Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR)
Citi 2012 Global Health Care Conference
February 27, 2012 09:30 am ET
Don M. Bailey – President and Chief Executive Officer
Don M. Bailey
Thank you. Good morning. I see the market’s now open. So, we will get started with Questcor here. You start with the market day. So, first, we have our standard – Safe Harbor statements have been updated, our 10-Q was filed last – 10-K was filed last week. So this Safe Harbor represents pretty much what’s in the new 10-K. Please read our risk carefully before investing, make sure you’re comfortable.
Questcor is a biopharmaceutical company. We have a product called Acthar. It’s principally represents all of our revenues. And Acthar is a drug that helps patients with difficult-to-treat medical conditions, typically conditions that have devastating outcomes. The drug is approved – Acthar is approved for 19 indications. The key revenue drivers currently are Multiple Sclerosis, the treatment of flares associated with Multiple Sclerosis and the treatment of patients with Nephrotic Syndrome. We also get sales from treating patients with the condition called Infantile Spasms. We will talk about each of those three between them; the market sizes here are in the low single-digit billions of dollars.
Our strategy is to continue to growth our sales in each of these three key markets, especially in the Multiple Sclerosis and Nephrotic Syndrome and to develop other on-label indications other these 19 on-label indications to try to grow sales in those markets. The company is profitable, cash flow positive. We have a little bit over $200 million in cash and we are debt free.
So let me walk through Multiple Sclerosis, Nephrotic Syndrome, Infantile Spasms, and then we’ll talk a little bit about a new on-label indication we will pursuing in the rheumatoid area.
Multiple Sclerosis is a neurodegenerative disorder. Acthar is approved for the treatment of acute relapses. Currently, the first-line treatment for patients who suffer from an exacerbation or relapse associated with Multiple Sclerosis. The first-line treatment is steroids, but many patients are not responsive to steroids, a little bit over a third of patients get better or get completely better, maybe only about a fourth get completely better back to their quality of life pre-flare. So there is at least quite a few patients who are potential Acthar candidates. There is almost a third of patients who have virtually no response to steroids or to get worse or have an adverse reaction. So there is a pretty good size market here for Acthar.
Our sales in terms of number of scripts are shown on this chart. So the script count – so these scripts here are new prescriptions that we receive at our reimbursement support center. And each of these bars is a quarters, so you can see here is about three years worth of data. And the script count has gradually grown over that time period. In the bottom part of the bars, we have the number of sales people – as we’ve increased a number of sales people and so for the last four – last year, we’ve had 77 sales people generating the script growth.
This chart is showing the same data on a monthly basis, and you see a nice up-tick over time. Sometimes sales go sideways for a little while and then they go up. It’s just a nature of the type of selling process we have here with selling Acthar into the MS market. So we are currently somewhere between 300 and 350 scripts a month or about a 1000 quarter, is the current run rate, which pushes at about 4,000 scripts a year. And we are looking at a MS patient population, that’s about 400,000 and maybe half of those patients have a flare every year. So out of 200,000 flares, Acthar is only treating 400,000 of those. If you compare that to the percentage numbers on the prior page, you can see there is probably still a lot of room to grow here.
Switching to Nephrotic Syndrome, Acthar has found a new home in treating the proteinuria levels of patients with Nephrotic Syndrome. So Nephrotic Syndrome is a kidney condition that’s characterized by a spilling of protein into the urine, and this is called proteinuria. And Acthar is approved for treating proteinuria and certain types of Nephrotic Syndrome, including idiopathic membranous nephropathy and other key one is called FSGS, those are probably the two key ones.
There is a significant unmet need here, patients who are on – who have Nephrotic Syndrome and don’t get successfully treated can end up an end-stage renal disease, needing a new kidney or they end up on dialysis, which is really not a good situation. So Acthar is a new therapy here for those patients in this category. There is no standard-of-care in treating proteinuria and Nephrotic Syndrome. So there is significant unmet need. And the goal here is straight forward. The goal of therapy is to reduce the levels of proteinuria in these patients.
We just got started during 2011 and trying to approach nephrologists to talk to them about Acthar. We hired a pilot sales force during the latter part of Q1, so about 12 months ago. And we had a little bit script growth in Q2 based just – with five sales people generated 45 scripts. So during Q3, we added another two dozen sales people. So we had 28 sales people making calls in Q4 and the script count jumped up to 146. So we are very pleased with that growth and we will talk about this just a little bit later, but we are going to expand the sales force again during Q1 and Q2.
First, let me talk about Acthar in Infantile Spasms and then Acthar in lupus and then we will come back to our growth plans. So Acthar in treating Infantile Spasms – Acthar has been the standard-of-care for treating Infantile Spasms for decades. So this was generally – Acthar was generally used off-label until – about 18 months ago, the FDA approved Acthar for treating Infantile Spasms. Infantile Spasms is a form of epilepsy that affects infants and hence the name, but it’s a devastating form of epilepsy. Unfortunately, if patients are not successfully treated to end up really in the severe developmental disabilities they can end up vegetative in hospice that kind of thing, and fortunately, some patients who are treated to end up totally normal. So it’s a pretty dramatic outcome whether patient’s rep will find a therapy that works for them. So Infantile Spasms typically does not respond to standard anti-epileptic therapies. So Acthar seems to be the standard-of-care here.
This is an medical emergency; time is of the essence when babies diagnosed with Infantile Spasms, you really want to get them on treatment very, very quickly. Let’s say, rare disorder, there is about 1500 patients on U.S. a year, who end up with Infantile Spasms and it looks like a half or maybe even 60% of these patients receive Acthar and a half of the patients who do receive Acthar end up, who receive in a full free either from Medicaid or free drug program. So, Acthar – we really only end up with about 30 patients a month who are full pay, commercial pay for Acthar.
So this is a mature market compared to MS, or Nephrotic Syndrome for Acthar, and yet the numbers are going up a little bit, we had higher numbers in the second half of 2011, we had a very good quarter in the fourth quarter. And we are off to a good start in the first quarter. These numbers have been slightly above the historic range that way the pattern on this chart is, what the brain looks like, that’s actually an EEG pattern, that’s characteristic of Infantile Spasms called hips arrhythmia. So that’s why that [why the k-aortic way patterns] on this chart.
Let me talk briefly about our efforts into rheumatology. So there are number of rheumatology indications on the Acthar label, (inaudible) systemic lupus erythematosus, which we are calling lupus here, that’s the principal form of lupus. Again there is high unmet need; there is not very many therapies, drugs approved for treating lupus, it’s difficult to treat condition, it’s a very heterogeneous condition. There is a serious health risk to those patients who are not successfully treated. And Acthar has a labeled indication for treating exacerbations for SLE. Acthar also has an indication for treating SLE on the maintenance basis. And in addition, there is an indication for treating lupus nephritis. So that also shows up [both our] Nephrotic Syndrome; it’s in really [buff camps]. And again there is a large patient population. The patient population for lupus is roughly the same size as MS 300,000, 400,000 patients. So it’s a big patient population that has an unmet need.
Again, I will talk about our expansion plans with lupus and MS and Nephrotic Syndrome in a minute. First, let me just run through the financials. As I said in the earlier chart, Questcor is profitable; debt free; and cash flow positive. We reported Q4 results last Wednesday. And our sales were over a 100% year-over-year; earnings were up nicely, so we had sales of $75 million – net sales of $75 million in Q4. And operating margins of about 50% – I think, 55%, 56%; fully taxed EPS of $0.48.
In the fourth quarter, we shipped a little bit over 300,000 vials of Acthar. So you can see this is a very low volume drug. So we are shipping somewhere in the neighborhood of 15,000 vials a year, about 5000 prescriptions a year, so this is a very low volume drug.
Channel inventories have stayed pretty stable here in the last couple of quarters. Medicaid reserves also appeared to be in the normal – being handled normally. Medicaid incidents has come down as a percentage, principally because the adult population of MS and Nephrotic Syndrome have a lower incidents of Medicaid patients in Infantile Spasms, which has a very high incidents of Medicaid patients.
This chart has our results for the full year 2011 versus 2010. (Inaudible) sales were not quite doubled (inaudible) 90%. Operating income pretty much doubled, EPS doubled, so all the numbers are moving in the right direction. We shipped about 10,000 vials in the year. Free cash flow was probably in the $80 million to $100 million range for the year. So the cash is building upon the balance sheet. So this is almost the entire balance sheet. There is not really much on our balance sheet. We have a $200 million in cash and this is after returning about $80 million to shareholders through share repurchase plan, which is discussed briefly on this chart. So we have a share repurchase plan. That has about 4 million shares left on it. We have bought back 15 million shares during the last four years, it’s about 20%. The outstanding shares have been repurchased. And that certainly has helped in for – probably has improved the EPS on the 10% to 15% range.
In 2012, we’ve had a policy of providing script counts monthly, I will get to that in just a minute. But we announced on Wednesday that we expect our operating expenses to go up during 2012 to fuel the growth that we see in front of us. We expect operating expenses to be up 20% to 25% during Q1 compared to the quarter that was just finished, in Q4. And then they will pretty much level out, they’ll go up a little bit again in Q2 and then should level out, that’s just today’s visibility, we have informed investors that we change frequently our plans going forward, because we are – our sales growth is so rapid that we have to consequently be adjusting our plans for our expenses in sales and marketing. We do expect our R&D expenses to roughly double. We had R&D expenses of about $17 million in Q – I mean, in 2011. So, our current plans which show R&D doubling in 2012.
So we have published our January script counts for new prescriptions that come through our reimbursement center. We announced these earlier in February and then we viewed them on the call last week. So MS continued to have strong numbers, 338 scripts that compares to – that’s a second best month we had I think, November – sorry, September was a little bit higher, but the January numbers were a little bit higher than October, November and December.
Nephrotic Syndrome were 72 scripts that compared to 145 for all of Q4; and IS was 48 and that compared to 125 for all of Q4, so all three of those numbers were good. There were a lot of working days in January – the number of working days does affect us. We will put out February numbers during the first 10 days of March – during the first 10 business days in March and we will continue that practice going forward to give you some information. There is nowhere else for you to get this information; IMS really doesn’t track it accurately.
So let me just talk briefly about how Acthar works and what we think is going on here, because it’s a natural question to ask how was this drug working in treating MS exacerbations like kidney condition, rheumatoid conditions, Infantile Spasms, the form of epilepsy what’s going on here.
So Acthar treats – all of these are pretty autoimmune conditions or inflammatory conditions that seems to work across a variety of organs whether it’s CNS or kidney or other parts of the body can be working in the lungs and so forth.
Acthar appears to calm down or modulate the immune system. So it operates a little bit more normally, many of these conditions, the immune systems are over active, attacking the body and appropriately and causing inflammation and Acthar seems to calm down and it does so by binding through what it called a melanocortin system, there is five melanocortin receptors located in various organs throughout the body.
ACTH seems to have different activity level. It seems to activate all five of those receptors and cause different activity within the body. On an indirect basis, it seems to – Acthar does cause the adrenal gland and produce cortisol and other adrenal compounds that have an effect through the body especially on inflammation. And then, Acthar seems to – also act at the cellular level through the other melanocortin receptors and actually does something at the targeted tissues such as the – in CNS, in the wiring and body for example.
All of the active ingredients of Acthar have yet to be characterized. Acthar is creative from an extraction of porcine pituitaries. So there is other things in Acthar other than ACTH and we are in the process of understanding the pharmacology better over time. Of course, we won’t be presenting that to any public body, but we may present that to the FDA (inaudible) up to speed.
And we had asked a lot about how Acthar will withstand competition? Acthar is a very complex products, has a complex manufacturing process. We don’t think it can be duplicated; we don’t think the process can be reverse engineered, Acthar is not well characterized, the pharmacology is quite complex, it’s not well characterized, so that’s how the drug works in the body.
Therefore, we think that all pathways to – for competitive drugs will require clinical trials, clinical trials mean a single indication, so we would expect at some point in the future, there will be drugs come on the market, it will – which will be attacking one of our or competing with us on one of our indications, but we won’t have any – we don’t think there will be as relevant plain generic.
So the market opportunity here is pretty significant, you can see market sizes around the right, we think the MS and nephrology market sizes are in the billion-dollar plus range. The per prescription value are quite high here, so MS prescription is in the neighborhood of $40,000 to $50,000. Nephrotic Syndrome prescription is couple of hundred thousand dollar prescription. And IS is about a 100,000. With lupus, we don’t really know yet, for treating lupus flares, it maybe similar to MS for treating the kidney and maybe more similar to the Nephrotic Syndrome script size. And then there are other markets, of course we will don’t know yet, what’s there.
So the Nephrotic Syndrome business, even though, we basically started that mid year last year is already significant. And our current – based on Q4, so Q4 times four, we think our run rate for Nephrotic Syndrome was already in the – almost $70 million, which is about half of what MS is, so for the revenues that we have right now is probably 55%, 60% MS and the rest is NS and IS. We do have about 5% that’s other. We do get prescriptions for other things here.
But the Nephrotic Syndrome, the MS script and IS script are filled immediately, all the vials are send immediately, so as you can see the numbers for the total amount of business at a script represent equals the revenue we obtain in a period. But Nephrotic Syndrome script is filled over six-month period. So we have some future revenue kind of built into the scripts that have been processed already and we are trying to show that in the right-hand column here that the Nephrotic Syndrome business is approaching the level of the MS business already.
Our plan going forward is very straightforward. We are going to focus on Acthar. We want to focus on the embedded pipeline within Acthar, and obviously the commercial potential for the on-label indications that are already approved. So we will be expanding our Nephrotic Syndrome efforts. We will be expanding our MS promotion effort. We are going to maintain small Infantile Spasms promotion that’s pretty mature market. We are considering developing yet this year a pilot rheumatology promotion effort and we are developing other markets for Acthar. So we are looking at other online indications. We have some studies going through – look at some not-on label indications like diabetic nephropathy and we want to further define and understand Acthar and take that (inaudible).
We do not expect to do any business development unless it’s closely related to Acthar in some way. This chart is showing our expansion plans. So we are already underway since we are in the middle of Q1 2012 there. We are underway with our nephropathy expansion. We are pretty well defined what our needs are; we will be going from 28 to 58 sales representatives in nephropathy. We will be doing that hiring with here we already started. So we will be doing that hiring, these training throughout Q2, so that by come Q3, we will have 58 sales people out calling on nephrologist.
Right on the heels of that effort, we will be expanding in neurology sales force, which currently is 77 strong and we will be taking that up to approximately 100. So that hiring will take place in Q2 and Q3 and be on the street in Q4. Then, we will explore initiating a pilot selling effort in rheumatology, this is somewhere between 3 and 10 sales people.
So, let me summarize here, Acthar has a sustainable competitive advantage as we believe, because of its nature being a biologic, difficult to reproduce. We don’t have any FDA risk here that drug is approved and it’s approved for 19 indications, many of these indications are large markets, at least in terms of dollars and there is a sizable unmet need. We have nice sales growth in both treating exacerbations in MS and treating patients with Nephrotic Syndrome and yet our market penetration is still were very early into those markets.
We are developing new vertical market in the rheumatology, especially focused on lupus. The company seems to enjoy high margins, which provide great operating leverage and we have a nice balance sheet.
So with that, it looks like my time is up, 40 second left so. Okay.
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