Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR)
Presentation at UBS Investment Bank’s Global Life Sciences Conference
September 19, 2011 10:30 am ET
Don Bailey – President, Chief Executive Officer
Ami Fadia – UBS
Good morning everybody. Thanks for joining us. I am Ami Fadia, the mid-cap (inaudible) analyst, UBS. Our next presentation is from Questcor Pharmaceuticals and it’s my pleasure to invite Don Bailey, and I’ll let him take the podium. Thanks. If we have some time for questions, you know, feel free to ask questions here; but there’s a break-out room at the Carnegie Room on the conference level. We can have more questions there.
Okay, good morning. Oh, this sounds like you can hear me okay. Good. So we’re here today to talk about Questcor Pharmaceuticals. I want to—for those of you who know the story, you already know that Questcor is a little bit of an unusual pharmaceutical company. For those of you who don’t know the story, I need to warn you that you’re going to hear something a little different today. For the most part, Questcor does not fall into the common constructs of most pharmaceutical companies, so—and we’ll get into details of that in a little bit.
This presentation was filed with the SEC on the 9th, which is why the dates—all this information is up-to-date through about 10 days ago. We have the standard Safe Harbor statement. I want to caution everybody to please read all of our risks carefully and invest your time first. Our risks really boil down to a risk of possible future competition and, of course, any action from a regulatory body.
Questcor is a single-product company. We call the company a biopharmaceutical. We fall into both the biotech model a little bit, but probably more into the specialty pharmaceutical model. We are dealing with difficult to treat medical conditions and patients who have serious life-threatening issues. Questcor’s flagship product—Questcor is basically a one-product company. It’s flagship product is Acthar gel. This is a product that’s been on the market for 60 years. It’s an old product. There’s 19 approved indications. I want to repeat that – 19 approved indications for Acthar. We currently have significant revenues in multiple sclerosis and infantile spasms, and a growing level of revenues treating nephrotic syndrome, a kidney condition. The combined market opportunity here is clearly in excess of a billion dollars, or a billion and a half dollars. We really don’t know, and as you get into the details you’ll see why it’s a little bit unknowable at this point. Our current—our run rate revenue level is about 200 million, just under 200 million.
The Company’s strategy is very straightforward. It’s to grow Acthar sales in each of these markets and develop lupus as our next market, another on-label indication, and then go after the other dozen or so on-label indications. The Company is profitable, cash-flow positive. We have a little bit over $2 a share in cash and the Company is debt-free.
The history of Acthar is a little bit unusual, as I mentioned. The drug was first approved in 1952. MS was added as an indication in 1978. Acthar acquired the drug from Big Pharma in 2001 after Big Pharma ran into manufacturing problems and wanted to get out of that market, get the drug off the market. Questcor rescued the drug from Big Pharma and kept it on the market. In 2007 we changed our strategy and adopted an orphan business model strategy, and 2007 was then the first time in a 60-year, 55-year history up to then that Acthar actually made money. So it lost money for 55 years and then we changed the strategy and it’s been profitable ever since. 2010, the FDA reviewed the entire label as part of a label submission that we had with infantile spasms and has now—the label is completely modernized and the 19 indications look good to us for the future.
There are significant barriers to entry. This is a key question we get – you know, what’s the patent situation and what’s the IP? There are no patents but there are significant barriers to entry. The first is the formulation. Acthar is derived from porcine pituitaries. The composition of Acthar is undisclosed. The manufacturing process is complex and proprietary. We own all aspects of it, and we own this drug—all aspects of this drug throughout the world, worldwide. The composition of the drug—the final composition of Acthar is tied to the process, which is a trade secret.
In addition, there are obviously FDA hurdles that a competitor would have to work their way through. When you get done this analysis, we think that a generic would be unlikely, a biosimilar would be unlikely, and that trials would be needed. The trials are needed, we’re into a whole different range of competitors. It eliminates substitutability as a threat, and now if a company is going to bring a new chemical entity into the picture, they’re going to have to try to bring it to market. They have to look at the business economics, they have to look at the cost of getting through the FDA, the probability of getting through the FDA. And if that were to all occur, they would just have a drug on the market for one indication. It wouldn’t be called Acthar or anything like ACTH, so the fact that we have multiple indications producing revenue should give some comfort to investors.
So again, our strategy is to sell more Acthar. We’re looking at multiple sclerosis as our prime market. Nephrotic syndrome is number two in terms of importance; it’s number three in terms of revenue right now. Infantile spasm is a mature market. It’s our only mature market, and then we’ve just announced that we’re looking at lupus as a market.
So let’s talk about each of these. MS and Acthar – MS is, of course, a well-known neurodegenerative disorder. Acthar is approved for treating relapses, so this is not a disease-modifying therapy. It’s the only drug other than steroids approved for treating acute relapses, and the treatment period is short. The value of a prescription here is in the $40,000 range, so we’re talking about using Acthar for those patients for whom steroids are not suitable. We started selling Acthar into the MS market about three years ago, so each of these bars is a quarter. You can see nice, steady growth.
The numbers at the top of the bars are the actual number of prescriptions in that quarter. The yellow numbers at the bottom of some of the bars are the number of salespeople, so we expanded the sales force in the fourth quarter of last year and then that expanded sales force has produced nice growth. That same information here is presented in monthly data for that same time period, or most of that same time period; and you can see we experienced some rapid growth in the first part of this year. We have announced that July’s data point on this chart is kind of in the same range - supposedly this works – same range as these numbers, so July is over here, and that August was a record. So that together, that run rate is about 10% higher than Q2 sequentially. And that’s what this chart says as well, so year-over-year in Q2, scripts are up 147%. MS now represents well over half of our sales, about 60% of our total net sales. There are only 400 prescribers writing Acthar in that quarter out of a potential for anywhere from 5 to 8,000 doctors who could write Acthar for MS. We only had 60 doctors write a prescription more than once a month, so we’re still early on. We think we’re still in a single-digit penetration into a market where we have basically no competition. And I’ve already told you about Q3.
So let me switch to nephrotic syndrome. Nephrotic syndrome is a condition characterized by excessive spilling of protein into the urine, a condition called proteinuria. This leads to end-stage renal disease which then leads to dialysis or transplant. There’s a significant unmet need. Acthar appears to be one of the few drugs approved for treatment of nephrotic syndrome. There is not a significant history of use here, so this is basically equivalent of a new launch for Acthar, even though this has been on-label for a long time. No commercial team has ever really tried to penetrate this market.
The treatment period here is much longer than it is for MS, so whereas MS was a couple weeks, here we’re talking a six-month treatment, and the value of a script is in the $200,000 range. Sales are just beginning. Now, these are very small numbers, so the number again—this is a bar chart for the last five quarters or six quarters. The first four quarters on there, there were no sales people so those scripts were just kind of coming in on their own – we call those spontaneous scripts. During the first quarter this year, we hired five salespeople just to try this market out. They started selling in March and had a little bit of traction. By May we realized that the return on investment was good here. Since each script is worth $200,000, a sales rep really just needs two scripts in a year to cover their costs, and they ended up Q2 with 45 scripts. So we’ve decided to expand that market – I’ll come back to that point in just a second.
The market size here is something in the neighborhood of 20 to 25,000 patients. There’s a list here of all the subsets of nephrotic syndrome that Acthar is approved for and that we’ll be looking at penetrating.
So we had the five sales reps—back to the sales rep story. We hired five sales reps and they made good traction in Q1 and Q2, so we have expanded the MS selling effort. This says expanding – we now have expanded it. We’ve just hired the 28th person, so we now have 28 sales reps. They’re in training. We expect them to all be in the field by October 1. A few of them are already in the field. We would expect the number of sales calls in Q4 to increase by quite a multiple over Q2. We have indicated to investors that because the sales team that we had in Q2, these five sales people, had to spend some time recruiting and training the new reps, that the number of sales calls in Q3 were down from Q2. Despite that fact, Q3 at least through July and August was running on a par with Q2, at least two-thirds of Q2.
We have initiated a company-sponsored phase four trial in idiopathic membranous nephropathy. It’s a dose response trial. It will have three arms, small-n here 84, 35 centers. This trial is underway, just getting started. The end point’s a really clear endpoint – reduction in proteinuria, and we would expect by late next year and into 2013 to have some data here that would be helpful. The results of this trial, we do not believe, are on the critical path to our success of the commercial roll-out, but they certainly could serve as an accelerant if we were able to get a positive outcome from this trial.
Let me briefly touch on infantile spasms which is a condition that affects children under two. It’s a form of epilepsy. It’s considered a medical emergency. The child is experiencing spasms but more importantly, their developmental process has been arrested; and if the child does not get treatment, they are going to end up in a very bad condition, in a vegetative state or with permanent epilepsy. Acthar has been the treatment of choice, been the gold-standard for treating infantile spasms for probably close to 40 years, and yet we just obtained approval. No one had tried to get approval for this drug for infantile spasms until we spent the money to do that. We were able to obtain approval last October. The treatment period here is two to four weeks. The value of a prescription here is about $100,000. About half the patients receive drug for free because that’s the way the Medicaid program works with Acthar.
There’s a study—the key study here for Acthar showed a very high level of efficacy, and the drug seems to work pretty well. When the drug works, patients can be back to a total normal life – not every time, but in many cases.
IS sales – IS is a mature market, so we don’t have a lot of selling effort going on here. We spent a little bit of time in Q1 and Q2 promoting Acthar just off of the approval, and sales did go up about 5%. But our sales reps’ time are better spent marketing MS, so that’s where they’ll be spending their time with a little bit of time in nephrology. So the only time we’ll spend in IS is targeting a few institutions that still need to be called on. There is significant variability just due to the small numbers here, small number of patients and small number of scripts that occur in a quarter, so we see significant variability. But it’s basically, again, a mature market. We noted that Q3 sales through script counts in July and August were in the normal range.
So our immediate growth opportunities are in MS, and here we have single-digit market penetration. We have a market positioning that seems to be working. We have a robust sales force that’s gaining some traction, and our plan there is just to keep on making sales. Nephrotic syndrome, we’re just starting. The first group had a little bit of success so we’ve expanded that group, and we’ll see what happens there. IS, as I said, is a mature market.
So our total sales force here – this chart summarizes our total sales force. We have what we call a specialty sales force that’s spending 80% of their time selling MS. They spend 15% of their time on nephrotic syndrome and a little bit on IS. So we have a total of 91 people in the sales force, 77 reps and management. Our nephrology sales force, 100% focused on nephrology in major metropolitan areas. Twenty-eight reps, they’re all hired now with five in management, and they should be hitting the streets soon. So the combined sales force is going to be calling on neurologists, nephrologists, and a few children’s hospitals.
Let me take a few minutes and talk about systemic lupus erythematosus, which we’ll just call lupus. There’s a high unmet need here, serious health risk if unsuccessfully treated. I think there is really just one drug approved for treating lupus. Acthar has multiple indications for lupus. Acthar is the only drug approved for treating exacerbations other than steroids – steroids are approved for everything – other than steroids. Acthar is also approved for maintenance therapy, where benlysta has just been approved, and Acthar is approved for lupus nephritis. There’s a large patient population here and we’re interested in seeing how Acthar will work here. We’re just getting started, so we’ve just announced that we’re looking at this market. We have one person working on that project.
Let’s take a quick look at our financials. The Company is profitable, debt-free, cash flow positive. Those are all good things. Have to repeat that since it’s a small pharmaceutical company – that’s not always the case. In Q2, our financials, our sales are up 60%-plus year-over-year. Earnings were up 50% year-over-year. We have a very nice operating margin north of 40%, gross margin north of 90%. You can see the exact numbers there on the chart. With the multi-use file, it’s a self-injectable subcutaneous injection, or IM, and we’re dealing with very, very low volumes here and a small number—a handful of scripts.
Our balance sheet – this is basically the entire balance sheet. So we have a lot of cash – cash is a little bit under 10% of our market cap, so it’s a reasonable amount of cash, and this was as of a couple weeks ago. (Audio interference) of the outstanding shares over the last three years. We’re an opportunistic re-purchaser, so we buy in large quantities infrequently, but we have been able to shrink the share count by quite a bit through that process, more than offsetting option dilution.
So our go-forward plan is extremely simple. Our plan is to sell more Acthar. This means that we’re going to just sustain the effort that we started with MS. We’re going to greatly expand our effort in nephrotic syndrome, maintain our positioning in IS, and explore lupus. We will then explore other on-label indications which include rheumatoid arthritis, polymyositis, sarcoidosis, Stevens-Johnson, optic neuritis, and a number of other indications; and we will look at off-label indications as well. There’s a long history of Acthar usage in many other indications, and Acthar works through down-regulating the immune system in just one phrase and therefore seems to have application throughout the body. We are working on better understanding the unique characteristics of Acthar as we move along.
We have no business development efforts planned, so no business development, no acquisitions, no mergers. The Company is not for sale, any of that kind of stuff, so.
Just to summarize and then we’ll have two or three minutes for questions. Acthar has a sustainable competitive advantage. The product seems to be in an area that has very low competition. We don’t have any FDA risk. Acthar is approved for lots of indications that have large markets and unmet needs. Our sales are growing rapidly and yet we’re just beginning to penetrate these markets. We’ve announced one new vertical, the fourth vertical market, high margins, good operating leverage, profitable cash flow, no debt.
So with that, we can take a couple questions if you want and then we’ll go to the breakout.
Question and Answer Session
Okay, the question is with so many rich opportunities already on-label, why don’t we go after more of these indications right now. And it really boils down to manpower and focus. We’ve had a good track record of execution and our strategy has been to focus on one or two major projects at a time. So right now, we’re focused on nephrotic syndrome and the expansion of that sales force - that’s a major undertaking – and continuing the momentum in MS. So we really don’t want to divert anybody’s attention who’s working on those projects. So if you’re on those projects, you’re not allowed to do something else like go look at the rest of the label. So last fall, we hired one person to look at the rest of the label, and that’s now Mr. Lupus. He’s now been sidetracked, but he’s not allowed to look at MS, IS, or NS, and they are not allowed to look at lupus. So it’s a one-person effort. If we could find three or four more people like him –he’s a very special person, not easy to find somebody that can go do that all by themselves. He’s got to understand science and he’s got to understand marketing, and that’s a hard person to find. So that’s the reason we can’t go faster. We would go faster if we could find the people, and if you know of anybody, please send them our way. We’re hiring all positions all the time.
Any other questions? I’m on the record here, so it’s a good time to ask on-the-record questions because once we go to break-out, I can’t answer those questions about the future, about today. Anything? Okay.
All right. Well, we ended up with an extra minute and no other questions, so we’ll go to break-out in the Carnegie Room. Okay.
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