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

Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR)

Q1 2011 Earnings Call Transcript

April 26, 2011 4:30 pm ET

Executives

Dough Sherk - IR, EVC Group

Don Bailey – President and CEO

Steve Cartt -Chief Business Officer

Mike Mulroy – CFO

Kirsten Fereday – Director of Business Analytics and Evaluations

Analysts

Tim Chiang – CRT Capital

John Newman – Citadel Securities

Chris Holterhoff – Oppenheimer & Co

Biren Amin – WJB Capital

Yale Jen – Maxim Group

John Paffendorf – Morgan Stanly

Brian Delaney – EnTrust Capital

Patrick Lin – Primarius Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Questcor first quarter 2011 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 Tuesday, April 26 of 2011. I will hand over the conference to Mr. Doug Sherk. Please go ahead sir.

Dough Sherk

Thank you, operator. Good afternoon everyone. Thank you for joining us today on the Questcor Pharmaceutical’s conference call to discuss the first quarter 2011 financial results. This afternoon at the market close, Questcor issued its first quarter earnings release, which is posted on the Company’s web site at www.questcor.com. In addition, we’ve arranged for a taped replay of this call which will be available approximately one hour after the call’s conclusion and will remain available for seven days. The operator will provide the replay instructions at the end of today’s call. The call is being broadcast live via webcast and an archive will also be available. To access the webcast and archive go to Questcor’s web site.

Before we get started, I’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.

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

Don Bailey

Thanks, Doug, and good afternoon, everyone. With me today are several other members of our management team. Three of them will be making prepared remarks, Steve Cartt, our Chief Business Officer; Mike Mulroy, our CFO; and Kirsten Fereday, our Director of Business Analytics and Evaluations.

In summary, we are off to a very good start this year as we continued to execute our straightforward strategy to sell more Acthar. Our decision to expand the MS sales force is clearly paying off. Also, our nephrotic syndrome sales force is having some early success. Net sales and vials shipped set new records in the first quarter. Operating income was 45% of net sales above the 40% level we consider a long-term objective.

The first batch of Medicaid managed fair bills arrived in March and were lower than expected. So we have slightly reduced the reserves for those states and we repurchased almost $1 million shares of Questcor stock in the quarter. After making some comments about our MS and nephrotic syndrome business, I will turn the call over to Steve and he will provide some color regarding sales, then, Mike will briefly discuss our financial performance and Kirsten will update you on our reserves for Medicaid rebates, afterwards we will open up the call to your questions.

Our record quarterly performance was propelled by a sharp increase in paid MS prescriptions. January, February MS sales ran slightly higher than the Q4 run rate, but in March, new MS prescriptions grew dramatically and this momentum has continued into April. We believe this MS sales performance reflects the strong underlying demand for Acthar. This growth in demand is being driven by the increasing productivity of our expanded sales force.

We believe net sales in the MS market are now about 60% of total Acthar net sales. Throughout the rest of this year, MS sales should continue to grow as a percentage of total Acthar sales, as our commercial team gains more experience selling Acthar to neurologists. We believe that there are many more MS patients who may benefit from Acthar, with only 500 neurologists currently prescribing Acthar, we have a lot of work still to do and a lot of room to grow.

Moving on to NS, our 5% dedicated sales team hit the street in early March. Their efforts contributed to a good quarter for NS sales, and like with MS, this momentum has continued into April. Steve will provide more information in a few minutes about our plans to expand this nephrotic syndrome selling effort. Also in March, the first clinical dataset supporting the use of Acthar in the treatment of nephrotic syndrome was published in a peer-reviewed journal.

This study will help our sales team and their efforts to get the word out to nephrologists about using Acthar to treat NS. In parallel with this NS selling effort we plan to broaden the clinical research on how Acthar benefits patients with NS. In April, we hired a Clinical Research Organization or CRO, to oversee a Phase IV dose ranging clinical trial designed to evaluate Acthar in treating nephrotic syndrome associated with idiopathic membranous nephropathy.

This kidney disorder has few therapeutic alternatives and has a significant unmet medical need.

Turning briefly to IS, infantile spasms, during the first quarter of 2011, we sold a total of 89 paid non-Medicaid commercial prescriptions for Acthar in IS. Therefore IS sales were within this normal quarterly sales range. Now I would like to turn the call over to Steve Cartt. Steve?

Steve Cartt

Thanks, Don. Our expanded promotional activities directed to neurologists generated significant growth in Acthar prescriptions for MS during the first quarter. During the quarter, we shipped a record 508 paid Acthar prescriptions, for the treatment of MS relapses. This was an increase of 120% over the year ago period and 44% over the previous quarter.

We believe this performance is a strong signal that the sales force expansion has gained traction in the MS market at a faster rate than we expected. In addition to rapid growth, other positive trends in our MS business indicate that we are building momentum in this key Acthar market. In particular, we appear to have a steadily growing number of both new and repeat prescribers, as well as increasingly broad participation across the country.

As a reminder for our investors, we are promoting Acthar specifically for those MS relapse patients who don’t experience optimal outcomes from IV steroids, with first-line treatment for MS relapses. Some patients don’t fully respond to steroids, others experience problematic side effects and still others have trouble using IV steroids due to poor veins. For these three types of patients, Acthar can be a valuable treatment alternative, our promotional efforts are increasingly focused on two main goals. One, convincing an increasing number of prescribers about the benefits of using Acthar with their patients and two helping doctors, nurses, and others in their medical practice become more effective at identifying potential Acthar patients.

Our investment in the recent commercial expansion was intended to significantly broaden sales coverage and increase call frequency in the MS markets. And we are clearly seeing initial positive signs that this strategy is working and continuing to drive the growth of Acthar prescriptions in MS.

In addition to doubling of our sales force in the fourth quarter has allowed us to significantly reduce the size of individual sales territories. To our sales reps are now spending more time on sales calls rather than driving or even flying to doctors’ offices. With double the number of sales people, we are now able to call on more than double the number of neurologists.

We are also delivering a higher frequency of calls to those MS doctors with a higher potential for prescribing. Based on our previous experience, a high frequency of calls is critical for impacting a neurologist prescribing behavior. As most of you know we have only now completed our first full quarter with a newly expanded sales team and we believe significant additional growth potential remains for Acthar in the MS market.

We expect the increased Acthar call activity as well as further productivity gains by our sales personnel to drive continued MS sales growth through the remainder of 2011 and into 2012. In addition to increased promotion by our sales reps, Acthar sales are benefiting from our sponsored physician speaker programs.

In these programs, existing Acthar prescribers present to small groups of physicians, their experiences using Acthar and the published efficacy and safety data for Acthar in MS relapses. When combined with follow-up sales calls, these programs appear to be a key driver of our sales growth.

Recently, we have been significantly increasing the number of speaker programs being conducted and expect to continue doing so in the future. As Don mentioned, we believe that we still have a lot of work to do and a lot of room to grow in the MS market. Our number of Acthar prescribers is growing, but at roughly 500 it’s still just a small fraction of the roughly 4,000 neurologists in the US currently being called on by our sales force.

Now I will discuss our progress in nephrology. We saw early positive results from our 5% nephrology sales team. We hope to generate the highest number of Acthar prescriptions in nephrotic syndrome of any quarters so far. The 18 scripts in the quarter, compares to the 31 scripts for all of 2010. Importantly, there were 14 different nephrologists writing those 18 scripts. To the number of nephrologists who were using Acthar to treat patients with nephrotic syndrome appears to be growing.

We are encouraged by the Acthar prescriptions for nephrotic syndrome in the first quarter and hopeful that prescription activity in nephrology will eventually follow the strong sales trends that we’ve seen in the MS market since 2008. Based on the encouraging early Acthar prescription activity, we are now planning to expand our nephrology selling efforts and are currently exploring options for increasing our sales efforts in the nephrotic syndrome market.

In the mean time, our group of five nephrology sales reps have only very recently begun to use the newly published first clinical dataset for Acthar in the treatment of nephrotic syndrome. We also expect additional new data on Acthar to be presented this November at the American Society of Nephrology Annual Meeting and we believe availability of this data will further enhance our selling efforts in this market.

Importantly, the recently published K-Series paper combined with the clinical dataset expected to be available in November, should give us ample tools to grow Acthar prescriptions in nephrology until we complete the larger company sponsored Phase IV study that is now underway.

Finally, as noted on previous calls, we have been conducting an in-depth assessment of the other 15 approved Acthar indications. This is an ongoing project and we have additional work to do in order to finalize our analysis. While it is premature to announce where we think this analysis will lead, we can report that we intend to provide a specific announcement on our next quarterly call.

So let’s summarize. We are very pleased with MS prescription to grow during the quarter and expect continued growth during 2011. Based on our early but positive prescription trends in nephrology, we plan to expand our nephrology selling effort and are in the process of evaluating options and timing for doing so. The IS business remains stable and has the potential to grow modestly over time.

And finally, we expect to be ready by our next quarterly conference call to provide a specific announcement related to our analysis of the on-label indications for Acthar. With that, let me turn the call over to our CFO, Mike Mulroy. Mike?

Michael Mulroy

Thanks, Steve. For the first quarter 2011, net sales increased 40% to a record $36.8 million from $26.2 million in first quarter 2010. Gross profit margin in the first quarter was 95%, we expect gross margin to return to its historic level of 92% to 94% next quarter. Operating expenses were $18.6 million, up $1.8 million from Q4 levels. We expect operating expenses to increase by a couple million dollars in Q2, as we expand marketing programs for MS and incur expenses related to the Phase IV clinical trial in NS.

We continue to generate strong free cash flows. As of April 22, 2011, Questcor’s cash, cash equivalents and short-term investments totaled $128 million. During the first quarter, the company used the $11.5 million to repurchase 884,300 shares of common stock in open market transactions. These repurchases brought the total expenditures for the repurchase of common and preferred shares to over $78 million since this effort began in 2008.

As of March 31, 2011, Questcor had 61.7 million shares of common stock outstanding, with 4.3 million shares remaining under its common stock repurchase program. We continue to be committed to returning a significant portion of our free cash flow to shareholders. Now I will turn it over to Kirsten, who will provide a summary of our sales-related reserves, especially on Medicaid reserves. Kirsten?

Kirsten Fereday

Thank you, Mike. Since the company does not received rebate claims from the various state Medicaid agencies, until well after the close of the quarter in which the underlying sales takes place, the company establishes reserves for expected rebate claims on a quarterly basis.

As a result of the adoption of healthcare reform for periods after March 23, 2010, the company has also included in this reserve an estimate for a new group of patients covered under state Medicaid Managed Care Organizations or Medicaid MCO, which were not previously rebate eligible. We have a reliable predictive model for the old group of Medicaid Acthar patients who are already rebate eligible before the new healthcare legislation.

For this group, we developed our Medicaid reserve provision through an extensive state-by-state analysis of our historic Medicaid-related Acthar prescription experience. We’d leverage this internal historic data to build our predictive model. During 2010, this predictive model accurately forecasted the rebate invoices for this group and this was again true for the bills received during the first quarter of 2011.

As I mentioned, the now 13 month old healthcare legislation expanded Medicaid rebates to a new groups of patients, the Medicaid MCO patients in about 28 days. The information we used to set the reserve for the old cohort is not yet reliably available for the new cohort. Since we have less internal or historic data to work from, our predictive model combines the internal data that we do receive with national enrollment statistics by age group to estimate our liabilities for the Medicaid MCO reserve.

States have been slow to bill us for this new cohort of patients. During Q1, we received from states representing about half of the new rebate population. Based on the internal analysis of the MCO bills received in Q1, we have adjusted the reserves set for those states. Specifically, we reduced this reserve by about $700,000. We currently expect to receive a significant portion of the remaining new rebate invoices during the remainder of 2011.

So in summary, we believe that our Medicaid reserves including those for Medicaid managed care patients are adequate. Further, our Q1 reserve is in the same percentage range as in the prior quarter’s reserves.

Don Bailey

Thanks, Kirsten. In summary, we have had a fast start to 2011 and are consistently executing on our sell-more-Acthar strategy. Our expanded Acthar MS sales force is generating positive results sooner than we expected. But in our opinion, we have lots of room to grow.

In 2011, we expect continued MS sales gains, as our commercial teams gains productivity by sharing best practices with each other. Furthermore, we plan to expand our NS selling efforts based on the early success of our nascent sales effort there. In the first quarter, we had increasing sales levels combined with strong profit margin and we continued our shareholder-oriented cash usage program. Based on our historical success and especially in light of our record first quarter, we are excited about Questcor’s prospects going forward.

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

Question-and-Answer-Session

Operator

Thank you sir, we will now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Tim Chiang with CRT Capital. Please go ahead.

Tim Chiang – CRT Capital

I had a question, you talked about some additional data that may come out at the upcoming ASN Meeting later this November. Can you talk a little bit about, is that new data that we haven’t seen yet in the nephrotic syndrome indication.

Don Bailey

Sure Tim, let me ask Steve Cartt who is also Head of Medical Affairs operation to providing answer there.

Steve Cartt

Yes Tim. So we know that the studies have been progressing and what we hear from the investigators and of course these are external studies. They are investigator sponsored studies. Although we provide grant funding for them and the investigators we talk to, we know that they are and some of them at least are working on wrapping studies up or have made significant progress and are planning to present data at ASN in November. So that’s really where that comes from. We really can’t comment on specifics about the data that will come later in the year.

Tim Chiang – CRT Capital

Okay and then just one follow-up, Don you mentioned, considering expanding the sales efforts in nephrotic syndrome, what are the alternatives that you are looking at right now and then sort of what’s the timing as to when you pull the trigger?

Don Bailey

First of all, we have the new sales team in place for less than two months. So we’ve seen enough progress to realize that an expansion at sometime make some sense here. The natural choices are to add more nephrotic syndrome sales or to emerge the activity with some of the activity of the MS sales group and that group has been following on child neurologists for infantile spasms and we are at the tail-end of that process. So they would have some time available, at least some of them. So we are just looking at all the natural choices that frankly you would look at as well dedicated versus emerged sales force. So we need more people and we are just too early on right now to give any specifics about how that might happen, but probably we’ll have something within the next three months that we can announce.

Tim Chiang – CRT Capital

Okay and just one last question, I just sneak it in which is, how big is the trial going to be for this Phase IV study in idiopathic membranous nephropathy?

Don Bailey

We are talking about a trial with three arms, two dosing arms and a placebo arm probably and equals about a 125 sites. We just gotten started we hope to get the first patient dosed during Q2. I think of course actually official start of the term.

Operator

Thank you. Our next question comes from John Newman with Citadel Securities. Please go ahead.

John Newman – Citadel Securities

I just wondered Don if you could give us a little bit more color on your spending for the rest of the year, I know that you mentioned that spending is expected to be higher going forward is that going to be more weighted second quarter is it going to be equally weighted across the quarters? And then Steve mentioned that you are continuing to increase your physician speaker program overall. I’m just curious if you are conducting speaker programs in nephrotic syndrome and if so you plan to increase those going forward? Thanks.

Don Bailey

Okay, let me take a shot at the first one and then I’ll ask Steve to answer that speaker program question or he hand it off to if he wants. The way we are approaching spending in our commercial area is, we have a hard budget for the immediate quarter, which in this case is the second quarter and soft budget for the rest of the year and as we get to the end of Q2, we’ll decide how much to increase or not increase spending for Q3. What we can tell you is for Q2, we would expect the selling and marketing expense to probably be up about $1 million roughly over Q1 and of course a lot it depends on how successful we are. A significant piece of our spending is commissions. So, we will be increasing speaker programs which will be the biggest part of that increase in Q2, further immediate return investments. Then for the rest of the year in sales and marketing, it will really depend on how well we do at the top line. For the rest of the company except for research and development and the trial, we don’t really expect too much of increased spending other than hiring a person here or there. Obviously the trial which we now gotten in the first steps going into Q2 will show fairly level of spending of approximately $1 million in each of the next three quarters, maybe a little bit more as we get into Q4. So Steve, could you address on his questions on speaker programs.

Steve Cartt

I’ve actually got John I have our VP of Commercial Ops Eldon Mayer here. I’ll let him, he his closer to this stuff on a day-to-day basis and wanted to comment on the speaker program.

Eldon Mayer

Hi, John, as you know, as was mentioned, we have dramatically increased the speaker programs in MS and we plan to increase them quite a bit looking forward and that’s been the major area of focus for that team the marketing team and the sales force. With respect nephrotic syndrome and nephrology your question, again we are just getting started here. There is a fair amount of infrastructure that needs to be built off of our speaker’s bureau. All of that training speakers, development of projects and everything else, so we are conducting speaker programs, yes, as a matter of fact I attended one last night. But they are not high quantity, again we’ve only got five reps and they are just getting started. However, we fully intend on increasing that building out that capability within the company. So I can’t give you any specific numbers, so we will be increasing those significantly over time. I hope that answers your question.

Operator

Our next question comes from the line of Chris Holterhoff with Oppenheimer & Company. Please go ahead.

Chris Holterhoff – Oppenheimer & Co

Thanks guys. Just a question on Medicaid rebates. You mentioned that you received Medicaid bills from I think about half of the patient population from the key 28 states. I’m just wondering if you could tell us what that represents in terms of the number of states of how many of the total 28 states that you’ve heard back from regarding Medicaid bills?

Don Bailey

Sure, I’ll let Kirsten answer that question.

Kirsten Fereday

We’ve received bills from nine states. Nine of the 28.

Chris Holterhoff – Oppenheimer & Co

A broader question. I’m wondering looking availability of the new oral MS therapies if you expect any impact on your opportunity for Acthar in MS either in the near term or long term?

Don Bailey

Steve, would you like to answer that question?

Steve Cartt

Yes, sure, we are not really seeing obviously any impact negatively at this point. Over the long term it’s hard to be 100% sure, but the efficacy rates with the newer drugs, though they are orals they may end up with better compliance rate that the injectables have. But as far as efficacy rates they are not too different than what we’ve seen from the older injectable drugs. So at this point we are not foreseeing any significant shifts in the number of relapses overall.

Don Bailey

The other thing Chris is we have such a smaller percentage of the relapse market at this point that the market could change a little bit and that really wouldn’t impact our growth potential.

Operator

Thank you. Our next question comes from the line of Biren Amin with WJB Capital. Please go ahead.

Biren Amin – WJB Capital

You noted that you reduced the reserve by $700,000, I guess based off of trends from the nine of the 28 states. So I guess what gives you confidence to reduce this reserve and I just want to kind of understand your thinking around that? Thanks.

Don Bailey

So first of all, we had estimates for this entire 28 state group. And we have broken those estimates down state-by-state. So when we have bills in for those nine states, we verified with those states what level of billing they think they have done. Then we took their estimates and conservatively adjusted and even after that, we were left with about $700,000 for those nine states. We made no adjustments for the other 19 states my math right here. So the 19 states we did received any bills from we did not adjust those 19 states based on the experience from the first nine.

Biren Amin – WJB Capital

You also mentioned on the call that, April scripts grew dramatically, is that in reference or in comparison to the March?

Don Bailey

No, I think what we said is that, the trends of March continued into April. So the strong prescription activity for both MS and nephrotic syndrome in March have continued into the first three weeks of April.

Operator

Thank you. Our next question comes from Yale Jen with Maxim Group. Please go ahead.

Yale Jen – Maxim Group

Thanks for taking the questions. Just want to know a little bit in terms of the revenue breakdown between the MS-IS maybe miscellaneous or if you want to be more specific on the MS. Could you share some color on that?

Don Bailey

So we are estimating MS at roughly 60%, IS at roughly 30%, so the remainder is split between MS and other. Now, nephrotic syndrome gets spread out over a six months period. So each of those scripts would show up in the first quarter. We will detail all the way through Q3. So and just for the new people on the call, our ability to strive our revenues precisely to therapeutic areas is not the best and thus far we would approximate.

Yale Jen – Maxim Group

Okay great and just a quick follow-up question that they maybe push a little bit to the length. In terms of seeing that MS expansion at this point with the sales force in place would you be willing to speculate what you think it might be for the rest of the year in terms of overall growth or still it’s premature at this moment?

Don Bailey

It’s premature on MS only. I think if we didn’t have nephrotic syndrome in the equation, we probably would not be looking at expanding the MS sales force yet again this year. Now, March was a dramatic upturn and if that continued maybe we’d accelerate our plans. But, more immediately is how do we want to expand the nephrotic syndrome selling effort and I’ve already described that we are just at the very beginning of working the plan.

Operator

Thank you. Our next question comes from John Paffendorf with Morgan Stanly. Please go ahead.

John Paffendorf – Morgan Stanly

First your scripts in MS is in impressive which seem to reflect higher number of sales calls. But on average your vials per script in the segment has almost halved. Could you talk about this trend a little bit, because obviously revenue growth is linked to incremental vials and not scripts?

Don Bailey

Right, that’s a good observation. We have seen over time in both infantile spasms and in MS, we’ve seen a gradual decrease in the number of vials. The average number of vials per script as doctors gain more experience in using the drug. Many of them find that a little bit less drug can get job done. And we are fine with that because the last thing in oral we want is for patient to be taking more Acthar when they don’t it because that’s a recipe leading safety issues. So, with MS the most common protocol is a one week protocol and with also many doctors that use a two week protocol and then many of the patients that take the drug for one week need a second week. So we have seen MS scripts overtime come down from average of 2.5 down to 2 and even we are noticing out starting to well below 2. Insurers are also playing in this a little bit, because as our volume picks up more of the insurers are approving one vial and then selling the patient if they need a second vial to come back and get him to retail. Now the same thing is true with IS, we’ve seen over time the number of vials per script come down from as high as 6 now down into the 4.5 range.

John Paffendorf – Morgan Stanly

Okay, one quick follow-up and then I have one question on Medicaid. Neurologists are cautious about Acthar without significantly more data proving superior efficacy. Is there a plan for a large multi-center study in the future for MS in order to provide the required information to physicians?

Don Bailey

No, and those physicians who say that, don’t understand the physicians interacts are. Acthar is not competing with IV steroids or first-line physicians. So it’s not relevant whether Acthar is more efficacious than IV steroids. The plan here is for the neurologist to prescribe IV steroids as the first-line treatment but use Acthar for those patients for whom they didn’t get the complete relief. So in this scenario, which is the one that the marketing team and our sales team are pursuing Acthar really isn’t competing against any other therapy. So there will be no reason to do a multi-center trial.

Operator

Thank you. Our next question is a follow-up question from the line of John Newman with Citadel Securities.

John Newman – Citadel Securities

Don, it seems like your tax rate this quarter was a little bit lower than what we’ve seen in past quarters and part of that’s slightly due to the adjustment that you made with the California tax law. Could you give us a sense as to whether what we’ve seen this quarter might be a reflection of what likely for the rest of the year and then also, you did buyback some shares this quarter. Just curious if you can give us any sense as to what your plans might look like there for the rest of the year. Thanks.

Don Bailey

Let me ask Kristi Engelke our Controller to answer the tax question and then I’ll address the repurchase question.

Kristi Engelke

You are correct. The reduction in the estimated tax rate is a reflection of the single sales factor for California and we had predicted it would be about a two percentage point reduction in our tax rate and that’s why exactly what it was. Going forward, I would imagine that our tax rate will stay within that range maybe a little bit higher but I think for now with the data we have available that seems to be a reasonable estimate.

Don Bailey

And with the share repurchase our plans haven’t changed. The statement that we made over time is that our goal is to return half of our free cash flow to the shareholders. At this point in time we are very close to having achieved that with the current program. There has been a time period where we have had a very heavy repurchase activity and then there has been time periods like all 2010 when we didn’t repurchased anything. So we repurchase when we have an opportunity and when we think the price is a good price.

Operator

Thank you. Our next question comes from the line of Brian Delaney with EnTrust Capital. Please go ahead.

Brian Delaney – EnTrust Capital

The original release you guys put out in fact on April 4, the expectation for the reserves will be comparable to the prior period, I think earlier in the call you said that you received a bunch of bills in March. So can you explain what happened between that release and with the reserves ended up today?

Don Bailey

When we put out the release on April 4, we said that the percentage of rebates to gross sales would be in the same range that it was in Q2, Q3, and Q4 of ’09 and I think that that range was 24% to 28% of 2010 I recall. So and that range was 24% to 28% and the reserves came in at 24%. We were right within that range. What took place between the end of -- April 4 and now, I’ll let Kirsten to try that just a little bit what the process we go through.

Kirsten Fereday

The first focus is using our model to predict the reserve for both the old existing rebates as well as the new group of rebates and then we also use the new information that we have from the most recent billing to look at the existing reserve to make any informed judgment that we want to make on that which is what we get with the MCO bill that we had available.

Brian Delaney – EnTrust Capital

And so what came in March then, that you said earlier in the call?

Kirsten Fereday

We received during February and March we received our standard Medicaid rebate billing. And so there were a lot of bills and part of what we would see during that time frame were some MCO bills. And so we use that information to further think about existing Medicaid MCO reserve.

Brian Delaney – EnTrust Capital

And so is the implication that’s for the nine states that come in obviously then it was well below the historical 24% to 28% range?

Don Bailey

The nine states, we have to separate, as the 24% includes both the Medicaid MCO and the historic fee for service and the 24% actually includes other elements of our sales reserve like TRICARE and so forth. So, a group of rebate that we have always been getting well within the normal range. There was nothing unusual there. So what was new were these or these 9 states that represented new rebates eligible patients and those were well below what we have reserved. That’s a new category and we had no history there yet.

Kirsten Fereday

And that $700,000 was looking at three quarters worth of reserve. It wasn’t just looking at one quarter worth of…

Don Bailey

Yes, so in Q2, Q3 and Q4 of 2010 we have gradually built up about an $8 million reserve and so those 9 states which represent about half maybe they were $4 million of that $8 million and we determine that that was a little bit too high.

Brian Delaney – EnTrust Capital

The operating cost come in slightly above what we talked about in the pre-release what happened there?

Mike Mulroy

We put out a range that we were kind of just above that. The main driver there was after that release went out, we decided to write-off about $300,000 of goodwill in connection with a old deal back in ’99 there was an acquisition that goodwill adjustment sitting on the books and we took the impairment charge this quarter.

Brian Delaney – EnTrust Capital

The momentum in scripts that continued in April, what is the correlation to shipment than also in April. I’m trying to breakdown the difference between scripts versus what vial shipments that ultimately translates into revenue. So, should we assume that there was also a continued strong shipment of vial than equal as well or should the takeaway we should have from that comment?

Don Bailey

It’s too early to make that exact correlation, but in general it’s the vials per scripts stayed the same. Then that would be a reasonable assumption over an extended period of time say six months. In any short time period you can always have inventory, selling out of inventory or replenishing of inventory that can cause that number to be higher or lower. So few weeks is not a good time period to look at that. And that there is this phenomenon of gradually decreasing vials per script, which means that we have to have more scripts in order to make up for that slight decrease.

Brian Delaney – EnTrust Capital

Right, so should I look at – it seems like your visibility to scripts but we don’t know the vial per script is right now. So should I be focusing on scripts or vials?

Don Bailey

We think the easiest thing to focus on is scripts, because without the script growth we won’t get the vial growth. So scripts represent end demand in terms of patient usage. If the script growth continues, the vial growth has to follow, but there is also a bit of a lag. Okay. We watch them both in summary.

Operator

(Operator Instructions) Our next question is a follow-up question from the line of John Paffendorf with Morgan Stanly. Please go ahead.

John Paffendorf – Morgan Stanly

Can you provide any color to the extent in which Acthar patient population will have more Medicaid patients going forward once the 28 states you mentioned finalize their Medicaid data under the new legislation. This is – from whether you are currently provisioned for the retroactive fee base under the legislation?

Don Bailey

No, we would not expect any additional increases. We’ve already accounted for the substantial bump in the number of rebate eligible patients that equates last March. And the level occurred in Q2, Q3, Q4 and Q1 should maintain. What we will gain over rest of this year is a better understanding what’s the reality there versus our estimate. So far that’s working pretty good.

Operator

Thank you. Our next question comes from the line of Patrick Lin with Primarius Capital. Please go ahead.

Patrick Lin – Primarius Capital

In the past quarters you’ve been able to give us a little preview of your confidence schedules might be like and I’m just wondering if you could do the same thing in terms of for the next couple of months where you might be in terms of the next conferences?

Don Bailey

Okay, we’ll give the shock. We’ve done state conferences so far this year but it’s going to slow down a little bit now. We don’t have any in May at this point. We have Jefferies in June. We are working on trying to get into Canaccord in August and we have UBS in September. So far that’s our immediate schedules and we will be doing some road shows as well.

Patrick Lin – Primarius Capital

And I understand that there is some event at the end of April in Las Vegas, is that right?

Don Bailey

There is the National Kidney Foundation Meeting, that starts tomorrow and we’ll have a booth there and presence at that conference.

Operator

Thank you. Our next question is a follow-up question from the line of Tim Chiang with CRT Capital. Please go ahead.

Tim Chiang – CRT Capital

Your gross margins historically has been around in the 92% to 93% range and I noticed they were almost at 95%, what’s driving the variance in gross margins?

Don Bailey

I like Kristi Engelke answer this complex scam.

Kristi Engelke

The margin for Q1 really is – it kind of rounded to 95%. We have some timing differences in QC cost that we generally incur over the quarter. So, we can expect it to go back to the low, about 94% going forward. It doesn’t take much to the swing margin by the way.

Tim Chiang – CRT Capital

Okay, great. Thanks.

Operator

Thank you. And I am showing no further questions at this time. I will turn the call back to management for any closing remarks.

Don Bailey

Thank you all for attending and we look forward to speaking to you at the end of the next quarter or before. Take care. Bye, bye.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Questcor, first quarter 2011 financial results conference call. If you like to listen to a replay of today’s conference please dial 1800-406-7325 or 303-590-3030 and entering access code 4434709. We thank you for your participation and 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 CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts