Questcor Pharmaceuticals, Inc. (QCOR) The 30th Annual J.P. Morgan Healthcare Conference January 12, 2012 1:00 PM ET
Don Bailey - President and CEO
Mike Mulroy - SVP, CFO, General Counsel and Corporate Secretary
Dewey Steadman - JP Morgan
Dewey Steadman - JP Morgan
Good morning. I’m Dewey Steadman with the U.S. pharmaceuticals team here at JP Morgan. And we are pleased to have today Questcor Pharmaceuticals. And from Questcor we are going to have Don Bailey, President and CEO. And also Mike Mulroy, CFO presenting. After today’s presentation the breakout will be across the hall, and with that I will turn it over to Don.
Thanks Dewey. Yesterday we had an unusual event here, we had an attack from a short community and we put out a statement and I’d like Mike Mulroy our Chief Financial Officer and General Counsel to comment on this. I really don’t want to get distracted with this particular issue. We don’t know anything more than what these people put out. And so we are here today to talk about Questcor and its value proposition for investors. So, let me get this out of the way and then we will start with the presentation.
I’m just going to read the release we went on yesterday. I’m assuming many of you saw for people on the webcast well. Questcor believes that its marketing and business practices are consistent, its regulatory requirements and industry’s standard practices. We market Acthar Gel for the treatment of acute exacerbations of MS in adults for treatment on the product syndrome and the treatment of infantile spasms in children under two years of age. These are all indications on the approved label for Acthar.
The company maintains a compliance program which is led by an experienced compliance officer, and includes the active participation of Questcor’s executive management team. Questcor attributes the success to the ability of Acthar to potentially address the unmet medical need associated with MS exacerbations and their product syndrome.
The company is committed to providing access to Acthar, the patients who need, and marketing Acthar in accordance with regulatory requirements and industry standard practices. Questcor plans to speak with a publication to discuss the company and its marketing and business practices. Thank you.
Okay, let’s move forward, then naturally we have a Safe Harbor statement; most of our risks are associated with potential competition in the future and with oversight from regulatory agencies and attack from short communities. So, I guess (inaudible).
Questcor is basically a single product company, it's a biopharmaceutical product, therefore, we are a biopharmaceutical company. Our main product is called Acthar. Acthar helps patients with serious difficult to treat mostly autoimmune medical conditions. Acthar is a product with 19 approved indications as a result of our review with the FDA about 15 months ago. The key market, the key current markets for Acthar are multiple sclerosis, the flares of multiple sclerosis, nephrotic syndrome specifically idiopathic membranous nephropathy and FSGS, and infantile spasms. The markets that we are looking at here, just these markets are several billion dollars that does not include the markets with the rest of the approved in patients.
Our strategy is very straight forward, Questcor is a commercial operation, we are commercially focused. We are trying to grow Acthar sales in each of these key markets, and develop other of the on label markets for Acthar. Questcor is profitable, cash flow positive and has $200 million in cash and is debt free.
So, what I want to do is walk down these major markets, multiple sclerosis, nephrotic syndrome, infantile spasms and then we are going to talk about lupus because that’s the next on label indication that we are looking to pursue commercially.
With MS, Acthar used to treat relapses for patients who do not get complete response to steroids. So, as this chart shows over half of patients who take steroids do not get complete relief, complete relief means they get back to the quality of life they had before they had with flare. When a patient has a flare it's a sudden worsening of their symptoms that are natural with associated with multiple sclerosis.
So, there is a huge target for Acthar, the sales for Acthar has gone very nicely in multiple sclerosis. These are actually the number of prescriptions that we receive at our reimbursement center. These are paid prescriptions, so we exclude any Medicaid prescriptions for which we don’t get paid. The numbers at the top of the bar are the actual number of prescriptions. The yellow numbers inside the bar are the number of Acthar representatives. We have calling on MS doctors and you can see these numbers are just going out nicely overtime. So, this is about a three year history.
The same data here is shown monthly, so the prior chart was quarterly. This data is monthly and you can see in the fourth quarter we had sales that are pretty much trending up a little bit. But if you look at this entire time period, sales have trended upward except for March and in this time period and late in the summer. In March we attribute that big jump to the productivity of these sales rep that came in and took a little while to figure out what to do and then when they get. And then in this time period it was due to some focused marketing efforts that we apply. So, we are going to expand this sales force yet again in 2012 and hopefully that will spur further growth.
Let me move on to nephrotic syndrome. Here nephrotic syndrome is characterized by a protein leaving the body and the urine is called proteinuria in excessive amounts. This can result in adrenal disease which leads to dialysis, and in the best case transplant.
There is a significant unmet need, few treatment options; Acthar is one of the few drugs approved for treating nephrotic syndrome. The goal of therapy is to give a significant reduction in this proteinuria level.
We entered this market more recently we hired a pilot sales team early in the year and we started to get some prescriptions. We were encouraged by that, so we increase the number of sales representatives here from 5 to 28. At the beginning of Q4 and you can see sales number of prescriptions went up. And so that’s been very positive development. I’ll come back to talk a bit more about this later.
Now let me briefly talk about Acthar and infantile spasms, this is a mature market by comparison to the growth markets for MS and nephrotic syndrome. Our market with infantile spasm is a mature market. Acthar was approved about 15 months ago, for treating infantile spasms, but has been the standard of care for over 40 years. So, infantile spasms is not responsive to standard anti-epileptic drug. It's is responsive to Acthar when babies get this condition if they are not successfully treated, their outcome is very grim and frequently when they get Acthar their outcome is quite good. Let’s consider the medical emergency; there is only a 1500 or so babies here in the U.S. that get this (inaudible).
So, that’s why it's a culture where orphan and because of the pricing history with Acthar, basically within Medicaid that’s a free drug program for patients because we have to provide a 100% rebates at Medicaid program. And about half of all babies are enrolled in Medicaid, so half of our population here receives the drug for free and we report sales net of that. And the adult population is only about 10% of the adults are in Medicaid.
In the fourth quarter, IS prescriptions were higher, in fact they were the highest we had in our history and they are above the historic range.
Let me briefly talk about lupus. Again there is a high unmet need, this is a difficult to treat condition, it's actually a pretty heterogeneous condition, there is a serious health risk in patients, that if they don’t get successfully treated, Acthar has three on label indications, Acthar is approved for the treatment of maintenance, it's approved for exacerbations, again flares associated with lupus and lupus (inaudible) condition that attacks the kidney. And there is a large patient population in the quarter million, 300,000 range or even higher.
I’m going to talk briefly about financials and then I’m going to shift the conversation little it to the future. So, just quickly, Questcor is profitable, debt free, cash flow positive. These are Q3 results we haven’t open that Q4 results, I think on February 23 is the plan.
Net sales in Q3 were about 60 million, operating income was little bit over half of that and fully diluted, fully taxed EPS was $0.35. And the (inaudible) in Q3 was 2,910. Our balance sheet is in good shape, we have no debt, there is really nothing on the balance sheet, there is really nothing in the way of intangibles to speak of just cash and equity.
We instituted a share buyback program several years ago, and during the ensuing several years we have repurchased about 20% of the outstanding stock. And today we have 63 million plus shares outstanding, that’s the outstanding of fully diluted numbers and of the 3 million or so. And we have 4 million plus shares remaining on the buyback. We have been an opportunistic repurchaser of our stock.
We provided in a press release last Friday some preliminary metrics for Q4. I can’t quite calculate net sales and profits from this, but the analyst have taken their best shot at it. So, with MS, I already showed some of these numbers, which is the actual data, MS prescriptions were they are somewhere in the range of 935, 950. The reason we have to give a range here is that we have to go through a process and check every single prescription to make sure we got this category correct between commercial pay and Medicaid. And sometimes we can’t tell from the name of the insurance company we have to go investigate, and one or two move around during the wedding process.
So, with nephrology, scrips were 140 to 150 and IS were 120 and 125 range which is a record. We shift 3,360 files which s up 100% year-over-year. Last year Q4 we had 1,680 files. We have also announced that our operating expenses in Q3 are up from Q3, Q3 was flat to Q2, Q4 is up from Q3 principally because of the expansion of the number of sales people we had in nephrology.
So, I want to shift to talk just a little bit for the first time here about Acthar and how does it work and what’s going on here. we are becoming more intrigue overtime about Acthar and it's possible uses and other autoimmune conditions. Acthar seems to modulate the immune system, and it also then helps reduce inflammatory response.
Acthar is a extraction of porcine pituitary ingredients, and it has more than ACTH in it, it's a polypeptide there is actually quite a few different chemicals in Acthar. The principal one is ACTH. ACTH seems to have a direct affect on the adrenal glands for the MCR2 receptor, but ACTH and these other peptides all coming from the master melanocortin peptide in the pituitary gland. It also have an effect on the other four melanocortin receptors which effect the central nervous system, effect wide range of organs in the body and their actions.
There seems also to be a direct effect with Acthar, it seems to [act at historical level] binding to these receptors, scanned on the immune cells and targeted tissues. So, for example Acthar seems to operate directly at the [porcine side] level which is core filtration element within the kidney.
Now all of the active ingredients of Acthar have yet to be fully characterize despite the fact this is a 60 year old drug. We are the first owner of the drug to spend any money on the pharmacology. So, we are in the process of identifying and fully characterizing the drug and determining all of the mechanisms of action in the pharmacokinetic profile. So, there is none of that is currently known, none of it's in the public domain. And when we find out it will not go into the public domain, but we probably will provide it to the FDA.
So, we get a lot of questions about what’s the competitive pathway, but the last bullet on the prior chart really is a all of that is yet to be learnt about Acthar and it's not in the public domain. It makes it very difficult for a generic company to create a product that’s identical. That’s Acthar, Acthar is the contents are not known publicly.
We think that investors if they want to get some comfort around this should look at the drug called Premerin which is also a very old drug, that’s never been duplicated in much bigger market and much bigger set of sales. We do think it's possible for a competitor to come down this pathway with a new chemical entity and possibly bring drug to market. But in that case they have to run a trial, we think patents would be very difficult to get which would limit their exclusivity, and we have to and they only get one indication we are therefore, we end up with a duopoly in one indication.
We want to talk about the market opportunity and then also the value of this nephrology business in particular. So, a prescription for Acthar, here is a range of revenue to us for a prescription is roughly in the neighborhood of 40,000 for MS, 200,000 for nephrology and 100,000 for infantile spasms. With lupus we don’t yet know what the RX value will be, because we don’t know how much drug will be needed to treat various elements of lupus. And for other indications we do get prescriptions for other indications wide range of other indications since the drug has been around the long time. And the RX value there can vary anywhere from $25,000 to $400,000.
The market size is here, with MS appears to be at least $1 billion. We only have about 10% of doctors who prescribe all of the other MS drugs are prescribing Acthar, so if you look at the number of doctors prescribing Copaxone for example, they are 10 times the number of that are prescribing Acthar. And we are at about $150 million run rate now. So, we think the market size is over billion, nephrotic syndrome appears to be over a billion and we don’t really know how big all these other markets are, but clearly they are significant.
If we take a look at our current the most recent quarter here. So, if we look at Q4 in the second column, we have estimated where net sales will come out and then we multiply that by 4. So, we think that MS is now about $150 million business at the sales level. Nephrology is already gone past IS, which is historically been about $45 million a year business. And nephrology is already in the $65 million range, but the nephrology business here is worth, the nephrology scrips that came in Q4 are worth more than this 60, 70 million because those prescriptions will be filled over six months.
In the case of MS, and in the case of IS the prescription is filled all the whiles are send out immediately. So, all of the revenue generally occurs in the quarter in which the prescription was received for IS and MS, but for NS the prescriptions those 140, 150 prescriptions that were received in Q4 only had a little bit over half of that revenue has occurred. So, the other half will occur in Q1 and into Q2.
So, you can see from this chart that 28 reps, but the number of NS reps were 28 reps, they were generating a $100 million of the business. and the 77 reps we are generating a $150 million worth of business. Those are both very good numbers and we want to expand these sales force. These two sales forces. So, our plan is to focus on Acthar, focus on this embedded pipeline, the current commercial opportunity with NS and MS expand those efforts, maintain our IS effort, get the rheumatology effort with lupus going. And start looking at the other markets for Acthar both on label and off label.
We stated publicly many times that we have no plans to do any business development and we added or unrelated just to cover the one possibility if we could find something that was related to the pituitary. We might do something there.
Now this chart shows the expansion timeframe. So, we have already started the effort here with nephrology. We expect to roughly double our nephrology sales force during the first half of 2012, and we are at 28 now. So, we go will go to 50 or 60. Following right behind that, we will be expanding modestly expanding our neurology sales force by a dozen or two dozen representatives. And then later in the year we have accelerated our plans, we originally were planning as rheumatology highlight in late 2013. We have moved up to late 2012.
As the summary chart here, we want to note that Acthar has, we think has a sustainable competitive advantage. We really don’t have any FDA risk. Acthar is approved for 19 indications lots of large markets, lots of unmet need, sales and the principal markets are growing, and yet there seems to be plenty of room to grow. We are in the process of developing the new vertical market. We have high margins and nice balance sheet.
[No Q&A session for this event]
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