Saturday, October 6, 2007

What Questcor didn't tell you about their income losses...

As patients, we benefit from the innovations of medical research and the advancements of the pharmaceutical industry. In our country, successful entrepreneurs are celebrated and rewarded, while capitalism is revered for providing the foundation for such success. No matter the policy which is decided in the White House or debated on Capitol Hill, I expect that scientists will continue to discover life-preserving cures and treatments for deadly and debilitating diseases, as well as find ways to lessen the effects of disease for millions of Americans and to improve their quality of life.

But 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 1400% from $1650 to $23,000 per vial in August. The exact numbers of pricing are difficult to ascertain as reports have varied (here, here, here, but the obscene increase is clearly evident. Outrage spred quickly throughout patient support systems for families affected by Infantile Spasms and throughout the Multiple Sclerosis community.

What is Questcor's CORPORATE MISSION?

(In 2007): Questcor Pharmaceuticals, Inc. develops and commercializes novel CNS-focused therapeutics which address significant unmet medical needs. Our primary goal is to provide products that help improve the lives of patients with CNS disorders, and by doing this successfully we will build long term value for our shareholders.

What has been the PRICE OF ACTHAR?

Even the United Stated Securities and Exchange Commission (the "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 = $867

In 2004 and 2005 combined, Questcor replaced/exchanged 2109 vials of Acthar valued at $2.228 million. One vial = $1057

Using information provided in Questcor's annual reports, the following amounts may have been the per vial prices during 2003, 2004, 2004 amended, 2005, 2006.

  • 2003: $867
  • 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: $23,000 (price up 1387% over June 2007)

What are Questcor's expenses for Cost of Goods (in millions)?

  • 2002: $2.822
  • 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

What are Questcor's modest expenses for R & D (in millions)?

  • 2002: $2.295
  • 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)
  • 2006: $3.033

$852,000 spread

What are Questcor's expenses for Depreciation and Ammoritization (in millions)?

  • 2002: $1.138
  • 2003: $1.157
  • 2004: $1.208
  • 2005: $0.995
  • 2006: $0.316
$892,000 spread

What are Questcor's Other Income/Expenses?

  • 2002: $(.382)
  • 2003: $(.457)
  • 2004: $(.566)
  • 2005: $9.642 (divesting of non-CNS products)
  • 2006: $.734

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 at $160,000 ea.)

$7,263,000 spread from 2005 to 2006....WHOA!!!

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.

What are Questcor's Total Assets (in millions)?

  • 2002: $12.766
  • 2003: $22.929
  • 2004: $28.173
  • 2005: $31.348
  • 2006: $29.635

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.

Now that should be attractive to the INVESTORS!!!

...but who is paying the price?

QUESTCOR: past and present

(In 2001): We are an integrated specialty pharmaceutical company focused on the development, acquisition, and marketing of acute care and critical care hospital/ specialty pharmaceutical and related healthcare products. We currently market four products through our internal sales force in the U.S. We expect to launch a fifth product in the U.S. in the first half of 2002, and we market a sixth product in Italy through a strategic partner. Our current products target pediatric neurologists, gastroenterologists, nephrologists, transplant centers and nuclear medicine centers.

On November 17, 1999, Questcor, formerly Cypros Pharmaceutical Corporation, completed a merger with RiboGene, Inc. (“RiboGene”) and subsequently changed its name to Questcor Pharmaceuticals, Inc. Under the terms of the merger agreement, each share of RiboGene common stock was exchanged for 1.509 shares of our common stock and each outstanding share of RiboGene Series A preferred stock was converted into 1.509 shares of our Series A preferred stock. In conjunction with the November 1999 acquisition of RiboGene, we changed our fiscal year end from July 31 to December 31. Since the completion of the merger, we have focused our resources on: i) acquiring new products, ii) increasing the sales of our existing products, and iii) out-licensing and partnering our research and development stage products. During 2001, we completed our transition from operating as essentially two independent companies to emerge as a specialty pharmaceutical company focused on the sales and marketing of our branded products.

(In 2003): We are a specialty pharmaceutical company that acquires, markets and sells brand name prescription drugs through our U.S. direct sales force and international commercialization partners. We focus on the treatment of central nervous system (“CNS”) diseases and gastroenterological disorders, which are served by a concentrated group of physicians such as neurologists and gastroenterologists. Our strategy is to acquire pharmaceutical products that we believe have sales growth potential, are promotionally responsive to a focused and targeted sales
and marketing effort
, and complement our existing products. In addition, through corporate collaborations, we intend to develop new patented intranasal formulations of medications previously approved by the Food and Drug Administration (“FDA”). For the year ended December 31, 2003, our total revenues were $14.1 million.

(In 2005): We are a specialty pharmaceutical company that focuses on novel therapeutics for the treatment of diseases and disorders of the central nervous system (“CNS”). Our current commercial CNS product is H.P. Acthar Gel® (“Acthar”), an injectable drug that is approved for the treatment of certain CNS disorders with an inflammatory component, including the treatment of flares associated with multiple sclerosis (“MS”), and is also commonly used in treating patients with infantile spasm, an epileptic syndrome.

We announced our CNS strategy in April 2005. As
part of this strategy, we intend to pursue the licensing and acquisition of additional CNS commercial products, the development of new products that have the potential to address unmet medical needs in the CNS field, using both our own intellectual property and intellectual property acquired or licensed from other companies, and selected opportunities to co-promote CNS commercial products of other pharmaceutical companies.

1 comment:

  1. Wow. That is an informative review on the business aspects of Questcor's operations. Thanks for taking the time to summarize it and provide such an important historical perspective. You say your not an accountant; great idea to use the SEC filings!

    The Acthar decision looks like an egregious abuse of the orphan drug act (and the patent system for medications in general). I know firsthand the effects it has on children with infantile spasms, and am sorry to hear it's affected the MS community as well. I've tried to cover some of the medical aspects (and alternatives) to Acthar-brand ACTH on the Miami Children's web site. One of the most important to know about is steroids (universally available, with no evidence that they are less effective for IS or MS), as well as other forms of ACTH.