Upon learning of the steep increase which Questcor Pharmaceuticals implemented in their lead drug, H.P. Acthar Gel on August 27, 2007, I became furious. Not because I am familiar with Infantile Spasms (IS), but because the families affected by IS will be facing an outrageous financial battle not too unlike my own financial battles stemming from multiple sclerosis.
Acthar was developed in the 1950's for the treatment of exacerbations in multiple sclerosis and became useful in treating the epileptic condition known as West Syndrome or Infantile Spasms. In 1997, the FDA recognized the need to continue manufacturing without interruption of H.P. Acthar Gel by Rhone-Poulenc for use in the treatment of Infantile Spasms.
For several months in 1996, Rhone-Poulenc stopped making Acthar because of manufacturing difficulties. A crisis resulted, with insufficient supplies to treat patients with West's syndrome and other diseases.
While the company worked with the Food and Drug Administration to fix problems in its plant, the nonprofit National Organization for Rare Disorders helped dole out the very limited supplies for emergency cases of infantile spasms and other conditions. "During the shortage, even some people with severe pain from rheumatoid arthritis couldn't get the drug in favor of babies with life-threatening West's syndrome," says NORD president Abbey Meyers.
In July 2001, Questcor acquired H.P. Acthar Gel from Aventis (formerly Rhone-Poulence) for the cost of $400,000. In November 2002, the FDA approved Questcor's application to extend the labeled shelf life of H.P. Acthar Gel from 12 months to 18 months. In October 2003, the FDA grants 'orphan drug' status to H.P. Acthar Gel for the treatment of Infantile Spasms. In November 2003, Questcor and IDIS enter into an exclusive agreement for distribution outside of the U.S. Between 2001 and 2005, Questcor made several strategic moves to consolidate Acthar manufacturing and distribution. In May 2004, neurologists from the American Academy of Neurology (AAN) and the Child Neurology Society (CNS) who specialize in diseases of the brain and central nervous system publish new guidelines presenting options for treating infantile spasms. A brief article regarding the new guidelines can be found here.
In February 2005, James Fares took the helm as CEO and proceeded to redirect Questcor to focus in the field of neurological disorders. Between May 2005 and September 2005, Questcor hires Craig Chambliss as Vice President of Sales & Marketing, Gregg Lapointe to the Board of Directors, and George Stuart as Chief Financial Officer. In October 2005, Questcor sells three of their products for $28.3 million earning them enough money to pay off much debt and focus on realizing their grand vision. In May 2006, Questcor acquires Doral(R) giving them a second product for the national neurology sales force. Ultimately the CEO's intent to revitalize the use of Acthar in MS market was not successful as IV Solumedrol is the preferred choice in treating multiple sclerosis flairs.
In August 2006, Questcor submitted an sNDA for FDA approval to include treatment of IS on the label of H.P. Acthar Gel. In December 2006, Questcor presents data on Acthar at the American Epilepsy Society annual meeting. On May 14, 2007, Questcor announced that the FDA did not approve the sNDA. One week later, Questcor CEO James Fares resigns. Followed by a number of colleagues in the months which followed.
...a more rapid transition to profitability.”
Albert Hansen, Chairman of the Questcor Board of Directors, commented, "We appreciate Jim's service over the past two years and wish him well in the future. Our goal is to increase shareholder value through a continued focus on Acthar, consistent progress in our development pipeline, and a more rapid transition to profitability." Questcor will announce additional adjustments to its efforts shortly.
During June and July 2007, Questcor makes strategic moves to consolidate supply by choosing Curascript, a subdivision of Express Scripts, as the sole distributor for Acthar. On August 27, 2007, Questcor board announces the New Strategy and Business Model for H.P. Acthar Gel.
UNION CITY, Calif.--(BUSINESS WIRE)--Aug. 27, 2007--Questcor Pharmaceuticals, Inc. (AMEX:QSC) announced today that its Board of Directors has approved a new strategy and business model for H.P. Acthar Gel(R), a natural form of adrenocorticotropic hormone (ACTH). This change may affect the usage of Acthar in the treatment of certain diseases, including multiple sclerosis (MS) and infantile spasms (IS), an extremely rare form of epilepsy. Specifically, Questcor will initiate a new pricing model, create an expanded safety net for patients using Acthar, and provide a group of Medical Science Liaisons to work with health care providers who are administering Acthar.
Don M. Bailey, Questcor's Interim President commented, "the goal of Questcor's new strategy is to make manufacturing and distribution of Acthar economically viable on a stand-alone basis, so that Questcor can continue to ensure the availability of Acthar for those patients who need it most and fund projects which can contribute to the growth of the company."
Acthar is currently approved in the U.S. for the treatment of MS exacerbations and other conditions. No drug is approved in the U.S. for the treatment of IS, a potentially life-threatening disorder that typically begins in the first year of life. However, pursuant to guidelines published by the American Academy of Neurology and the Child Neurology Society, many child neurologists use Acthar to treat infants afflicted with this condition. In June 2006 Questcor submitted a Supplemental New Drug Application to the Food and Drug Administration (FDA) and is currently pursuing formal agency approval for Acthar in the treatment of IS. Previously, the FDA granted Orphan Designation to H.P. Acthar Gel for the treatment of IS. As a result of this Orphan Designation, if Questcor is successful in obtaining FDA approval for the IS indication, Questcor will also qualify for a seven year exclusivity period during which FDA is prohibited from approving any other ACTH formulation for IS unless the other formulation is demonstrated to be clinically superior to Acthar. Questcor anticipates incurring significant additional costs in its further pursuit of a formal FDA-approved indication for Acthar in the treatment of IS.
The implementation of this new strategy includes a change in the method of distribution for Acthar and a significant increase in treatment cost. In addition, Questcor has changed its support program for health care professionals and reinforced its safety net for patients using Acthar. Questcor previously announced that the change in distribution from multiple distributors to a single specialty distributor is complete. Acthar is now being distributed only through its specialty distributor, Curascript. This new distribution system provides seamless support for Acthar including providing necessary information to health care providers and families, assisting with reimbursement, and distributing product faster. As of the end of July, this transition had virtually eliminated all Acthar inventories held by wholesalers. The new pricing is effective Monday, August 27 and brings Acthar in line with the cost of treatments for other very rare diseases. Based on Questcor's understanding of the usage of Acthar, the cost for a course of treatment could approach $80,000-$100,000.
Questcor acquired Acthar in 2001. Since then, to ensure that this drug remains available on a consistent basis for the patients who need it, Questcor has incurred significant costs to transfer and modernize Acthar's complex manufacturing process to assure continued compliance with FDA standards. Questcor net losses were $10.1 million in 2006 and $5.5 million for the first six months of 2007.
Questcor's new strategy is intended to create an economic model that will allow Questcor to support ongoing efforts to manufacture and distribute Acthar, to conduct any FDA-required studies, to continue development of QSC-001, and to develop or acquire other drugs or drug candidates for neurological disorders or for rare diseases.
Questcor continues to focus on the need to work with patients who are attempting to secure reimbursement from their insurance companies and has expanded its participation with the National Organization for Rare Disorders (NORD), an advocacy group for patients afflicted with rare disorders and a sponsor of patient assistance and co-pay assistance programs for patients who are otherwise unable to afford their treatments. The combination of the change to a specialty distributor, the availability of Medical Science Liaisons, the expanded participation with NORD, and existing government programs -- Medicaid and the federally-funded State Children's Health Insurance Program -- is intended to provide a safety net to make Acthar available to all patients who need it.
The term 'orphan drug' refers to a product that treats a rare disease affecting fewer than 200,000 Americans. The Orphan Drug Act was signed into law on January 4, 1983. The intent of the Orphan Drug Act is to stimulate the research, development, and approval of products that treat rare diseases. However, Questcor did not research and develop H.P. Acthar Gel, they purchased it from Aventis for $400,000 in 2001. But yet they want to bring the cost inline with other expensive drugs used to treat rare disorders which did result from huge R & D expenses.
Now the issue of 'rare diseases' is one which I do have personal knowledge. I have MS and I use an expensive self-injectable drug. The safety net for that drug is administered by National Organization for Rare Disorders (NORD), which is the same safety net Questcor uses for H.P. Acthar Gel. However, this 'safety net' has big holes and many families may likely fall right through. If you've read my other posts (at brassandivory.blogspot.com), you are aware that NORD finally awarded full assistance in receiving that $21,000 drug after my earnings sunk below $20,000. I do not know the details of the Acthar program, but if it is anything like the Copaxone program, the family's earnings will need to be below 200% Federal Poverty Level in order to qualify.
So with the August 2007 announcement, Questcor also claims that the price increase is necessary due to the company's net losses of $10.1 million in 2006 and $5.5 million for the first six months of 2007. The following information comes from research I conducted and published on my blog in October 2007. Some of the numbers were not made public at the time, so corrections have been incorporated.
...each time I contemplate the wonder of drug discovery and the ways in which I personally benefit from the investment in research, I am reminded that pharmaceuticals mean big business. Don't be fooled into thinking otherwise, especially when a company points to the bottom line when discussing the need to adjust business strategy and raise drug prices, as Questcor has done.
Since learning that Questcor raised the price for H.P. Acthar Gel, an injectable drug used primarily to treat the seizures associated with Infantile Spasms and the acute relapses of Multiple Sclerosis, I have been plagued with Questcor's justification for raising the price almost from $1650 to $23,265 per vial in August. Outrage spread quickly throughout patient support systems for families affected by Infantile Spasms and throughout the Multiple Sclerosis community.
What has been the PRICE OF ACTHAR?
Even the United Stated Securities and Exchange Commission (SEC) expressed concern in 2005 with the accounting methods Questcor applied in recording expenses related to the exchange or rebate of expired Acthar stock held by drug wholesalers. After Questcor reintroduced the distribution of Acthar through major drug wholesalers, thousands of vials (~5000) and over $4.5 million worth of drug expired in 2003- 2005 without reaching patients who may have benefited from its use. During this time period, Questcor recorded the value of these exchanges against gross revenue of product sales, which affects the company's perceived operating margin. Questcor's explanation to the SEC refers to the representation of company growth to please the investors. (Not being an accountant, I don't completely understand their justifications.) In addition to concerns over the exchange accountings, the SEC expressed difficulty in determining the assigned value of each vial of Acthar.
The SEC's correspondence can be read here:In 2003, Questcor replaced/exchanged 2653 vials of Acthar valued at $2.3 million. The return rate for expired drug was 18-20% according to their annual report.
One vial = ~$867In 2004 and 2005 combined, Questcor replaced/exchanged 2109 vials of Acthar valued at $2.228 million.
One vial = ~$1057
2004: $928 (sales up 2%, demand up 7%, price up 7%)
2005: $1058 (sales down 2%, demand down 13%, price up 14%)
2006: $1185 (sales up 20%, price up 12%)
2007: $1658 (2nd q. price up 41% over 2nd q. 2006)
August 2007: $23,265 (price up 1400% over June 2007)
Questcor has more recently revealed that the list price for one vial of H.P. Acthar Gel was $1650 before they raised the list price to $23,265 in August 2007, giving it an increase of 1410% over the June 2007 price.
$1650 x 1410% = $23,265
In the following, the italicized excerpts are taken from Questcor's 2007 Annual Report.
What are Questcor's expenses for Cost of Goods (in millions)?
2003: $3.573 (inc. $467K write-off)
2004: $3.730 (inc. $606K write-off)
2005: $3.110 (inc. $103K write-off)
2006: $3.000 (inc. $726K for Acthar increase in volume)
$908,000 spread = 32% difference low-to-high
2007: $5.295 (inc. $1.83M for royalties based on Acthar net sales)
$2.3M increase = 77% increase over 2006
Cost of product sales for the year ended December 31, 2007 increased $2.3 million from the year ended December 31, 2006. Cost of product sales includes material cost, packaging, warehousing and distribution, product liability insurance, royalties, quality control (which primarily includes product stability testing), quality assurance and reserves for excess or obsolete inventory. Stability testing is required on each production lot of Acthar and is conducted at third party laboratories at periodic intervals subsequent to manufacturing. Stability testing costs are expensed as incurred. We incur a royalty of 3% on total net sales of Acthar to a third party and a royalty of 1% of annual net sales over $10.0 million to another third party.
The increase in cost of product sales was due primarily to an increase of $1.4 million in royalties on Acthar due to the increase in net sales during the year ended December 31, 2007 as compared to the same period in 2006. Increases of $308,000 in product stability testing and $254,000 in distribution costs also contributed to the increase of cost of product sales in the year ended December 31, 2007 as compared to the same period in 2006. Cost of product sales as a percentage of total net product sales was 11% for the year ended December 31, 2007, as compared to 23% for the year ended December 31, 2006. The decrease in cost of product sales as a percentage of total net product sales in the year ended December 31, 2007 as compared to the same period in 2006 was due primarily to the increase in net product sales resulting from the new Acthar pricing level implemented in August 2007. We estimate that cost of sales as a percentage of sales for 2008 will be approximately 10%.
What are Questcor's modest expenses for R & D (in millions)?
2003: $2.267 (inc. $821K for site transfer fees and sublease)
2004: $2.181 (inc. $580K for site transfer fees)
2005: $2.227 (inc. $560K for site, legal, and consulting fees)
$852,000 spread = 39% difference low-to-high
2007: $4.758 (inc. $333K for legal fees and $1.3M for increased head-count
unknown non-cash (stock option) compensation expected to be $1M in 2008
$1.725M increase = 57% increase over 2006
Research and development expense for the year ended December 31, 2007 increased $1.7 million from the year ended December 31, 2006. The costs included in research and development relate primarily to our product development efforts, outside services related to medical and regulatory affairs, compliance activities, costs associated with our medical science liaisons, and our preliminary evaluation of additional product development opportunities. The increase in research and development was due primarily to the addition of our clinical and development leadership team during the fourth quarter of 2006 and our medical science liaisons in the second quarter of 2007. Headcount-related costs increased by approximately $1.3 million in the year ended December 31, 2007 as compared to the same period in 2006. An increase totaling approximately $333,000 for regulatory fees and patent-related legal fees also contributed to the increase as compared to the same period in 2006.
We estimate that our research and development expenses (excluding non-cash SFAS No. 123(R) share-based compensation expense) will be approximately $10.0 million to $14.0 million during 2008 resulting from our efforts related to the Acthar submission to the FDA for the treatment of IS and the continued development of QSC-001. The higher end of the range would only result in the event that we were to successfully advance QSC-001 to clinical trials. We estimate that total non-cash SFAS No. 123(R) share-based compensation expense for 2008 will be approximately $4.5 million of which we estimate approximately $1.0 million will be incurred in research and development expense.
What are Questcor's expenses for Depreciation and Ammoritization (in millions)?
Depreciation and amortization expense for the year ended December 31, 2007 increased to $498,000 from $316,000 for the year ended December 31, 2006. The increase in depreciation and amortization was due primarily to amortization expense related to the Doral purchased technology. In May 2006 we purchased the rights in the United States to Doral. Our total purchase price, including acquisition costs, allocated to the Doral product rights was $4.1 million. In addition, in January 2007, we made a $300,000 payment to IVAX to eliminate the Doral royalty obligation that was also recorded to purchased technology. Purchased technology is being amortized on a straight-line basis over fifteen years, the expected life of the Doral product rights.What are Questcor's Other Income/Expenses?
2005: $9.642 (inc. divesting of non-CNS products)
2007: $1.439 (inc. divesting of Emitasol)
What are Questcor's Administrative/Sales Expenses (in millions)?
2002: $10.715 (inc. $1.5 for officers, and $5.9 sales/marketing)
2003: $10.400 (inc. $2.3 for officers, sales/marketing not distinct)
2004: $11.551 (inc. $3.6 for officers, severance, and accounting)
2005: $10.019 (inc. $2.6 for officers, severance, and accounting)
2006: $17.282 (inc. $4.9 for officers, directors, severance, and accounting; as well as $5.6 for additional sales force)
2007: $17.662 (inc. $6.9 for officers, directors, severance, etc. based on $2M increase; $4.0 for additional sales force which was let go based on $1.6 decrease in head-count)
$7,263,000 spread from 2005 to 2006....WHOA!!!
From my October analysis:
In 2006, Questcor adopted a new accounting standard to include the value of stock options in operating expense and specified the amounts paid to each member on the board of directors. These two amounts alone account for $1,250,000. The amounts paid to officers in salary, bonuses, and other expenses totaled $3,895,000.
The $5.6 million expansion in sales force accounts for approximately 35 employees paid $160,000 each. Coincidentally, these employees are many of the same ones which have been eliminated in Questcor's new strategy in 2007 to cut costs. From my viewpoint, it seems that Questcor invested $5.6 million to leverage their position as the sole source for Acthar to patients and to justify an outrageous increase in price to maintain the financial viability of the drug company.
Selling, general and administrative expense for the year ended December 31, 2007 was consistent with selling, general and administrative expense for the same period in 2006. Increased share-based compensation expense, costs associated with the reduction of our field organization and the departure of our former Chief Executive Officer and an increase in management compensation were offset by lower sales and marketing headcount-related costs resulting primarily from the reduction of our field organization in the second quarter of 2007.
We incurred a total non-cash charge of $1.8 million for SFAS No. 123(R) share-based compensation for the year ended December 31, 2007. Of this amount, $1.5 million was included in selling, general and administrative expenses, an increase of $523,000 as compared to the same period in 2006. For the year ended December 31, 2007, management bonuses related primarily to our 2007 profitable results contributed to a $757,000 increase in bonus expense as compared to the same period in 2006. We recorded $272,000 of severance and other associated costs in the second quarter of 2007 related to the departure of our former Chief Executive Officer in May 2007. In addition, during the second quarter of 2007 we reduced our field organization from 45 sales representatives to 10 product service consultants and 3 medical science liaisons and incurred a one-time expense of $451,000 for severance benefits and other associated costs. We currently have 10 product service consultants and 4 medical science liaisons. The expenses associated with our medical science liaisons are included in Research and Development expense in the accompanying Consolidated Statements of Operations. Sales and marketing headcount-related costs for the year ended December 31, 2007 decreased by approximately $1.6 million as compared to the same period in 2006 due primarily to the reduction of our field organization in the second quarter of 2007.
We estimate that our selling, general and administrative expense (excluding non-cash SFAS No. 123(R) share-based compensation expense) for 2008 will be in the range of approximately $15.0 million to $17.0 million. We anticipate the addition of selective key new hires and investment in customer service and marketing initiatives. We estimate that our total non-cash SFAS No. 123(R) share-based compensation expense for 2008 will be approximately $4.5 million of which we estimate approximately $3.5 million will be incurred in selling, general and administrative expense. The increase from 2007 results from new option grants and higher non-cash SFAS No. 123(R) expense associated with our employee stock purchase plan.
What are Questcor's Total Assets (in millions)?
2007 increase $48.813 in total assets with net sales of $48.7 for H.P. Acthar Gel
From my October estimates:
Coincidentally, Questcor's total assets equal $24.024 million at the end of the 2nd quarter 2007. According to my math, this seems to be just about $5.6 million less than their stated total assets at the end of 2006.
If Questcor's new business strategy (raising the price of Acthar) is successful, they are well-positioned to significantly increase gross revenues while incurring no significant increase in Cost-of-Goods-Sold. Even if they are able to sell a limited supply of 5500 vials of Acthar at the full $23,000 price, while 'giving away' 4500 vials, their gross revenue would exceed $126.5 million, about 10 times their 2006 net product sales.
Interesting prediction because Questcor now estimates that - “if annual Acthar demand remains in the annualized range of 5,100 to 5,700 vials experienced since the implementation of the new Acthar strategy, we estimate that this would result in 2008 annual net sales of approximately $80.0 million to $89.0 million.” This forecast allows for the “estimate that Acthar gross sales resulting from our reported shipments will be reduced by approximately 30% related to Medicaid rebates and government chargebacks.”
Basically, all of the preceding analysis is to dispel the argument that Questcor was incurring such income losses necessary to justify the 1400% increase in price of H.P. Acthar Gel. What they incurred was an increase in recognition of high salaries, bonuses, and stock options awarded to directors and executives.
Ultimately, the patients who cannot afford the drug suffer and the health insurance system bears the burden only to pass it on to their customers in higher costs. Questcor states that they have given away $10 million worth of Acthar free to patients in need since the implementation of the new pricing strategy. This accounts for approximately 430 vials of drug which would cover 70-100 courses of treatment.
However, does a drug which costs less than $250 to manufacture really need to be marked up by $23,000?