UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 001-14758
QUESTCOR PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
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CALIFORNIA
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33-0476164
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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3260 Whipple Road
Union City, CA 94587-1217
(Address of Principal Executive Offices)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 400-0700
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 prior 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 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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
þ
As
of May 1, 2008 there were 69,418,637 shares of the Registrants common stock, no par
value per share, outstanding.
QUESTCOR PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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March 31,
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December 31,
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2008
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2007
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(Unaudited)
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(Note 1)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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10,370
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$
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15,939
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Short-term investments
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21,662
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14,273
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Total cash, cash equivalents and short-term investments
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32,032
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30,212
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Accounts receivable, net of allowance for doubtful accounts
of $94 and $57 at March 31, 2008 and December 31, 2007,
respectively
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17,894
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23,639
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Inventories, net
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2,348
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2,365
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Prepaid expenses and other current assets
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1,522
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778
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Deferred tax assets
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10,391
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14,879
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Total current assets
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64,187
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71,873
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Property and equipment, net
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480
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522
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Purchased technology, net
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3,893
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3,967
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Goodwill
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299
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299
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Deposits and other assets
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748
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744
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Deferred tax assets, net
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1,043
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1,043
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Total assets
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$
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70,650
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$
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78,448
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LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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2,748
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$
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1,777
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Accrued compensation
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783
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1,945
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Sales-related reserves
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10,007
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8,176
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Income taxes payable
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27
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1,330
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Other accrued liabilities
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1,176
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1,492
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Total current liabilities
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14,741
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14,720
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Lease termination and deferred rent liabilities
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1,724
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1,869
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Other non-current liabilities
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5
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7
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Preferred stock, no par value, 7,500,000 shares authorized; none
and 2,155,715 Series A shares issued and outstanding at March
31, 2008 and December 31, 2007, respectively (aggregate
liquidation preference of $10,000 at December 31, 2007)
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5,081
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Shareholders equity:
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Common stock, no par value, 105,000,000 shares authorized;
69,403,636 and 70,118,166 shares issued and outstanding at
March 31, 2008 and December 31, 2007, respectively
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104,497
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108,387
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Accumulated deficit
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(50,396
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)
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(51,670
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Accumulated other comprehensive gain
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79
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54
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Total shareholders equity
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54,180
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56,771
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Total liabilities, preferred stock and shareholders equity
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$
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70,650
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$
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78,448
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See accompanying notes.
3
QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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Three Months Ended
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March 31,
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2008
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2007
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Net sales
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$
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19,132
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$
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3,701
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Cost of sales (exclusive of amortization of purchased technology)
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1,319
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850
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Gross profit
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17,813
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2,851
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Operating costs and expenses:
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Selling, general and administrative
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5,066
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5,550
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Research and development
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1,971
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1,140
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Depreciation and amortization
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122
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123
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Total operating costs and expenses
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7,159
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6,813
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Income (loss) from operations
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10,654
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(3,962
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Other income (expense):
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Interest income
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364
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210
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Other income (expense), net
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11
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(7
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)
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Total other income
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375
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203
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Income (loss) before income taxes
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11,029
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(3,759
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Income tax expense
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4,488
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Net income (loss)
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6,541
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(3,759
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Deemed dividend on Series A preferred stock
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5,267
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Net income (loss) applicable to common shareholders
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$
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1,274
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$
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(3,759
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)
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Net income (loss) per share applicable to common shareholders:
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Basic
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$
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0.02
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$
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(0.05
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)
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Diluted
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$
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0.02
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$
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(0.05
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)
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Shares used in computing net income (loss) per share applicable to
common shareholders:
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Basic
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69,946
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68,773
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Diluted
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74,103
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68,773
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See accompanying notes.
4
QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Three Months Ended
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March 31,
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2008
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2007
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OPERATING ACTIVITIES
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Net income (loss)
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$
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6,541
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$
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(3,759
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)
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
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Share-based compensation expense
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1,933
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496
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Deferred income taxes
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4,488
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Amortization of investments
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(209
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)
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Depreciation and amortization
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122
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123
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Changes in operating assets and liabilities:
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Accounts receivable
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5,745
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(748
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)
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Inventories
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17
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344
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Prepaid expenses and other current assets
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(744
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)
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(197
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Accounts payable
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971
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(139
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Accrued compensation
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(1,162
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)
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(198
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Sales-related reserves
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1,831
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615
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Income taxes payable
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(1,303
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)
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Other accrued liabilities
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(316
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)
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(20
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Other non-current liabilities
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(147
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)
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(190
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)
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Net cash flows provided by (used in) operating activities
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17,767
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(3,673
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)
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INVESTING ACTIVITIES
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Purchase of property and equipment
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(6
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(59
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Acquisition of purchased technology
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(300
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)
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Purchase of short-term investments
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(13,341
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)
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(8,670
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)
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Proceeds from the sale and maturities of short-term investments
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6,186
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2,500
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Changes in deposits and other assets
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(4
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)
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(5
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)
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Net cash flows used in investing activities
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(7,165
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)
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(6,534
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)
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FINANCING ACTIVITIES
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Issuance of common stock, net
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378
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284
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Repurchase of Series A preferred stock
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(10,348
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)
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Repurchase of common stock
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(6,201
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)
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Net cash flows provided by (used in) financing activities
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(16,171
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)
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284
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Decrease in cash and cash equivalents
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(5,569
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)
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(9,923
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)
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Cash and cash equivalents at beginning of period
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15,939
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15,937
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Cash and cash equivalents at end of period
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$
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10,370
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$
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6,014
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See accompanying notes.
5
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Questcor Pharmaceuticals, Inc. (the Company or Questcor) is a pharmaceutical company that
owns two commercial products, H.P. Acthar
®
Gel (repository corticotropin injection) and
Doral
®
(quazepam). H.P. Acthar Gel (Acthar) is an injectable drug that is approved for
the treatment of certain disorders with an inflammatory component, including the treatment of
exacerbations associated with multiple sclerosis (MS). In addition, Acthar is not indicated for,
but is 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. Doral is indicated for the treatment of insomnia characterized by difficulty in falling
asleep, frequent nocturnal awakenings, and/or early morning awakenings. The Company is also
developing new medications, including 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.
In August 2007, the Company announced a new strategy and business model for Acthar. As part of
the new strategy, the Company implemented a new pricing level for Acthar which took effect August
27, 2007. The Company also expanded its 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 established a group of product service consultants and medical science liaisons
to work with healthcare providers who administer Acthar. The new strategy has significantly
improved the Companys ability to maintain the long-term availability of Acthar and fund important
research and development projects.
Acthar is currently approved in the U.S. for the treatment of exacerbations associated with MS
and many other conditions with an inflammatory component. No drug is approved in the U.S. for the
treatment of IS, a potentially life-threatening disorder that typically begins in the first year of
life. However, pursuant to guidelines published by the American Academy of Neurology and the Child
Neurology Society, many child neurologists use Acthar to treat infants afflicted with IS. In June
2006, the Company submitted a Supplemental New Drug Application (sNDA) to the FDA and is
currently pursuing formal agency approval of an indication for the use of Acthar in the treatment
of IS. In May 2007, the Company received an action letter from the FDA indicating that its sNDA was
not approvable in its current form. In November 2007, the Company met with the FDA to further
discuss its sNDA. At the meeting, the FDA concurred with the Companys suggested pathway to
resubmit the application with additional information. The Companys efforts are focused on two
major projects involving the gathering of efficacy data from prior, randomized control trials and
the extraction of existing safety data. The Companys goal is to submit the additional information
to the FDA by the end of 2008. At this time, the FDA is not requiring the Company to conduct a
clinical trial to support its resubmission.
The
Companys strategy is to focus on growth initiatives for Acthar,
continue the development of QSC-001, improve operational
efficiencies, and return cash to shareholders through the execution of the Companys common share
repurchase program. The Companys most important growth initiative is the planned 2008 resubmission
to the FDA of the sNDA in support of a new indication for IS. Should the FDA grant approval for
this indication, the Company could then begin actively promoting the use of Acthar in this
indication, something the Company is presently prohibited from doing. The Company believes that
such promotion has the potential to increase usage of Acthar in IS beyond current levels. The
Company is also currently working on a number of initiatives aimed at developing future growth
opportunities for Acthar in therapeutic areas other than IS. These include in-depth evaluation of
uses that are currently a part of Acthars extensive list of on-label indications. For example, the
Company has observed some continued usage, as well as favorable insurance coverage, in the segment
of MS patients who do not respond to, or who cannot tolerate, IV corticosteroids, the
first-line treatment of most neurologists for MS flares. Market research indicates that an
estimated 10% to 14% of MS flare patients may be in this segment. The Company is in the process of
evaluating whether this could become an area for further Acthar promotion and revenue growth. The
Company is also looking at other indications that could provide additional sales growth potential
for Acthar.
The Company has determined that it operates in one business segment, pharmaceutical products.
The accompanying unaudited consolidated financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles and applicable Securities and
Exchange Commission regulations for interim financial information. These financial statements do
not include all of the information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. The unaudited financial statements should be read in
conjunction with the audited financial statements and related footnotes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007. The accompanying
6
consolidated balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date. In the opinion of the Companys management, all adjustments (consisting of
normal recurring adjustments) considered necessary for the fair presentation of interim financial
information have been included. Operating results for the interim period presented are not
necessarily indicative of the results that may be expected for the year ending December 31, 2008 or
for any future interim period. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated.
On May 5, 2008, the Company announced that its board of directors approved the decision to
switch the listing of its common stock from the American Stock Exchange to the NASDAQ Stock Market
LLC. Effective May 16, 2008, the Company will trade on NASDAQ under the trading symbol QCOR.
2. SHARE-BASED COMPENSATION
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123(R)), using the modified-prospective transition method. Under that transition
method, share-based compensation cost related to employees and non-employee members of the
Companys board of directors includes the compensation cost related to share-based payments granted
to employees and non-employee members of the board of directors through, but not yet vested as of
December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123), and compensation cost
for share-based payments granted to employees and non-employee members of the board of directors
subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123(R).
Share-based compensation expense recorded for awards granted to employees and non-employee
members of the board of directors under stock option plans and the employee stock purchase plan is
as follows (in thousands):
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|
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|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cost of sales
|
|
$
|
|
|
|
$
|
1
|
|
Selling, general and administrative
|
|
|
1,644
|
|
|
|
405
|
|
Research and development
|
|
|
233
|
|
|
|
67
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,877
|
|
|
$
|
473
|
|
|
|
|
|
|
|
|
Share-based compensation cost related to stock options granted to employees and non-employee
members of the board of directors is recognized as an expense, net of estimated pre-vesting
forfeitures, ratably over the vesting period of the award. The Company has estimated an annual
pre-vesting forfeiture rate of 12% for a typical stock award with a four year vesting term. The
pre-vesting forfeiture rate was estimated based on historical data.
The fair value of stock options awarded to employees and non-employee members of the Companys
board of directors was estimated using the Black-Scholes option valuation model. Expected
volatility is based on the historical volatility of the Companys stock. The expected term for the
three month period ended March 31, 2008 is based on the Companys historical term of its stock
option awards. The expected term for the three month period ended March 31, 2007 was estimated
using the simplified method described in Staff Accounting Bulletin No. 107 issued by the Securities
and Exchange Commission. The expected term represents the estimated period of time that stock
options granted are expected to be outstanding. The risk-free interest rate is based on the U.S.
Treasury yield curve. The expected dividend yield is zero, as the Company does not anticipate
paying dividends in the near future. The weighted average assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
Expected volatility
|
|
|
86%
|
|
|
|
86%
|
|
Expected term (in years)
|
|
4.4
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
2.1%
|
|
|
|
4.6%
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of the stock options granted to employees and
non-employee members of the Companys board of directors was $3.36 and $1.06 during the three month
periods ended March 31, 2008 and 2007, respectively.
7
The Company utilized the Black-Scholes option valuation model in connection with determining
the fair value of each option element of the Companys Employee Stock Purchase Plan. Expected
volatility is based on historical volatility of the Companys common stock. The expected term
represents the life of the option element. The risk-free interest rate is based on the U.S.
Treasury yield. The expected dividend yield is zero, as the Company does not anticipate paying
dividends in the near future. The weighted average assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
Expected volatility
|
|
|
78%
|
|
|
|
65%
|
|
Expected term (in years)
|
|
|
0.30
|
|
|
|
0.53
|
|
Risk-free interest rate
|
|
|
2.2%
|
|
|
|
5.0%
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
The weighted average fair value of each option element under the Companys Employee Stock
Purchase Plan was $3.61 and $0.40 for the three month periods ended March 31, 2008 and 2007,
respectively.
3. REVENUE RECOGNITION
During July 2007, the Company began utilizing CuraScript, a third party specialty distributor,
to store and distribute Acthar. Effective August 1, 2007, the Company no longer sells Acthar to
wholesalers and all of the Companys proceeds from sales of Acthar in the United States are
received from CuraScript. The Company sells Acthar to CuraScript at a discount from the Companys
list price. CuraScript sells Acthar primarily to hospitals and specialty pharmacies. Product sales
are recognized net of this discount upon receipt of the product by CuraScript. In April 2008, the
Company revised its agreement with CuraScript, as discussed further in Note 13. The amendment is
effective on June 1, 2008. Under the new terms, the discount provided by the Company to CuraScript
will be reduced significantly. However, under the amended distribution terms the pricing to Acthar
end users is unchanged. In addition, the payment terms have been reduced from 60 days to 30 days.
The Company sells Doral to wholesalers, who in turn sell Doral primarily to retail pharmacies and
hospitals. The Company does not require collateral from its customers. Revenues from product sales
are recognized based upon shipping terms, net of estimated reserves for government chargebacks,
Medicaid rebates, payment discounts and returns for credit. Revenue is recognized upon customer
receipt of the shipment, provided that title to the product transfers at the point of receipt by
the customer. If the title to the product transfers at the point of shipment, revenue is recognized
upon shipment of the product.
The Company will supply replacement product to CuraScript on product returned between one
month prior to expiration to three months post expiration. Returns from product lots will be
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. A reserve for
estimated future replacements has been recorded as a liability which will be reduced as future
replacements occur, with an offset to product inventories. The Company issues credit memoranda for
product sold to wholesalers that is returned within six months beyond the expiration date. The
credit memoranda is equal to the sales value of the product returned and the estimated amount of
such credit memoranda is recorded as a liability with a corresponding reduction in gross product
sales. This reserve is reduced as credit memoranda are issued, with an offset to accounts
receivable. Returns are subject to inspection prior to acceptance. The Company records estimated
sales reserves for expected credit memoranda based primarily upon historical return rates by
product, analysis of return merchandise authorizations and returns received. The Company also
considers sales patterns, current inventory on hand at wholesalers, and other factors such as shelf
life.
The Company provides a rebate related to product dispensed to Medicaid eligible patients. The
Companys estimated historical rebate percentage is used to estimate the rebate units for the
period. The Company then applies a rebate amount per unit to the estimated rebate units to arrive
at the estimated reserve for the period. The estimated total rebate units are comprised of the
estimated rebate units associated with estimated end user demand during the period and the
estimated rebate units associated with estimated inventory in the distribution channel as of the
end of the period. The rebate amount per unit is determined based on a formula established by
statute that 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 the Company receives on its product sales and an additional per unit rebate that
is based on the Companys current sales price compared to its sales price on an inflation adjusted
basis from a designated base period.
Certain government entities are permitted to purchase the Companys products for a nominal
amount from wholesalers and CuraScript. These customers charge the significant discount back to the
Company. The chargeback approximates the Companys
8
sales price to its customers. As a result, the Company does not recognize any net sales on
shipments to these entities. In estimating government chargeback reserves, the Company analyzes
actual chargeback amounts and applies historical chargeback rates to sales to which chargebacks
apply.
Significant judgment is inherent in the selection of assumptions and in the interpretation of
historical experience as well as the identification of external and internal factors affecting the
estimate of reserves for product returns, Medicaid rebates and government chargebacks. The Company
routinely assesses the historical returns and other experience including customers compliance with
its return goods policy and adjusts its reserves as appropriate.
At March 31, 2008 and December 31, 2007, sales-related reserves included in the accompanying
Consolidated Balance Sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Product returns credit memoranda policy
|
|
$
|
750
|
|
|
$
|
1,307
|
|
Product returns product replacement policy
|
|
|
33
|
|
|
|
31
|
|
Medicaid rebates
|
|
|
8,781
|
|
|
|
6,514
|
|
Government chargebacks
|
|
|
341
|
|
|
|
222
|
|
Other
|
|
|
102
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
$
|
10,007
|
|
|
$
|
8,176
|
|
|
|
|
|
|
|
|
4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid investments with maturities from the date of purchase of
three months or less to be cash equivalents. The Company had cash, cash equivalents and short-term
investments of $32.0 million and $30.2 million at March 31, 2008 and December 31, 2007,
respectively. Cash equivalents are invested in money market funds and commercial paper. Short-term
investments are invested in commercial paper and government-sponsored enterprises and have an
average contractual maturity of approximately 5 months as of March 31, 2008. The fair value of the
funds approximated their cost.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157 applies to all fair measurements not otherwise specified in an existing
standard, clarifies how to measure fair value, and expands fair value disclosures. SFAS No. 157
does not significantly change the Companys previous practice with regard to asset valuation. All
of the Companys fair market value measurements utilize quoted prices in active markets for all its
short-term investments, and are as a result valued at the Level 1 fair value hierarchy as defined
in SFAS No. 157.
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market and consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
2,072
|
|
|
$
|
1,987
|
|
Finished goods
|
|
|
288
|
|
|
|
387
|
|
Less allowance for excess and obsolete inventories
|
|
|
(12
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
$
|
2,348
|
|
|
$
|
2,365
|
|
|
|
|
|
|
|
|
6. PURCHASED TECHNOLOGY
Purchased technology at March 31, 2008 consists of the Companys acquisition costs related to
the May 2006 acquisition of the Doral product rights and a cash payment of $300,000 to IVAX
Research, Inc. made in January 2007 to eliminate the Doral royalty obligation. The purchased
technology is being amortized on a straight-line basis over Dorals expected life of 15 years.
Accumulated amortization for the Doral purchased technology was $493,000 as of March 31, 2008.
7. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
The Company leases a 30,000 square foot facility in Hayward, California. The Companys master
lease on the Hayward facility expires in November 2012. Effective November 1, 2007, the Company
subleased 5,000 square feet of the facility through April 2009 and effective February 1, 2008 the
Company subleased the remaining 25,000 square feet through the remainder of the term of the
9
master lease. These subleases cover a portion of the Companys lease commitment and all of its
insurance, taxes and common area maintenance. 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 Operations. As of March 31, 2008, the Company is obligated to pay rent
on the Hayward facility of $4.0 million. Over the remaining term of the master lease the Company
anticipates that it will receive approximately $1.8 million in sublease income to be used to pay a
portion of its Hayward facility obligation. As of March 31, 2008 and December 31, 2007, the
estimated liability related to the Hayward facility totaled $1.4 million and $1.6 million,
respectively, and is included in Lease Termination and Deferred Rent 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 Company is 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
Company reviews the assumptions used in determining the estimated liability quarterly and revises
its estimate of the liability to reflect changes in circumstances. During the three month periods
ended March 31, 2008 and 2007, the Company recognized total expense of $72,000 and $162,000,
respectively, related to the Hayward facility.
On January 22, 2008, the Company amended its manufacturing agreement with BioVectra dcl. The
amendment renewed the terms of the prior contract with BioVectra until December 31, 2010 and
includes a one-year extension option. The Companys commitment under the amended agreement is
approximately $500,000.
On March 11, 2008, the Company entered into an agreement with Icon Development Solutions to
perform an efficacy analysis of patients using Acthar for IS, and to develop a response to the FDA
for the Acthar IS sNDA. The Companys obligation under the agreement is $1.5 million.
The Company, as permitted under California law and in accordance with its Bylaws, indemnifies
its officers and directors for certain events or occurrences while the officer or director is or
was serving at the Companys request in such capacity. The potential future indemnification limit
is to the fullest extent permissible under California law; however, the Company has a director and
officer insurance policy that limits its exposure and may enable it to recover a portion of any
future amounts paid. The Company believes the fair value of these indemnification agreements is
minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31,
2008 and December 31, 2007.
The Company has entered into employment agreements with its 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.
From time to time, the Company may become involved in claims and other legal matters arising
in the ordinary course of business. Management is not currently aware of any such matters that will
have a material adverse affect on the financial position, results of operations or cash flows of
the Company.
8. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the two-class method. Under the two-class
method, undistributed net income is allocated to common stock and participating securities based on
their respective rights to share in dividends. The Companys Series A Preferred Stock was a
participating security for periods prior to its repurchase on February 19, 2008 (see Note 11). No
undistributed earnings are allocable to the Companys Series A Preferred Stock for the three months
ended March 31, 2008 since such shares were repurchased effective February 19, 2008. Net loss has
not been allocated to the Series A preferred stockholder for the three months ended March 31, 2007
as the Series A preferred stockholder did not have a contractual obligation to share in the losses
of the Company. For basic net income (loss) per share applicable to common shareholders, net income
(loss) applicable to common shareholders is divided by the weighted average common shares
outstanding during the period. Diluted net income per share gives effect to all potentially
dilutive common shares outstanding during the period such as options, warrants, convertible
preferred stock, and contingently issuable shares.
10
The following table presents the amounts used in computing basic and diluted net income (loss)
per share applicable to common shareholders for the three month periods ended March 31, 2008 and
2007, and the effect of dilutive potential common shares on the number of shares used in computing
basic net income (loss) per share applicable to common shareholders. Diluted potential common
shares resulting from the assumed exercise of outstanding stock options and warrants are determined
based on the treasury stock method (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
1,274
|
|
|
$
|
(3,759
|
)
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per
share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,946
|
|
|
|
68,773
|
|
Effect of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,773
|
|
|
|
|
|
Warrants
|
|
|
352
|
|
|
|
|
|
Restricted stock
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
74,103
|
|
|
|
68,773
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
applicable to common shareholders
|
|
$
|
0.02
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
The computation of diluted net income per share applicable to common shareholders for the
three month period ended March 31, 2008 excluded the effect of 1,127,000 options to purchase common
shares, 233,296 shares of unvested restricted stock and 2,155,715 shares of Series A Preferred
Stock as the inclusion of these securities would have been anti-dilutive. Diluted net loss per
share has not been computed for the three month period ended March 31, 2007 as, due to the
Companys net loss position, it would have been anti-dilutive.
9. INCOME TAXES
The Company makes 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 its consolidated financial statements, the Company is
required to estimate its income taxes in each of the jurisdictions in which it operates. This
process involves estimating 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 the
Companys consolidated balance sheets.
Income tax expense for the three month period ended March 31, 2008 was $4.5 million. During
the quarter ended March 31, 2008, the Company recorded its income tax expense for financial
reporting purposes using an estimated annual effective federal and state tax rate of approximately
41 percent. Actual tax payments related to 2008 are expected to be paid at a rate of approximately
18 percent, as the Company has access to $29.4 million and $17.4 million of federal and state
operating loss carryforwards, respectively, and $157,000 and $180,000 of the federal and California
research and development credits, respectively, to reduce its 2008 taxable income. There was no
income tax expense for the three month period ended March 31, 2007 as the Company incurred a net
loss of $3.8 million.
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and the change in unrealized
holding gains and losses on available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net income (loss)
|
|
$
|
6,541
|
|
|
$
|
(3,759
|
)
|
Change in unrealized gains on available-for-sale securities
|
|
|
25
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
6,566
|
|
|
$
|
(3,757
|
)
|
|
|
|
|
|
|
|
11
11. EQUITY TRANSACTIONS
On February 19, 2008, the Company 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 preferred share as the closing price per share of the
Companys common stock on February 19, 2008. The Series A Preferred Stock had a carrying value of
$5.1 million. The $5.2 million difference between the $10.3 million repurchase payment and the
$5.1 million balance sheet carrying value was accounted for as a deemed dividend and reduced the
Companys net income in the determination of net income applicable to common shareholders in the
accompanying Consolidated Statement of Operations.
On February 29, 2008, the Companys board of directors approved a stock repurchase plan that
provides for the Companys repurchase of up to 7 million of its 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. Through March 31, 2008, the Company had
repurchased 1,527,700 common shares at an average price per share of $4.06, for a total of $6.2
million (see Note 13).
On February 29, 2008, the Companys board of directors, as administrator of the Employee Stock
Purchase Plan (ESPP), also approved a reduction in the offering period of its ESPP from twelve
months to three months effective with the next offering period that begins 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, the
Companys board of directors approved an amendment on April 16, 2008 to 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 approved by the Companys board of directors on February 29, 2008 and April 16, 2008 are
subject to shareholder approval.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities an Amendment of FASB Statement
No. 133
(SFAS No. 161). SFAS No. 161 requires companies to provide qualitative disclosures about
the objectives and strategies for using derivatives, quantitative data about the fair value of and
gains and losses on derivative contracts, and details of credit-risk-related contingent features in
their hedged positions. The statement also requires companies to disclose more information about
the location and amounts of derivative instruments in financial statements; how derivatives and
related hedges are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities
; and how the hedges affect the companys financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years beginning after
November 15, 2008. The Company is currently evaluating the impact, if any, the adoption of
SFAS No. 161 will have on its consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
Effective Date of FASB
Statement No. 157
(FSP FAS No. 157-2), which defers the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually), for fiscal
years beginning after November 15, 2008 and interim periods within those fiscal years for items
within the scope of FSP FAS No. 157-2. The Company does not expect that the adoption of FSP
FAS No. 157-2 will have a material impact on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)),
which replaces FAS No. 141. SFAS No. 141(R) 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. SFAS No. 141(R) 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. The Company will assess the impact of
SFAS No. 141(R) if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement.
SFAS No. 160 clarifies that changes in a parents ownership interest in a subsidiary that do not
result in deconsolidation are equity transactions if the parent retains its controlling financial
interest. In addition, this statement requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such
gain or loss will be measured using the fair value of the noncontrolling equity investment on
the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the
adoption of SFAS No. 160 will have on its consolidated financial statements.
12
In November 2007, the EITF issued EITF Issue No. 07-1,
Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
(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.
EITF 07-1 is effective for collaborative arrangements in place at the beginning of the annual
period beginning after December 15, 2008. The Company does not expect that the adoption of EITF
07-1 will have a material impact on the Companys financial position and results of operations.
13. SUBSEQUENT EVENTS
On April 16, 2008, the Companys board of directors, as administrator of the Employee Stock
Purchase Plan (ESPP), approved an amendment to the Companys ESPP to 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. The amendment to the ESPP
approved by the Companys board of directors is subject to shareholder approval.
On April 18, 2008, the Company amended its distribution agreement with CuraScript, its U.S.
distributor for H.P. Acthar Gel. The amendment is effective on June 1, 2008. Under the new terms,
the discount provided by the Company to CuraScript will be reduced significantly. The new
discounted sales price to CuraScript will be $23,039, or $230 per vial less than the stated list
price of $23,269. However, under the new terms the pricing to Acthar end users is unchanged. The
amount of the discount to CuraScript is subject to annual adjustments based on the Consumer Price
Index. In addition, the payment terms have been reduced from 60 days to 30 days.
From April 1, 2008 through May 13, 2008, the Company
repurchased 201,300 shares of its common
stock at an average price of $4.44 per share, for a total purchase
price of $894,000 under its
stock repurchase program approved by the Companys board of directors in February 2008.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as those discussed in our
Annual Report on Form 10-K for the year ended December 31, 2007, including Item 1 Business of
Questcor, and Item 1A Risk Factors, as well as factors discussed in any documents incorporated
by reference herein or therein. Whenever used in this Quarterly Report, the terms Questcor,
Company, we, our, ours, and us refer to Questcor Pharmaceuticals, Inc. and its
consolidated subsidiary.
Overview
We currently own two commercial products, H.P. Acthar Gel (repository corticotropin injection)
and Doral (quazepam). H.P. Acthar Gel (Acthar) is an injectable drug that is approved for the
treatment of certain disorders with an inflammatory component, including the treatment of
exacerbations associated with multiple sclerosis (MS). In addition, Acthar is not indicated for,
but is 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. Doral is indicated for the treatment of insomnia characterized by difficulty in falling
asleep, frequent nocturnal awakenings, and/or early morning awakenings. We are also developing new
medications, including 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.
In August 2007, we announced a new strategy and business model for Acthar. In connection with
the new strategy, we implemented a new pricing level for Acthar which was effective August 27,
2007. We also 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
established a group of product service consultants and medical science liaisons to work with
healthcare providers who administer Acthar. The new strategy has significantly improved our ability
to maintain the long-term availability of Acthar and fund important research and development
projects.
Acthar is currently approved in the U.S. for the treatment of exacerbations associated with MS
and many other conditions with an inflammatory component. No drug is approved in the U.S. for the
treatment of IS, a potentially life-threatening disorder that typically begins in the first year of
life. However, pursuant to guidelines published by the American Academy of Neurology and the Child
Neurology Society, many child neurologists use Acthar to treat infants afflicted with IS. In June
2006, we submitted a Supplemental New Drug Application (sNDA) to the FDA and are currently
pursuing formal agency approval of an indication for the use of Acthar in the treatment of IS. In
May 2007, we received an action letter from the FDA indicating that our sNDA was not approvable in
its current form. In November 2007, we met with the FDA to further discuss our sNDA. At the
meeting, the FDA concurred with our suggested pathway to resubmit the application with additional
information. Our efforts are focused on two major projects involving the gathering of efficacy data
from prior, randomized control trials and the extraction of existing safety data. Our goal is to
submit the additional information to the FDA by the end of 2008. At this time, the FDA is not
requiring us to conduct a clinical trial to support our resubmission.
Our
strategy is to focus on growth initiatives for Acthar, continue the
development of QSC-001, improve operational efficiencies,
and return cash to shareholders through the execution of our common share repurchase program. Our
most important growth initiative is the planned 2008 resubmission to the FDA of the sNDA in support
of a new indication for IS. Should the FDA grant approval for this indication, we could then begin
actively promoting the use of Acthar in this indication, something we are presently prohibited from
doing. We believe that such promotion has the potential to increase usage of Acthar in IS beyond
current levels. We are also currently working on a number of initiatives aimed at developing future
growth opportunities for Acthar in therapeutic areas other than IS. These include in-depth
evaluation of uses that are currently a part of Acthars extensive list of on-label indications.
For example, we have observed some continued usage, as well as favorable insurance coverage, in the
segment of MS patients who do not respond to, or who cannot tolerate, IV
corticosteroids, the first-line treatment of most neurologists for MS flares. Market research
indicates that an estimated 10% to 14% of MS flare patients may be in this segment. We are in the
process of evaluating whether this could become an area for further Acthar promotion and revenue
growth. We are also looking at other indications that could provide additional sales growth
potential for Acthar.
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, amount of Medicaid rebates on our products dispensed to Medicaid eligible patients, the
amount of chargebacks on the sale of our products by our specialty distributor to government
entities,
14
the availability of finished goods from our sole-source manufacturers, the timing of certain
expenses, the timing and amount of our product development expenses, and our ability to develop
growth opportunities for Acthar.
On May 5, 2008, we announced that our board of directors approved the decision to switch the
listing of our common stock from the American Stock Exchange to the NASDAQ Stock Market LLC.
Effective May 16, 2008, we will trade on NASDAQ under the trading symbol QCOR.
Critical Accounting Policies
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
U.S. 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, chargebacks on sales of our products by wholesalers and
our specialty distributor to government entities, product returns, bad debts, 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
For the three month periods ended March 31, 2008 and 2007, we have estimated reserves for
product returns from our specialty distributor, wholesalers, hospitals and pharmacies; government
chargebacks for sales of our products by wholesalers and our specialty distributor to certain
Federal government organizations including the Veterans Administration; Medicaid rebates to all
states for products dispensed to patients covered by Medicaid; and cash discounts for prompt
payment. We estimate our reserves by utilizing historical information for our existing products and
data obtained from external sources.
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 product returns, government chargebacks, and Medicaid rebates. We
believe that the assumptions used to estimate these sales reserves are the most reasonably likely
assumptions considering known facts and circumstances. However, our product returns, government
chargebacks, and Medicaid rebates could differ significantly from our estimates because our
analysis of product shipments, prescription trends, the amount of product in the distribution
channel, and our interpretation of the Medicaid statute and regulations, may not be accurate. If
actual product returns, government chargebacks, and Medicaid rebates are significantly different
from our estimates, or if our customers fail to adhere to our expired product returns policy, such
differences would be accounted for in the period in which they become known. To date, actual
amounts have been consistent with our estimates.
During July 2007, we began utilizing CuraScript, a third party specialty distributor, to store
and distribute Acthar. Effective August 1, 2007, we no longer sell Acthar to wholesalers and all of
our proceeds from sales of Acthar in the United States are received from CuraScript. We sell Acthar
to CuraScript at a discount from our list price. Product sales are recognized net of this discount
upon receipt of the product by CuraScript. Under our existing agreement with CuraScript, they have
60 days from when product is received to pay us for their purchases of Acthar. We will supply
replacement product to CuraScript on product returned between one month prior to expiration to
three months post expiration. Returns from product lots will be 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. A reserve for estimated future replacements has
been recorded as a liability which will be reduced as future replacements occur, with an offset to
product inventories.
In April 2008, we announced the amendment of our distribution agreement with CuraScript. The
amendment is effective on June 1, 2008. Under the new terms, the discount provided by us to
CuraScript will be reduced significantly. The new discounted sales price to CuraScript will be
$23,039, or $230 per vial less than the stated list price of $23,269. However, under the new terms
the pricing to Acthar end users is unchanged. The amount of the discount to CuraScript is subject
to annual adjustments based on the Consumer Price Index. In addition, the payment terms have been
reduced from 60 days to 30 days.
We establish a reserve for the sales value of expired product expected to be returned by
wholesalers and their customers with a corresponding reduction in gross product sales. The reserve
is reduced as credit memoranda are issued, with an offset to accounts
15
receivable. In estimating the return rate for expired product returned by wholesalers and
their customers, we primarily analyze historical returns by product and return merchandise
authorizations. We also consider current inventory on hand at wholesalers, the remaining shelf life
of that inventory, and changes in demand measured by prescriptions or other data as provided by an
independent third party source. We believe that the information obtained from wholesalers regarding
inventory levels and from independent third parties regarding prescription demand is reliable, but
we are unable to independently verify the accuracy of such data. We routinely assess our historical
experience including customers compliance with our product return policy, and we adjust our
reserves as appropriate. The reserve for the sales value of expired product expected to be
returned by wholesalers and their customers relates to estimated returns associated with our sales
of Doral and our estimate of returns associated with sales of Acthar to wholesalers prior to our
transition to CuraScript.
We provide a rebate related to product dispensed to Medicaid eligible patients. Our estimated
historical rebate percentage is used to estimate the rebate units for the period. We then apply a
rebate amount per unit to the estimated rebate units to arrive at the estimated reserve for the
period. The estimated total rebate units are comprised of the estimated rebate units associated
with estimated end user demand during the period and the estimated rebate units associated with
estimated inventory in the distribution channel as of the end of the period. 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.
Certain government entities are permitted to purchase our products for a nominal amount from
wholesalers and CuraScript. Our customers charge the significant discount back to us. The
chargeback approximates our sales price to our customers. As a result, we do not recognize any net
sales on shipments to these entities. In estimating government chargeback reserves, we analyze
actual chargeback amounts and apply historical chargeback rates to sales to which chargebacks
apply.
We routinely assess our experience with Medicaid rebates and government chargebacks and adjust
the reserves accordingly. For sales of Doral, we grant payment terms of 2%, net 30 days.
Allowances for cash discounts are recorded as a reduction to trade accounts receivable and are
estimated based upon the amount of trade accounts receivable subject to the cash discounts.
At March 31, 2008 and December 31, 2007, sales-related reserves included in the accompanying
Consolidated Balance Sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Product returns credit memoranda policy
|
|
$
|
750
|
|
|
$
|
1,307
|
|
Product returns product replacement policy
|
|
|
33
|
|
|
|
31
|
|
Medicaid rebates
|
|
|
8,781
|
|
|
|
6,514
|
|
Government chargebacks
|
|
|
341
|
|
|
|
222
|
|
Other
|
|
|
102
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
$
|
10,007
|
|
|
$
|
8,176
|
|
|
|
|
|
|
|
|
Inventories
As of March 31, 2008, our net raw material and finished goods inventories totaled $2.3
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. We intend to
control inventory levels of our products purchased by our customers. 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.
Intangible and Long-Lived Assets
As of March 31, 2008, our intangible and long-lived assets consisted of goodwill of $299,000
generated from a merger in 1999, net purchased technology of $3.9 million related to our
acquisition of Doral and $480,000 of net property and equipment. 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
16
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 SFAS No. 142,
Goodwill and Other Intangible
Assets
, we review goodwill for impairment on an annual basis. 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 SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-Lived Assets
, 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 March 31, 2008, no impairment had been indicated.
Share-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123(R), using the modified-prospective transition method. Under the fair value recognition
provisions of SFAS No. 123(R), share-based compensation
cost is estimated at the grant date based on the fair 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 three
month period ended March 31, 2008 based on the historical term of our stock option awards. We
estimated the expected term of stock options granted for the three month period ended March 31,
2007 based on the simplified method provided in Staff Accounting Bulletin No. 107. 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 three month period ended March 31, 2008 includes $1.9 million of
share-based compensation expense related to employees and non-employee members of our board of
directors. Our net loss for the three month period ended March 31, 2007 includes $473,000 of
share-based compensation expense related to employees and non-employee members of our board of
directors.
On February 29, 2008, our board of directors approved a reduction in the offering period of
the Employee Stock Purchase Plan (ESPP) from twelve months to three months effective with the
next offering period that begins 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 on April 16,
2008 to 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 approved by our board of directors on February 29, 2008 and April 16,
2008 are subject to shareholder approval.
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 FIN 27:
Accounting for a
Loss on a Sublease, an interpretation of FASB 13 and APB Opinion No. 30
and FTB 79-15,
Accounting
for the Loss on a Sublease Not Involving the Disposal of a Segment.
As of March 31, 2008 and
December 31, 2007, the estimated liability related to the Hayward facility totaled $1.4 million and
$1.6 million, respectively, and is included in Lease Termination and Deferred Rent 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,
17
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. 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. These subleases cover a portion of our lease commitment, and all of our insurance, taxes and
common area maintenance. As of March 31, 2008, we are obligated to pay rent on the Hayward
facility of $4.0 million. Over the remaining term of the master lease we anticipate that we will
receive approximately $1.8 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 Operations. During the three month periods ended March 31, 2008 and 2007
we recognized total expense of $72,000 and $162,000, 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. 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 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. As a result of our analysis of all available evidence, both positive and
negative, as of December 31, 2006, it was not considered more likely than not that our deferred
tax assets would be realized and, accordingly, we recorded a full valuation allowance against the
deferred tax assets. Based on taxable income in the third and fourth quarter of 2007, cumulative
taxable income for the most recent three years and anticipated taxable income for 2008, we
determined, in the fourth quarter of 2007, that it was more likely than not that some of the
deferred tax assets would be recovered. 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. The remaining valuation allowance at December 31, 2007 relates to
deferred tax assets for federal net operating loss and tax credit carryforwards and certain state
temporary differences that may not be recovered until 2009 or subsequent years. Any changes in the
valuation allowance based upon our future 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.
During the quarter ended March 31, 2008, we recorded our income tax expense for financial
reporting purposes using an estimated annual effective federal and state tax rate of approximately
41 percent. Actual tax payments related to 2008 are expected to be paid at a rate of approximately
18 percent, as we have access to $29.4 million and $17.4 million of federal and state operating
loss carryforwards, respectively, and $157,000 and $180,000 of the federal and California research
and development credits, respectively, to reduce our 2008 taxable income. Current and long-term
deferred tax assets, net of a valuation allowance of $5.2 million, totaled $11.4 million and $15.9
million at March 31, 2008 and December 31, 2007, respectively, as reflected in the accompanying
Consolidated Balance Sheets.
18
Results of Operations
Three months ended March 31, 2008 compared to the three months ended March 31, 2007:
Total Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
2008
|
|
2007
|
|
Increase
|
|
Change
|
|
|
(in $000s)
|
Net sales
|
|
$
|
19,132
|
|
|
$
|
3,701
|
|
|
$
|
15,431
|
|
|
|
417
|
%
|
Net sales for the three month periods ended March 31, 2008 and 2007 were comprised of net
sales of our neurology products Acthar and Doral. Net sales of Acthar for the three month period
ended March 31, 2008 totaled $18.9 million as compared to $3.4 million during the same period in
2007. The increase in net sales resulted from the new 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. 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 1,260 Acthar units to our specialty distributor during the first quarter of
2008. This continued ordering coupled with a positive pattern of insurance reimbursement has
resulted in a significant increase in our net sales. However, future Acthar orders may be impacted
by several factors, including inventory practices at specialty and hospital pharmacies, greater use
of patient assistance programs, the overall pattern of usage by the healthcare community, including
Medicaid and government entities, and the reimbursement policies of insurance companies.
We estimate that seasonally-adjusted end user demand for Acthar since the implementation of
the new Acthar strategy has averaged between 1,275 to 1,425 vials per
quarter. However, Acthar end
user demand follows a distinct historical pattern of significant quarter-to-quarter variability.
This quarter-to-quarter variability is the result of two separate factors seasonality and normal
variation in Acthar end user demand in the treatment of IS. To measure these two factors we
evaluated the
historical patterns of quarterly Acthar usage within child neurology, as measured by
Wolters-Kluwer, a leading provider of prescription data for the pharmaceutical industry. We
tabulated the average retail demand for each quarter, from July 2002 to June 2007, as a percentage
of the overall average quarterly retail demand. According to these data, while retail demand in
child neurology, where Acthar is now primarily used, stayed constant during the five-year period
July 2002 to June 2007, variation from the mean was frequently observed for individual quarters.
The results of the analysis indicate that due to seasonal factors, end user demand in the first
calendar quarter has historically averaged about 15% below the annual average, the third calendar
quarter has historically averaged about 12% above the annual average, and the second and fourth
calendar quarters are slightly above the annual average. The results of the analysis further
indicate that the second factor, normal variation in end user demand, also deviates
quarter-to-quarter at a similar level as the seasonal variations.
As required by federal regulations, we provide a rebate related to product dispensed to
Medicaid eligible patients and government 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 government chargebacks are estimated by us each quarter and reduce our gross sales in
the determination of our net sales. For the three months ended March 31, 2008, Acthar gross sales
were reduced by approximately 32% to account for the estimated amount of Medicaid rebates and
government chargebacks. This reduction from gross sales to arrive at net sales was comprised of 29%
related to estimated Medicaid rebates and government chargebacks associated with first quarter 2008
shipments, and 2.7% associated with the payment of a greater amount of Medicaid rebates during the
2008 first quarter than estimated during the fourth quarter of 2007 for shipments in the fourth
quarter of 2007. We estimate that Acthar gross sales resulting from our reported shipments will be
reduced by approximately 30% related to Medicaid rebates and government chargebacks for 2008.
During July 2007, we began utilizing CuraScript to store and distribute Acthar. Effective
August 1, 2007, we no longer sell Acthar to wholesalers and all of our proceeds from sales of
Acthar in the United States are received from CuraScript. We sell Acthar to CuraScript at a
discount from our list price. Product sales are recognized net of this discount upon receipt of the
product by CuraScript. Under our existing agreement with CuraScript, they have 60 days from when
product is received to pay us for their purchases of Acthar. We will supply replacement product to
CuraScript on product returned one month prior to expiration to three months post expiration.
In April 2008, we announced the amendment of our distribution agreement with CuraScript. The
amendment is effective on June 1, 2008. Under the new terms, the discount provided by us to
CuraScript will be reduced significantly. The new discounted sales price to CuraScript will be
$23,039, or $230 per vial less than the stated list price of $23,269. However, under the new terms
the pricing to Acthar end users is unchanged. The amount of the discount to CuraScript is subject
to annual adjustments based on the Consumer Price Index. In addition, the payment terms have been
reduced from 60 days to 30 days. The reduction in payment terms will reduce
19
our accounts receivable balance and generate a one-time increase in our cash balance of approximately $10 million. If
annual Acthar demand remains in the annualized range of 5,100 to 5,700 vials experienced since the
implementation of the new Acthar strategy, we estimate that the amendment of the distribution
agreement will have the following impact on our operating results and cash flows:
|
|
|
Price increase to Acthar end users
|
|
None
|
Estimated increase in annualized net sales
|
|
$2.9 million to $3.2 million
|
Estimated increase in annualized income before income taxes
|
|
$2.8 million to $3.1 million
|
Estimated increase in annualized net income
|
|
$1.7 million to $1.8 million
|
Estimated one-time decrease in accounts receivable
|
|
$10 million
|
Estimated one-time increase in cash resulting from accounts receivable reduction
|
|
$10 million
|
If annual Acthar demand remains in the annualized range of 5,100 to 5,700 vials experienced
since the implementation of the new Acthar strategy, we estimate that the amended distribution
terms will result in an increase in 2008 annual net sales from the previous range of approximately
$80 million to $89 million to a range of approximately $82 million to $91 million.
We review the amount of inventory of Doral at wholesalers and Acthar at CuraScript in order to
help assess the demand for our products. We may choose to defer sales in situations where we
believe inventory levels are already adequate. We expect quarterly fluctuations in net sales due to
changes in demand for our products, the timing of shipments, changes in inventory levels,
expiration dates of product sold, and the impact of our sales-related reserves.
Cost of Sales and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
2008
|
|
2007
|
|
Increase
|
|
Change
|
|
|
(in $000s)
|
Cost of sales
|
|
$
|
1,319
|
|
|
$
|
850
|
|
|
$
|
469
|
|
|
|
55
|
%
|
Gross profit
|
|
|
17,813
|
|
|
|
2,851
|
|
|
|
14,962
|
|
|
|
525
|
%
|
Gross margin
|
|
|
93%
|
|
|
|
77%
|
|
|
|
|
|
|
|
|
|
Cost of sales includes material cost, packaging, warehousing and distribution, product
liability insurance, royalties, quality control (which primarily includes product stability
testing), quality assurance and reserves for excess or obsolete inventory. The increase in cost of
sales was due primarily to an increase of $553,000 in royalties on Acthar due to the increase in
net sales during the three month period ended March 31, 2008 as compared to the same period in
2007, and an increase of $375,000 in distribution costs in the three month period ended March 31,
2008 as compared to the same period in 2007. The increase in distribution costs is due in part to
the inclusion in the three month period ended March 31, 2007 of credits from wholesalers
related to price increases. These increases were partially offset by a decrease in product
stability testing expenses and inventory obsolescence totaling approximately $470,000 during the
three month period ended March 31, 2008 as compared to the same period in 2007. The gross margin
was 93% for the three month period ended March 31, 2008, as compared to 77% for the three month
period ended March 31, 2007. The increase in the gross margin in the three month period ended March
31, 2008 as compared to the same period in 2007 was due primarily to the increase in net sales
resulting from the new Acthar pricing level implemented in August 2007. We estimate that the gross
margin for 2008 will be approximately 90%.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Change
|
|
|
(in $000s)
|
Selling, general and administrative expense
|
|
$
|
5,066
|
|
|
$
|
5,550
|
|
|
$
|
(484
|
)
|
|
|
(9
|
)%
|
The decrease in selling, general and administrative expense was due primarily to lower headcount
and related costs resulting from the reduction of our field organization in the second quarter of
2007 and lower expenses for outside services, offset in part by an increase in share-based
compensation expense. In May 2007, we reduced our field organization from 45 sales representatives
to 10 product service consultants and 4 medical science liaisons. The expenses associated with our
medical science liaisons are included in Research and Development expense in the accompanying
Consolidated Statements of Operations. Headcount and related costs included in selling, general and
administrative expense related to our field organization, excluding share-based compensation,
decreased by approximately $1.4 million in the three month period ended March 31, 2008 as compared
to the same period in 2007. A decrease in expenses for outside services of approximately $200,000
contributed to the decrease in selling, general and administrative expense for the three month
period ended March 31, 2008 as compared to the same period in 2007.
20
We incurred a total non-cash charge of $1.9 million for SFAS No. 123(R) share-based
compensation for the quarter ended March 31, 2008. Of this amount, $1.6 million was included in
selling, general and administrative expenses, an increase of $1.2 million as compared to the same
period in 2007. The increase in share-based compensation expense in the first quarter of 2008 was
primarily associated with our employee stock purchase plan. Of the total non-cash charge of $1.9
million in the first quarter of 2008 for share-based compensation expense, $1.2 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 current offering period. This resulted in a significant increase in the non-cash
SFAS No. 123(R) expense for the current 12-month offering period. On February 29, 2008, our board
of directors approved a reduction in the offering period from twelve months to three months
effective with the next offering period that begins 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 plan. The amendment to the plan is subject to shareholder
approval. We estimate that these changes will materially reduce the non-cash SFAS No. 123(R)
expense associated with our employee stock purchase plan subsequent to the end of the current
offering period.
We estimate that our selling, general and administrative expense (excluding non-cash
SFAS No. 123(R) share-based compensation expense) for 2008 will be in the range of approximately
$15.0 million to $17.0 million. We anticipate the addition of selective key new hires and
investment in customer service and marketing initiatives. We estimate that our total non-cash
SFAS No. 123(R) share-based compensation expense for 2008 will be approximately $4.5 million of
which we estimate approximately $3.5 million will be incurred in selling, general and
administrative expense. The increase from 2007 results from new option grants and higher non-cash
SFAS No. 123(R) expense associated with our employee stock purchase plan.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
2008
|
|
2007
|
|
Increase
|
|
Change
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
Research and development
|
|
$
|
1,971
|
|
|
$
|
1,140
|
|
|
$
|
831
|
|
|
|
73
|
%
|
Costs included in research and development relate primarily to our product development
efforts, outside services related to medical and regulatory affairs, compliance activities, costs
associated with our medical science liaisons, and our preliminary evaluation of additional
development opportunities. The increase in research and development expenses was due primarily to
the addition of our medical science liaisons in the second quarter of 2007 and an increase in
expenses associated with our product development efforts. Headcount-related costs, excluding
share-based compensation, increased by approximately $256,000 in the three month period ended March
31, 2008 as compared to the same period in 2007. Expenses for product development and outside
services related primarily to regulatory affairs increased approximately $230,000 as compared to
the same period in 2007. A non-cash charge of $233,000 for SFAS No. 123(R) share-based
compensation was included in research and development expenses in the three month period ended
March 31, 2008, an increase of $166,000 as compared to the same period in 2007.
We estimate that our research and development expenses (excluding non-cash SFAS No. 123(R)
share-based compensation expense) will be approximately $10.0 million to $14.0 million during 2008
resulting from our efforts related to the Acthar submission to the FDA for the treatment of IS and
the continued development of QSC-001. The higher end of the range would only result in the event
that we were to successfully advance QSC-001 to clinical trials. We estimate that total non-cash
SFAS No. 123(R) share-based compensation expense for 2008 will be approximately $4.5 million of
which we estimate approximately $1.0 million will be incurred in research and development expense.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Change
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
Depreciation and amortization
|
|
$
|
122
|
|
|
$
|
123
|
|
|
$
|
(1
|
)
|
|
|
(1
|
)%
|
Depreciation and amortization expense for the three months ended March 31, 2008 was consistent
with depreciation and amortization expense for the same period in 2007.
21
Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
%
|
|
|
2008
|
|
2007
|
|
Increase
|
|
Change
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
Other income, net
|
|
$
|
375
|
|
|
$
|
203
|
|
|
$
|
172
|
|
|
|
85
|
%
|
Other income, net for the three month period ended March 31, 2008 increased $172,000 as
compared to other income, net for the same period in 2007. The increase was due primarily to an
increase in interest income resulting from higher cash balances in the three month period ended
March 31, 2008 as compared to the same period in 2007.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
|
(in $000s)
|
|
|
|
|
Income tax expense
|
|
$
|
4,488
|
|
|
$
|
|
|
|
$
|
4,488
|
|
Income tax expense for the three month period ended March 31, 2008 was $4.5 million. There was
no income tax expense for the three month period ended March 31, 2007 as we incurred a net loss of
$3.8 million. During the quarter ended March 31, 2008, we recorded our income tax expense for
financial reporting purposes using an estimated annual effective federal and state tax rate of
approximately 41 percent. Actual tax payments related to 2008 are expected to be paid at a rate of
approximately 18 percent, as we have access to $29.4 million and $17.4 million of federal and state
operating loss carryforwards, respectively, and $157,000 and $180,000 of the federal and California
research and development credits, respectively, to reduce our 2008 taxable income. Current and
long-term deferred tax assets, net of a valuation allowance of $5.2
million, totaled $11.4 million and $15.9 million at March 31, 2008 and
December 31, 2007, respectively, as reflected in the accompanying Consolidated Balance Sheets.
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
Net income (loss)
|
|
$
|
6,541
|
|
|
$
|
(3,759
|
)
|
|
$
|
10,300
|
|
For the three months ended March 31, 2008, we had net income of $6.5 million as compared to a
net loss of $3.8 million for the three months ended March 31, 2007, an increase of $10.3 million.
The increase resulted primarily from the implementation of our new strategy and business model for
Acthar.
Deemed Dividend on Series A Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
|
(in $000s)
|
|
|
|
|
Deemed dividend on Series A Preferred Stock
|
|
$
|
5,267
|
|
|
$
|
|
|
|
$
|
5,267
|
|
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 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). 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 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. The repurchase
transaction had no income tax impact.
22
Net Income (Loss) Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
2007
|
|
Increase
|
|
|
|
|
|
|
(In $000s)
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
1,274
|
|
|
$
|
(3,759
|
)
|
|
$
|
5,033
|
|
For the three months ended March 31, 2008, we had net income applicable to common shareholders
of $1.3 million, or $0.02 per fully diluted share, as compared to a net loss applicable to common
shareholders of $3.8 million, or $0.05 loss per share, for the three months ended March 31, 2007,
an increase of $5.0 million. The increase resulted primarily from the implementation of our new
strategy and business model for Acthar. 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
Prior to the implementation of our new strategy and business model for Acthar, 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. During the three month period ended March
31, 2008, we generated $17.8 million in cash from operations resulting from the implementation of
our new Acthar strategy.
At March 31, 2008, we had cash, cash equivalents and short-term investments of $32.0 million
compared to $30.2 million at December 31, 2007. The increase was due primarily to $17.8 million of
cash generated from operations, partially offset by the $10.3 payment for the repurchase of our
Series A preferred stock and $6.2 million paid to repurchase our common stock. At March 31, 2008,
our working capital was $49.4 million compared to $57.2 million at December 31, 2007. The decrease
in our working capital was principally due to a decrease in accounts receivable of $5.7 million and
a decrease in deferred tax assets of $4.5 million as of March 31, 2008.
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). 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.
In March 2008, we announced that our board of directors approved a stock repurchase plan that
provides for our repurchase of up to 7 million of our common shares in either open market or
private transactions, which will occur from time to time and in such amounts as management deems
appropriate. Through May 13, 2008, we have repurchased 1,729,000 shares of our common stock at an
average price of $4.10 per share, for a total purchase price of $7.1 million.
In April 2008, we announced the amendment of our distribution agreement with CuraScript. The
amendment is effective on June 1, 2008. Under the new terms, the discount provided by us to
CuraScript will be reduced significantly. The new discounted sales price to CuraScript will be
$23,039, or $230 per vial less than the stated list price of $23,269. However, under the new terms
the pricing to Acthar end users is unchanged. The amount of the discount to CuraScript is subject
to annual adjustments based on the Consumer Price Index. In addition, the payment terms have been
reduced from 60 days to 30 days. The reduction in payment terms will reduce our accounts receivable
balance and generate a one-time increase in our cash balance of approximately $10 million, which we
expect will be reflected on our September 30, 2008 balance sheet. If annual Acthar demand remains
in the annualized range of 5,100 to 5,700 vials experienced since the implementation of the new
Acthar strategy and our estimates for expenses are achieved, we now estimate that cash from
operations generated during 2008 will increase from the previous range of approximately $40 million
to $50 million to a range of approximately $50 million to $60 million.
We lease a 30,000 square foot facility in Hayward, California. Our master lease on the Hayward
facility expires in November 2012. As of March 31, 2008, we were obligated to pay rent on the
Hayward facility of $4.0 million and to pay our share of insurance, taxes and common area
maintenance through the expiration of the master lease. 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. These
subleases cover a portion of our lease commitment, and all of our insurance, taxes and common area
maintenance.
23
Recently Issued Accounting Standards
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities an Amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
requires companies to provide qualitative disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their hedged positions. The
statement also requires companies to disclose more information about the location and amounts of
derivative instruments in financial statements; how derivatives and related hedges are accounted
for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
; and how the
hedges affect the companys financial position, financial performance and cash flows. SFAS No. 161
is effective for fiscal years beginning after November 15, 2008. We are currently evaluating the
impact, if any, the adoption of SFAS No. 161 will have on our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
Effective Date of FASB
Statement No. 157
(FSP FAS No. 157-2), which defers the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually), for fiscal
years beginning after November 15, 2008 and interim periods within those fiscal years for items
within the scope of FSP FAS No. 157-2. We do not expect that the adoption of FSP FAS No. 157-2
will have a material impact on our financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)),
which replaces FAS No. 141. SFAS No. 141(R) 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. SFAS No. 141(R) 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 SFAS No. 141(R) if
and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement.
SFAS No. 160 clarifies that changes in a parents ownership interest in a subsidiary that do not
result in deconsolidation are equity transactions if the parent retains its controlling financial
interest. In addition, this statement requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited. We are currently
evaluating the impact, if any, the adoption of SFAS No. 160 will have on our consolidated financial
statements.
In November 2007, the EITF issued EITF Issue No. 07-1,
Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
(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.
EITF 07-1 is effective for collaborative arrangements in place at the beginning of the annual
period beginning after December 15, 2008. We do not expect that the adoption of EITF 07-1 will
have a material impact on our financial position and results of operations.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk at March 31, 2008 has not changed materially from December 31,
2007, and reference is made to the more detailed disclosures of market risk included in our Annual
Report on Form 10-K for the year ended December 31, 2007.
ITEM 4. 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 quarter 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.
There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 1A. RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The Companys actual results could differ
materially from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to:
|
|
|
|
|
|
|
the Companys ability to continue to successfully implement
the new strategy and business model for Acthar,
|
|
|
|
|
the introduction of competitive products,
|
|
|
|
|
the Companys ability to accurately forecast the demand for its products,
|
|
|
|
|
the gross margin achieved from the sale of its products,
|
|
|
|
|
the Companys ability to enforce its product returns policy,
|
|
|
|
|
the Companys ability to estimate the quantity of Acthar used by government entities and Medicaid eligible patients,
|
|
|
|
|
that the actual amount of rebates and discounts related to the use of Acthar by government entities and Medicaid eligible patients may differ materially from the Companys estimates,
|
|
|
|
|
the sell-through by the Companys distributors,
|
|
|
|
|
the expenses and other cash needs for upcoming periods,
|
|
|
|
|
the inventories carried by the Companys distributors, specialty pharmacies and hospitals,
|
|
|
|
|
volatility in the Companys monthly and quarterly Acthar shipments and end-user demand,
|
|
|
|
|
the Companys ability to obtain finished goods from its sole source contract manufacturers on a timely basis if at all,
|
|
|
|
|
the Companys ability to retain key management personnel,
|
|
|
|
|
the Companys ability to utilize its net operating loss carry forwards to reduce income taxes on taxable income,
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research and development risks,
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uncertainties regarding the Companys intellectual property and the uncertainty of receiving required regulatory approvals in a timely way, or at all,
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other research, development, and regulatory risks, and
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the ability of the Company to acquire products and, if acquired, to market them successfully and find marketing partners where appropriate.
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These and other
risks are described in Part I, Item 1A of the Companys Annual Report on Form 10-K for the year ended
December 31, 2007.
25
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer
Purchases of Equity Securities:
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Total Number
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Maximum Number
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Average
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Of Shares Purchased
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Of Shares That May
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Total Number
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Price
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as Part of
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Yet be Purchased
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of Shares
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Paid per
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Publicly Announced
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Under the Plans or
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Period
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Purchased
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Share
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Plans or Programs
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Programs
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January 1 January 31, 2008
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February 1 February 29, 2008
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(a)
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7,000,000
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March 1 March 31, 2008
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1,527,700
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$
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4.06
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1,527,700
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5,472,300
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Total
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1,527,700
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1,527,700
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(a)
On February 19,
2008, the Company 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 preferred share as the closing
price per share of the Company's common stock on February 19, 2008.
On February 29, 2008, the Companys board of directors approved a stock repurchase plan that
provides for the Companys repurchase of up to 7 million of its common shares. The stock repurchase
plan was publicly announced on March 3, 2008. Stock repurchases under this program may be made
through open market or privately negotiated transactions in accordance with all applicable laws,
rules and regulations. The transactions may be made from time to time and in such amounts as
management deems appropriate and will be funded from available working capital. The stock
repurchase program does not have an expiration date and may be limited or terminated at any time by
the board of directors without prior notice.
From
April 1, 2008 through May 13, 2008, the Company repurchased
an additional
201,300 shares of its common
stock at an average price of $4.44 per share, for a total purchase
price of $894,000 under its
stock repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
26
ITEM 6. EXHIBITS
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Exhibit No
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Description
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31
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32*
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Certifications pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
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*
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These certifications are being furnished solely to accompany this quarterly report
pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of
the Securities Exchange Act of 1934 and are not to be incorporated by reference into any
filing of Questcor Pharmaceuticals, Inc., whether made before or after the date hereof,
regardless of any general incorporation language in such filing.
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27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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QUESTCOR PHARMACEUTICALS, INC.
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Date: May 14, 2008
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By:
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/s/ Don M. Bailey
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Don M. Bailey
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President and Chief Executive Officer
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By:
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/s/ George Stuart
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George Stuart
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Senior Vice President, Finance and Chief Financial Officer
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28
Exhibit Index
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Exhibit No
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Description
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31
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32 *
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Certifications pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
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*
|
|
These certifications are being furnished solely to accompany this quarterly report pursuant
to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of
Questcor Pharmaceuticals, Inc., whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
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29