Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR)
Morgan Stanley Global Healthcare Conference
September 11, 2012, 03:30 pm ET
Don Bailey - President & CEO
Mike Mulroy - SVP & CFO
We are very happy to be here today with Questcor. We have Don Bailey, President and CEO and Mike Mulroy, the CFO, who I am sure familiar to many of you, so guys, thanks for sitting down with us. I guess before we jump into Q&A, may be take a couple of minutes, you know, to just give people a quick overview of kind of your focus from a strategic perspective right now.
Sure, I would be happy to do that. So before we start, can we verify that this is being webcast?
Alright, of course we need to caution all our remarks. Please review all our filings with the SEC and look at our risk; I got my attorney here. So he is going to make me say this.
Unidentified Company Representative
Thank you very much.
And welcome to everybody in the room. We may be referring to slides. We filed some presentation, we're having tomorrow at another conference and it was available, it's available on our website. It's available at the SEC. We may refer to it today and I supposed it’s been handed out, so have that and for people who are listening on the web.
So Questcor is a commercial stage company. We have a very interesting product called Acthar; and Acthar has proven to be very helpful to patients with MS exacerbations with a kidney condition called Nephrotic Syndrome and most recently, we've been introducing Acthar into the rheumatology market, first targeting a condition called polymyositis, dermatomyositis. Acthar is also a standard care for a rare epileptic condition affecting babies called infantile spasm. Company sales are roughly, I think last quarter, we did about $112 million; company is profitable and we have been growing nicely.
So strategically our focus is to continue to grow the doctor awareness of our drug in each of these various therapeutic markets. We are very interested especially in MS market, the Nephrology market and Rheumatology markets. The infantile spasm market is premature, so we do see others have good growth characteristics. We are still at a fairly earlier stage in each of these three.
Within MS exacerbations, we've been in that market about four years. We maybe penetrated it at about 10% or 15% of what we potentially could penetrate it. In Nephrology, we've been in that market for one year; probably have a lower penetration there. And in the Rheumatology market, we've been in just for one month.
So our focus is very straight forward, we would likely be able to help more and more patients with each conditions. We are generating cash and basically our strategy with the cash is going to return it to shareholders as opposed to try there go find another product. We have our hands full with what we are doing.
Our development strategy is to continue to look first to developed the markets for the other indications that are already on the Acthar level and there are number of other interesting indications on our level including lupus rheumatoid arthritis, Stevens-Johnson sarcoidosis and a basket of thalamic indications.
Past that, we will be looking at other possible other immune and inflammatory conditions where we think Acthar may have some usefulness. We have started exploratory work in those areas certainly we’ll be looking to see if any of those become viable and could possibly be added through an sNDA process. So that’s basically the overview of the company and our strategy.
Great, so I think that’s a good place to start from. So, maybe as the first question to touch on some of the most recent news which is the news about your Medicaid rebate; so what kind of led to that change and what is the kind of the potential earnings benefit from that?
Yeah, the real issue is the benefit, so for about three and three and a half years we have been exploring ways to improve our situation with our Medicaid rebate. Going back three years, we were paying out Medicaid rebates that we’re in excess of our price with the healthcare legislation 2010 commonly called Obama Care, that legislation for the cap at a 100% which actually was an improvement for us and kind of a rare situation. And since then we have been working with various lawyers and regulators to try to improve our situation and we have been successful here recently.
It looks like going forward probably starting sometime in the first quarter that rebate will be lowered and the impact on the company is probably something in $40 million revenue range, would be our best guess on it, a lot of depends on whether there is impact on business or not, so this looks to be meaningful and so it’s about may be an 8% to 10% improvement on the net sales line.
And presumably all of that we’ll talk through, well through the bottomline, are there any plans to reinvest any of that in that commercial franchise?
Well, we are already cash flow positive, so we are already investing heavily in the commercial franchise; we are investing heavily in science and of course we are growing and we’ll grow also investing in the infrastructure of the business and IT and HR, information systems compliance; everything you need to run a pharmaceutical company, so we give first preference for our cash to the business and it is based on the commercial area as we have invested, that might then return very, very quickly. We have a growing science effort; we have a quite a few studies underway and we are interested in growing our business, but we are still at a very early stage we have only been out there for about two years.
Sure. There has been a lot of interest in understanding the commercial channel and what’s going on you know in your end markets. So starting with MS, it would be great to get a sense today and you guys have been steadily growing the sales force, so you know how much of the growth that you are seeing is same store sales versus the benefit of new reps. You’ve also talked about productivity gains of the existing reps, so can you help to sort of quantify some of that and put that together for people?
Sure, I’ll do the best I can. We are seeing growth in every metric you can look at, so if we are looking at how many new doctors are coming in we are seeing growth and especially if you look at it say in the most recent quarter versus four quarters ago, so it will be little harder to see trends just quarter-over-quarter or month-over-month.
So if you compare any metric to a year ago whether you are looking at, where they are slicing the information from the point of view of distribution over doctors, distribution over geography, no matter how you do it, all the numbers look good, so we are seeing new doctors come in, we are seeing doctors increase their usage who are already been writing and we see that in both MS and we are even now starting to see that in nephrology.
And then do you have a sense of you know once you’ve converted a physician you get pretty good capture of the relapse that are addressable by that division or is that still a challenge?
It's a good question. I don't think I can really answer that from my own knowledge. I think I have asked that question exactly that right but to see that we get anecdotally at least when I’ve done my very small sampling when I am talking to doctors, , like hey doc what percentage of your patients respond, I hear very high numbers. I have never heard of number lower than 50%. So I heard numbers extremely high. So one would think if you doctoring and you are getting that kind of results you would be using the drug more and more.
The drug does work differentially from any other drug that we know about. Acthar seems to modulate the immune system, maybe hold it off a little bit if it's over active and allow the body’s normal processes to heal them. I think that’s our basic overall theory at this point. If that’s the case, then it means it has a lot of applications that would make sense that it would work in exacerbation especially when patients are flaring with exacerbation or with lupus or with anyone who is rheumatologic conditions where they experience flares. The part of the body that’s attacking the back of a little then that patient has a chance, a fighting chance.
And then when, as you think about further expanding the MS sales force, what are the most important metrics, is it sales per rep, is it scripts per head and kind of where did those, what's optimal level for that you think across the sales force?
Yeah. I am a very analytical person and I know everybody in the audience and yet our process isn’t overly analytical. It's like you look at the numbers we're putting out and we put numbers out every months and you look at numbers and you see them going up and at some point you say I think if we had a more sales reps and the numbers could go up even more and it’s a big process to add in reps but we've done this now six or seven times and its been successful each time.
So I think we've just sort to develop the feel as when the right time is to do that and that's probably how we keep doing it. But certainly that exactly not mathematically we're looking at what you say we're looking at the number of scripts per rep and it’s not like when the scripts per rep you know we pull the trigger, so it’s not exactly like that.
And you are still adding new territories at this point or you starting to split as you add new reps?
So it’s different with each of three sales forces. So and MS railed up to 107 salespeople and this most recent change there were very few new territories added. So the whole US was pretty well covered when we had 77. Now probably not every doctor was covered because you can't cover in MS it’s a pretty intensive selling effort. It’s more intensive than nephrology or rheumatology.
You need more frequency by intensive you mean more frequency with a doctor. And to some reasons why that's different?
So I think there we were more probably taking some doctors and moving them around maybe doctors weren't be called on intensively not. So that's not exactly geographic but it was more region frequency. It’s probably more frequency than reach was going on there. In the case of nephrology, we were adding, we definitely work hard; we only had 28 reps, we are going to 58.
So each rep had to states. So clearly that you need to shrink that territory in order to get some efficiency just to drive down the windshield time, [windshield] factory we call it not the timing of card. And rheumatology we've just started to supply in the last month and we have 12 reps and that's geographically located in the Eastern United States.
And then how do the sales force incentives the way you incentivize the sales force differ between something more mature like MS versus some of your earlier efforts like nephrology?
Well MS isn’t all that mature. So we use pretty much the same system the entire industry uses. So reps have base compensation and then they have variable compensation bonuses. We really are using more of a model of difficulty here, so as the reps are out there generating some sales, and they are establishing relationships they are going to get paid different incentives for different aspects of that, it varies from time-to-time so I can’t tell you exactly what’s going on today.
And we are constantly tweaking that, the management is constantly tweaking those models and there seems to be whatever we are doing it’s actually working. We stress with the reps that they have to be squeaky clean in what they do in compliance rules and regulations and we have a lot of compliance oversight, so that nobody really can get too excited about that and that step over the balance. So there is no reason for them to do that. This is a matter of educating doctors to informing them about a therapeutic alternative that they are just not aware of and that’s there patients who need if the doctors want to try that.
So and then may be touch on rheumatology where you are just getting started, the most recent monthly numbers had some interesting sort of early numbers in it. So what are you seeing out there and what can people expect over the next couple of quarters?
Okay, that’s excellent point. We are very interested and I would say excited about rheumatology. A year ago we were very excited about the nephrology and when it first started it surprised us and certainly this first month have surprised us with rheumatology.
So in the 8-K that we filed last Friday, we indicated that we had 13 page prescriptions for polymyositis to dermatomyositis that may sound like a really small number and it is but it’s in the very first month and we had a dozen reps out there selling really just from the first of the month.
So in addition, if you look on page seven of the handout or slide seven, it is actually on I am not sure it’s on page four may be, you will see that we also had five prescriptions for rheumatoid arthritis and lupus and we just script those together and the reps weren’t focused on lupus and rheumatoid arthritis, even though those conditions are on the label free and they are treated by rheumatologist.
So our rheumatology reps have an opportunity here in when later on to be able to talk to the doctor about polymyositis to dermatomyositis, lupus flares, lupus maintenance, rheumatoid arthritis, psoriatic arthritis, all of these conditions are on the label.
So that’s why we are pretty excited about rheumatology because each one of these represents a sizeable opportunity with 25,000 to 50,000 patients in them and rheumatoid arthritis we will be talking about a drug that using Acthar for those patients for whom the anti-TNF drugs have not been successful, so a subset of the huge population there but still sizeable substance. And so we think each one of those has a really sizable revenue opportunity for us.
So we were very pleased with August, we are looking forward to the next months. So in most cases, we cancel and investors don’t want look at one month. It's just one month. Whether it's good like the NS number we had in August or maybe disappointing to some like the numbers, the MS numbers we had in July. You need to look at things for a little bit longer period of time with this drug because there is just, the randomness associated with prescribing patterns of these doctors and the occurrence of patients showing up at the right time with these doctors.
And in [PNDM], is it, you know, if you think there is not a lot of -- obviously not a lot of options for those patients out there right now. So it's a little bit of a different environment than maybe you came in to in NS. So has it been easier you know do you expect it to be easier to kind of get physician buy in.
That’s a good point and it's closer to nephrology and that nephrologists, when we start talking about Acthar and treating for a reduction in partum area and nephrotic syndrome and when we are talking to doctors and probably my side, they really don’t have a lot of experience with Acthar and a lot of history with us, so to them it's like a new therapy, it's like why haven’t I been hearing about this of what's going on.
There is a little bit of history with Acthar in rheumatoid arthritis for some doctors who might have been around in the 70s or 80s. When we contrast that with NS, doctors in NS, so NS had been promoted to doctors in the past for NS and doctors had developed an opinion that Acthar and steroids have the same thing.
And so steroids are the first line treatment for treating NS exacerbations and we're suggesting to use Acthar second line mainly because you know insurance companies aren’t going to prove Acthar as a first line treatment just because of cost. Acthar has indicated to be first line treatment, but insurance companies obviously aren’t going to let that happen.
So I would -- with them as doctors we had to basically untrain them if you will or reeducate them I am not sure what the right wording is but they had this paradigm in their head that really is not correct. All Acthar was doing was simulating during this to produce steroids. And obviously there is a lot more going on in the body with Acthar than just stimulating the adrenal gland or it wouldn't be working in at (inaudible) always have the conditions.
So maybe just on your reimbursement in payer discussions on for NNS and as well as room and how has that gone early on and you know is it environmental or otherwise stable.
Yeah we think it's stable so and it's been stable for quite some time and certainly with NS. So I would say that we have enjoyed a very high rate of reimbursement approvals, we are already 85% with all our indications.
So in some cases we're 95% like infantile spasNS. Nephrotic syndrome is slightly higher than NS for some reason, but they are close and I think that the insurers are requiring not unreasonably that the patients have you know a medical need here and they want evidence of that from the doctor in most cases. It's a very high level of prior authorization required. Again that's not unreasonable given the situation.
So where the information is given to the insurance company that the patient really needs this drug and this is the right drug for them and we are receiving approval.
And then just to switch gears a little bit, you guys on the last call I think you guys made some of the most expansive comments you have made to date on generics and how you guys think about that or alternate to Acthar. So I guess a couple of questions there, first is how much insight do you have via through the API supply chain whatever it might be to people who are active in this class and then second more broadly, what are the kind of couple of biggest things to drive your confidence and the lack of the alternative risk.
So certainly the risk of a substitutable product would be a significant risk that investors need to become comfortable with. The Acthar is produced from; it’s an extraction of forcing in pituitary. So in the natural slaughtering process pituitaries are harvested and eventually we end up with an end product which is an injectable gel.
Along the way there is many step process, that entire process is a trade secret. We own 100% of everything associated with that process, we own all the equipment, all the processes, all the intellectual property. We have all the worldwide rights, we have no partners. So there is really no way for anybody to have access to any intermediate step there, other than obviously people can go find (inaudible) and people could buy Acthar from us. I believe by law we have to sell it to them.
So otherwise and we don’t know if anybody has asked us -- nobody has asked so for us to sell Acthar. So we don’t know if anybody that’s doing anything with generics on a serious basis. I know that this has been an issue for the [short] communities lately and I think they have been pestering to death the generic company is asking them about this.
So you probably can talk to them and I think what I am hearing from investors is that their due diligence is consistent with our, their response is consistent with what we said which is we think this would be an extremely difficult if not the possible drug to genericize.
It would take the technology that doesn’t yet exist in our opinion, in order to reverse engineer the final product and we don’t see any way to get your hands on any of the intermediate product without coming to us. One of your colleagues has addressed this head on recently with a very nice very thorough report and people can, I know a lot of people are aware of that, they can get – that we can't endorse it what he did, but he certainly gave an independent view and he said a few things.
I think it is virtually impossible to duplicate.
And may be switch back on the commercial side and you know in nephrology for NS, kind of you have obviously been expanding that effort as well, you know may be talk about some of the trends you are seeing in that market and what are the kind of keys in terms of continue to drive duration in that market?
Well okay, so Acthar is improved as I said before for the reduction of (inaudible) and several subsets of nephrotic syndrome including the condition called (inaudible), that is probably the key condition and another one called FSGS. It is also approved for few other subsets of that nephritic syndrome. Each of these conditions looks like it has about 8000 to 10000 patients or little smaller patient group, but the prescription size here is little bigger.
We're talking about a prescription that uses as many as 10 or 12 vial. So the revenue to us is higher with NS where there is just one or two vials used. We have been penetrating that market; rather the growth has been rather nice. So within a year, it's gone from basically near zero to over $200 million annualized. We think there is plenty of growth there left. It's just a matter of persistently calling on doctors and educating.
Going after it. Great and I guess in the last few seconds here, you seem like you’ve been making a little bit more of an effort on the R&D side, you are investing a little bit more in the R&D. So kind of any kind of key data sets coming up that you can point people to that might be worth paying attention to?
There is no specific trials coming out that we're going – that would have any significant news that are going to move things up now. Our strategy is to have a constant stream of smaller papers coming now and the reports coming out. And we do have a couple of trials under way but you know, there will be years, before they come out, you know, we have enough indications on the label already that we can pursue this. But we're very interested in understanding more about how the drug works, what other applications there are for the drugs and we are investing heavily into science.
Great and with that we're out of time. Don, Mike, thank you. Thanks everyone for joining the session.