Our next question comes from the line of Tim Chiang with CRT Capital. Please go ahead.

Tim Chiang – CRT Capital

Hi, Don. I had a couple of questions. I guess you know you mentioned the pilot sales force effort for nephrotic syndrome. How many nephrologists are you planning to target initially?

Don Bailey

Eldon, do you want to answer the question?

Eldon Mayer

Yes sure.

Don Bailey

This is Eldon Mayer. He is the Vice President of Commercial Operations.

Eldon Mayer

I would say we are being very selective about the doctors we were targeting and Steve mentioned it’s a limited number of nephrologists. So probably in total about 100 to 150.

Tim Chiang – CRT Capital

Okay. And at what point would you consider building out a separate sales force for just marketing to the nephrologists? Is it dependent upon the clinical data or the clinical studies that you are running right now or could it be something that you would do even before that data comes out?

Steve Cartt

Yes, Tim, this is Steve. We are definitely going to watch and see what happens with this pilot effort. Our thinking right now is that we would be able to sell Acthar to different audiences with the same sales force. There are a lot of benefits to that, including keeping the territory sizes as small as possible, which is helpful in recruiting good people and maintaining them. And also limiting windshield time getting into the offices and selling and sort of traveling. So we would probably lean towards keeping it all MS, IS, and nephrology calls and a lot of these doctors are in the same medical buildings and the same metropolitan areas, so once you have a rep there, they can easily call on the different audiences, but we are going to wait, as we said earlier, we are going to wait until we see what the results of the pilot effort are. And if it goes well, we can very well expand.

Tim Chiang – CRT Capital

Okay. Just a quick follow-up, Don. You sort of talked about this stock buyback program and your intention to potentially buy more stock back. Do you have any interest in potentially looking at other products that might be I guess complementary to Acthar at this point or is that something that’s probably further down the line?

Don Bailey

We’ve reached a corporate decision to start to look at a diversification program. With the hiring of our Chief Medical Officer that frees up Steve Cartt to spend some time in the activity that he knows and loves most, which is business dividend, corporate development, so he is now going to be spending a fair amount of his time in that area, looking for new assets. But I can tell you that nobody here is thinking that we are going to jump at something to create a diversification effort. We are not enamored by what I call bright shining objects. We want to find marketed programs that we can find has some confidence that we can add to sales and preferably be anti-dilutive [ph].

Tim Chiang – CRT Capital

Okay, and just may be one last question. It’s just really more tied to the margins. Given the fact that your MS business is starting to ramp and you might be getting more nephrotic syndrome prescriptions, what sort of opportunity do you have to potentially expand the gross margins? Is that possible, or is 93% sort of the highest that you can get to?

Don Bailey

Well, we have a 4% royalty right off the back, so you know that’s kind of limits us to 96%, so we are – there is not a lot of room between 93% and 96% unfortunately. It’s pretty much a fixed cost outside of the royalty, so increased volume would marginally improve those gross margins.

Tim Chiang – CRT Capital

So, I guess, just on the operating expense side, assuming you don’t really hire that many more reps is the SG&A number around $7.8 million – $8 million a quarter. Is that a pretty good run rate to sort of stick with at least for the first half of this year?

Don Bailey

We have – since the beginning of the fourth quarter, we’ve finished filling out the sales force so they were in all hired by the first of October. And also, we’ve brought on our Chief Scientific Officer and his staff and we’ve now brought in a Chief Medical Officer. We have some expanded costs in the preparations for an IS launch, slightly expanded costs in MS. So I think you will see cost go up a little bit, not dramatically, but there will be some.

Tim Chiang – CRT Capital

Okay. And sorry for this last question, but I notice that you mentioned that you have this new pricing strategy for Acthar in the infantile spasm market for the Medicaid segment. And I think you indicated that that would help you increase your revenues by about 10%. Is there a way you could sort of walk me sort of – I mean what are the mechanics to that?

Don Bailey

Sure. This is a very confusing area and I may have to help some of you offline. It may be too complicated to do this on a large conference call. And it relates not to Medicaid, but to Tricare and VA. Tricare is a Department of Defense dependents pharmacy system. And the contracts, we operate under six contracts in total with the government and five of them are with – in that area. So, some of those contracts have been renegotiated, others we are operating under those regulations within those Tricare and VA areas. And a way to think about this is the rebate that we’ve been having to pay in Medicaid, VA, and Tricare area. It’s permanent for Medicaid, but it was only a two-year rebate system for Tricare and DoD. So that may help you simplify it, so we – basically (inaudible) for two years with those organizations.

Tim Chiang – CRT Capital

I see. Okay, great, thanks a lot, Don.

Don Bailey

Yes, and the 10% would only hold if our level of business stayed the same, so it’s possible that the level of business will drop off some with increased prices there.

Tim Chiang – CRT Capital

Okay, great. That helps a lot.

Operator

Thank you. Our next question comes from the line of Jat Baser [ph] with Manchester Management [ph]. Please go ahead.

Jat Baser – Manchester Management

My question has been answered. Thank you.

Operator

(Operator instructions) Our next question is a followup question from the line of Yale Jen with Maxim Group. Please go ahead.

Yale Jen – Maxim Group

Thanks a lot for taking my followup questions. So just a few quick ones. The first one the share buyback program. I know you have about five million left in that. Do you anticipate that going forward you might actually have increased that maybe 2010 or 2011?

Don Bailey

Well, it’s certainly possible, Yale. We increased it once during 2009 and if we – and we’ve repurchased 14 million shares in two year, and we have five million left. So that’s certainly possible. We’ve purchased, when we are in open time periods, which is not very frequently. And of course we are – like you guys – we are price sensitive.

Yale Jen – Maxim Group

Sure. And the second quickie is that in terms of supplemental NDA for the IS, do you – I believe we (inaudible) maybe there is an expert panel meetings, would you anticipate if that should occur, will that be something – some time in the second quarter of this year?

Don Bailey

The FDA with the PDUFA date of June 11th, we would anticipate a panel meeting four to six weeks before that assuming they can find enough panel members. So sometimes either conflicts of interest or annual society meetings or international society meetings get in the way of their plan. So it’s – we’ll know when – about the same time you know because the FDA will post it on their website.

Yale Jen – Maxim Group

Sure. And quickly in terms of nephrotic syndrome, I see a very local concentration – I mean percentage of Medicaid. Do you see that to be the case or you don’t know for sure at this moment if you’ve spent a lot population, would that be – would that percentages still hold?

Don Bailey

I think that percentage is probably, is pretty good. If you look at the MS percentage, it runs less than 10% and we would nephrotic syndrome to run less than 10% as well.

Yale Jen – Maxim Group

So those both are similar. And lastly –

Don Bailey

Because of the demographics of the population –

Yale Jen – Maxim Group

Right, great. And lastly is that the – I know earlier you haven spoken about potentially exploring other indication like – your hands are full. Is that the situation or you are still sort of looking for other potential (inaudible) for the Acthar?

Don Bailey

Nothing’s changed in that regard. I just didn’t want to focus on that in this call because we wanted to put the spotlight on our MS sales, nephrotic syndrome sales, and IS sales.

Yale Jen – Maxim Group

Okay, great. Thanks a lot. Appreciate it.

Operator

Management, I show there are no further questions at this time. So, please continue with any further remarks.

Don Bailey

I have no further remarks. So, we’ll look forward to talking to you guys in about 60 days. Take care. Bye-bye.

Operator

Ladies and gentlemen, if you will like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 1-303-590-3030 and entering the access code 4221516 followed by the pound key. The replay will be available until March, 8, 2010. This concludes the Questcor Pharmaceuticals fourth quarter 2009 financial results conference call. ACT would like to thank you for your participation. You may now disconnect.

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: transcripts@seekingalpha.com. Thank you!

Source: Questcor Pharmaceuticals, Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts