##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (MARK ONE)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 FOR THE TRANSITION PERIOD FROM   TO
 COMMISSION FILE NUMBER: 001-14758
 QUESTCOR PHARMACEUTICALS, INC.
 (Exact name of Registrant as specified in its charter)
 CALIFORNIA
    
    33-0476164(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 3260 Whipple Road
Union City, CA 94587-1217
(Address of Principal Executive Offices)
 REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 400-0700
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



QUESTCOR PHARMACEUTICALS, INC.
 FORM 10-Q
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1 Financial Statements and Notes (Unaudited)
    
    
    3Consolidated Balance Sheets  March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations  for the three months ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows  for the three months ended March 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4 Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    25Item 1 Legal Proceedings
    
    
    25Item 1A Risk Factors
    
    
    25Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3 Defaults Upon Senior Securities
    
    
    26Item 4 Submission of Matters to a Vote of Security Holders
    
    
    26Item 5 Other Information
    
    
    26Item 6 Exhibits
    
    
    27Signatures
    
    
    28EXHIBIT 31EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,370
    
    
    $
    15,939Short-term investments
    
    
    21,662
    
    
    
    14,273Total cash, cash equivalents and short-term investments
    
    
    32,032
    
    
    
    30,212Accounts receivable, net of allowance for doubtful accounts
of $94 and $57 at March 31, 2008 and December 31, 2007,
respectively
    
    
    17,894
    
    
    
    23,639Inventories, net
    
    
    2,348
    
    
    
    2,365Prepaid expenses and other current assets
    
    
    1,522
    
    
    
    778Deferred tax assets
    
    
    10,391
    
    
    
    14,879Total current assets
    
    
    64,187
    
    
    
    71,873Property and equipment, net
    
    
    480
    
    
    
    522Purchased technology, net
    
    
    3,893
    
    
    
    3,967Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    748
    
    
    
    744Deferred tax assets, net
    
    
    1,043
    
    
    
    1,043Total assets
    
    $
    70,650
    
    
    $
    78,448LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,748
    
    
    $
    1,777Accrued compensation
    
    
    783
    
    
    
    1,945Sales-related reserves
    
    
    10,007
    
    
    
    8,176Income taxes payable
    
    
    27
    
    
    
    1,330Other accrued liabilities
    
    
    1,176
    
    
    
    1,492Total current liabilities
    
    
    14,741
    
    
    
    14,720Lease termination and deferred rent liabilities
    
    
    1,724
    
    
    
    1,869Other non-current liabilities
    
    
    5
    
    
    
    7Preferred 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)
    
    
    
    
    
    
    5,081Shareholders equity: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
    
    
    104,497
    
    
    
    108,387Accumulated deficit
    
    
    (50,396
    )
    
    
    (51,670
    )Accumulated other comprehensive gain
    
    
    79
    
    
    
    54Total shareholders equity
    
    
    54,180
    
    
    
    56,771Total liabilities, preferred stock and shareholders equity
    
    $
    70,650
    
    
    $
    78,448
  3




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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 (UNAUDITED)
 Three Months EndedMarch 31,2008
    
    
    2007Net sales
    
    $
    19,132
    
    
    $
    3,701Cost of sales (exclusive of amortization of purchased technology)
    
    
    1,319
    
    
    
    850Gross profit
    
    
    17,813
    
    
    
    2,851Operating costs and expenses:Selling, general and administrative
    
    
    5,066
    
    
    
    5,550Research and development
    
    
    1,971
    
    
    
    1,140Depreciation and amortization
    
    
    122
    
    
    
    123Total operating costs and expenses
    
    
    7,159
    
    
    
    6,813Income (loss) from operations
    
    
    10,654
    
    
    
    (3,962
    )Other income (expense):Interest income
    
    
    364
    
    
    
    210Other income (expense), net
    
    
    11
    
    
    
    (7
    )Total other income
    
    
    375
    
    
    
    203Income (loss) before income taxes
    
    
    11,029
    
    
    
    (3,759
    )Income tax expense
    
    
    4,488
    
    
    
    Net income (loss)
    
    
    6,541
    
    
    
    (3,759
    )Deemed dividend on Series A preferred stock
    
    
    5,267
    
    
    
    Net income (loss) applicable to common shareholders
    
    $
    1,274
    
    
    $
    (3,759
    )Net income (loss) per share applicable to common shareholders:Basic
    
    $
    0.02
    
    
    $
    (0.05
    )Diluted
    
    $
    0.02
    
    
    $
    (0.05
    )Shares used in computing net income (loss) per share applicable to
common shareholders:Basic
    
    
    69,946
    
    
    
    68,773Diluted
    
    
    74,103
    
    
    
    68,773
  4




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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 Three Months EndedMarch 31,2008
    
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    6,541
    
    
    $
    (3,759
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Share-based compensation expense
    
    
    1,933
    
    
    
    496Deferred income taxes
    
    
    4,488
    
    
    
    Amortization of investments
    
    
    (209
    )
    
    
    Depreciation and amortization
    
    
    122
    
    
    
    123Changes in operating assets and liabilities:Accounts receivable
    
    
    5,745
    
    
    
    (748
    )Inventories
    
    
    17
    
    
    
    344Prepaid expenses and other current assets
    
    
    (744
    )
    
    
    (197
    )Accounts payable
    
    
    971
    
    
    
    (139
    )Accrued compensation
    
    
    (1,162
    )
    
    
    (198
    )Sales-related reserves
    
    
    1,831
    
    
    
    615Income taxes payable
    
    
    (1,303
    )
    
    
    Other accrued liabilities
    
    
    (316
    )
    
    
    (20
    )Other non-current liabilities
    
    
    (147
    )
    
    
    (190
    )Net cash flows provided by (used in) operating activities
    
    
    17,767
    
    
    
    (3,673
    )INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (6
    )
    
    
    (59
    )Acquisition of purchased technology
    
    
    
    
    
    
    (300
    )Purchase of short-term investments
    
    
    (13,341
    )
    
    
    (8,670
    )Proceeds from the sale and maturities of short-term investments
    
    
    6,186
    
    
    
    2,500Changes in deposits and other assets
    
    
    (4
    )
    
    
    (5
    )Net cash flows used in investing activities
    
    
    (7,165
    )
    
    
    (6,534
    )FINANCING ACTIVITIESIssuance of common stock, net
    
    
    378
    
    
    
    284Repurchase of Series A preferred stock
    
    
    (10,348
    )
    
    
    Repurchase of common stock
    
    
    (6,201
    )
    
    
    Net cash flows provided by (used in) financing activities
    
    
    (16,171
    )
    
    
    284Decrease in cash and cash equivalents
    
    
    (5,569
    )
    
    
    (9,923
    )Cash and cash equivalents at beginning of period
    
    
    15,939
    
    
    
    15,937Cash and cash equivalents at end of period
    
    $
    10,370
    
    
    $
    6,014
  5




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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. BASIS OF PRESENTATION
 ® ®
     6




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2. SHARE-BASED COMPENSATION
 Share-Based Payment Accounting for Stock-Based Compensation
  Three Months EndedMarch 31,2008
    
    
    2007Cost of sales
    
    $
    
    
    
    $
    1Selling, general and administrative
    
    
    1,644
    
    
    
    405Research and development
    
    
    233
    
    
    
    67Total
    
    $
    1,877
    
    
    $
    473
   Three Months EndedMarch 31,2008
    
    2007Expected volatility
    
    
    86%
    
    
    
    86%Expected term (in years)
    
    4.4
    
    
    6.25Risk-free interest rate
    
    
    2.1%
    
    
    
    4.6%Expected dividends
    
    
    
    
    
    
    
  7




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Three Months EndedMarch 31,2008
    
    2007Expected volatility
    
    
    78%
    
    
    
    65%Expected term (in years)
    
    
    0.30
    
    
    
    0.53Risk-free interest rate
    
    
    2.2%
    
    
    
    5.0%Expected dividends
    
    
    
    
    
    
    
  3. REVENUE RECOGNITION
     8




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March 31,
    
    
    December 31,2008
    
    
    2007Product returns  credit memoranda policy
    
    $
    750
    
    
    $
    1,307Product returns  product replacement policy
    
    
    33
    
    
    
    31Medicaid rebates
    
    
    8,781
    
    
    
    6,514Government chargebacks
    
    
    341
    
    
    
    222Other
    
    
    102
    
    
    
    102$
    10,007
    
    
    $
    8,176
 4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
   5. INVENTORIES
  March 31,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    2,072
    
    
    $
    1,987Finished goods
    
    
    288
    
    
    
    387Less allowance for excess and obsolete inventories
    
    
    (12
    )
    
    
    (9
    )$
    2,348
    
    
    $
    2,365
 6. PURCHASED TECHNOLOGY
  7. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
  9




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8. NET INCOME (LOSS) PER SHARE
  10




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Three Months EndedMarch 31,2008
    
    
    2007Net 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
    
    
    
    68,773Effect of dilutive potential common shares:Stock options
    
    
    3,773
    
    
    
    Warrants
    
    
    352
    
    
    
    Restricted stock
    
    
    32
    
    
    
    Diluted
    
    
    74,103
    
    
    
    68,773Basic and diluted net income (loss) per share
applicable to common shareholders
    
    $
    0.02
    
    
    $
    (0.05
    )
  9. INCOME TAXES
    10. COMPREHENSIVE INCOME (LOSS)
  Three Months EndedMarch 31,2008
    
    
    2007Net income (loss)
    
    $
    6,541
    
    
    $
    (3,759
    )Change in unrealized gains on available-for-sale securities
    
    
    25
    
    
    
    2Comprehensive income (loss)
    
    $
    6,566
    
    
    $
    (3,757
    )
 11




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11. EQUITY TRANSACTIONS
    12. RECENTLY ISSUED ACCOUNTING STANDARDS
 Disclosures about Derivative Instruments and Hedging Activities  an Amendment of FASB Statement
No. 133 Accounting for Derivative Instruments and
Hedging Activities
 Effective Date of FASB
Statement No. 157
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 12




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Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property .
 13. SUBSEQUENT EVENTS
    13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
      14




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Critical Accounting Policies
  Sales Reserves
      15




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March 31,
    
    
    December 31,2008
    
    
    2007Product returns  credit memoranda policy
    
    $
    750
    
    
    $
    1,307Product returns  product replacement policy
    
    
    33
    
    
    
    31Medicaid rebates
    
    
    8,781
    
    
    
    6,514Government chargebacks
    
    
    341
    
    
    
    222Other
    
    
    102
    
    
    
    102$
    10,007
    
    
    $
    8,176
 Inventories
  Intangible and Long-Lived Assets
  16




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Goodwill and Other Intangible
Assets Accounting for
the Impairment or Disposal of Long-Lived Assets
 Share-Based Compensation Expense
    Lease Termination Liability
  Accounting for a
Loss on a Sublease, an interpretation of FASB 13 and APB Opinion No. 30 Accounting
for the Loss on a Sublease Not Involving the Disposal of a Segment.
 17




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Income Taxes
     18




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Results of Operations
 Three months ended March 31, 2008 compared to the three months ended March 31, 2007:
 Total Net Sales
 Three Months EndedMarch 31,
    
    
    
    
    
    %2008
    
    2007
    
    Increase
    
    Change(in $000s)Net sales
    
    $
    19,132
    
    
    $
    3,701
    
    
    $
    15,431
    
    
    
    417
    %
      19




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Price increase to Acthar end users
    
    NoneEstimated increase in annualized net sales
    
    $2.9 million to $3.2 millionEstimated increase in annualized income before income taxes
    
    $2.8 million to $3.1 millionEstimated increase in annualized net income
    
    $1.7 million to $1.8 millionEstimated one-time decrease in accounts receivable
    
    $10 millionEstimated one-time increase in cash resulting from accounts receivable reduction
    
    $10 million
   Cost of Sales and Gross Profit
 Three Months EndedMarch 31,
    
    
    
    
    
    %2008
    
    2007
    
    Increase
    
    Change(in $000s)Cost of sales
    
    $
    1,319
    
    
    $
    850
    
    
    $
    469
    
    
    
    55
    %Gross profit
    
    
    17,813
    
    
    
    2,851
    
    
    
    14,962
    
    
    
    525
    %Gross margin
    
    
    93%
    
    
    
    77%
  Selling, General and Administrative
 Three Months EndedMarch 31,
    
    
    
    
    
    %2008
    
    2007
    
    (Decrease)
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    5,066
    
    
    $
    5,550
    
    
    $
    (484
    )
    
    
    (9
    )%
  20




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Research and Development
 Three Months EndedMarch 31,
    
    
    
    
    
    %2008
    
    2007
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    1,971
    
    
    $
    1,140
    
    
    $
    831
    
    
    
    73
    %
   Depreciation and Amortization
 Three Months EndedMarch 31,
    
    
    
    
    
    %2008
    
    2007
    
    (Decrease)
    
    Change(in $000s)Depreciation and amortization
    
    $
    122
    
    
    $
    123
    
    
    $
    (1
    )
    
    
    (1
    )%
  21




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Other Income, net
 Three Months EndedMarch 31,
    
    
    
    
    
    %2008
    
    2007
    
    Increase
    
    Change(in $000s)Other income, net
    
    $
    375
    
    
    $
    203
    
    
    $
    172
    
    
    
    85
    %
  Income Tax Expense
 Three Months EndedMarch 31,2008
    
    2007
    
    Increase(in $000s)Income tax expense
    
    $
    4,488
    
    
    $
    
    
    
    $
    4,488
  Net Income (Loss)
 Three Months EndedMarch 31,2008
    
    2007
    
    Increase(in $000s)Net income (loss)
    
    $
    6,541
    
    
    $
    (3,759
    )
    
    $
    10,300
  Deemed Dividend on Series A Preferred Stock
 Three Months EndedMarch 31,2008
    
    2007
    
    Increase(in $000s)Deemed dividend on Series A Preferred Stock
    
    $
    5,267
    
    
    $
    
    
    
    $
    5,267
  22




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Net Income (Loss) Applicable to Common Shareholders
 Three Months EndedMarch 31,2008
    
    2007
    
    Increase(In $000s)Net income (loss) applicable to common shareholders
    
    $
    1,274
    
    
    $
    (3,759
    )
    
    $
    5,033
  Liquidity and Capital Resources
       23




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Recently Issued Accounting Standards
 Disclosures about Derivative Instruments and
Hedging Activities  an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 Effective Date of FASB
Statement No. 157
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property .
 24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
  
  the Companys ability to continue to successfully implement
the new strategy and business model for Acthar,
  
  the introduction of competitive products,
  
  the Companys ability to accurately forecast the demand for its products,
  
  the gross margin achieved from the sale of its products,
  
  the Companys ability to enforce its product returns policy,
  
  the Companys 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 Companys estimates,
  
  the sell-through by the Companys distributors,
  
  the expenses and other cash needs for upcoming periods,
  
  the inventories carried by the Companys distributors, specialty pharmacies and hospitals,
  
  volatility in the Companys monthly and quarterly Acthar shipments and end-user demand,
  
  the Companys ability to obtain finished goods from its sole source contract manufacturers on a timely basis if at all,
  
  the Companys ability to retain key management personnel,
  
  the Companys ability to utilize its net operating loss carry forwards to reduce income taxes on taxable income,
  
  research and development risks,
  
  uncertainties regarding the Companys intellectual property and the uncertainty of receiving required regulatory approvals in a timely way, or at all,
  
  other research, development, and regulatory risks, and
  
  the ability of the Company to acquire products and, if acquired, to market them successfully and find marketing partners where appropriate.
  25




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ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number
    
    Maximum NumberAverage
    
    Of Shares Purchased
    
    Of Shares That MayTotal Number
    
    Price
    
    as Part of
    
    Yet be Purchasedof Shares
    
    Paid per
    
    Publicly Announced
    
    Under the Plans orPeriod
    
    Purchased
    
    Share
    
    Plans or Programs
    
    ProgramsJanuary 1  January 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1  February 29, 2008
    
    
    
    (a)
    
    
    
    
    
    
    
    
    
    
    7,000,000March 1  March 31, 2008
    
    
    1,527,700
    
    
    $
    4.06
    
    
    
    1,527,700
    
    
    
    5,472,300Total
    
    
    1,527,700
    
    
    
    
    
    
    
    1,527,700
 
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  26




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ITEM 6. EXHIBITS
 Exhibit No
    
    Description31
    
    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32*
    
    Certifications pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
 
 *
    
    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. 27




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SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date: May 14, 2008
    By:
    /s/ Don M. BaileyDon M. BaileyPresident and Chief Executive OfficerBy:
    /s/ George StuartGeorge StuartSenior Vice President, Finance and Chief Financial Officer 28




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Exhibit Index
 Exhibit No
    
    Description31
    
    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32 *
    
    Certifications pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
 
 *
    
    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. 29