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QUESTCOR PHARMACEUTICALS 10-K 2010 Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Commission file number
001-14758
Questcor Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
Registrants telephone number, including area code:
(510) 400-0700
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). o Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company
(as defined by
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting Common
Stock held by non-affiliates of the Registrant was approximately
$236,197,000 as of June 30, 2009, based upon the last sales
price of the Registrants Common Stock reported on the
NASDAQ Stock Market. The determination of affiliate status for
the purposes of this calculation is not necessarily a conclusive
determination for other purposes. The calculation excludes
approximately 16,587,037 shares held by directors, officers
and shareholders whose ownership exceeds five percent of the
Registrants outstanding Common Stock as of June 30,
2009. Exclusion of these shares should not be construed to
indicate that such person controls, is controlled by or is under
common control with the Registrant.
As of March 3, 2010 the Registrant had
62,018,979 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III of this Annual Report incorporates by reference
information from the definitive Proxy Statement for the
Registrants 2010 Annual Meeting of Stockholders.
ANNUAL
REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 TABLE OF CONTENTS
Table of Contents
PART I
This Annual Report contains forward-looking statements that have
been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. These statements relate to future
events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as
may, will, should,
forecasts, expects, plans,
anticipates, believes,
estimates, predicts,
potential, or continue or the negative
of such terms and other comparable terminology. These statements
are only predictions. Actual events or results may differ
materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
this Item 1 Business, Item 1A Risk
Factors, and Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations, as well as those discussed in any documents
incorporated by reference herein or therein. When used in this
Annual Report, the terms Questcor,
Company, we, our,
ours and us refer to Questcor
Pharmaceuticals, Inc. and its consolidated subsidiary.
Overview
We are a pharmaceutical company focused on diseases and
disorders for which there is significant unmet medical need. Our
primary drug is H.P.
Acthar®
Gel (repository corticotropin injection), an injectable drug
that is approved by the U.S. Food and Drug Administration
(FDA) for the treatment of a variety of diseases and
disorders. Since 2007, we have sought to identify diseases and
disorders in which the use of Acthar could improve patient
outcomes. Among the many indications for which it is approved,
Acthar is approved for the treatment of exacerbations associated
with multiple sclerosis (MS) and, in 2008, we
identified a subset of the MS patient population who do not
respond to the standard therapies for MS exacerbations as
potential candidates for Acthar. In 2009, we significantly
expanded our sales force dedicated to the MS market and have
experienced strong sales growth in this market. Acthar is also
used in treating patients with infantile spasms
(IS), a rare form of refractory childhood epilepsy,
and opsoclonus myoclonus syndrome, a rare autoimmune-related
childhood neurological disorder, but is not approved for the
treatment of either disorder. While we do not promote Acthar for
the treatment of IS, a significant percentage of our net sales
is derived from the treatment of this disorder. Acthar is
approved to induce a diuresis or a remission of
proteinuria in the nephrotic syndrome (NS) without
uremia of the idiopathic type or that due to lupus
erythamatosus. NS is a kidney disorder characterized by
high levels of protein in the urine and low levels of protein in
the blood that often leads to end-stage renal disease. During
the fourth quarter of 2009, we generated a modest amount of net
sales as a result of physicians writing prescriptions for Acthar
to treat NS, and we are working to generate more clinical data
to further support the effectiveness of Acthar in the treatment
of this disorder. From time to time we receive prescriptions for
Acthar for other conditions. We are also in discussions with
experts in other disease states with high unmet medical needs
for which there is a potential therapeutic role for Acthar. We
also market
Doral®
(quazepam), which is indicated for the treatment of insomnia.
In August 2007, we announced our Acthar-centric business
strategy, which included a new pricing level for Acthar
effective August 27, 2007. The strategy was adopted in
order to best ensure financial viability and continued
availability of Acthar, establish support programs to benefit
Acthar patients, advance our product development programs and
ensure that the company became economically viable. Since the
adoption of the strategy, we have expanded our sponsorship of
Acthar patient assistance and co-pay assistance programs, which
provide an important safety net for uninsured and under-insured
patients using Acthar, and have established a group of
representatives and medical science liaisons to work with
healthcare providers who administer Acthar. We continue to
support the Acthar patient assistance programs administered by
the National Organization for Rare Disorders (NORD).
These and other patient-oriented support programs have now
provided free drug with commercial value of over
$44 million to patients since September 2007. In addition
to the free drug program, significant financial support
continues to be provided to needy patients through NORDs
co-pay assistance programs that we sponsor. We have been working
closely with the neurology community to identify promising new
research projects for which we can provide needed financial
support. We are providing support to leading researchers in
their efforts to better understand the underlying disease
processes that cause infantile spasms, a subject for which there
has been little research funding in recent decades, as well as
to better understand the drugs mechanisms of action.
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Acthar is currently approved in the U.S. for the treatment
of MS exacerbations, nephrotic syndrome and many other
conditions. 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 IS even
though it is not approved for this indication. In December 2009,
our supplemental New Drug Application (sNDA) to add
the treatment of infantile spasms to the Acthar label was
accepted for filing by the FDA. The FDA has set the user fee
goal date, also known as the PDUFA date, for action on our
filing of June 11, 2010 for this sNDA. There can be no
assurance that this date will be met or that the sNDA will be
approved. Previously, the FDA granted Orphan Designation to the
active ingredient in Acthar for the treatment of IS. As a result
of this Orphan Designation, if we are successful in obtaining
FDA approval for the IS indication, we believe we will also
qualify for a seven-year exclusivity period during which the FDA
is prohibited from approving any other adrenocorticotropic
hormone (ACTH) formulation for IS unless the other
formulation is demonstrated to be clinically superior to Acthar
or is considered by the FDA to have an active ingredient that is
different from the active ingredient of Acthar. However, it is
unclear what impact the potential approval of our sNDA may have,
as Acthar is already used in the treatment of IS.
During early 2008, we observed some continued usage, as well as
favorable insurance coverage, in refractory MS patients who do
not respond to, or who cannot tolerate, intravenous
corticosteroids, the first-line treatment of most neurologists
for MS exacerbations. Questcor-sponsored market research
indicates that as many as 10% of MS exacerbation patients may be
in this subset. In response, we completed the initial phase of
our MS sales force expansion plan in the summer of 2008. During
the first quarter of 2009, we completed the second phase of our
sales force expansion. During this second phase, we completed
significant territorial realignments. During the third quarter
of 2009, we completed a third phase of our sales force expansion
which added sales representatives to unassigned territories. Our
expanded sales force of 38 representatives and 6 managers allows
us to build upon continued positive growth trends in
prescriptions of Acthar for the treatment of exacerbations
associated with MS.
In October 2008, we announced that we are evaluating nephrotic
syndrome as a potential new growth opportunity for Acthar.
Nephrotic syndrome is characterized by excessive spilling of
protein from the kidneys into the urine, a condition known as
proteinuria. Acthar is specifically indicated to induce a
diuresis or a remission of proteinuria in the nephrotic syndrome
without uremia of the idiopathic type or that due to lupus
erythamatosus. If not adequately treated, patients
suffering from nephrotic syndrome often progress to end-stage
renal disease. End-stage renal disease is a serious, life
threatening condition whose current treatments, including renal
dialysis and kidney transplant, are expensive and can have a
significant negative impact on quality of life. Nephrotic
syndrome can be caused by a number of different diseases and
disorders of the kidney.
We are currently funding more than two dozen pre-clinical and
clinical investigator initiated studies. Many of these studies
are examining the use of Acthar in the treatment of nephrotic
syndrome. We are also now beginning to fund exploratory
pre-clinical research evaluating whether Acthar could have
potential value in the management of amyotrophic lateral
sclerosis (also known as ALS or Lou Gehrigs Disease) and
traumatic brain injury. Efforts to identify additional potential
new uses for Acthar are ongoing. As we generate clinical data
that supports the effectiveness of Acthar in new uses, we will
develop marketing plans to reach these new markets.
While our primary strategy is to further penetrate our existing
markets for Acthar and to identify and pursue new markets for
Acthar, we are also in the early stages of exploring potential
investment and acquisition opportunities to diversify our
product portfolio. In evaluating these opportunities, we are
focused on marketed pharmaceutical products and companies with
marketed pharmaceutical products rather than development stage
products. Although we have stringent acquisition criteria and
management expertise in marketed pharmaceutical products, we
might not be successful in identifying suitable candidates or in
making acquisitions or investments on commercially acceptable
terms. See Item 1A Risk Factors: Risks
Associated with our Growth Initiatives Our
strategy to diversify our product portfolio might not be
successful for a discussion of additional risks
related to investments and acquisitions.
Our total net sales were $88.3 million for the year ended
December 31, 2009 as compared to $95.2 million and
$49.8 million for the years ended December 31, 2008
and 2007, respectively. Our net income applicable to common
shareholders was $26.6 million for the year ended
December 31, 2009 as compared to net income applicable to
common shareholders of $35.3 million and $36.4 million
for the years ended December 31, 2008 and 2007,
respectively. As of December 31, 2009, our cash, cash
equivalents and short-term investments totaled
$75.7 million as compared to $55.5 million as of
December 31, 2008.
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During 2009, we repurchased a total of 4.9 million shares
of our common stock for $21.1 million under our stock
repurchase program, at an average price of $4.33 per share. In
May 2009, our board of directors increased our common share
repurchase program authorization by an additional
6.5 million shares. As of December 31, 2009, there are
a total of 5.1 million shares authorized remaining under
the revised stock repurchase program. Since the initiation of
this program, we have returned approximately $67.0 million
to shareholders through our common and preferred stock buyback
efforts.
We have registered trademarks on H.P.
Acthar®
Gel and
Doral®.
Any other trademark, trade name or service mark appearing in
this document belongs to its respective holder. We believe that
our trademarks, trade names and service marks have value and
play an important role in our business efforts.
Our corporate office is located at 3260 Whipple Road, Union
City, California 94587 and our telephone number is
(510) 400-0700.
Our corporate internet address is
http://www.questcor.com.
We do not intend for the information contained on our website to
be part of this Annual Report.
H.P.
Acthar Gel
H.P. Acthar Gel, which we acquired in July 2001, is a natural
source injectable preparation containing adrenocorticotropic
hormone (ACTH). Acthar is specially formulated to
provide prolonged release after intramuscular or subcutaneous
injection. One primary mechanism of action for Acthar is the
stimulation of the adrenal cortex to secrete endogenous
corticosteroids, including cortisol, corticosterone,
aldosterone, and a number of weakly androgenic substances. It is
believed by certain key medical researchers that there are
likely to be additional mechanisms of action for Acthar.
Questcor has initiated the funding of several studies to provide
additional evidence for these mechanisms. Acthar was approved by
the FDA in 1952. It is used in a wide variety of conditions,
including the treatment of exacerbations associated with
multiple sclerosis, infantile spasms, opsoclonus myoclonus
syndrome and nephrotic syndrome.
Acthar is indicated for use in acute exacerbations of MS.
Intravenous methylprednisolone is the most common treatment for
this indication, but Acthar is used by some neurologists for
patients who do not respond adequately to intravenous
methylprednisolone or who cannot tolerate intravenous
methylprednisolone.
Although the FDA-approved package labeling does not include IS
as an FDA-approved indication, Acthar has historically been used
to treat this condition. Based on the document entitled
Practice Parameter: Medical Treatment of Infantile
Spasms, a 2004 report of the American Academy of Neurology
and the Child Neurology Society, we believe that there has been
no clinical evidence to show that any therapy is better than
Acthar for the treatment of IS. IS is an epileptic syndrome
characterized by the triad of infantile spasms (generalized
seizures), hypsarrhythmia and arrest of psychomotor development
at seizure onset. We estimate that as many as 2,000 children
annually experience bouts of this devastating syndrome in the
U.S. In 90% of children with IS, the spasms occur during
the first year of life, typically between 3 to 6 months of
age. The first onset rarely occurs after the age of two.
Patients left untreated or treated inadequately have a poor
prognosis for intellectual and functional development. Rapid and
aggressive therapy to control the abnormal seizure activity
appears to improve the chances that these children will develop
to their fullest potential.
In addition to being indicated for the treatment of
exacerbations of MS and nephrotic syndrome, Acthar has over
fifty other labeled indications and uses in certain endocrine
disorders, rheumatic disorders, collagen diseases, allergic
states, ophthalmic diseases, respiratory diseases, hematologic
disorders, neoplastic diseases, edematous states, and
gastrointestinal diseases. Questcor is currently studying the
potential use of Acthar in certain of these and other
indications and may fund additional studies. There can be no
assurance, however, that we will ever successfully market Acthar
as a treatment for any of these disorders or diseases.
For the years ended December 31, 2009, 2008 and 2007, net
sales of Acthar were $87.6 million, $94.4 million and
$48.7 million, respectively.
Doral
In May 2006, we purchased the rights in the United States to
Doral from MedPointe (now Meda Pharmaceuticals) pursuant to an
Assignment and Assumption Agreement. Doral is a commercial
product indicated for the
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treatment of insomnia. Net sales of Doral were $691,000,
$800,000 and $1.1 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Product
Development
In November 2006, we initiated a clinical development program
under our investigational new drug application with the FDA for
QSC-001, a unique orally disintegrating tablet (ODT)
formulation of hydrocodone bitartrate and acetaminophen
(HB/APAP) for the treatment of moderate to
moderately severe pain in patients with swallowing difficulties.
QSC-001 is being formulated by Eurand Pharmaceuticals, Inc. and
would utilize Eurands proprietary
Microcaps®
taste-masking and
AdvaTabtm
ODT technologies. We own the world-wide rights to commercialize
QSC-001 and Eurand would exclusively supply the product and
receive a royalty on product sales. HB/APAP, in its variety of
strengths, is one of the most frequently prescribed products in
the U.S. and there are currently no ODT formulations of
HB/APAP available in the United States. For the many pain
patients who experience significant difficulty swallowing pills,
we believe QSC-001 represents a valuable option for the
treatment of their pain. During the third quarter of 2008, we
completed formulation development of QSC-001. Currently, we are
seeking a partner to complete development of this product so
that our research and development resources can be focused on
pursuing the potential growth opportunities for Acthar that have
been identified.
Questcor continues to incur expenses pursuing obtaining approval
for the treatment of IS with Acthar as well as funding numerous
research projects for IS, MS, nephrotic syndrome and other
diseases and disorders.
Our research and development expense totaled $9.7 million,
$10.6 million and $4.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Manufacturing
Our products are manufactured for us by approved contract
manufacturers.
Acthar has a shelf life of 18 months from the date of
manufacture. In 2003, we transferred the Acthar final fill and
packaging process from Aventis to our contract manufacturer,
Cangene bioPharma, Inc., formerly known as Chesapeake Biological
Laboratories, Inc. (Cangene), and produced our first
lot of Acthar finished vials. This transfer was approved by the
FDA in January 2004. In January 2010 we entered into a supply
agreement with Cangene pursuant to which Cangene will continue
to manufacture supplies of Acthar for us (the Supply
Agreement). The supply agreement is in effect until
terminated by either Cangene or Questcor subject to not less
than twelve months termination notice. In 2004, we
transferred the Acthar active pharmaceutical ingredient
(API) manufacturing process from Aventis to our
contract manufacturer, BioVectra dcl (BioVectra),
and produced the first BioVectra API lot. The Acthar API
manufacturing site transfer was approved by the FDA in June
2005. We have signed an agreement with BioVectra, which
terminates on December 31, 2010 and includes a one-year
extension option. While we have received approval for the Acthar
finished vials and API transfers to new contract manufacturers,
the processes used to manufacture and test Acthar are complex
and subject to FDA inspection and approval.
Doral has a shelf life of 60 months from the date of
manufacture. We entered into a separate supply agreement with
Meda Pharmaceuticals (Meda, formerly MedPointe) for
Doral. Our agreement with Meda calls for Meda to procure the raw
materials and manufacture and package Doral. The API used in
Doral is procured by Meda from a third party supplier. A new
manufacturer of the API was approved by the FDA in November 2006.
There can be no assurance that any of our API or finished goods
contract manufacturers will continue to meet our requirements
for quality, quantity and timeliness. Also, there can be no
assurance our contract manufacturers will be able to meet all of
the FDAs current good manufacturing practice
(cGMP) requirements, or that lots will not have to
be recalled with the attendant financial or other consequences
to us.
Our dependence upon others for the manufacture of API or our
finished products, or for the manufacture of products that we
may acquire or develop, may adversely affect the future profit
margin on the sale of those products and our ability to develop
and deliver products on a timely and competitive basis. We do
not have substitute suppliers for our products although we
strive to plan appropriately and maintain safety stocks of
product to cover unforeseen events at manufacturing sites.
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Divested
Product Rights
In June 2008, we sold to Hale BioPharma Ventures, LLC, a
development stage company, our rights, including certain
patents, relating to the nasal administration of
benzodiazepines, which resulted in total proceeds of $150,000.
As additional consideration for the purchased assets, Hale
BioPharma has agreed to pay Questcor certain milestone and
royalty payments based on the achievement of certain objectives.
The transferred products require further development and
regulatory approval before any sales could occur and,
accordingly, there can be no assurance that we will receive any
milestone or royalty payments.
In June 2007, we sold to Evoke Pharma, Inc., a development stage
company, our rights relating to nasally administered
metaclopromide or other pharmaceutical products covered by the
claims set forth in U.S. Patent Nos. 5,760,086 and
6,770,262, which resulted in total net proceeds of $598,000. The
purchased assets included various regulatory filings with the
FDA and the unregistered trademarks Emitasol and
Pramidin. As additional consideration for the
purchased assets, Evoke has agreed to pay certain milestone and
royalty payments based on the achievement of certain objectives.
The transferred products require further development and
regulatory approval before any sales could occur and,
accordingly, there can be no assurance that we will receive any
milestone or royalty payments.
Sales and
Marketing
We own the worldwide rights for Acthar and the U.S. rights
for Doral. We do not have substantial operations outside the
U.S. However, we have agreements with the following
companies to market and distribute Acthar on a named patient
basis in certain other countries.
Beacon
Pharmaceuticals, Ltd.
We have an agreement with Beacon Pharmaceuticals, Ltd.
(Beacon) of Tunbridge Wells, Kent, UK, for the
exclusive marketing and distribution of Acthar in the United
Kingdom on a named patient basis. Gross sales to Beacon were
$261,000, $186,000 and $308,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
IDIS
Limited
We have an agreement with IDIS Limited (IDIS) of
Sirbiton, Surrey, UK for the exclusive distribution of Acthar on
a named patient basis. The agreement covers all countries of the
world except the United States, Australia, New Zealand, and the
UK, where Acthar is sold through Beacon. We did not have any
sales to IDIS for the years ended December 31, 2009 and
2008. Gross sales to IDIS were $759,000 for the year ended
December 31, 2007.
Competition
The pharmaceutical and biotechnology industries are intensely
competitive and subject to rapid and significant technological
change. A number of companies are pursuing the development of
pharmaceuticals and products that target the same diseases and
conditions that we target. There are products and treatments on
the market that compete with Acthar. Moreover, technology
controlled by third parties that may be advantageous to our
business may be acquired or licensed by our competitors, which
may prevent us from obtaining this technology on favorable
terms, or at all.
Most of our competitors are larger than us and have
substantially greater financial, marketing and technical
resources than we have. If any of our present or future
competitors develop new products that are superior to Acthar,
our performance may be materially and adversely affected.
Certain potentially competitive products to Acthar are in
various stages of development, some of which have been approved
by regulatory authorities in the U.S. and other countries.
Vigabatrin is a potentially competitive anti-convulsive product
that was approved by the FDA for the treatment of IS and
introduced into the U.S. market in September 2009.
Solu-Medrol (methylprednisolone sodium succinate) and its
generic versions are the primary competitive product to Acthar
for the treatment of MS exacerbations.
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The current success of our Acthar-centric business strategy is
likely to attract additional competition. See Item 1A
Risk Factors: Risks Associated with Acthar
for a discussion of additional risks related to competition.
Government
Regulation
Marketed
Pharmaceutical Products
Our operations associated with the production, testing,
packaging and distribution of pharmaceutical products are
subject to regulation by the FDA. Any restrictions or
prohibitions applicable to sales of products we market could
materially and adversely affect our business.
We market prescription drug products that have been approved by
the FDA, though the FDA has the authority to revoke existing
approvals if new information reveals that a particular drug is
not safe or effective. The FDA also regulates the promotion,
including the advertisement, of prescription drugs. In September
2007, the Food and Drug Administration Amendments Act of 2007,
or FDAAA, was signed into law. This legislation granted
significant new powers to the FDA, many of which are aimed at
addressing the safety of drug products before and after
approval. The law authorizes the FDA to, among other things,
require post-approval studies and clinical trials, mandate
changes to drug labeling to reflect new safety information, and
require risk evaluation and mitigation strategies
(REMS) for certain drugs, including certain
currently approved drugs. In addition, the law significantly
expanded the federal governments clinical trial registry
and results databank and created restrictions on the advertising
and promotion of drug products. Under the FDAAA, companies that
violate these and other provisions of the law are subject to
substantial monetary and other civil penalties.
Pursuant to the FDAAA, the FDA has been actively implementing
REMS as a condition of drug approval, or after initial
marketing, if the FDA becomes aware of new safety data about the
drug. However, the actual effect of these developments on our
own business is uncertain and unpredictable. The requirements
and other changes that the FDAAA imposes may make it more
difficult, and likely more costly, to obtain approval of new
indications for Acthar or maintain approval for existing
approved indications, and it is uncertain whether the FDAAA may
impact the approval of our sNDA.
Drug products must be manufactured, tested, packaged, and
labeled in accordance with their approvals and in conformity
with cGMP standards and other requirements. Drug manufacturing
facilities must be registered with and approved by the FDA and
must list with the FDA the drug products they intend to
manufacture or distribute. The manufacturer is subject to
inspections by the FDA and periodic inspections by other
regulatory agencies. The FDA has extensive enforcement powers
over the activities of pharmaceutical manufacturers, including
authority to seize and prohibit the sale of unapproved or
non-complying products, and to halt any pharmaceutical
operations that are not in compliance with cGMPs. The courts may
impose criminal penalties arising from non-compliance with
applicable FDA regulations.
In March 2007 we received a drug class action letter from the
FDA requesting modifications to labeling and creation of a
Medication Guide for sedative-hypnotic drug products that are
indicated for the treatment of insomnia, including our product
Doral. We have revised Dorals labeling and created a
Medication Guide, both of which have been approved by the FDA.
In February 2008 we began shipping Doral product with the
revised labeling and new Medication Guide. The Doral label was
revised and approved by the FDA in 2009 to include results from
an in-vitro inhibition study conducted by Questcor in
which quazepam (the active pharmaceutical ingredient in Doral)
was found to be a mechanistic inhibitor of CYP2B6. This
in-vitro study shows that there is the potential of drug
interactions between Doral and CYP2B6 substrates such as
bupropion (trade name Wellbutrin
XL®).
The FDA has required Questcor to conduct a small clinical trial
(24 patients) aimed at determining if the
drug-to-drug
interactions between Doral and bupropion are observed in
patients. This clinical study is planned to commence in the
second quarter of 2010 and will be completed in 2010.
Additionally, a patent was issued to Questcor in 2009 based on
the observed in-vitro
drug-to-drug
interactions between Doral and bupropion.
Questcor operates in a highly regulated industry. We are subject
to the regulatory authority of the Securities and Exchange
Commission, the Food and Drug Administration and numerous other
federal and state governmental agencies including state Attorney
General Offices, which have become more active in investigating
the business
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practices of pharmaceutical companies. From time to time, we
receive informal requests for information from various
governmental agencies. On February 25, 2009, we received a
Civil Investigative Demand (CID) from the Attorney
General of the State of Missouri, in connection with that
offices investigation into our pricing practices with
respect to Acthar under Missouris Merchandising Practices
Act. On May 7, 2009, we received a subpoena from the
Attorney General of the State of New York, in connection with
that offices investigation, under New Yorks
antitrust statute and Federal antitrust statutes, of our
acquisition of Acthar from Aventis in 2001, our Acthar royalty
arrangements and our subsequent pricing of Acthar. We have
provided documents and information to the Attorneys General of
Missouri and New York, and will continue to cooperate with these
offices if called upon to do so. There can be no assurance that
these types of requests for information or investigations will
not have a material adverse effect on our business.
See Item 1A Risk Factors: Risks Associated
with Government Regulations and Health Care Reform
We are currently subject to numerous governmental
regulations and it can be costly to comply with these
regulations and to develop compliant products and
processes for a discussion of risks related to
government regulation of marketed pharmaceutical products.
Drugs
in Development
Products in development are subject to extensive regulation by
the U.S., principally under the Federal Food, Drug, and Cosmetic
Act and the Public Health Service Act, and if applicable by
foreign governmental authorities. In particular, drugs and
biological products are subject to rigorous pre-clinical and
clinical testing and other approval requirements by the FDA,
state and local authorities and comparable foreign regulatory
authorities. The process for obtaining the required regulatory
approvals from the FDA and other regulatory authorities takes
many years and is very expensive. There can be no assurance that
any product developed by us and current or potential development
partners will prove to meet all of the applicable standards to
receive marketing approval in the U.S. or abroad. There can
be no assurance that these approvals will be granted on a timely
basis, if at all. Delays and costs in obtaining these approvals
and the subsequent compliance with applicable federal, state and
local statutes and regulations could materially adversely affect
our ability to commercialize our products and our ability to
earn sales revenues.
Product
Liability Insurance
The clinical testing, manufacturing and marketing of our
products may expose us to product liability claims, against
which we maintain liability insurance. See Item 1A
Risk Factors: Other Risks Associated with our
Business If product liability lawsuits are
successfully brought against us or we become subject to other
forms of litigation, we may incur substantial liabilities and
costs and may be required to limit commercialization of our
products for a discussion of certain risks related to
product liability claims that may be made against us.
Patents
and Proprietary Rights
Our success may depend in part upon our ability to maintain
confidentiality, operate without infringing upon the proprietary
rights of third parties, and obtain patent protection for our
products. We rely primarily on a combination of patent,
copyright, trademark and trade secret laws, confidentiality
procedures, and contractual provisions to protect our
intellectual property. We do not have a patent on Acthar.
However, we do have a U.S. patent related to Doral, and
U.S. and foreign patents relating to certain of our other
technology.
Our efforts to protect our intellectual property may not be
adequate. Our competitors may independently develop similar
technology or duplicate our products or services. Unauthorized
parties may infringe upon or misappropriate our products,
services or proprietary information. In addition, the laws of
some foreign countries do not protect proprietary rights as well
as the laws of the United States. In the future, litigation may
be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Any such litigation could be time consuming and costly.
We could be subject to intellectual property infringement claims
as we expand our product and service offerings and the number of
competitors increases. Defending against these claims, even if
not meritorious, could be expensive and divert our attention
from operating our company. If we become liable to third parties
for infringing upon their intellectual property rights, we could
be required to pay a substantial damage award and be forced to
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develop non-infringing technology, obtain a license or cease
using the applications that contain the infringing technology or
content. We may be unable to develop non-infringing technology
or content or obtain a license on commercially reasonable terms,
or at all.
See Item 1A Risk Factors: Other Risks
Associated with our Business If we are unable to
protect our proprietary rights, we may lose our competitive
position and future revenues for a discussion of
additional risks related to intellectual property rights.
Employees
As of December 31, 2009 and 2008 we had 77 and
46 full-time employees, respectively. During 2009, we
completed two phases of our MS sales force expansion plan,
hiring and training our sales force as well as completing all
territorial realignments. Our expanded sales force of 38
representatives and 6 managers allows us to build upon continued
positive growth trends in prescriptions of Acthar for the
treatment of exacerbations associated with MS, an indication for
which Acthar is already approved. In addition, our sales force
provides a platform for initiating sales of Acthar, or other
pharmaceutical products, for additional uses.
Our continued success will depend in large part on our ability
to attract and retain key employees. We believe that our
relationship with our employees is good. None of our employees
are represented by a collective bargaining agreement, nor have
we experienced work stoppages.
Website
Address
Our website address is
http://www.questcor.com.
We make available free of charge through our website our Annual
Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to these reports as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the SEC.
Financial
Information
Please refer to Item 6, Selected Consolidated
Financial Data, for a review of our financial results and
financial position for the five years ended December 31,
2009, and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
for a review of revenue and net income for the three years ended
December 31, 2009.
Risks
Associated with Acthar
Substantially
all of our revenue and profits are derived from
Acthar.
For the year ended December 31, 2009, sales of Acthar
represented 99% of our total net sales. We expect to continue to
rely on this product for substantially all of our revenues and
profits for the foreseeable future. Also, for the year ended
December 31, 2009, a significant percentage of Acthar
prescriptions were for IS, which is not an approved indication
for Acthar. The demand for Acthar used to treat IS is highly
variable, and we cannot predict whether we will continue to
generate significant revenues from sales of Acthar for the
treatment of IS. If the demand for Acthar declines, if
competitive products (including Vigabatrin) approved by the FDA
for the treatment of IS are used to the exclusion of Acthar, if
the FDA requires us to make changes to the label of Acthar which
harm our ability to market Acthar for approved indications, if
third-party payors refuse to provide reimbursement for purchases
of Acthar, if we are forced to reduce the price for Acthar, if a
greater proportion of our Acthar unit sales is comprised of
product dispensed to Medicaid eligible patients and certain
government entities where we do not recognize any net sales, or
if we are forced to re-negotiate important contracts or terms,
our net sales from the sale of Acthar would decline. If the cost
to produce Acthar increases, our gross margins on the sale of
Acthar would decline. If our net sales or gross margins from the
sale of Acthar decline, our ability to generate profits would be
harmed.
We utilize CuraScript, a third-party specialty distributor, to
distribute Acthar. We rely on CuraScript for all of our proceeds
from sales of Acthar in the United States. The outsourcing of
these functions is complex, and we may
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experience difficulties that could reduce, delay or stop
shipments of Acthar. If we encounter such distribution problems,
and we are unable to quickly enter into a similar agreement with
another specialty distributor on substantially similar terms,
Acthar distribution could become disrupted, resulting in lost
revenues or customer dissatisfaction.
We rely on contract manufacturers to produce Acthar. The
manufacturing process for Acthar is complex and contract
manufacturers may not be able to meet our needs with respect to
timing, cost, quantity or quality. All of our manufacturers are
sole-source manufacturers and no currently qualified alternative
suppliers exist. If we are unable to contract for a sufficient
supply of Acthar on acceptable terms, or if we encounter delays
or difficulties in our relationships with our manufacturers, we
will lose the ability to fulfill orders and thus will lose
sales. Moreover, contract manufacturers that we use must
continually adhere to current good manufacturing practices
enforced by the FDA. If the facilities of these manufacturers
cannot pass an inspection, supply would be disrupted. Failure to
obtain products for sale for any reason may result in an
inability to meet Acthar demand and a loss of potential revenues.
We
cannot predict whether the FDA will approve our sNDA for
Acthar.
We are continuing to pursue a Supplemental New Drug Application
(sNDA) to the FDA to add the treatment of infantile
spasms (IS) to the list of approved indications on
the Acthar label. In December 2009, our sNDA was accepted for
filing by the FDA to add the treatment of infantile spasms to
the Acthar label. The FDA has notified us that an Advisory
Committee Meeting of independent experts will be held to discuss
the approval and use of Acthar in infantile spasm. The FDA has
set the user fee goal date, also known as the PDUFA date, for
action on our filing of June 11, 2010 for this sNDA.
However, there can be no assurance as to the actual timetable
for FDA action or whether the Advisory Committee will recommend
approval or the sNDA will be approved by the FDA. Additionally,
in connection with the application process, the FDA could
require various actions by the Company including modification of
the existing Acthar label or the adoption of FDA-mandated risk
evaluation and mitigation strategies, also known as a REMS
program. These requirements could increase our costs or limit
our sales of Acthar.
A significant percentage of Acthar prescriptions is for IS,
which is not an approved indication for Acthar. While physicians
may lawfully prescribe Acthar for IS and other off-label uses,
any promotion by us for off-label uses would be unlawful. The
FDA has approved a competitive product, Vigabatrin, for the
treatment of IS. We are restricted from countering claims made
by the sales force for FDA-approved competitive products, which
increases the risk that competitive products may be prescribed
for IS instead of Acthar.
We are
aware of several competitors attempting to develop and market
products competitive to Acthar, which may reduce or eliminate
our commercial opportunity.
The pharmaceutical and biotechnology industries are intensely
competitive and subject to rapid and significant technological
changes, and a number of companies are pursuing the development
of pharmaceuticals and products that target the same diseases
and conditions that we target. Some of the companies developing
competing technologies and products have significantly greater
financial resources and expertise in development, manufacturing,
obtaining regulatory approvals, and marketing than we do. Other
smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and
established companies. In the event we are successful in
expanding the therapeutic reach for Acthar, other companies may
dedicate greater resources to develop and introduce generic
versions of Acthar and other competitive therapies for the
diseases and conditions that we target.
We cannot predict with accuracy the timing or impact of the
introduction of potentially competitive products or their
possible effect on our sales. Certain potentially competitive
products to Acthar are in various stages of development, some of
which have been filed for approval with the FDA, or have already
been approved by the FDA or regulatory authorities in other
countries. Vigabatrin (Sabril) is a competitive anti-convulsive
product that was approved by the FDA for the treatment of IS and
introduced into the U.S. market in September 2009.
Prednisone and prednisolone are the generic names for
anti-inflammatory corticosteroid drugs that are used to treat
various types of inflammation. One off-label use of these drugs
has been to treat IS. Should more doctors
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prescribe prednisone or prednisolone to target the same diseases
and conditions that Acthar targets, the result could be
detrimental to current Acthar sales.
In addition to the possibility of competitive products not based
on ACTH, a competitor could seek approval for, and the FDA could
approve, a generic version of Acthar. Acthar does not have any
patent or other form of exclusivity protection that would
legally prevent the FDA from approving a generic version. If a
competitor applied to the FDA for a generic version, we would
not receive any notice from the FDA about the existence of the
application.
Our
strategy to generate Acthar revenue from other therapeutic areas
might not be successful.
Acthar was approved by the FDA in 1952, with over 50 approved
indications on its label, including nephrotic syndrome. At that
time, in order to receive FDA approval for a drug it was not
necessary to demonstrate the efficacy of that drug for the
indications for which approval was sought. MS was added to the
label in 1972, when efficacy was required to be demonstrated.
There is limited data on the efficacy of Acthar in the treatment
of nephrotic syndrome. It is unclear what amount of clinical or
other data physicians will require prior to deciding whether or
not to use Acthar in the treatment of nephrotic syndrome. We
have funded multiple investigator initiated studies relating to
use of Acthar to treat nephrotic syndrome but these studies are
at early stages and it is unclear if any of these studies will
result in data that supports the use of Acthar to treat
nephrotic syndrome. Further, even if one or more of these
studies produce positive data, these studies are not the same as
randomized clinical trials and it is unclear whether any such
data will result in doctors prescribing Acthar for the treatment
of nephrotic syndrome.
The use of Acthar for the treatment of MS flares is generally
accepted, but the primary treatment for flares is IV
corticosteroids. While we have had some initial success in
positioning Acthar as a second-line treatment for MS flares for
patients who do not respond to IV corticosteroids, it is
unclear whether we will continue to be able to expand this
market or even maintain our current level of sales in this
market.
While there are over 50 approved indications on the Acthar
label, for many of these indications it is not likely that we
will be successful in generating net sales in the near future.
Further, under the Food and Drug Administration Amendments Act
of 2007, the FDA has greater authority to require sponsors to
modify labels of previously approved drugs. If the FDA requires
us to remove any indications for which we were previously
approved, we may not be able to market Acthar for those
indications, thus potentially decreasing our revenue.
If we are successful in growing our sales in the MS and
nephrotic syndrome markets, or in developing other markets for
Acthar, our increasing the overall sales volume of Acthar may
lead other companies to dedicate greater resources to develop
and introduce generic versions of Acthar or other competitive
therapies for the diseases and conditions that we target.
The
manufacture of our products is a highly exacting and complex
process, and if any of our suppliers encounters problems
manufacturing products, our business could suffer.
Biological products such as Acthar require production processes
that are significantly more complicated than those required for
chemical pharmaceuticals, due in part to strict regulatory
requirements. Problems may arise during manufacturing for a
variety of reasons, including equipment malfunction, failure to
follow specific protocols and procedures, problems with raw
materials, natural disasters, and environmental factors. In
addition, we currently use single suppliers for our products and
materials.
If problems arise during the production of a batch of product,
that batch of product may have to be discarded. This could,
among other things, lead to increased costs, lost revenue,
damage to company reputation and customer relations, time and
expense spent investigating the cause and, depending on the
cause, similar losses with respect to other batches or products.
If problems are not discovered before the product is released to
the market, recall and product liability costs may also be
incurred. To the extent that one of our suppliers experiences
significant manufacturing problems, this could have a material
adverse effect on our revenues and profitability. For example,
in the quarter ended September 30, 2009, the Company
reserved approximately $540,000 for a manufactured lot of Acthar
that did not meet applicable specifications.
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Acthar is derived from the extraction and purification of
porcine pituitary glands through complicated processes, and is
difficult to manufacture. We have a supply agreement with
BioVectra dcl to produce the active pharmaceutical ingredient in
Acthar. The supply agreement with BioVectra terminates on
December 31, 2010, and includes a mutual one-year extension
option. If we are unable to extend or renew our supply agreement
with BioVectra or enter into a new supply agreement on
substantially similar terms with a new manufacturer, or are
unable to obtain FDA approval for a new manufacturer, we may not
be able to manufacture or sell Acthar, which would result in a
substantial loss of revenues and damage to our business.
We have a supply agreement with Cangene bioPharma, Inc.
(Cangene), formerly known as Chesapeake Biological
Laboratories, Inc., to produce our finished vials of Acthar. The
supply agreement with Cangene is in effect until terminated by
either party upon twelve months notice. If either party
cancels the supply agreement, and we are unable to enter into a
new supply agreement on substantially similar terms with a new
manufacturer, or are unable to obtain FDA approval for a new
manufacturer, we may not be able to manufacture or sell Acthar,
which would result in a substantial loss of revenues and damage
to our business.
Risks
Associated with Our non-Acthar Growth Initiatives
We
have a very limited pipeline of new products.
Since the adoption of our Acthar-centric business model in
August 2007, we have focused our research and development
efforts on Acthar. Besides Acthar, our pipeline of potential new
products consists of a single development program: QSC-001. In
February 2009, we announced that we were seeking a partner to
complete development of QSC-001. There can be no assurance that
we will be able to identify such a partner or successfully
negotiate a license or other agreement with commercially
reasonable terms. Such terms could include deferred
consideration in the form of milestone payments and royalties
and there can be no assurance that any such payments or
royalties would actually become due to Questcor.
Our
strategy to diversify our product portfolio might not be
successful.
To remain competitive and grow our business, we must launch new
products and technologies. To accomplish this, we intend to
commit efforts, funds, and other resources to research and
development and business development. Even with acquired
products and technologies, a high rate of failure is inherent in
the acquisition of pharmaceutical products. We must make ongoing
substantial expenditures without any assurance that our efforts
will be commercially successful. Failure can occur at any point
in the process, including after significant funds have been
invested.
For example, promising new product candidates may fail to reach
the market or may only have limited commercial success because
of efficacy or safety concerns, failure to achieve positive
clinical outcomes, inability to obtain necessary regulatory
approvals, limited scope of approved uses, excessive costs to
manufacture, the failure to establish or maintain intellectual
property rights, or infringement of the intellectual property
rights of others. Even if we successfully acquire or develop new
products, they may be quickly rendered obsolete by changing
customer preferences, changing industry standards, or
competitors innovations. Innovations may not be accepted
quickly in the marketplace because of, among other things,
entrenched patterns of clinical practice or uncertainty over
third-party reimbursement. We cannot state with certainty when
or whether we will be able to develop, license, or otherwise
acquire compounds or products, or whether any products will be
commercially successful. Failure to launch successful new
products or new indications for Acthar may cause our products to
become obsolete, causing our revenues and operating results to
suffer.
We may
have insufficient capital to fund our Growth Initiatives and may
be forced to seek dilutive financing.
The acquisition of new products or businesses is expensive,
which may require us to raise additional capital in excess of
our current cash and short term investments. In the current
economic environment, we may not be able to raise enough capital
to acquire prospective products or businesses. To the extent
that we raise additional capital by issuing equity securities,
our existing shareholders ownership will be diluted. Any
debt, receivables or royalty financing we enter into may involve
covenants that restrict our operations. These restrictive
covenants may include
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limitations on additional borrowing and specific restrictions on
the use of our assets as well as prohibitions on our ability to
create liens, pay dividends, redeem our stock or make
investments.
Risks
Associated with Government Regulations and Health Care
Reform
Federal
and/or state health care reform initiatives could negatively
affect our business.
Bills and regulations proposing comprehensive health care reform
are being formulated in Congress and state legislatures as well
as in agencies of those governmental bodies that could
potentially limit pharmaceutical prices and establish mandatory
or voluntary refunds. New legislation has been proposed in the
United States at the federal and state levels that would effect
major changes in the health care system, either nationally or at
the state level. Recently, President Obama and members of
Congress have proposed significant reforms. On November 7,
2009, the House of Representatives passed, and on
December 24, 2009, the Senate passed health care reform
legislation that would require most individuals to have health
insurance, establish new regulations on health plans, create
insurance pooling mechanisms and a government insurance option
to compete with private plans and other expanded health
measures. President Obama introduced additional proposals in
February 2010. Because legislation has not yet been enacted, it
is still not possible to determine what, if any, impact this
legislation may have on the pharmaceutical industry and our
business. It is further uncertain if any legislative proposals
will be adopted and how federal, state or private payors for
health care goods and services will be impacted by or respond to
any health care reforms.
The high cost of pharmaceutical prices continues to generate
substantial government interest. Various governmental entities
may focus on pharmaceutical prices by holding hearings or
launching investigations regarding the pricing for drugs by
specialty pharmaceutical companies such as ours and the ability
of patients to obtain drugs. In December 2009, the Government
Accounting Office released its report on the growing cost of
brand-name prescription drugs. In addition, in July 2008, the
Joint Economic Committee of Congress held hearings on the
pricing of drugs for rare conditions. Should hearings or
investigations occur that result in legislative changes or
consent decrees regarding drug pricing, we may be forced to
decrease the price that we charge for Acthar, thereby decreasing
our net income.
Questcor
operates in a highly regulated industry.
We are subject to the regulatory authority of the Securities and
Exchange Commission, the Food and Drug Administration and
numerous other federal and state governmental agencies including
state Attorney General Offices, which have become more active in
investigating the business practices of pharmaceutical
companies. From time to time, we receive requests for
information from various governmental agencies. On
February 25, 2009, we received a Civil Investigative Demand
(CID) from the Attorney General of the State of
Missouri, in connection with that offices investigation of
our pricing practices with respect to Acthar under
Missouris Merchandising Practices Act. On May 7,
2009, we received a subpoena from the Attorney General of the
State of New York in connection with that offices
investigation, under New Yorks antitrust statute and
Federal antitrust statutes, of our acquisition of Acthar from
Aventis in 2001, our Acthar royalty arrangements and our
subsequent pricing of Acthar. We have provided documents and
information to the Attorneys General of Missouri and New York,
and will continue to cooperate with these Attorneys General if
called upon to do so. There can be no assurance that these types
of requests for information or investigations will not have a
material adverse effect on our business.
We may
be negatively affected by lower reimbursement
levels.
Notwithstanding the impact of any proposed health care reform
legislation, our ability to generate net sales is affected by
the availability of third-party reimbursement for Acthar, and
our ability to generate net sales will be diminished if we fail
to maintain an adequate level of reimbursement for Acthar from
such third-party payors.
The sale of Acthar depends in part on the availability of
reimbursement from third-party payors such as private insurance
plans. In the United States, there have been, and we expect
there will continue to be, a number of state and federal
proposals that limit the amount that private insurance plans may
pay to reimburse the cost of drugs, including Acthar. We believe
the increasing emphasis on managed care in the United States has
and will continue to put pressure on the price and usage of
Acthar, which may also impact sales of Acthar. In addition,
current third-party reimbursement policies for Acthar may change
at any time. Negative changes in reimbursement or our failure to
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obtain reimbursement for Acthar may reduce the demand for, or
the price of, Acthar, which could result in lower Acthar sales,
thereby weakening our competitive position and negatively
impacting our results of operations.
Medicaid
eligible patients and government entities may account for a
greater proportion of our Acthar unit sales resulting in reduced
net sales.
Our net sales may be adversely affected by laws and regulations
reducing reimbursement rates. Administrative or judicial
interpretations of such laws and regulations could also force us
to reduce our reimbursement rates or increase the amount of
chargebacks paid to certain government entities. The sources and
amounts of our revenues are determined by a number of factors,
including the rates of reimbursement among payers. Changes in
the payer mix among private pay, Medicaid, and government
programs usage may significantly affect our profitability.
A portion of the estimated end-user vial demand for Acthar is
for patients covered under Medicaid and other government-related
programs. As required by Federal regulations, we provide rebates
related to Acthar dispensed to a significant percentage of
Medicaid patients. In addition, certain other
government-supported agencies are permitted to purchase Acthar
for a nominal amount from our specialty distributor, which then
charges the discount back to us. As a result of these rebates
and chargebacks, we do not generate any net sales with respect
to sales which are subject to rebates or chargebacks. As a
result of current economic conditions, recently adopted
legislation or potential future legislation, it is possible that
a greater proportion of Acthar sales will be subject to these
rebates and chargebacks, reducing our net sales. Additionally,
there could be changes to Medicaid regulations resulting in
higher rebates and chargebacks, which would reduce our net sales
further.
The interpretation of laws and regulations may negatively affect
the amount we are able to charge government agencies for Acthar,
or may negatively affect our historical financial results. For
example, on March 17, 2009, the Department of Defense
issued final regulations under the Fiscal Year 2008 National
Defense Authorization Act which interpreted such Act to expand a
government health care program, Tricare, to include prescription
drugs dispensed by Tricare retail network pharmacies. During the
year ended December 31, 2009, we recorded a reserve for
$3.5 million, the total amount of our potential exposure
for these Tricare claimed rebates.
We may
be negatively affected by unforeseen invoicing of historical
Medicaid sales.
We provide a rebate related to product dispensed to Medicaid
eligible patients in instances where regulations provide for
such a rebate. The rebate per unit formula is comprised of a
basic rebate of 15.1% applied to the average per unit amount of
payments we receive on our product sales and an additional per
unit rebate that is based on our current sales price compared to
our sales price on an inflation adjusted basis from a designated
base period. We multiply the rebate amount per unit by the
estimated rebate units to arrive at the reserve for the period.
This reserve is deducted from gross sales in the determination
of net sales. Effective January 1, 2008, the amount we
rebate for each Acthar vial dispensed to a Medicaid eligible
patient is approximately $2,500 higher than our price to
CuraScript SD. The Medicaid rebates associated with end user
demand for a period are mostly paid to the states by the end of
the quarter following the quarter in which the rebate reserve is
established. Revisions in the Medicaid rebate estimates are
charged to income in the period in which the information that
gives rise to the revision becomes known. However, certain
states may provide their requested rebates to us on a delayed
basis, which would negatively affect future financial
performance in periods occurring after the period in which the
original reserved Medicaid rebate accrual occurred. For example,
in the third quarter of 2009, we received higher than
anticipated amounts of Medicaid rebates related to prior period
Acthar usage. In connection with our receipt of invoices related
to these rebates, we increased our rebate reserve which reduced
net sales in the third quarter of 2009 by approximately
$4.6 million.
We are
currently subject to numerous governmental regulations and it
can be costly to comply with these regulations and to develop
compliant products and processes.
Without considering the impact of any proposed or future health
care reform initiatives, no assurance can be given that we will
remain in compliance with currently applicable FDA and other
regulatory requirements for our currently marketed products or
any new product once clearance or approval has been obtained.
These requirements include, among other things, regulations
regarding manufacturing practices, product labeling and
post-marketing
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reporting, including adverse event reports and field alerts due
to product quality concerns. Additionally, the facilities and
procedures of our suppliers are subject to ongoing regulation,
including periodic inspection by the FDA and other regulatory
authorities. Any product that we develop must receive all
relevant regulatory approvals or clearances before it may be
marketed in a particular country.
A significant percentage of Acthar prescriptions is for the
treatment of IS, which is not an approved indication for Acthar.
While physicians may lawfully prescribe Acthar for IS and other
off-label uses, any promotion by us of any off-label uses would
be unlawful. Some of our practices that are intended to respond
to questions from physicians with respect to off-label uses of
Acthar without engaging in off-label promotion could nonetheless
be construed by the FDA as off-label promotion. Although we have
policies and procedures in place designed to help assure ongoing
compliance with regulatory requirements regarding off-label
promotion, some non-compliant actions may nonetheless occur or
be deemed by regulatory authorities to have occurred. Regulatory
authorities could take enforcement action against us if they
believe we are promoting or have promoted our products for
off-label use.
Also, the label for Acthar includes a list of indications for
which Acthar has not been actively promoted or prescribed for in
several years, if ever. It is possible that the FDA could, in
the context of reviewing our sNDA for IS or otherwise, conduct a
review of the Acthar label and require us to provide data to the
FDA regarding the safety and efficacy of Acthar relating to
these indications. If we are unable to provide such data to the
FDA, we may be forced to remove those indications. Our inability
to market Acthar for indications that we were previously able to
promote may negatively affect our financial performance.
The regulatory process, which may include extensive pre-clinical
studies and clinical trials of each product to establish its
safety and efficacy, is uncertain, can span many years, and
requires the expenditure of substantial time and resources to
ensure compliance with complex regulations. Should we fail to
comply with applicable regulations, possible regulatory actions
could include warning letters, fines, damages, injunctions,
civil penalties, recalls, seizures of our products and criminal
prosecution. These actions could result in, among other things,
substantial modifications to our business practices and
operations; refunds, recalls or a total or partial shutdown of
production in one or more of our suppliers facilities
while our suppliers remedy the alleged violation; the inability
to obtain future pre-market clearances or approvals; and
withdrawals or suspensions of current products from the market.
Any of these events could disrupt our business and have a
material adverse effect on our revenues and financial condition.
In addition, data obtained from pre-clinical and clinical
activities are susceptible to varying interpretations that could
delay, limit or prevent regulatory approval or clearance. In
addition, delays or rejections may be encountered based upon
changes in regulatory policy during the period of product
development and the period of review of any application for
regulatory approval or clearance for a product. Delays in
obtaining regulatory approvals or clearances could:
Regulatory approval, if granted, may entail limitations on the
indicated uses for which a new product may be marketed that
could limit the potential market for the product. Product
approvals, once granted, may be withdrawn if problems occur
after initial marketing. Furthermore, manufacturers of approved
products are subject to pervasive review, including compliance
with detailed regulations governing FDA good manufacturing
practices. The FDA periodically revises the good manufacturing
practices regulations and requires manufacturers to remain
current with the latest regulations.
In addition, we cannot predict the extent of governmental
regulations or the impact of new governmental regulations that
may result in a delay in the development, production and
marketing of our products. As such, we may be required to incur
significant costs to comply with current or future laws or
regulations.
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Other
Risks Associated with our Business
The
loss of our key management personnel or failure to integrate new
management personnel could have an adverse impact on future
operations.
We are highly dependent on the services of the principal members
of our senior management team, and the loss of a member of
senior management could create significant disruption in our
ability to provide Acthar to our customers. We do not carry key
person life insurance for our senior management or other
personnel. Additionally, the future potential growth and
expansion of our business is expected to place increased demands
on our management skills and resources. Recruiting and retaining
management and operational personnel to perform sales and
marketing, financial operations, business development, clinical
development, regulatory affairs, quality assurance, medical
affairs and contract manufacturing in the future will also be
critical to our success. We do not know if we will be able to
attract and retain skilled and experienced management and
operational personnel in the future on acceptable terms given
the intense competition among numerous pharmaceutical and
biotechnology companies for such personnel. If we are unable to
hire necessary skilled personnel in the future, our business
could be harmed.
Our
financial results can be negatively impacted by economic
downturns.
Downturns in the general economic environment present us with
several potential challenges. In challenging economies and
periods of increased unemployment, a greater percentage of our
unit volume may be subject to reimbursement under Medicaid and
other government programs. This shifting in payer mix can
negatively impact our financial results. In addition,
third-party payors such as private insurance companies may be
less willing to satisfy their reimbursement obligations in a
timely matter, or at all. State and federal reimbursement
programs such as Medicaid may curtail their reimbursements due
to budget cuts.
As a result of downturns in the economy, there may be a
disruption or delay in the performance of our third-party
contractors, suppliers or collaborators, including CuraScript.
If CuraScript is unable to satisfy its commitments to us, our
business would be adversely affected. There may be a disruption
or delay in the performance of our third-party manufacturers for
Acthar. If such third-party manufacturers are unable to satisfy
their commitments to us, our business would be adversely
affected.
Downturns in the capital markets may have a negative impact on
the market values of the investments in our investment
portfolio. We cannot predict future market conditions or market
liquidity and there can be no assurance that the markets for
these securities will not deteriorate or that the institutions
that hold these investments will be able to meet their debt
obligations at the time we may need to liquidate such
investments or until such time as the investments mature.
If we
are unable to protect our proprietary rights, we may lose our
competitive position and future revenues.
We do not have a patent on Acthar. However, our success will
depend in part on our ability to do the following:
We will only be able to protect our proprietary rights from
unauthorized use by third parties to the extent that these
rights are covered by valid and enforceable patents or are
effectively maintained as trade secrets and are otherwise
protectable under applicable law. We will attempt to protect our
proprietary position by filing U.S. and foreign patent
applications related to our proprietary products, technology,
inventions and improvements that are important to the
development of our business.
The patent positions of biotechnology and biopharmaceutical
companies involve complex legal and factual questions and,
therefore, enforceability cannot be predicted with certainty.
Patents, if issued, may be challenged,
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invalidated or circumvented. Thus, any patents that we own or
license from third parties for future products may not provide
any protection against competitors. Pending patent applications
we may file in the future, or those we may license from third
parties, may not result in patents being issued. Also, patent
rights may not provide us with proprietary protection or
competitive advantages against competitors with similar
technology. Furthermore, others may independently develop
similar technologies or duplicate any technology that we have
developed or we will develop. The laws of some foreign countries
may not protect our intellectual property rights to the same
extent as do the laws of the United States.
In addition to patents for future products, we rely on trade
secrets and proprietary know-how for Acthar. We currently seek
protection, in part, through confidentiality and proprietary
information agreements. These agreements may not provide
meaningful protection or adequate remedies for proprietary
technology in the event of unauthorized use or disclosure of
confidential and proprietary information. The parties may not
comply with or may breach these agreements. Furthermore, our
trade secrets may otherwise become known to, or be independently
developed by, competitors.
Our success will further depend, in part, on our ability to
operate without infringing the proprietary rights of others. If
our activities infringe on patents owned by others, we could
incur substantial costs in defending ourselves in suits brought
against a licensor or us. Should our products or technologies be
found to infringe on patents issued to third parties, the
manufacture, use and sale of our products could be enjoined, and
we could be required to pay substantial damages. In addition,
we, in connection with the development and use of our products
and technologies, may be required to obtain licenses to patents
or other proprietary rights of third parties, which may not be
made available on terms acceptable to us.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results. As a
result, current and potential shareholders could lose confidence
in our financial reporting, which could have a negative market
reaction.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to report on, and requires our independent registered public
accounting firm to attest to, the effectiveness of our internal
control over financial reporting. At December 31, 2009, we
were compliant and have implemented an ongoing program to
perform the system and process evaluation and testing necessary
to continue to comply with these requirements. Accordingly, we
continue to incur expenses and will devote management resources
to Section 404 compliance as necessary. Further, effective
internal controls and procedures are necessary for us to provide
reliable financial reports. If our internal controls and
procedures become ineffective, we may not be able to provide
reliable financial reports, our business and operating results
could be harmed and current and potential shareholders may not
have confidence in our financial reporting.
If
product liability lawsuits are successfully brought against us
or we become subject to other forms of litigation, we may incur
substantial liabilities and costs and may be required to limit
commercialization of our products.
Our business exposes us to potential liability risks that are
inherent in the manufacturing, testing and marketing of
pharmaceutical products. The use of our currently marketed
products or any drug candidates ultimately developed by us or
our collaborators in clinical trials may expose us to product
liability claims and possible adverse publicity. Under a recent
United States Supreme Court ruling, FDA approval of a drug does
not prevent the filing of product liability claims in state
courts, potentially making it more costly and time consuming to
defend against such claims. Product liability insurance for the
pharmaceutical industry is generally expensive, if available at
all. We currently have product liability insurance for claims up
to $10.0 million. However, if we are unable to maintain
insurance coverage at acceptable costs, in a sufficient amount,
or at all, or if we become subject to a product liability claim,
our reputation, stock price and ability to devote the necessary
resources to the commercialization of our products could be
negatively impacted.
Business
interruptions could limit our ability to operate our
business.
Our operations are vulnerable to damage or interruption from
computer viruses, human error, natural disasters,
telecommunications failures, intentional acts of vandalism and
similar events. In particular, our corporate
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headquarters is located in the San Francisco Bay area,
which has a history of seismic activity. We have not established
a formal disaster recovery plan, and our
back-up
operations and our business interruption insurance may not be
adequate to compensate us for losses that occur. A significant
business interruption could result in losses or damages incurred
by us and require us to cease or curtail our operations.
Risks
Related to our Common Stock
Our
stock price has a history of volatility, and an investment in
our stock could decline in value.
The price of our common stock is subject to significant
volatility. The closing price per share of our common stock
ranged in value from $3.49 to $9.54 during the two year period
ended December 31, 2009. Any number of events, both
internal and external to us, may continue to affect our stock
price. For example, our quarterly revenues or earnings or losses
can fluctuate based on the buying patterns of our specialty
distributor and our end users. In the event that patient demand
for Acthar is less than our sales to our specialty distributor,
excess Acthar inventories may result at our specialty
distributor and end users, which may impact future Acthar sales.
Other potential events that could affect our stock price
include, without limitation; our quarterly and yearly revenues
and earnings or losses; our ability to acquire and market
appropriate pharmaceuticals; announcement by us or our
competitors regarding product development efforts, including the
status of regulatory approval applications; the outcome of legal
proceedings, including claims filed by us against third parties
to enforce our patents and claims filed by third parties against
us relating to patents held by the third parties; the launch of
competing products; our ability to obtain product from our
contract manufacturers; the resolution of (or failure to
resolve) disputes with collaboration partners and corporate
restructuring by us.
We
have significant stock option overhang which could dilute your
investment.
We have a substantial overhang of common stock due to a low
average exercise price of employee stock options. The future
exercise of employee stock options could cause substantial
dilution, which may negatively affect the market price of our
shares.
We
have certain anti-takeover provisions in place.
Certain provisions of our articles of incorporation and the
California General Corporation Law could discourage a third
party from acquiring, or make it more difficult for a third
party to acquire, control of our company without approval of our
board of directors. These provisions could also limit the price
that certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow the board
of directors to authorize the issuance of preferred stock with
rights superior to those of the common stock. We are also
subject to Section 1101(e) of the California General
Corporation Law, which, among other things, limits the ability
of a majority shareholder holding more than 50% but less than
90% of the outstanding shares of a California corporation from
consummating a cash-out merger.
The provisions in our articles of incorporation and provisions
of the California General Corporation Law may discourage, delay
or prevent a third party from acquiring us.
None.
At December 31, 2009, we leased two buildings, and
subleased additional office space. We lease our
23,000 square foot headquarters in Union City, California
under a lease agreement that expires in March 2011. Our
headquarters is currently occupied by the Executive, Commercial
Development, Finance and Administration, Sales and Marketing,
Medical Affairs, Contract Manufacturing, Quality Control and
Quality Assurance departments.
We lease a building with 30,000 square feet of laboratory
and office space in Hayward, California under a master lease
that expires in November 2012. Effective November 1, 2007,
we subleased 5,000 square feet of the facility through
April 2009 and effective February 1, 2008, we subleased the
remaining 25,000 square feet through
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the remainder of the term of the master lease. The
5,000 square foot sublease is being leased on a
month-to-month
basis subsequent to April 2009. These subleases cover a portion
of our lease commitment and all of our insurance, taxes and
common area maintenance. Please refer to Note 9,
Indemnifications, Commitments and Contingencies, of our Notes to
Consolidated Financial Statements and Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, for further
discussion related to the sublease of the Hayward facility.
We sublease a building with 2,000 square feet of office
space in Columbia, Maryland under a lease agreement that expires
in 2011. This office is currently occupied by our Product
Development and Regulatory Affairs departments.
We believe that our current leased office space is sufficient to
meet our current business requirements and that additional
office space will be available on commercially reasonable terms
if required.
Questcor operates in a highly regulated industry. We are subject
to the regulatory authority of the Securities and Exchange
Commission, the Food and Drug Administration and numerous other
federal and state governmental agencies including state Attorney
General Offices, which have become more active in investigating
the business practices of pharmaceutical companies. From time to
time, we receive informal requests for information from various
governmental agencies.
On February 25, 2009, we received a Civil Investigative
Demand (CID) from the Attorney General of the State
of Missouri, in connection with that offices investigation
into our pricing practices with respect to Acthar under
Missouris Merchandising Practices Act. On May 7,
2009, we received a subpoena from the Attorney General of the
State of New York, in connection with that offices
investigation, under New Yorks antitrust statute and
Federal antitrust statutes, of our acquisition of Acthar from
Aventis in 2001, our Acthar royalty arrangements and our
subsequent pricing of Acthar. We have provided documents and
information to the Attorneys General of Missouri and New York,
and will continue to cooperate with these offices if called upon
to do so.
There can be no assurance that these types of requests for
information or investigations will not have a material adverse
effect on our business.
In addition, we may become involved in litigation relating to
claims arising from our ordinary course of business.
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PART II
Price
Range of Common Stock; Holders of Record
Effective March 6, 2009, our common stock is traded on the
NASDAQ Global Market under the symbol QCOR. The
following table sets forth, for the periods presented, the high
and low closing price per share of our common stock.
The closing price of our common stock on March 3, 2010 was
$6.21 per share. As of March 3, 2010 there were
approximately 171 holders of record of our common stock.
Stock
Repurchases
See Liquidity and Capital Resources Financing
Cash Flows in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Part II,
Item 7 of this
Form 10-K
for information on our stock repurchases.
Dividends
We have never paid a cash dividend on our common stock. Any
future cash dividends will depend on future earnings, capital
requirements, our financial condition and other factors deemed
relevant by our board of directors.
Equity
Compensation Plans
For additional information regarding our equity compensation
plans please see Item 12 of this Annual Report.
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Stock
Performance Graph
The following graph shows the total shareholder return, for the
five years ended December 31, 2009, on an investment of
$100 in cash in (i) Questcor Common Stock, (ii) the
NYSE Amex Composite Index, and (iii) the NASDAQ
Pharmaceutical Index.
Comparison
of 5 Year Cumulative Total Return*
Among Questcor Pharmaceuticals, Inc.,
the NYSE Amex Composite Index
and the NASDAQ Pharmaceutical Index
![]()
This stock performance graph shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), or otherwise subject to the liabilities of that
section, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933, as amended, or the
Exchange Act, except as expressly set forth by specific
reference in such filing.
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The following table sets forth certain financial data with
respect to our business. The selected consolidated financial
data should be read in conjunction with our Consolidated
Financial Statements and related Notes and Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and other information
contained elsewhere in this Annual Report.
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QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
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The following discussion should be read in conjunction with our
audited consolidated financial statements, and the notes
thereto, contained elsewhere in this Annual Report and the
statements regarding forward-looking information and the factors
that could affect our future financial performance described
below in this Annual Report.
The discussion below in this Item of this Annual Report includes
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
1933 Act) and Section 21E of the
Securities Exchange Act of 1934, as amended (the
1934 Act). Those Sections of the 1933 Act
and 1934 Act provide a safe harbor for
forward-looking statements to encourage companies to provide
prospective information about their financial performance so
long as they provide meaningful, cautionary statements
identifying important factors that could cause actual results to
differ significantly from projected results. Forward-looking
statements often include the words believe,
expect, anticipate, intend,
plan, estimate, project, or
words of similar meaning, or future or conditional verbs such as
will, would, should,
could, or may. Any statements as to our
expectations or beliefs concerning, or projections or forecasts
of, our future financial performance or future financial
condition, or with respect to trends in our business or in our
markets, are forward-looking statements. Factors that could
affect our future operating results and cause them to differ,
possibly significantly, from those currently anticipated are
described in (i) Item 1A, entitled Risk
Factors, in Part I of this Annual Report, and
(ii) the subsection entitled Critical Accounting
Policies and Use of Estimates in Item 7 below and,
accordingly, the descriptions of the Risk Factors and the
Critical Accounting Policies and Use of Estimates in this Annual
Report should be read in their entirety.
Overview
We are a pharmaceutical company focused on diseases and
disorders for which there is significant unmet medical need. Our
primary drug is H.P. Acthar Gel (repository corticotropin
injection), an injectable drug that is approved by the
U.S. Food and Drug Administration (FDA) for the
treatment of a variety of diseases and disorders. Since 2007, we
have sought to identify diseases and disorders in which the use
of Acthar could improve patient outcomes. Among the many
indications for which it is approved, Acthar is approved for the
treatment of exacerbations associated with multiple sclerosis
(MS) and, in 2008, we identified a subset of the MS
patient population who do not respond to the standard therapies
for MS exacerbations as potential candidates for Acthar. In
2009, we significantly expanded our sales force dedicated to the
MS market and have experienced strong sales growth in this
market. Acthar is also used in treating patients with infantile
spasms (IS), a rare form of refractory childhood
epilepsy, and opsoclonus myoclonus syndrome, a rare
autoimmune-related childhood neurological disorder, but is not
approved for the treatment of either disorder. While we do not
promote Acthar for the treatment of IS, a significant percentage
of our net sales is derived from the treatment of this disorder.
Acthar is approved to induce a diuresis or a remission of
proteinuria in the nephrotic syndrome (NS) without
uremia of the idiopathic type or that due to lupus
erythamatosus. NS is a kidney disorder characterized by
high levels of protein in the urine and low levels of protein in
the blood that often leads to end-stage renal disease. During
the fourth quarter of 2009, we generated a modest amount of net
sales as a result of physicians writing prescriptions for Acthar
to treat NS, and we are working to generate more clinical data
to further support the effectiveness of Acthar in the treatment
of this disorder. From time to time we receive prescriptions for
Acthar for other conditions. We are also in discussions with
experts in other disease states with high unmet medical needs
for which there is a potential therapeutic role for Acthar. We
also market Doral (quazepam), which is indicated for the
treatment of insomnia.
In August 2007, we announced our Acthar-centric business
strategy, which included a new pricing level for Acthar
effective August 27, 2007. The strategy was adopted in
order to best ensure financial viability and continued
availability of Acthar, establish support programs to benefit
Acthar patients, advance our product development programs and
ensure that the company became economically viable. Since the
adoption of the strategy, we have expanded our sponsorship of
Acthar patient assistance and co-pay assistance programs, which
provide an important safety net for uninsured and under-insured
patients using Acthar, and have established a group of
representatives and medical science liaisons to work with
healthcare providers who administer Acthar. We continue to
support the Acthar patient assistance programs administered by
the National Organization for Rare Disorders (NORD).
These and other patient-oriented support programs have now
provided free drug with commercial value of over
$44 million to patients since September 2007. In addition
to the free drug program, significant financial support
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continues to be provided to needy patients through NORDs
co-pay assistance programs that we sponsor. We have been working
closely with the neurology community to identify promising new
research projects for which we can provide needed financial
support. We are providing support to leading researchers in
their efforts to better understand the underlying disease
processes that cause infantile spasms, a subject for which there
has been little research funding in recent decades, as well as
to better understand the drugs mechanisms of action.
Acthar is currently approved in the U.S. for the treatment
of MS exacerbations, nephrotic syndrome and many other
conditions. 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 IS even
though it is not approved for this indication. In December 2009,
our supplemental New Drug Application (sNDA) to add
the treatment of infantile spasms to the Acthar label was
accepted for filing by the FDA. The FDA has set the user fee
goal date, also known as the PDUFA date, for action on our
filing of June 11, 2010 for this sNDA. There can be no
assurance that this date will be met or that the sNDA will be
approved. Previously, the FDA granted Orphan Designation to the
active ingredient in Acthar for the treatment of IS. As a result
of this Orphan Designation, if we are successful in obtaining
FDA approval for the IS indication, we believe we will also
qualify for a seven-year exclusivity period during which the FDA
is prohibited from approving any other adrenocorticotropic
hormone (ACTH) formulation for IS unless the other
formulation is demonstrated to be clinically superior to Acthar
or is considered by the FDA to have an active ingredient that is
different from the active ingredient of Acthar. However, it is
unclear what impact the potential approval of our sNDA may have,
as Acthar is already used in the treatment of IS.
Our results of operations may vary significantly from quarter to
quarter depending on, among other factors, demand for our
products by patients, inventory levels of our products held by
third parties, the amount of Medicaid rebates on our products
dispensed to Medicaid eligible patients, the amount of
chargebacks and other government rebate programs on the sale of
our products by our specialty distributor to
government-supported entities, the availability of finished
goods from our sole-source manufacturers, the timing of certain
expenses, the timing and amount of our product development
expenses, the introduction of a competitive product, and our
ability to develop growth opportunities for Acthar.
Critical
Accounting Policies and Use of Estimates
Our managements discussion and analysis of our financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting
principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosures. On an on-going basis, we evaluate our
estimates, including those related to our Medicaid rebate
obligation related to our products dispensed to Medicaid
eligible patients, other government rebate programs and
chargebacks on sales of our products by wholesalers and our
specialty distributor to government-supported entities,
inventories, intangible assets, share-based compensation, lease
termination liability and income taxes. We base our estimates on
historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe
the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of
our consolidated financial statements.
Sales
Reserves
We have estimated reserves for Medicaid rebates to all states
for products dispensed to patients covered by Medicaid;
government chargebacks for sales of our products by wholesalers
and our specialty distributor to certain Federal government
organizations including the Veterans Administration; and
reserves for rebates related to a health coverage program called
Tricare. We have also estimated reserves for product returns
from our specialty distributor, wholesalers, hospitals and
pharmacies. However, our product returns have been insignificant
since 2008. Gross sales are also reduced for payments made under
our Acthar patient co-payment assistance programs. We estimate
our reserves by utilizing historical information for our
existing products and data obtained from external sources.
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Significant judgment is inherent in the selection of assumptions
and the interpretation of historical experience as well as the
identification of external and internal factors affecting the
estimates of our reserves for Medicaid rebates and other
government program rebates and chargebacks. We believe that the
assumptions used to estimate these sales reserves are reasonable
considering known facts and circumstances. However, our Medicaid
rebates and other government program rebates and chargebacks
could differ significantly from our estimates because of
unanticipated changes in prescription trends or patterns in the
states submissions of Medicaid claims, adjustments to the
amount of product in the distribution channel, and new
interpretations of the Medicaid statutes and regulations. If
actual Medicaid rebates, or other government program rebates and
chargebacks are significantly different from our estimates, such
differences would be accounted for in the period in which they
become known. During the quarter ended September 30, 2009,
we received higher than anticipated amounts of Medicaid rebates
related to prior period Acthar usage, and we increased our
rebate reserve which reduced net sales in the third quarter of
2009 by approximately $4.6 million. Historically, actual
amounts have been generally consistent with our estimates.
Medicaid
Rebates
We provide a rebate related to product dispensed to Medicaid
eligible patients in instances where regulations provide for
such a rebate. Our a) estimated rebate percentage, adjusted
for b) recent and expected future utilization rates for
these programs, is used to estimate the rebate units associated
with product shipped during a period as follows:
a) The estimated liability included in sales-related
reserves as of the end of a period is comprised of the estimated
rebate units associated with estimated end user demand during
the period, the estimated rebate units associated with estimated
inventory in the distribution channel as of the end of the
period, and the estimated rebate units, if any, associated with
prior rebate periods.
b) In order to assess current and future rates of Medicaid
utilization, we analyze inventory levels received from a third
party, CuraScript SD, patient prescription and shipment data
received from a third party, CuraScript SP, and claims-level
detail received from state Medicaid agencies.
The rebate amount per unit is determined based on a formula
established by statute and is subject to review and modification
by the administrators of the Medicaid program. The rebate per
unit formula is comprised of a basic rebate of 15.1% applied to
the average per unit amount of payments we receive on our
product sales and an additional per unit rebate that is based on
our current sales price compared to our sales price on an
inflation adjusted basis from a designated base period. We
multiply the rebate amount per unit by the estimated rebate
units to arrive at the reserve for the period. This reserve is
deducted from gross sales in the determination of net sales.
Effective January 1, 2008, the amount we rebate for each
Acthar vial dispensed to a Medicaid eligible patient is
approximately $2,500 higher than our price to CuraScript SD. Our
Acthar rebate amount per unit was approximately 65% of our price
to our specialty distributor through August 26, 2007 and
increased to 73% of our price to our specialty distributor
during the fourth quarter ended December 31, 2007.
Management believes that the information received from
CuraScript SD related to inventory levels and CuraScript SP
related to prescription and shipment data is reliable, but we
are unable to independently verify the accuracy of such data.
The Medicaid rebates associated with end user demand for a
period are mostly paid to the states by the end of the quarter
following the quarter in which the rebate reserve is
established. We routinely assess our experience with Medicaid
rebates and adjust the reserves accordingly. Revisions in the
Medicaid rebate estimates are charged to income in the period in
which the information that gives rise to the revision becomes
known. We consider an incremental 2 to 3 percentage point
variance to be a reasonably likely change in the percent of
Medicaid rebates to related gross sales. An incremental 2 to
3 percentage point change in the estimated rebate units
would lead to an approximate $1.0 million to
$1.5 million effect on net sales and an approximate
$0.9 million to $1.4 million effect on operating
income in 2009.
In connection with the implementation of our pricing strategy
for Acthar in August 2007, coupled with clarifications of the
Medicaid statute in July 2007 by program administrators, during
2007 we initiated an extensive review of the Medicaid statute
and regulations. After such review and consultation with our
regulatory legal counsel, we prospectively modified how we
determine our rebate amount per unit to conform with the
statute. The
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modification was implemented in August 2007 and communicated to
the program administrators in September 2007. The modification
increased net sales and net income applicable to common
shareholders by $6.9 million, or $0.10 per diluted share,
for the year ended December 31, 2007. This sales and income
benefit ended during the fourth quarter of 2007.
The following table summarizes the activity in the account for
sales-related reserves for Medicaid rebates:
The increase in the Medicaid provision for sales made in 2008
primarily results from the increased pricing level for Acthar
effective August 27, 2007, which resulted in higher rebate
amounts.
Government
Chargebacks
For the years ended December 31, 2009, 2008 and 2007,
certain other government-supported entities such as the Veterans
Administration and Department of Defense were permitted to
purchase Acthar from CuraScript SD for a nominal amount.
CuraScript SD charges the significant discount back to us and
reduces subsequent payment to us by the amount of the approved
chargeback. The chargeback approximates our sales price to our
customers. As a result, we recognize nominal, if any, net sales
on shipments to these entities that qualify for the government
chargeback. Effective January 1, 2010, we established new
prices for Acthar purchased by Veterans Administration medical
centers. Sales recorded in 2010 on shipments to the Veterans
Administration will represent an increase as compared to the
nominal net sales recognized in 2009.
The reduction to gross sales for a period related to chargebacks
is comprised of actual approved chargebacks originating during
the period and an estimate of chargebacks in the ending
inventory of our customers. In estimating the government
chargeback reserve as of the end of a period, we estimate the
amount of chargebacks in our customers ending inventory
using actual average monthly chargeback amounts and ending
inventory balances provided by our largest customers.
Chargebacks are generally applied by customers against their
payments to us approximately 30 to 45 days after they have
provided appropriate documentation to confirm their sale to a
qualified government-supported entity. We routinely assess the
chargeback estimates and adjust the reserves accordingly.
Revisions in chargeback estimates are charged to income in the
period in which the information that gives rise to the revision
becomes known. A change in the chargeback estimates would not
have a material effect on our sales or operating income.
The following table summarizes the activity in the account for
sales-related reserves for government chargebacks:
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Tricare
Rebates
We have established a reserve for rebates related to a health
coverage program called Tricare. On March 17, 2009, the
Department of Defense issued final regulations under the Fiscal
Year 2008 National Defense Authorization Act which interpreted
such Act to expand Tricare to include prescription drugs
dispensed by Tricare retail network pharmacies. Our Tricare
rebate reserve reflects this program expansion and is based on
estimated Department of Defense eligible sales multiplied by the
Tricare rebate formula. During the year ended December 31,
2009, we recorded a reserve for $3.5 million, the total
amount of our potential exposure for these Tricare claimed
rebates.
Effective January 1, 2010, we established new prices for
Acthar purchased by Tricare. Sales recorded in 2010 on shipments
to Tricare will represent an increase as compared to the nominal
net sales recognized in 2009.
The following table summarizes the activity in the account for
sales-related reserves for Tricare rebates:
Co-Pay
Assistance Programs
We sponsor co-pay assistance programs for Acthar patients which
are administered by the National Organization for Rare Disorders
(NORD). The payments made under our co-pay
assistance programs are accounted for as a reduction of gross
sales.
Product
Returns
We supply replacement product to CuraScript SD on product
returned between one month prior to expiration to three months
post expiration. Returns from product lots are exchanged for
replacement product, and estimated costs for such exchanges,
which include actual product material costs and related shipping
charges, are included in cost of sales. Product returns have
been insignificant since we began utilizing the services of
CuraScript SD to distribute Acthar.
Shelf-Stock
Adjustment Credit
Under our distribution agreement with CuraScript SD, if the
price of Acthar is reduced, CuraScript SD will receive a
shelf-stock adjustment credit based upon the amount of product
in their inventory at the time of the price reduction. Any
reduction in the selling price of Acthar is at our discretion.
To date, there have been no such price reductions.
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At December 31, 2009 and 2008, sales-related reserves
included in the accompanying Consolidated Balance Sheets were as
follows:
Inventories
As of December 31, 2009 our net raw material and finished
goods inventories totaled $3.4 million. We maintain
inventory reserves primarily for excess and obsolete inventory
(due to the expiration of shelf life of a product). In
estimating inventory excess and obsolescence reserves, we
analyze (i) the expiration date, (ii) our sales
forecasts, and (iii) historical demand. Judgment is
required in determining whether the forecasted sales information
is sufficiently reliable to enable us to reasonably estimate
excess and obsolete inventory. If actual future usage and demand
for our products is less favorable than projected, additional
inventory write-offs may be required in the future which would
increase our cost of sales in the period of any write-offs.
Customer inventories may be compared to both internal and
external databases to determine adequate inventory levels. We
may monitor our product shipments to customers and compare these
shipments against prescription demand for our individual
products. Additionally, inventory write-offs can occur as a
result of manufacturing problems. For example, during the third
quarter of 2009, a manufactured lot of Acthar did not meet
specifications. As a result, we recorded a charge of
approximately $540,000 related to that manufactured lot.
Intangible
and Long-Lived Assets
As of December 31, 2009 our intangible and long-lived
assets consisted of goodwill of $299,000 generated from a merger
in 1999, net purchased technology of $3.4 million related
to our acquisition of Doral and $407,000 of net property and
equipment. The costs related to our acquisition of Doral are
being amortized over an estimated life of 15 years. The
determination of whether or not our intangible and long-lived
assets are impaired and the expected useful lives of purchased
technology involves significant judgment. Changes in strategy or
market conditions could significantly impact these judgments and
require a write-down of our recorded asset balances and a
reduction in the expected useful life of our purchased
technology. Such a write-down of our recorded asset balances or
reduction in the expected useful life of our purchased
technology would increase our operating expenses. In accordance
with ASC 350, Intangibles-Goodwill and Other (formerly
SFAS No. 142), we review goodwill for impairment on an
annual basis or whenever events occur or circumstances change
that could indicate a possible impairment may have occurred. Our
fair value is compared to the carrying value of our net assets,
including goodwill. If the fair value is greater than the
carrying amount, then no impairment is indicated. In accordance
with ASC 360, Property Plant and Equipment (formerly
SFAS No. 144), we review long-lived assets, consisting
of property and equipment and purchased technology, for
impairment whenever events or circumstances indicate that the
carrying amount may not be fully recoverable. Recoverability of
assets is measured by comparison of the carrying amount of the
asset to the net undiscounted future cash flows expected to be
generated from the use or disposition of the asset. If the
future undiscounted cash flows are not sufficient to recover the
carrying value of the assets, the assets carrying value is
adjusted to fair value. As of December 31, 2009 and 2008,
no impairment had been indicated.
Share-Based
Compensation
Effective January 1, 2006, we adopted the fair value
recognition provisions of ASC 718, Compensation-Stock
Compensation (formerly SFAS No. 123(R)), using the
modified-prospective transition method. Under the fair value
recognition provisions of ASC 718, share-based compensation cost
is estimated at the grant date based on the fair
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value of the award and is recognized as expense, net of
estimated pre-vesting forfeitures, ratably over the vesting
period of the award. We selected the Black-Scholes option
pricing model as the most appropriate fair value method for our
awards. Calculating share-based compensation expense requires
the input of highly subjective assumptions, including the
expected term of the share-based awards, stock price volatility,
and pre-vesting forfeitures. We estimated the expected term of
stock options granted for the years ended December 31, 2009
and 2008 based on the historical experience of similar awards,
giving consideration to the contractual terms of the share-based
awards, vesting schedules and the expectations of future
employee behavior. We estimated the expected term of stock
options granted for the year ended December 31, 2007 based
on the simplified method provided in Staff Accounting
Bulletin No. 107, Share-Based Payment. We
estimated the volatility of our common stock at the date of
grant based on the historical volatility of our common stock.
The assumptions used in calculating the fair value of
share-based awards represent our best estimates, but these
estimates involve inherent uncertainties and the application of
management judgment. As a result, if factors change and we use
different assumptions, our share-based compensation expense
could be materially different in the future. In addition, we are
required to estimate the expected pre-vesting forfeiture rate
and only recognize expense for those shares expected to vest. We
estimate the pre-vesting forfeiture rate based on historical
experience. If our actual forfeiture rate is materially
different from our estimate, our share-based compensation
expense could be significantly different from what we have
recorded in the current period.
Our net income for the year ended December 31, 2009
reflected $3.0 million of share-based compensation expense
related to employees and non-employee members of our board of
directors, of which $235,000 was related to our Employee Stock
Purchase Plan (ESPP). Our net income for the year
ended December 31, 2008 reflected $3.9 million of
share-based compensation expense related to employees and
non-employee members of our board of directors, of which
$2.1 million was related to our ESPP. In February 2008, our
board of directors approved a reduction in the offering period
of the ESPP from 12 months to 3 months effective with
the offering period that began on September 1, 2008,
eliminated the ability of plan participants to increase their
contribution levels during an offering period and authorized the
addition of 500,000 shares to the ESPP. In addition, our
board of directors approved an amendment in April 2008 to
permanently reduce the maximum offering period available from
27 months to 6 months and to permanently remove the
ability of ESPP participants to increase their contributions
during an offering period. These amendments to the ESPP were
approved by shareholders at our 2008 annual meeting.
As of December 31, 2009, $5.6 million of total
unrecognized compensation cost related to unvested grants of
stock options and awards of restricted stock is expected to be
recognized over a weighted-average period of 2.8 years.
Lease
Termination Liability
We entered into an agreement to sublease laboratory and office
space, including laboratory equipment, at our Hayward,
California facility in July 2000, due to the termination of our
then existing drug discovery programs. The sublease on our
Hayward facility expired in July 2006. Our obligations under the
Hayward master lease extend through November 2012. During the
fourth quarter of 2005, the sublessee notified us that they did
not intend to extend the sublease beyond the end of July 2006.
We determined that there was no loss associated with the Hayward
facility when we initially subleased the space, as we expected
cash inflows from the sublease to exceed our rent cost over the
term of the master lease. However, we reevaluated this in 2005
when the sublessee notified us that it would not be renewing the
sublease beyond July 2006. As a result, we computed a loss and
liability on the sublease in the fourth quarter of 2005 in
accordance with ASC 840, Leases (which now includes
former FIN 27 and FTB
79-15). As
of December 31, 2009 and 2008, the estimated liability
related to the Hayward facility totaled $980,000 and
$1.2 million, respectively, and is included in Lease
Termination Liabilities in the accompanying Consolidated Balance
Sheets. The fair value of the liability was determined using a
credit-adjusted risk-free rate to discount the estimated future
net cash flows, consisting of the minimum lease payments under
the master lease, net of estimated sublease rental income that
could reasonably be obtained from the property. The most
significant assumption in estimating the lease termination
liability relates to our estimate of future sublease income. We
base our estimate of sublease income, in part, on the opinion of
independent real estate experts, current market conditions, and
rental rates, among other factors.
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Adjustments to the lease termination liability will be required
if actual sublease income differs from amounts currently
expected. We review all assumptions used in determining the
estimated liability quarterly and revise our estimate of the
liability to reflect changes in circumstances. Effective
November 1, 2007, we subleased 5,000 square feet of
the facility through April 2009 and effective February 1,
2008 we subleased the remaining 25,000 square feet through
the remainder of the term of the master lease. The
5,000 square foot sublease is being leased on a
month-to-month
basis subsequent to April 2009. These subleases cover a portion
of our lease commitment, and all of our insurance, taxes and
common area maintenance. As of December 31, 2009, we are
obligated to pay rent on the Hayward facility of
$2.6 million. Over the remaining term of the master lease
we anticipate that we will receive approximately
$1.2 million in sublease income to be used to pay a portion
of our Hayward facility obligation.
We are also required to recognize an on-going accretion expense
representing the difference between the undiscounted net cash
flows and the discounted net cash flows over the remaining term
of the Hayward master lease using the interest method. The
accretion amount represents an on-going adjustment to the
estimated liability. The on-going accretion expense and any
revisions to the liability are recorded in Selling, General and
Administrative expense in the accompanying Consolidated
Statements of Income. During the years ended December 31,
2009, 2008 and 2007 we recognized total expense of $193,000,
$138,000 and $1.0 million, respectively, related to the
Hayward facility.
Income
Taxes
We make certain estimates and judgments in determining income
tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial
statement purposes.
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
us estimating our current tax exposure under the most recent tax
laws and assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included in our consolidated balance sheets.
We regularly assess the likelihood that we will be able to
recover our deferred tax assets, which is ultimately dependent
upon us generating future taxable income. We consider all
available evidence, both positive and negative, including
historical levels of income, expectations and risks associated
with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a
valuation allowance. If it is not considered more likely
than not that we will recover our deferred tax assets, we
will increase our provision for taxes by recording a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. Changes in the valuation
allowance based on our assessment will result in an income tax
benefit if the valuation allowance is decreased and an income
tax expense if the valuation allowance is increased.
Based on taxable income for 2007, cumulative taxable income for
the three most recent years, and anticipated taxable income for
2008, we reversed the valuation allowance for deferred tax
assets in 2007 that we believed would be recovered based on
anticipated taxable income in 2008. In 2008, we reversed the
remaining valuation allowance for deferred tax assets that we
believed would be recovered based on anticipated taxable income
in 2009 and future years. These reversals resulted in an income
tax benefit of $15.9 million in 2007 and $5.2 million
in 2008 which reduced our income tax expense. Any changes in the
valuation allowance based upon our future assessment will result
in an income tax expense if the valuation allowance is increased.
At December 31, 2009, we had federal and state net
operating loss carryforwards of $7.7 million and
$16.8 million, respectively, and federal and California
research and development tax credits of $296,000 and $306,000,
respectively. Federal net operating loss carryforwards totaling
$7.7 million are subject to annual limitations and will be
available from 2010 through 2018, as a result of federal
ownership change limitations. Of this amount, $2.1 million
of federal net operating loss carryforwards are available to
reduce our 2010 taxable income. State net operating loss
carryforwards totaling $16.8 million are subject to annual
limitations and are available from 2013 through 2016. In
September 2008, California suspended for two years the ability
to use state operating loss carryforwards and certain credit
carryforwards to reduce taxable income. We expect to use these
state operating loss carryforwards and certain credit
carryforwards after the two year suspension. The federal and
state
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net operating loss carryforwards and the federal credit
carryforwards expire at various dates beginning in the years
2012 through 2018, if not utilized.
Utilization of our net operating loss and research and
development credit carryforwards may still be subject to
substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar
state provisions for ownership changes after December 31,
2009. Such an annual limitation could result in the expiration
of the net operating loss and research and development credit
carryforwards available as of December 31, 2009 before
utilization.
We implemented the provisions of Financial Interpretation
No. 48, which is now codified in ASC 740, Income
Taxes, as of January 1, 2007. This resulted in the
reversal of fully reserved deferred tax assets totaling
$315,000, which relate to uncertain tax positions, and the
related valuation allowance. We increased our unrecognized tax
benefits by $6,000 and $601,000 for the years ended
December 31, 2009 and 2008, respectively. These
unrecognized tax benefits, if recognized in full, would reduce
our income tax expense by $922,000 and result in adjustments to
other tax accounts, primarily deferred taxes.
Results
of Operations
Year
ended December 31, 2009 compared to year ended
December 31, 2008:
Total
Net Sales
Net sales for the years ended December 31, 2009 and 2008
were comprised of our products Acthar and Doral. Net sales of
Acthar for the year ended December 31, 2009 totaled
$87.6 million as compared to $94.4 million during the
same period in 2008. During the year ended December 31,
2009 we shipped 5,973 Acthar vials to our specialty distributor
as compared to 5,830 vials shipped during the same period in
2008. In addition, a reduction of the discount we provide to our
specialty distributor contributed to the increase in Acthar
gross sales in 2009 as compared to 2008.
The decrease in Acthar net sales was due to higher sales
reserves in 2009 for Medicaid rebates, other government program
rebates and chargebacks, and co-pay assistance programs. The
decrease in net sales resulting from higher sales reserves was
partially offset by the continued sequential improvement in
sales of Acthar in the multiple sclerosis (MS) market.
Sales reserves recorded in 2009 for Medicaid rebates, other
government program rebates and chargebacks, and co-pay
assistance programs were significantly higher than sales
reserves recorded in 2008. We provide a rebate related to
product dispensed to Medicaid eligible patients in instances
where regulations provide for such a rebate. In addition, other
government-supported entities are permitted to purchase our
products for a nominal amount from our customers who charge back
the significant discount to us. These Medicaid rebates and other
government program rebates and chargebacks are estimated by us
each quarter and reduce our gross sales in the determination of
our net sales. In addition, as a result of a new assessment of
our liability under a Department of Defense regulation,
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we recorded an additional rebate reserve which reduced
2009 net sales by $3.5 million for rebates related to
a health coverage program called Tricare.
For the year ended December 31, 2009, to determine our net
sales, Acthar gross sales were reduced by approximately 33% to
account for the estimated amount of Medicaid rebates and
government chargebacks, as compared to approximately 28% for the
year ended December 31, 2008. Effective January 1,
2008, the amount we rebate for each Acthar vial dispensed to a
Medicaid eligible patient is approximately $2,500 higher than
our price to our specialty distributor.
We completed the second phase of our sales force expansion
during the first quarter of 2009, and a third sales force
expansion to 38 representatives was completed during the third
quarter of 2009. The sales force expansion supports our
increased sales efforts related to the use of Acthar for the
treatment of exacerbations associated with MS, an indication for
which Acthar is already approved. Our increased sales efforts
have resulted in a significant increase in sales of Acthar to
treat select MS exacerbation patients in 2009 as compared to
2008. These sales efforts and our initiatives to educate MS
specialists about the treatment benefits of Acthar have resulted
in a 218% year over year increase in new paid commercial MS
prescriptions. A lesser percentage of adults than infants are
eligible for Medicaid. As a result, fewer MS patients than IS
patients participate in the Medicaid program. In addition,
during the fourth quarter of 2009 we received a modest set of
Acthar prescriptions for the treatment of nephrotic syndrome
(NS) which is an indication for which Acthar is
already approved. There can be no guarantee that any of these
growth trends will continue.
Acthar orders may be affected by several factors, including
inventory levels at specialty and hospital pharmacies, greater
use of patient assistance programs, the overall pattern of usage
by the health care community, including Medicaid and
government-supported entities, the use of alternative therapies
for the treatment of IS, and the reimbursement policies of
insurance companies. Our specialty distributor ships Acthar to
specialty pharmacies and hospitals to meet end user demand. We
track our own Acthar shipments daily, but those shipments vary
compared to end user demand because of seasonal usage and
changes in inventory levels at specialty pharmacies and
hospitals. We also review the amount of inventory of Acthar at
CuraScript SD and Doral at wholesalers in order to help assess
the demand for our products.
Acthar shipments may be affected by seasonality as well as
quarter to quarter fluctuations driven by the relatively small
IS patient population. We believe these fluctuations are
principally due to the low incidence of IS, as a relatively
small number of cases can create meaningful fluctuations. We
will continue to monitor these factors as there may be
volatility in our Acthar shipments and end user demand in future
periods.
Cost
of Sales and Gross Profit
Cost of sales for the year ended December 31, 2009 was
consistent with cost of sales for the year ended
December 31, 2008. Cost of sales includes material costs,
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
an additional third party.
Decreases in distribution costs and royalties on Acthar were
offset by an increase in inventory obsolescence totaling
approximately $600,000. During the third quarter of 2009, a
manufactured lot of Acthar did not meet specifications. As a
result, we recorded a charge of approximately $540,000 related
to that manufactured lot.
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The gross margin was 92% for each of the years ended
December 31, 2009 and 2008.
Selling,
General and Administrative
Selling, general and administrative expense for the year ended
December 31, 2009 increased $10.7 million as compared
to the same period in 2008. The increase in selling, general and
administrative expense was due primarily to an increase in
headcount related costs and costs associated with the support of
our Acthar strategy.
Headcount related costs included in selling, general and
administrative expense, excluding share-based compensation,
increased by approximately $4.5 million in the year ended
December 31, 2009 as compared to the same period in 2008.
The increase is due to the expansion of our sales force in order
to build upon continued positive growth trends in prescriptions
of Acthar for the treatment of exacerbations associated with MS.
We completed the second phase of our sales force expansion
during the first quarter of 2009, and a third sales force
expansion to 38 representatives was completed during the third
quarter of 2009.
Costs associated with the support of our Acthar strategy
increased by approximately $5.1 million in the year ended
December 31, 2009 as compared to the same period in 2008,
due in part to our marketing program for MS. An increase of
approximately $900,000 for professional services also
contributed to the increase in selling, general and
administrative expense in the year ended December 31, 2009.
We incurred a total non-cash charge of $3.0 million for ASC
718 share-based compensation related to employees and
non-employee members of our board of directors for the year
ended December 31, 2009, as compared to $3.9 million
for the year ended December 31, 2008. Of this amount,
$2.4 million was included in selling, general and
administrative expenses, a decrease of $933,000 as compared to
the year ended December 31, 2008. The decrease in total
share-based compensation expense in the year ended
December 31, 2009 was due primarily to an approximate
$1.8 million decrease in expense associated with our
employee stock purchase plan as compared to 2008.
Research
and Development
Research and development expense for the year ended
December 31, 2009 decreased $961,000 from the year ended
December 31, 2008. Costs included in research and
development relate primarily to costs related to the
resubmission of our Acthar sNDA for IS to the FDA, the funding
of medical research projects to better understand the
therapeutic benefit of Acthar in current and new therapeutic
applications, product development efforts and compliance
activities. The decrease in research and development expenses
was due primarily to decreases in costs related to our
resubmission of our sNDA for IS and product development
expenses. Expenses related to the resubmission of our sNDA and
product development decreased approximately $2.8 million in
the year ended December 31, 2009 as compared to the same
period in 2008. These decreases were partially offset by
increased funding of medical research projects to better
understand the therapeutic benefit of Acthar in current and new
therapeutic applications. Expenses related to medical research
projects increased approximately $1.4 million in the year
ended December 31, 2009 as compared to the same period in
2008. In addition, headcount related expenses, excluding
share-based compensation, increased approximately $300,000 in
the year ended December 31, 2009 as compared to the same
period in 2008.
In October 2009 we resubmitted our sNDA to the FDA seeking
approval to market Acthar for the treatment of infantile spasms.
In December 2009, our sNDA to add the treatment of infantile
spasms to the Acthar label was accepted for filing by the FDA.
The FDA has set the PDUFA date for action on our filing of
June 11, 2010 for this sNDA.
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We are seeking a partner to complete development of QSC-001 so
that our research and development resources can be focused on
pursuing potential growth opportunities for Acthar that have
recently been identified.
A non-cash charge of $623,000 for ASC 718 share-based
compensation was included in research and development expenses
in the year ended December 31, 2009, which was consistent
with share-based compensation expense for the same period in
2008.
We are providing support to leading researchers in their efforts
to better understand the underlying disease processes that cause
infantile spasms. We are currently funding pre-clinical and
clinical studies to explore potential new uses for Acthar, as
well as to better understand the drugs mechanisms of
action.
Depreciation
and Amortization
Depreciation and amortization expense for the year ended
December 31, 2009 was consistent with depreciation and
amortization expense for the year ended December 31, 2008.
Depreciation and amortization expense consist of depreciation
expense related to property and equipment and amortization
expense related to the Doral purchased technology. Purchased
technology is being amortized on a straight-line basis over
fifteen years, the expected life of the Doral product rights.
Total
Other Income
Total other income for the year ended December 31, 2009
decreased $239,000 as compared to total other income for the
same period in 2008. Lower interest income resulting from a
lower yield on our cash, cash equivalent and short-term
investment balances during the year ended December 31, 2009
as compared to the same period in 2008 was offset in part by a
$225,000 gain on sale of product rights.
Income
Before Income Taxes and Income Tax Expense
Income before income taxes for the year ended December 31,
2009 was $42.1 million as compared to $58.7 million
for the year ended December 31, 2008. The decrease was due
to the decrease in net sales and the changes in expenses
discussed above. Income tax expense for the year ended
December 31, 2009 was $15.5 million as compared to
$18.2 million for the year ended December 31, 2008.
During the year ended December 31, 2009, our effective tax
rate for financial reporting purposes was approximately 36.8% as
compared to approximately 31% for the year ended
December 31, 2008.
The year ended December 31, 2008 included a net tax benefit
of $5.2 million, or $0.07 per diluted share. At
December 31, 2007 we established a valuation allowance of
$5.2 million for deferred tax assets related to
$9.9 million of our federal net operating loss
carryforwards, $591,000 of federal research and development
credit carryforwards, $458,000 of California research and
development credit carryforwards, and other state temporary
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differences, as it was not considered more likely than not as of
December 31, 2007 that we would be able to utilize these
tax assets to offset future taxable income. The net tax benefit
was due to the reversal of this valuation allowance, as we
determined in 2008 that, based on anticipated taxable income in
2009 and future years, it was more likely than not that our
deferred tax assets at December 31, 2008 would be realized.
Net
Income
For the year ended December 31, 2009, we had net income of
$26.6 million as compared to net income of
$40.5 million for the year ended December 31, 2008, a
decrease of $13.9 million. The decrease resulted primarily
from the decrease in net sales and the changes in expenses
discussed above. The decrease was partially offset by income tax
expense of $15.5 million in the year ended
December 31, 2009 as compared to $18.2 million of
income tax expense for the year ended December 31, 2008.
Series A
Preferred Stock Dividend
The deemed dividend resulted from the repurchase of our
Series A Preferred Stock in February 2008. We repurchased
all of the outstanding Series A Preferred Stock in February
2008 for cash consideration of $10.3 million or $4.80 per
share. As of December 31, 2007, the Series A Preferred
Stock had a carrying amount of $5.1 million. The deemed
dividend represents the difference between the
$10.3 million repurchase payment and the $5.1 million
balance sheet carrying value of the Series A Preferred
Stock.
Net
Income Applicable to Common Shareholders
For the year ended December 31, 2009, we had net income
applicable to common shareholders of $26.6 million, or
$0.40 per fully diluted share, as compared to net income
applicable to common shareholders of $35.3 million, or
$0.49 per fully diluted share for the year ended
December 31, 2008, a decrease of $8.6 million. The
decrease resulted primarily from the 2008 deemed dividend on the
repurchased Series A Preferred Stock. The $5.3 million
reduction to net income related to the deemed dividend on the
repurchased Series A Preferred Stock reduced our 2008 fully
diluted earnings per share applicable to common shareholders by
$0.07.
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Year
ended December 31, 2008 compared to year ended
December 31, 2007:
Total
Net Sales
Total net sales for the year ended December 31, 2008
increased $45.5 million, or 91%, from the year ended
December 31, 2007. For the years ended December 31,
2008 and 2007 all net sales were in the neurology therapeutic
area.
Net sales of Acthar for the year ended December 31, 2008
totaled $94.4 million as compared to $48.7 million
during the same period in 2007. The increase in net sales
resulted from a full year under the Acthar pricing level
implemented in August 2007. In August 2007 we announced a new
strategy and business model for Acthar, and initiated a new
pricing level for Acthar that was effective August 27,
2007. Under the new Acthar strategy, our sales price to
CuraScript, our specialty distributor of Acthar, increased to
$22,222 per vial based on a list price of $23,269 per vial.
Effective June 1, 2008, the discounted sales price to
CuraScript increased to $23,039 per vial based on a list price
of $23,269 per vial. The list price prior to the new pricing
level was $1,650 per vial. While total Acthar units shipped have
decreased since the implementation of the new Acthar strategy,
we shipped 5,830 Acthar units to our specialty distributor
during the year ended December 31, 2008. This continued
ordering coupled with a positive pattern of insurance
reimbursement and rapid patient access to Acthar resulted in a
significant increase in our net sales in 2008.
During 2008, we increased our sales effort related to the use of
Acthar for the treatment of exacerbations associated with MS, an
indication for which Acthar is already approved. The increased
sales effort resulted in positive growth trends in prescriptions
of Acthar for the treatment of exacerbations associated with MS.
As required by federal regulations, we provide a rebate related
to product dispensed to Medicaid eligible patients. In addition,
certain government-supported entities were permitted to purchase
our products for a nominal amount from our customers who charge
back the significant discount to us. These Medicaid rebates and
government chargebacks were estimated by us each quarter and
reduced our gross sales in the determination of our net sales.
Effective January 1, 2008, the amount we rebate for each
Acthar vial dispensed to a Medicaid eligible patient is
approximately $2,500 higher than our price to our specialty
distributor. For the year ended December 31, 2008, Acthar
gross sales were reduced by 28% to account for the estimated
amount of Medicaid rebates and government chargebacks. A lesser
percentage of adults than infants are eligible for Medicaid. As
a result, fewer MS patients than IS patients participate in the
Medicaid program. As a result of the increased proportion of MS
prescriptions in the fourth quarter of 2008, the rebate and
chargeback amounts as a percentage of gross sales were lower as
compared to the full year 2008.
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Cost
of Sales and Gross Profit
Cost of sales for the year ended December 31, 2008
increased $2.0 million from the year ended
December 31, 2007. The increase in cost of sales was due
primarily to an increase of $1.8 million in royalties on
Acthar due to the increase in net sales during the year ended
December 31, 2008 as compared to the same period in 2007
and an increase of approximately $580,000 in distribution costs
in the year ended December 31, 2008 as compared to the same
period in 2007. These increases were partially offset by
decreases in product stability testing and inventory
obsolescence totaling approximately $515,000 in the year ended
December 31, 2008 as compared to the same period in 2007.
The gross margin was 92% for the year ended December 31,
2008, as compared to 89% for the year ended December 31,
2007. The increase in the gross margin in the year ended
December 31, 2008 as compared to the same period in 2007
was due primarily to the increase in net sales resulting from a
full year under the Acthar pricing level implemented in August
2007.
Selling,
General and Administrative
Selling, general and administrative expense for the year ended
December 31, 2008 increased $1.6 million as compared
to the same period in 2007. The increase in selling, general and
administrative expense was due primarily to an increase in
share-based compensation expense and general costs associated
with the support of our Acthar strategy, offset in part by lower
expenses associated with our Hayward facility and lower
headcount related costs resulting from the reduction of our
field organization in the second quarter of 2007.
We incurred a total non-cash charge of $3.9 million for ASC
718 share-based compensation for the year ended
December 31, 2008. Of this amount, $3.3 million was
included in selling, general and administrative expenses, an
increase of approximately $1.8 million as compared to the
same period in 2007. The increase in share-based compensation
expense in the year ended December 31, 2008 was primarily
associated with our employee stock purchase plan. Of the total
non-cash charge of $3.9 million in the year ended
December 31, 2008 for share-based compensation expense,
$2.1 million was related to our employee stock purchase
plan. As a result of the significant increase in our stock price
during the fourth quarter of 2007, many plan participants
increased their contributions to maximum levels for the
12-month
offering period that began on September 1, 2007. This
resulted in a significant increase in the non-cash ASC 718
expense for that
12-month
offering period. In February 2008, our board of directors
approved a reduction in the offering period from 12 months
to 3 months effective with the offering period that began
on September 1, 2008, eliminated the ability of plan
participants to increase their contribution levels during an
offering period and approved an amendment authorizing the
addition of 500,000 shares to the plan. In addition, our
board of directors approved an amendment in April 2008 to
permanently reduce the maximum offering period available from
27 months to 6 months and to permanently remove the
ability of ESPP participants to increase their contributions
during an offering period. These amendments to the plan were
approved by shareholders at our 2008 annual meeting.
General costs associated with the support of our Acthar strategy
increased by approximately $1.2 million in the year ended
December 31, 2008 as compared to general costs associated
with our Acthar strategy incurred during the same period in 2007.
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Expenses associated with our Hayward facility decreased by
approximately $890,000 in the year ended December 31, 2008
as compared to the same period in 2007. The decrease is due
primarily to the inclusion of losses totaling $646,000 in the
year ended December 31, 2007 resulting from revisions of
our estimate of our Hayward lease liability.
Headcount related costs included in selling, general and
administrative expense, excluding share-based compensation,
decreased by approximately $600,000 as compared to the same
period in 2007. Selling, general and administrative expense for
the year ended December 31, 2007 includes severance
benefits and other associated costs related to the reduction of
our field organization and the departure of our former Chief
Executive Officer in the second quarter of 2007.
Research
and Development
Research and development expense for the year ended
December 31, 2008 increased $5.9 million from the year
ended December 31, 2007. The increase in research and
development expenses was due primarily to an increase in costs
related to our efforts to complete the resubmission of our sNDA
for IS. Expenses related to the resubmission of our sNDA and
product development increased approximately $3.5 million in
the year ended December 31, 2008 as compared to the same
period in 2007. Activities associated with our medical science
liaisons contributed approximately $800,000 to the increase in
research and development expenses in the year ended
December 31, 2008 as compared to the prior year. These
activities include the initiation of basic research funding for
infantile spasms. Headcount related costs, excluding share-based
compensation, increased by approximately $800,000 in the year
ended December 31, 2008 as compared to the same period in
2007, due primarily to the addition of headcount during 2008. A
non-cash charge of $590,000 for ASC 718 share-based
compensation was included in research and development expenses
in the year ended December 31, 2008, an increase of
approximately $270,000 as compared to the same period in 2007.
Depreciation
and Amortization
Depreciation and amortization expense for the year ended
December 31, 2008 was consistent with depreciation and
amortization expense for the year ended December 31, 2007.
Total
Other Income
Total other income for the year ended December 31, 2008
decreased $289,000 as compared to total other income for the
same period in 2007. The decrease was due primarily to the
inclusion in the year ended December 31, 2007 of the gain
on sale of product lines related to Emitasol, and the reversal
of an accrual of $248,000 related to an agreement with Roberts
Pharmaceutical Corporation, a subsidiary of Shire
Pharmaceuticals, Inc. (Shire), as we determined that
the amount would not be due to Shire under the agreement. In
June 2007, we divested our non-core development stage product
Emitasol (nasal metoclopramide) which resulted in a gain of
$448,000. The decreases
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were partially offset by increased interest income resulting
from higher cash balances during the year ended
December 31, 2008 as compared to the same period in 2007.
Income
Before Income Taxes and Income Tax Expense
(Benefit)
Income before income taxes for the year ended December 31,
2008 was $58.7 million as compared to $23.0 million
for the year ended December 31, 2007. The increase was due
to the increase in net sales and the changes in expenses
discussed above. Income tax expense for the year ended
December 31, 2008 was $18.2 million as compared to an
income tax benefit for the year ended December 31, 2007 of
$14.6 million, or $0.21 per diluted share. The year ended
December 31, 2008 included a net tax benefit of
$5.2 million, or $0.07 per diluted share. At
December 31, 2007 we established a valuation allowance of
$5.2 million for deferred tax assets related to
$9.9 million of our federal net operating loss
carryforwards, $591,000 of federal research and development
credit carryforwards, $458,000 of California research and
development credit carryforwards, and other state temporary
differences, as it was not considered more likely than not as of
December 31, 2007 that we would be able to utilize these
tax assets to offset future taxable income. The net tax benefit
was due to the reversal of this valuation allowance, as we
determined in 2008 that, based on anticipated taxable income in
2009 and future years, it was more likely than not that our
deferred tax assets at December 31, 2008 would be realized.
For the year ended December 31, 2007, we were able to use
our net operating loss carryforwards to offset the majority of
our 2007 taxable income. In addition, based on taxable income in
the third and fourth quarters of 2007, cumulative taxable income
for the three most recent years ended December 31, 2007 and
anticipated taxable income for 2008, we determined in the fourth
quarter of 2007 that it was more likely than not that some of
our deferred tax assets at December 31, 2007 would be
realized. Accordingly, we reversed the valuation allowance for
such deferred tax assets at December 31, 2007 and recorded
an income tax benefit of $15.9 million for the year ended
December 31, 2007. This amount was offset by
$1.3 million of current tax expense for the federal and
California alternative minimum tax (AMT) and other
state income taxes. The utilization of the tax loss
carryforwards to offset our 2007 taxable income was limited in
the calculation of AMT and as a result we recorded a current tax
expense for AMT for the year ended December 31, 2007.
Net
Income
For the year ended December 31, 2008, we had net income of
$40.5 million as compared to net income of
$37.6 million for the year ended December 31, 2007, an
increase of $2.9 million. The increase resulted primarily
from the implementation of our strategy and business model for
Acthar. The increase was partially offset by income tax expense
of $18.2 million in the year ended December 31, 2008
as compared to the $14.6 million net income tax benefit for
the year ended December 31, 2007.
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Series A
Preferred Stock Dividend and Distribution
The deemed dividend resulted from the repurchase of our
Series A Preferred Stock in February 2008. On
February 19, 2008, we completed the repurchase of the
outstanding 2,155,715 shares of Series A Preferred
Stock from Shire for cash consideration of $10.3 million or
$4.80 per share (the same price per preferred share as the
closing price per share of our common stock on February 19,
2008). As of December 31, 2007, the Series A Preferred
Stock had a carrying amount of $5.1 million as reflected on
the accompanying Consolidated Balance Sheet. The deemed dividend
represented the difference between the $10.3 million
repurchase payment and the $5.1 million balance sheet
carrying value of the Series A Preferred Stock.
The $1.1 million allocation of undistributed earnings to
Series A Preferred Stock for the year ended
December 31, 2007 represented an allocation of a portion of
our fiscal year 2007 net income to the Series A
Preferred Stock for purposes of determining net income
applicable to common shareholders. This was an accounting
allocation only based on relative share holdings and was not an
actual distribution or obligation to distribute a portion of our
fiscal year 2007 net income to the Series A
stockholder.
Net
Income Applicable to Common Shareholders
For the year ended December 31, 2008, we had net income
applicable to common shareholders of $35.3 million, or
$0.49 per fully diluted share, as compared to net income
applicable to common shareholders of $36.4 million, or
$0.51 per fully diluted share for the year ended
December 31, 2007, a decrease of $1.2 million. The
decrease resulted primarily from income tax expense of
$18.2 million in the year ended December 31, 2008 as
compared to the income tax benefit of $14.6 million in the
prior year, and the deemed dividend on the repurchased
Series A Preferred Stock. The $5.3 million reduction
to net income related to the deemed dividend on the repurchased
Series A Preferred Stock reduced fully diluted earnings per
share applicable to common shareholders by $0.07.
Liquidity
and Capital Resources
During 2009 and 2008, we generated $40.0 million and
$63.5 million in cash from operations, respectively,
resulting from the implementation of our strategy and business
model for Acthar in August 2007. Prior to the implementation of
our Acthar strategy, we principally funded our activities
through various issuances of equity securities and debt and from
the sale of our non-core commercial product lines in October
2005.
On February 29, 2008, our board of directors approved a
stock repurchase program that provides for our repurchase of up
to 7 million of our common shares. On May 29, 2009,
our board of directors increased our common share repurchase
program authorization by an additional 6.5 million shares.
Stock repurchases under this program may be made through either
open market or privately negotiated transactions in accordance
with all applicable laws, rules and regulations. Through
December 31, 2009, we have repurchased a total of
8.4 million shares of our common stock for
$36.7 million under our stock repurchase program, at an
average price of $4.39 per share. As of December 31, 2009,
there are 5.1 million shares authorized remaining under the
stock repurchase program. In addition, we completed two
repurchases outside of our stock repurchase program. On
August 13, 2008, we completed a board-approved repurchase
of 2,200,000 shares of our common stock from Chaumiere
Consultadorio & Servicos SDC Unipessoal L.D.A., an
entity owned by Paolo Cavazza and members of his family, for
$10.9 million
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or $4.95 per share, and on September 3, 2008, we completed
a board-approved repurchase of an additional
1,800,000 shares of our common stock from Inverlochy
Consultadorio & Servicos L.D.A., an entity owned by
Claudio Cavazza, for $9.1 million or $5.06 per share.
On February 19, 2008, we completed the repurchase of the
outstanding 2,155,715 shares of Series A Preferred
Stock from Shire Pharmaceuticals, Inc. for cash consideration of
$10.3 million or $4.80 per share, the same price per
preferred share as the closing price per share of our common
stock on February 19, 2008.
At December 31, 2009, we had cash, cash equivalents and
short-term investments of $75.7 million compared to
$55.5 million at December 31, 2008. At
December 31, 2009, our working capital was
$71.0 million compared to $59.3 million at
December 31, 2008. The increase in our working capital was
principally due to increases in our cash, cash equivalents and
short-term investments of $20.3 million, an increase in
accounts receivable of $4.4 million, and an increase in
current deferred tax assets. These increases to working capital
were partially offset by an $8.6 million increase in
accounts payable due to timing of Medicaid payments, a decrease
of $3.3 million in prepaid taxes, and an increase in
sales-related reserves of $3.1 million. The increase in our
cash, cash equivalents and short-term investments balance
primarily reflects the $40.0 million in cash provided by
our operations, offset in part by $21.1 million used to
repurchase our common stock.
Cash and cash equivalents were $45.8 million,
$13.3 million and $15.9 million as of
December 31, 2009, 2008 and 2007, respectively. Cash and
cash equivalents exclude our short-term investments of
$29.9 million, $42.2 million and $14.3 million as
of December 31, 2009, 2008 and 2007, respectively. The
primary changes in our operating, investing and financing cash
flows related to cash and cash equivalents are described below.
Operating
Cash Flows
Net cash of $40.0 million was provided by operating
activities for the year ended December 31, 2009. Primary
factors contributing to the net operating cash flows included
our net income of $26.6 million for the year ended
December 31, 2009, and an increase in accounts payable of
$8.6 million primarily due to timing of Medicaid payments.
Other factors contributing to the net operating cash flows
include a decrease of $3.3 million in prepaid income taxes,
an increase of $3.1 million in sales reserves due primarily
to increases in our reserve for Medicaid rebates, and
$3.1 million in non-cash share-based compensation. These
factors were partially offset by an increase in accounts
receivable of $4.4 million.
Net cash of $63.5 million was provided by operating
activities for the year ended December 31, 2008, primarily
a result of a full year under our Acthar strategy implemented in
August 2007. Primary factors contributing to the net operating
cash flows included our net income of $40.5 million for the
year ended December 31, 2008, and a decrease in accounts
receivable of $13.2 million generated primarily by the
reduction in CuraScripts payment terms from 60 days
to 30 days under our amended distribution agreement
effective April 1, 2008. Other factors contributing to the
net operating cash flows include an increase of
$3.6 million in sales reserves due primarily to increases
in our reserve for Medicaid rebates, a decrease of
$4.6 million in total deferred tax assets, and
$4.1 million in non-cash share-based compensation. These
factors were partially offset by an increase in prepaid taxes
and a decrease in income taxes payable totaling
$4.6 million.
Net cash of $10.1 million was provided by operating
activities for the year ended December 31, 2007 as a result
of the implementation of our strategy and business model for
Acthar in August 2007. Primary factors contributing to
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the net operating cash flows included our net income of
$37.6 million for the year ended December 31, 2007, an
increase of $5.4 million in sales reserves due primarily to
increases in our reserve for Medicaid rebates, increases
totaling $1.9 million for accrued compensation and other
accrued liabilities, and $1.8 million in non-cash
share-based compensation were partially offset by an increase in
accounts receivable of $21.9 million and a
$15.9 million increase in our total deferred tax assets.
Investing
Cash Flows
Net cash provided by investing activities for the year ended
December 31, 2009 was $11.9 million. The net cash
provided by investing activities resulted primarily from net
maturities of short-term investments of $11.8 million.
Net cash used in investing activities for the year ended
December 31, 2008 was $27.2 million. The net cash used
in investing activities resulted primarily from net purchases of
short-term investments of $27.2 million.
Net cash used in investing activities for the year ended
December 31, 2007 was $11.3 million. Net purchases of
short-term investments of $11.3 million and the acquisition
of purchased technology were partially offset by the proceeds
from the sale of product rights related to Emitasol. In January
2007, we made a $300,000 payment to IVAX to eliminate the Doral
royalty obligation that was recorded to purchased technology. In
June 2007, we divested our non-core development stage product
Emitasol (nasal metoclopramide) which resulted in net proceeds
of $448,000.
Financing
Cash Flows
Net cash of $19.3 million was used by financing activities
for the year ended December 31, 2009. We repurchased a
total of 4,866,600 shares of our common stock for
$21.1 million under our board-approved stock repurchase
program. We received a total of $1.0 million for the
issuance of common stock related to the exercise of stock
options and for the issuance of common stock pursuant to the
employee stock purchase plan. Net cash from financing activities
was increased by $743,000 in excess tax benefits from
share-based compensation plans representing primarily the
benefit of tax deductions in excess of share-based compensation
expense.
Net cash of $38.9 million was used by financing activities
for the year ended December 31, 2008. We completed the
repurchase of the outstanding Series A Preferred Stock for
cash consideration of $10.3 million in February 2008. In
addition, we repurchased a total of 7,490,900 shares of our
common stock for $35.6 million under both our
board-approved stock repurchase program and repurchases made
outside of our stock repurchase program. We received a total of
$2.2 million for the issuance of common stock related to
the exercise of stock options and for the issuance of common
stock pursuant to the employee stock purchase plan. Net cash
from financing activities was increased by $4.8 million in
excess tax benefits from share-based compensation plans
representing primarily the benefit of tax deductions in excess
of share-based compensation expense.
Net cash of $1.2 million was provided by financing
activities for the year ended December 31, 2007. We
received $961,000 for the issuance of common stock related to
the exercise of stock options and warrants, and $263,000 for the
issuance of common stock pursuant to the employee stock purchase
plan.
Off
Balance Sheet Arrangements
We had no off balance sheet arrangements during the three years
ended December 31, 2009.
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Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2009. This table does not include potential
milestone payments and assumes non-termination of agreements.
Additional
Payments
We have entered into a development and license agreement which
contains provisions for payment on completion of certain
development, regulatory and sales milestones. Due to the
uncertainty concerning when and if the milestones may be
completed, we have not included these potential future
obligations in the above table.
In November 2006, we initiated a clinical development program
under our IND application with the FDA for QSC-001, a unique
orally disintegrating tablet formulation of hydrocodone
bitartrate and acetaminophen for the treatment of moderate to
moderately severe pain in patients with swallowing difficulties.
QSC-001 is being formulated by Eurand, a specialty
pharmaceutical company that develops, manufactures and
commercializes enhanced pharmaceutical and biopharmaceutical
products based on its proprietary drug formulation technologies.
QSC-001 would utilize Eurands proprietary
Microcaps®
taste-masking and
AdvaTabtm
ODT technologies. We own the world-wide rights to commercialize
QSC-001 and Eurand would exclusively supply the product and
receive a royalty on product sales. We would be obligated to
make milestone payments upon the achievement of certain
development milestones including, but not limited to, the filing
of a New Drug Application (NDA), the approval of an
NDA, and attainment of certain levels of sales. Such potential
future milestone payments total $3.3 million. We are
currently seeking a partner to complete development of this
product so that our research and development resources can be
focused on pursuing the potential growth opportunities for
Acthar that have been identified.
Indemnifications
As permitted under California law and in accordance with our
Bylaws, we indemnify our officers and directors for certain
events or occurrences while the officer or director is or was
serving at our request in such capacity. The potential future
indemnification limit is to the fullest extent permissible under
California law; however, we have a
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director and officer insurance policy that limits our exposure
and may enable us to recover a portion of any future amounts
paid. We believe the fair value of these indemnification
agreements in excess of applicable insurance coverage is minimal.
Employment
Agreements
We have entered into employment agreements with our corporate
officers that provide for, among other things, base compensation
and/or other
benefits in certain circumstances in the event of termination or
a change in control. In addition, certain of the agreements
provide for the accelerated vesting of outstanding unvested
stock options upon a change in control.
Equity
Transactions
On October 20, 2009, in connection with its regular review
of best practices in corporate governance, our board of
directors unanimously approved two corporate governance
initiatives which will provide Questcor shareholders more say
with respect to proposals to acquire Questcor and better
information about the economic interests of proponents of
shareholder proposals and director nominations. The board voted
to amend our shareholder rights plan to accelerate the final
expiration date of the preferred stock purchase rights issued
thereunder. The amendment had the effect of terminating the
rights plan effective October 26, 2009. In addition, the
board approved amendments to our bylaws to require any Questcor
shareholder submitting a proposal or director nomination to
provide information regarding hedging positions or other
agreements that serve to mitigate the loss to or otherwise
manage the risk of changes to Questcors stock price, and
to update such information within 10 days after the record
date for our annual meeting.
On February 29, 2008, our board of directors approved a
stock repurchase program that provides for our repurchase of up
to 7 million of our common shares. Stock repurchases under
this program may be made through either open market or privately
negotiated transactions in accordance with all applicable laws,
rules and regulations. On May 29, 2009, our board of
directors increased our common share repurchase program
authorization by an additional 6.5 million shares. During
2009, we repurchased a total of 4.9 million shares of our
common stock for $21.1 million under our stock repurchase
program, at an average price of $4.33 per share. We have
repurchased a total of 8.4 million shares of our common
stock under this stock repurchase program, for
$36.7 million through December 31, 2009, at an average
price of $4.39 per share. As of December 31, 2009, there
are a total of 5.1 million shares authorized remaining
under the revised stock repurchase program.
During 2008, we completed two repurchases outside of our stock
repurchase program. On August 13, 2008, we completed a
board-approved repurchase of 2,200,000 shares of our common
stock from Chaumiere Consultadorio & Servicos SDC
Unipessoal L.D.A., an entity owned by Paolo Cavazza and members
of his family, for $10.9 million or $4.95 per share, and on
September 3, 2008, we completed a board-approved repurchase
of an additional 1,800,000 shares of our common stock from
Inverlochy Consultadorio & Servicos L.D.A., an entity
owned by Claudio Cavazza, for $9.1 million or $5.06 per
share.
In February 2008, our board of directors approved a reduction in
the offering period of the Employee Stock Purchase Plan
(ESPP) from 12 months to 3 months
effective with the offering period that began on
September 1, 2008, eliminated the ability of plan
participants to increase their contribution levels during an
offering period and approved an amendment authorizing the
addition of 500,000 shares to the ESPP. In addition, in
April 2008 our board of directors approved an amendment to
permanently reduce the maximum offering period available from
27 months to 6 months and to permanently remove the
ability of ESPP participants to increase their contributions
during an offering period. These amendments to the ESPP were
approved by shareholders at our 2008 annual shareholders
meeting.
In May and June 2008, a total of 348,228 shares of our
common stock were issued upon the cashless net exercise of
475,248 warrants in accordance with the terms of the warrants.
As of December 31, 2009, we had no outstanding warrants.
On February 19, 2008, we repurchased all of the outstanding
2,155,715 shares of Series A Preferred Stock from
Shire Pharmaceuticals, Inc. for cash consideration of
$10.3 million or $4.80 per share, the same price per
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preferred share as the closing price per share of our common
stock on February 19, 2008. The existence of the
Series A Preferred Stock created a complex capital
structure that limited our flexibility in developing a long-term
strategy and required us to take into consideration the interest
of the preferred stockholder. For example, among other rights
associated with the Series A Preferred Stock, the
Series A Preferred Stock was convertible into
2,155,715 shares of common stock, had a $10 million
liquidation preference, and required us to obtain the
holders separate approval in the event of a merger
transaction.
Cash
Requirements
Based on our internal forecasts and projections, we believe that
our cash resources at December 31, 2009 will be sufficient
to fund operations through at least December 31, 2010.
Our future funding requirements beyond 2010 will depend on many
factors, including: the timing and extent of product sales;
returns of expired product; strategic transactions, if any;
licensing of products, technologies or compounds, if any; our
ability to manage growth; competing technological and market
developments; costs involved in filing, prosecuting, defending
and enforcing patent and intellectual property claims; the
receipt of licensing or milestone fees from current or future
collaborative and license agreements, if established; the timing
of regulatory approvals; any expansion or acceleration of our
development programs; and other factors.
Recently
Issued Accounting Standards
In February 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
2010-09
(ASU
2010-09),
Subsequent Events, Amendments to Certain Recognition and
Disclosure Requirements, which clarifies certain existing
evaluation and disclosure requirements in ASC 855 related to
subsequent events. ASU
2010-09
requires SEC filers to evaluate subsequent events through the
date on which the financial statements are issued and is
effective immediately. The new guidance does not have an effect
on our consolidated results of operations and financial
condition.
In January 2010, the FASB issued Accounting Standards Update
No. 2010-06
(ASU
2010-06),
which amends the use of fair value measures and the related
disclosures. ASU
2010-06
requires new disclosures for transfers in and out of
Level 1 and Level 2 fair value measurements. ASU
2010-06 is
effective for us for the quarter ended March 31, 2010. We
are currently evaluating the impact that the adoption of this
standard will have on our consolidated financial statements, if
any.
In June 2009, the FASB issued Statement of Financial Accounting
Standards (SFAS) Statement No. 168, The FASB
Accounting Standards
Codificationtm
(ASC). The FASB notes that the ASC will become the
source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. All of the ASC content will
carry the same level of authority, effectively superseding
Statement No. 162. The GAAP hierarchy will be modified to
include only two levels of GAAP: authoritative and
non-authoritative. The ASC is effective for financial statements
issued for interim and annual periods ending after
September 15, 2009.
In May 2009, the FASB issued an accounting standard codified in
ASC 855, Subsequent Events (formerly
SFAS No. 165) which provides guidance on
managements assessment of subsequent events. ASC 855
represents the inclusion of guidance on subsequent events in the
accounting literature and is directed specifically to
management, since management is responsible for preparing an
entitys financial statements. ASC 855 is not expected to
significantly change practice because it includes guidance which
is similar to that in AU Section 560, with some important
modifications. The new standard clarifies that management must
evaluate, as of each reporting period, events or transactions
that occur after the balance sheet date through the date that
the financial statements are issued or are available to be
issued. Management must perform its assessment for both interim
and annual financial reporting periods. We adopted ASC 855
effective June 30, 2009.
In April 2009, the FASB issued an accounting standard codified
in ASC 320, Investments-Debt and Equity Securities
(formerly FASB Staff Position (FSP)
115-2 and
FSP 124-2).
ASC 320 provides greater clarity to investors about the credit
and noncredit component of an
other-than-temporary
impairment event and to more effectively communicate when an
other-than-temporary
impairment event has occurred. ASC 320 applies to fixed maturity
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securities only and requires separate display of losses related
to credit deterioration and losses related to other market
factors. When an entity does not intend to sell the security and
it is more likely than not that an entity will not have to sell
the security before recovery of its cost basis, it must
recognize the credit component of an
other-than-temporary
impairment in earnings and the remaining portion in other
comprehensive income. In addition, upon adoption of ASC 320, an
entity will be required to record a cumulative-effect adjustment
as of the beginning of the period of adoption to reclassify the
noncredit component of a previously recognized
other-than-temporary
impairment from retained earnings to accumulated other
comprehensive income. ASC 320 was effective for us for the
quarter ended June 30, 2009. The adoption of ASC 320 did
not have an impact on our consolidated financial position and
results of operations.
In April 2009, the FASB issued an accounting standard codified
in ASC 820, Fair Value Measurements and Disclosures
(formerly
FSP 157-4).
ASC 820 provides additional authoritative guidance to assist
both issuers and users of financial statements in determining
whether a market is active or inactive, and whether a
transaction is distressed. ASC 820 was effective for us for the
quarter ended June 30, 2009. The adoption of ASC 820 did
not have an impact on our consolidated financial position and
results of operations.
In April 2009, the FASB issued an accounting standard codified
in ASC 825, Financial Instruments (formerly
FSP 107-1
and APB
28-1). ASC
825 requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. ASC 825 was
effective for us for the quarter ended June 30, 2009. The
adoption of ASC 825 did not have an impact on our consolidated
financial position and results of operations.
In December 2007, the FASB issued an accounting standard
codified in ASC 805, Business Combinations (formerly
FAS No. 141(R)). ASC 805 establishes principles and
requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
controlling interest; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and
financial effects of the business combination. ASC 805 is to be
applied prospectively to business combinations for which the
acquisition date is on or after an entitys fiscal year
that begins after December 15, 2008. We will assess the
impact of ASC 805 if and when a future acquisition occurs.
In November 2007, the EITF issued an accounting standard
codified in ASC 808, Collaborative Arrangements (formerly
EITF 07-1).
Companies may enter into arrangements with other companies to
jointly develop, manufacture, distribute, and market a product.
Often the activities associated with these arrangements are
conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a
virtual joint venture). The arrangements generally
provide that the collaborators will share, based on
contractually defined calculations, the profits or losses from
the associated activities. Periodically, the collaborators share
financial information related to product revenues generated (if
any) and costs incurred that may trigger a sharing payment for
the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of
activities for which they act as the principal on a gross basis
and report any payments received from (made to) other
collaborators based on other applicable GAAP or, in the absence
of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election. ASC 808 is
effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15,
2008. The adoption of ASC 808 did not have an impact on our
consolidated financial position and results of operations.
Market
Rate Risk
Our exposure to market rate risk for changes in interest rates
relates primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio. We
place our investments with high quality issuers and follow
internally developed guidelines to limit the amount of credit
exposure to any one issuer. Additionally, in an attempt to limit
interest rate risk, we follow guidelines to limit the average
and longest single maturity dates. We are adverse to principal
loss and aim to ensure the safety and preservation of our
invested funds by limiting default, market and reinvestment
risk. None of our investments are in auction rate securities.
Our
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investments include money market accounts, government-sponsored
enterprises, certificates of deposit and municipal bonds.
The table below presents the amounts of our investment portfolio
as of December 31, 2009 and 2008, and related average
interest rates of our investment portfolio for the years ended
December 31, 2009 and 2008.
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QUESTCOR
PHARMACEUTICALS, INC.
CONTENTS
None.
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Our disclosure controls and procedures
were designed to provide reasonable assurance that the controls
and procedures would meet their objectives.
As required by SEC
Rule 13a-15(b),
we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level.
Managements
Annual Report on Internal Control over Financial
Reporting
Internal control over financial reporting refers to the process
designed by, or under the supervision of, our Chief Executive
Officer and Chief Financial Officer, and effected by our board
of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles, and includes those policies and
procedures that:
(1) Pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
(2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being
made only in accordance with authorization of our management and
directors; and
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(3) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisitions, use or
disposition of our assets that could have a material effect on
the financial statements.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk. Management is responsible for
establishing and maintaining adequate internal control over
financial reporting for the Company.
Management has used the framework set forth in the report
entitled Internal Control-Integrated Framework published
by the Committee of Sponsoring Organizations of the Treadway
Commission, known as COSO, to evaluate the effectiveness of our
internal control over financial reporting. Based on this
assessment, management has concluded that our internal control
over financial reporting was effective as of December 31,
2009. Odenberg, Ullakko, Muranishi & Co. LLP, the
independent registered public accounting firm that audited the
consolidated financial statements included in this Annual Report
on
Form 10-K,
has issued an attestation report on the effectiveness of our
internal control over financial reporting as of
December 31, 2009. This report, which expresses an
unqualified opinion on the effectiveness of our internal control
over financial reporting as of December 31, 2009, is
included herein.
There has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Not Applicable.
PART III
Biographical information for our executive officers is set forth
below.
Don M. Bailey, 64, President and CEO, joined the Companys
Board of Directors in May 2006. Mr. Bailey was appointed
our interim President in May 2007. Mr. Bailey was appointed
President and Chief Executive Officer in November 2007.
Mr. Bailey is currently the non-executive Chairman of the
Board of STAAR Surgical Company. STAAR Surgical Company is a
leader in the development, manufacture, and marketing of
minimally invasive ophthalmic products employing proprietary
technologies. Mr. Bailey was the Chairman of the Board of
Comarco, Inc. from 1998 until 2007 and was employed by Comarco,
Inc., where he served as its Chief Executive Officer from 1991
to 2000. Mr. Bailey has been Chairman of the Board of STAAR
since April 2005. Mr. Bailey holds a B.S. degree in
mechanical engineering from the Drexel Institute of Technology,
an M.S. degree in operations research from the University of
Southern California, and an M.B.A. from Pepperdine University.
Stephen L. Cartt, 47, Executive Vice President and Chief
Business Officer, joined the Company in March 2005.
Mr. Cartt was a private consultant from August 2002 until
March 2005. From March 2000 through August 2002, Mr. Cartt
was the Senior Director of Strategic Marketing for Elan
Pharmaceuticals. Mr. Cartt holds a B.S. degree from the
University of California at Davis in biochemistry, and an M.B.A.
from Santa Clara University.
David J. Medeiros, 58, Senior Vice President, Pharmaceutical
Operations, joined the Company in June 2003 as Vice President,
Manufacturing. Prior to joining the Company, Mr. Medeiros
served as Senior Director, Manufacturing at Titan
Pharmaceuticals, Inc. from November 2000 to June 2003.
Mr. Medeiros holds a B.S. degree in chemical engineering
from San Jose State University, a Masters degree in
chemical engineering from University of California, Berkeley and
an M.B.A. from the University of California at Berkeley.
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Gary M. Sawka, 63, Senior Vice President, Finance and Chief
Financial Officer, joined the Company in September 2008. From
February 2007 to April 2008, Mr. Sawka served as the Chief
Financial Officer and Designated Responsible Individual of
Tripath Technology, Inc., a former NASDAQ-listed fabless
semiconductor company, during its Chapter 11 reorganization
and its reverse merger. From August 2006 to February 2007, he
served as a consulting Chief Financial Officer to Tripath
Technology, Inc. From 2002 to 2006, Mr. Sawka worked as a
financial consultant for several NASDAQ-listed companies. From
2000 to 2001, he served as Executive Vice President and Chief
Financial Officer of ePlanning Securities, a national,
representative-owned, independent FINRA
Broker / Dealer. During the period from 1984 to 2002,
Mr. Sawka served as Vice President and Chief Financial
Officer of Tvia, Inc.(OTC: TVIA.PK), a fabless semiconductor
company, PrimeSource Corporation, an international container
leasing company specializing in high service leases, and Itel
Containers International Corporation, at that time, the
worlds largest international container leasing company.
Since May 2007, Mr. Sawka has served on the Board of
Directors of CAI International, Inc. (NYSE: CAP) an
international container leasing and management company, where he
is a member of the Audit and Compensation Committees and Chairs
the Corporate Governance and Nominating Committee.
Mr. Sawka has an M.B.A. from Harvard University Graduate
School of Business Administration and a B.S. in Accounting from
the University of Southern California.
David Young, Ph.D., 57, Chief Scientific Officer, joined
the Companys Board of Directors in September 2006.
Dr. Young was appointed Chief Scientific Officer in October
2009. Prior to joining Questcor, Dr. Young was President of
AGI Therapeutics, Inc. from 2006 to 2009. Previously,
Dr. Young was the Executive Vice President of the Strategic
Drug Development Division of ICON plc, an international CRO,
from 2003 to 2006, and founder and CEO of GloboMax LLC, a
contract drug development firm purchased by ICON plc in 2003,
from 1997 to 2003. Prior to forming GloboMax, Dr. Young was
an Associate Professor at the School of Pharmacy, University of
Maryland where he held a number of roles including Director of
the Pharmacokinetics and Biopharmaceutics Lab and Managing
Director of the University of Maryland-VA Clinical Research
Unit. Dr. Young holds a B.S. degree in physiology from the
University of California, Berkeley, an M.S. degree in physics
from the University of Wisconsin-Madison, a Pharm.D. from the
University of Southern California and a Ph.D. in pharmaceutical
sciences from the University of Southern California.
Jason Zielonka, M.D., 61, Senior Vice President and Chief
Medical Officer, joined the Company in February 2010. Prior to
joining Questcor, Dr. Zielonka was the Senior Medical
Director for Trial Methodology at Ortho-McNeil Janssen, Johnson
and Johnsons primary U.S. pharmaceuticals business.
He also held senior positions in Clinical Research and Medical
Affairs at Pfizer, DuPont Pharmaceuticals and Bristol-Myers
Squibb, as well as several other pharmaceutical companies. Prior
to joining the pharmaceutical industry, Dr. Zielonka was
Chief of Nuclear Medicine Services at the Veterans
Administration Medical Center and Assistant Professor of
Radiology at the Medical College of Wisconsin. Dr. Zielonka
received his B.S. in Electrical Science and Engineering from the
Massachusetts Institute of Technology, his M.D. from the Yale
University School of Medicine and his Nuclear Medicine
fellowship training at the Harvard Medical School.
The information related to Questcors Directors required by
this item will be contained in our definitive proxy statement to
be filed with the Securities and Exchange Commission in
connection with the Annual Meeting of our Shareholders (the
Proxy Statement), which is expected to be filed not
later than 120 days after the end of our fiscal year ended
December 31, 2009, and is incorporated in this report by
reference.
The remaining information required by this item will be set
forth in the Proxy Statement and is incorporated in this Annual
Report by reference.
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this Annual Report by
reference.
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The following table sets forth information regarding outstanding
options and shares reserved for future issuance under the
Companys existing equity compensation plans as of
December 31, 2009:
The remaining information required by this item will be set
forth in the Proxy Statement and is incorporated in this Annual
Report by reference.
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this Annual Report by
reference.
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this Annual Report by
reference.
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PART IV
(a) The following documents are filed as part of this
Annual Report:
1. Financial Statements. Our financial statements
and the Reports of Independent Registered Public Accounting Firm
are included in Part IV of this Annual Report on the pages
indicated:
2. Financial Statement Schedules. The following
financial statement schedule is included in Item 15(a)(2):
Valuation and Qualifying Accounts.
(c) Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUESTCOR PHARMACEUTICALS, INC.
Don M. Bailey
President and Chief Executive Officer
Dated: March 16, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Questcor Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of
Questcor Pharmaceuticals, Inc. as of December 31, 2009 and
2008, and the related consolidated statements of income,
preferred stock and shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2009. Our audits also included the financial
statement schedule listed in Item 15(a)(2). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by
us present fairly, in all material respects, the consolidated
financial position of Questcor Pharmaceuticals, Inc. at
December 31, 2009 and 2008, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Questcor Pharmaceuticals, Inc.s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 15, 2010 expressed an unqualified opinion thereon.
/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
March 15, 2010
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Questcor Pharmaceuticals, Inc.
We have audited Questcor Pharmaceuticals, Inc.s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Questcor Pharmaceuticals, Inc.s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting included in
Managements Annual Report on Internal Control Over
Financial Reporting included in Item 9A. Our responsibility
is to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Questcor Pharmaceuticals, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Questcor Pharmaceuticals, Inc. as
of December 31, 2009 and 2008, and the related consolidated
statements of income, preferred stock and shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2009 and our report dated March 15,
2010 expressed an unqualified opinion thereon.
/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
March 15, 2010
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QUESTCOR
PHARMACEUTICALS, INC.
See accompanying notes.
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QUESTCOR
PHARMACEUTICALS, INC.
See accompanying notes.
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QUESTCOR
PHARMACEUTICALS, INC.
See accompanying notes.
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QUESTCOR
PHARMACEUTICALS, INC.
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