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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

For the transition period from ___________ to __________.

Commission file number: 0-20772

QUESTCOR PHARMACEUTICALS, INC.

3260 Whipple Road
Union City, CA 94587-1217
(Address of Principal Executive Offices)

REGISTRANT’S 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   x      No   o

         At November 7, 2002 there were 38,672,583 shares of the Registrant’s common stock, no par value per share, outstanding.

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QUESTCOR PHARMACEUTICALS, INC.
FORM 10-Q
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ITEM 1.   FINANCIAL STATEMENTS

See accompanying notes.

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See accompanying notes.

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QUESTCOR PHARMACEUTICALS, INC.

See accompanying notes.

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QUESTCOR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.

BASIS OF PRESENTATION

         Questcor Pharmaceuticals, Inc. (the “Company”) was incorporated in California in 1990. The Company is an integrated specialty pharmaceutical company focused on the acquisition and marketing of acute care and critical care hospital/specialty pharmaceutical and related healthcare products. The Company currently markets five products in the U.S.: HP Acthar® Gel (“Acthar”), an injectable drug that is commonly used in treating patients with infantile spasm, or West Syndrome; Ethamolin®, an injectable drug used to treat enlarged weakened blood vessels at the entrance to the stomach that have recently bled, known as esophageal varices; Glofil™-125 and Inulin in Sodium Chloride, which are both injectable agents that assess how well the kidney is working by measuring glomerular filtration rate, or kidney function; and VSL#3™, a patented probiotic marketed as a dietary supplement, to promote normal gastrointestinal (GI) function. Probiotics are living organisms in food and dietary supplements, which, upon ingestion in certain numbers, improve the health of the host beyond their inherent basic nutrition.

         The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States 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 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed on March 19, 2002 with the Securities and Exchange Commission. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of interim financial information have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Certain amounts in the prior quarter’s financial statements have been reclassified to conform to the current quarter’s presentation. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

2.

REVENUE RECOGNITION

         Revenues from product sales of Acthar®, Ethamolin®, Glofil™-125, Inulin and VSL#3™ are recognized based upon shipping terms, net of estimated reserves for sales returns and discounts. Revenue is recognized upon shipment of product, provided the title to the products has been transferred at the point of shipment. If title of product transfers at point of receipt by the customer, revenue is recognized upon customer receipt of the shipment. Revenues from Glofil™-125 unit dose sales are recognized when the product is sold to end-users in accordance with the distribution agreement with the third-party distributor. The Company records estimated sales allowances against product revenues for expected returns, chargebacks and discounts based on historical sales returns, analysis of return merchandise authorization and other known factors such as shelf life of products, as required. The Company continually assesses the historical returns experience and adjusts its allowances as appropriate. The Company’s return policy allows customers to return expired product within six months beyond the expiration date. Effective August 12, 2002 the Company changed its return goods policy such that it no longer issues credit memorandums for returns, rather all returns are exchanged for replacement product, and estimated costs for such exchanges, which include actual product material costs and related shipping charges, are included in Cost of Product Sales. All returns are subject to quality assurance reviews prior to acceptance. The Company sells product to wholesalers, who in turn sell its products to pharmacies and hospitals. In the case of VSL#3™ we sell direct to consumers. The Company does not require collateral from its customers.

         Revenue earned under collaborative research agreements is recognized as the research services are performed. Amounts received in advance of services to be performed are recorded as deferred revenue until the services are performed.

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         The Company has received government grants which support the Company’s research effort in specific research projects. These grants provide for reimbursement of approved costs incurred as defined in the various awards.

         The Company has received payments in exchange for proprietary licenses related to technology and patents. The Company classifies these payments as “Technology Revenue.” These payments are recognized as revenues upon receipt of cash and the transfer of intellectual property, data and other rights licensed, assuming no continuing obligations exist.

3.

CASH AND 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. At September 30, 2002, the Company had cash, cash equivalents and short-term investments of $9,336,000. Following is a summary of cash equivalents and short-term investments (in thousands) based on quoted market prices for these investments:

         In September 2000, the Company entered into an agreement with Rigel Pharmaceuticals, Inc. (“Rigel”), to sell exclusive rights to certain proprietary antiviral research technology in exchange for cash and 83,333 shares of Rigel stock. The Company has recorded an other-than-temporary loss of $186,000 on these shares for the quarter ended September 30, 2002. This write-down is included in Other Expense on the Statements of Operations. The write-down reduced the cost of the equity investment to $1.60 per share or $133,000 at September 30, 2002. At December 31, 2001, the equity investment had a cost of $500,000 and an unrealized loss of $112,000.

4.

INVENTORIES

         Inventories are stated at the lower of cost (first-in, first-out method) or market and are comprised of finished goods of $452,000 and $152,000 and raw materials of $56,000 and $0, at September 30, 2002 and December 31, 2001, respectively. These amounts are shown net of an allowance for obsolete/excess inventories of $72,000 and $56,000 at September 30, 2002 and December 31, 2001, respectively.

5.

PURCHASED TECHNOLOGY AND INTANGIBLE ASSETS

         In July 2001, the FASB issued Statement No. 141, “Business Combinations” (SFAS 141) and Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and also specifies the criteria for the recognition of intangible assets separately from goodwill. SFAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. The Company’s adoption of SFAS 142 as of January 1, 2002 did not have a material impact on its financial statements. Goodwill and other indefinite lived intangible assets no longer subject to amortization amounted to $479,000 at September 30, 2002. The remaining net balance of $518,000 relates to purchased technology and is being amortized over the estimated sales life of the associated product (seven years).

         In accordance with SFAS 141 and 142, the Company discontinued the amortization of goodwill on January 1, 2002, which would have resulted in an increase of reported net loss of approximately $409,000 for the nine months ended September 30, 2002, as compared with the accounting prior to the adoption of SFAS 141 and SFAS 142. The Company performed an impairment test of goodwill as of January 1, 2002, which did not result in an impairment charge at transition. The Company will continue to monitor the carrying value of goodwill through the annual impairment tests.

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         A reconciliation of previously reported net loss and net loss per share to the amounts adjusted for the exclusion of goodwill amortization, follows (in thousands, except per share amounts).

6.

NOTE PAYABLE

         In December 1998, RiboGene, Inc. (“RiboGene”), a company that Questcor merged with in 1999, borrowed $5.0 million pursuant to a long-term note payable to a bank. The note required monthly interest only payments at prime plus 1.0%. In November 2000, the $5.0 million long-term note payable was converted into a $5.0 million cash secured facility. The minimum $5.0 million compensatory balance, which was invested in certificates of deposit, is included in cash and cash equivalents at December 31, 2001. The note was paid in full on January 18, 2002.

7.

LINE OF CREDIT

         In January 2002, the Company entered into a revolving accounts receivable line of credit with an asset based lending division of a bank. Under this line of credit, the Company can borrow up to the lesser of 80% of the eligible accounts receivable balance or $3,000,000. Interest accrues on outstanding advances at an annual rate equal to prime rate plus four and one-half percent. The term of this line of credit is one year. As of September 30, 2002, there were no borrowings under this line of credit. The line of credit is secured by a blanket lien on all assets including intellectual property.

8.

CONVERTIBLE DEBENTURES

         In March 2002, the Company issued $4.0 million of 8% convertible debentures to an institutional investor, and Defiante Farmaceutica Unipessoal L.D.A. (“Defiante”), a wholly-owned subsidiary of Sigma-Tau Finanzaria S.p.A (“Sigma-Tau”). The Company will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. Included in Other Accrued Liabilities on the Balance Sheet is $80,000 of accrued interest payable on these debentures. The debentures are convertible into shares of the Company’s common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). The debentures mature on March 15, 2005.

         The Company may redeem the debentures for cash prior to maturity after March 15, 2003, provided the average of the closing sale price of the Company’s common stock for the twenty (20) consecutive trading days prior to the delivery of the optional prepayment notice to the holders of the debentures is equal to or greater than $3.16 per share, and the Company has satisfied certain equity conditions. At the end of the term of the debentures, under certain circumstances, the Company may redeem any outstanding debentures for stock. The Company may redeem the institutional investor’s debentures for stock at maturity, provided the total aggregate number of shares of the Company’s common stock issued to them (including shares issuable upon conversion of their debenture and shares issuable upon exercise of their warrant) does not exceed 7,645,219 shares (representing 19.999% of the total number of issued and outstanding shares of the Company’s common stock as of March 15, 2002). The Company may redeem Defiante’s debenture for stock at maturity, provided the market price of the Company’s common stock at the time of redemption is greater than $1.50 per share (representing the five day average closing sale price of the Company’s common stock immediately prior to March 15, 2002).

         The Company issued warrants to the institutional investor, Defiante and the placement agent to acquire an aggregate of 1,618,987 shares of common stock at an exercise price of $1.70 per share. The warrants expire on March 15, 2006. The warrants

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issued to the institutional investor and Defiante were assigned a value of $843,000. The warrants issued to the placement agent were assigned a value of $82,000. The warrants were valued using the Black-Scholes method with the following assumptions: a risk-free interest rate of 5%; an expiration date of March 15, 2006; volatility of 0.72; and a dividend yield of 0%. In connection with the issuance of the debentures and warrants, the Company recorded $641,000 related to the beneficial conversion feature on the convertible debentures. The total amount of the deemed discount on the convertible debentures as a result of the warrant issuance and the beneficial conversion feature amounts to $1,484,000. The beneficial conversion feature and warrant value will be amortized over the term of the debentures.

9.

NET LOSS PER SHARE

         Under SFAS No. 128, Earnings Per Share, basic and diluted loss per share is based on net loss for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all potential dilutive common shares outstanding during the period such as options, warrants, convertible preferred stock, and contingently issuable shares. Diluted net loss per share has not been presented separately as, due to the Company’s net loss position, it is anti-dilutive. Had the Company been in a net income position at September 30, 2002, shares used in calculating diluted earnings per share would have included the dilutive effect of an additional 7,975,308 stock options, 2,155,715 convertible preferred shares, 2,531,646 shares issuable upon conversion of debentures (if dilutive), placement unit options for 986,898 shares and 4,851,201 warrants.

10.

STOCK OPTIONS AND WARRANTS

         As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company has elected to account for stock options and purchase rights granted to employees using the intrinsic value method and, accordingly, does not recognize compensation expense for options and purchase rights granted to employees with exercise prices which are not less than the fair value of the underlying common stock.

         For equity awards to non-employees, including lenders and lessors, the Company applies the Black-Scholes method to determine the fair value of such instruments. The options and warrants granted to non-employees are re-measured as they vest and the resulting value is recognized as expense over the period of services received or the term of the related financing.

11.

RELATED PARTY TRANSACTIONS

         In December 2001, the Company entered into a promotion agreement with VSL Pharmaceuticals Inc. (“VSL”), a private company owned in part by the major shareholders of Sigma Tau. Sigma Tau beneficially owned approximately 39% of the Company’s outstanding stock as of September 30, 2002. On June 27, 2002, the Company signed an amendment to the promotion agreement. Under these agreements, the Company has agreed to purchase VSL#3™ from VSL at a stated price, and has also agreed to promote, sell, warehouse and distribute the VSL#3™ product direct to customers at its cost and expense. Revenues from sales of VSL#3™ are recognized when product is shipped to the customer. The Company does not accept returns of VSL#3™. VSL#3™ revenue for the quarter ending September 30, 2002 was $183,000 and is included in Net Product Sales. Included in Accounts Payable is $87,000 for amounts owed to VSL. An access fee to VSL is calculated quarterly, which varies based upon sales and costs incurred by the Company. The access fee for the quarter ended September 30, 2002 is estimated to be $27,000 and is included in Sales and Marketing expense. Additionally, under these agreements, VSL has paid the Company $200,000 in exchange for services provided by the Company to launch the VSL#3™ product. This $200,000 payment is being recognized over a one-year period (the deemed benefit period related to the launch of the product) and is included in “Services revenue from a related party” on the Statements of Operations. The term of the agreement is three years, however, VSL is entitled to unilaterally terminate the agreement by providing written notice to the Company after the one-year anniversary of the effective date. The VSL#3™ product was formally launched on May 23, 2002.

         In January 2002, the Company entered into a royalty agreement with Glenridge Pharmaceuticals LLC (“Glenridge”). Kenneth R. Greathouse, the Company’s Vice President of Commercial Operations, is a part owner of Glenridge. This agreement calls for the payment of royalties on a quarterly basis on the net sales of Acthar®. The Company has paid Glenridge $353,000 in 2002 related to royalties on Acthar® sales. The Company has accrued $90,000 for royalties earned in the quarter ended September 30, 2002, which is included in Other Accrued Liabilities on the Balance Sheet.

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12.

COMPREHENSIVE LOSS

                  Comprehensive loss is comprised of net loss and unrealized holding gains and losses on available-for-sale securities.

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Independent Accountants’ Review Report

The Board of Directors
Questcor Pharmaceuticals, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of Questcor Pharmaceuticals, Inc. as of September 30, 2002, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2002 and 2001, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Questcor Pharmaceuticals, Inc. as of December 31, 2001, and the related consolidated statements of operations, preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended and in our report dated February 12, 2002, (except for Note 1, paragraph 4, and Note 17, as to which the date is March 15, 2002), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

Palo Alto, California
October 25, 2002

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ITEM 2.   MANAGEMENT’S 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, including statements regarding the period of time during which our existing capital resources and income from various sources will be adequate to satisfy our capital requirements. 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 fiscal year ended December 31, 2001, including Item 1 “Business of Questcor,” and including without limitation “Risk Factors,” as well as factors discussed in any documents incorporated by reference herein or therein.

Overview

         We are an integrated specialty pharmaceutical company focused on the acquisition and marketing of acute care and critical care hospital/specialty pharmaceutical and related healthcare products. We currently market five products in the United States: HP Acthar® Gel (“Acthar”), an injectable drug that is commonly used in treating patients with infantile spasm, or West Syndrome; Ethamolin®, an injectable drug used to treat enlarged weakened blood vessels at the entrance to the stomach that have recently bled, known as esophageal varices; Glofil™-125 and Inulin in Sodium Chloride, which are both injectable agents that assess the kidney function by measuring glomerular filtration rate, or kidney function; and VSL#3™, a patented probiotic marketed as a dietary supplement, to promote normal gastrointestinal function. Probiotics are living organisms in food and dietary supplements, which, upon ingestion in certain numbers, improve the health of the host beyond their inherent basic nutrition.

         We have sustained an accumulated deficit of $76.6 million from inception through September 30, 2002. Based on our internal forecast and projections, we believe that our cash on hand and the cash to be generated through the expected sale of our products will be sufficient to fund operations for the next twelve months. Results of operations may vary significantly from quarter to quarter depending on, among other factors, the results of our sales efforts, the availability of raw materials and finished goods from our sole-source manufacturers, the timing of certain expenses, the establishment of strategic alliances and corporate partnering and the receipt of milestone payments (See “Liquidity and Capital Resources”).

Results of Operations

         Three months ended September 30, 2002 compared to the three months ended September 30, 2001:

         For the quarter ended September 30, 2002, we incurred a net loss of $995,000 or $0.03 per share, as compared to a net loss of $2,261,000, or $0.07 per share for the quarter ended September 30, 2001, an improvement of $1,266,000 or 56%.

         For the quarter ended September 30, 2002, net product sales increased $2,514,000 or 200% to $3,772,000 from $1,258,000 for the quarter ended September 30, 2001. The increase in product revenues was due primarily to sales of Acthar®, which we introduced in the third quarter of 2001, and to increased unit sales of Ethamolin®. Effective June 24, 2002, we increased our list price for Ethamolin and Acthar. From the date of the notification of the price increase through June 30, 2002, we received $3,231,000 of Acthar and Ethamolin orders of which $777,000 had shipped prior to June 30, 2002. The remaining $2,454,000 of Acthar and Ethamolin orders were fulfilled in July 2002. We believe that a portion of the increase in net product sales for the quarter ended September 30, 2002, as compared to the same quarter last year, is attributable to purchases made as a result of the notification of the price increase.

         We review external data sources to estimate customer demand for our products. In the event that demand for our products is less than our sales to wholesalers, excess inventory may result at the wholesaler level, which may impact future product sales. The historical usage data for Acthar is unavailable at this time, and therefore its difficult to estimate the amount of inventory at the wholesaler level. If the supply of Acthar currently available exceeds the future demand, our future revenues from the sales of Acthar may be affected adversely. Based upon a review of the historical usage data for Ethamolin and the higher than anticipated purchases of Ethamolin that occurred as a result of the price increase, we believe the current supply of Ethamolin in the wholesale channel exceeds normal inventory levels. It is difficult to accurately measure the amount of inventory that exists at any point in time at the wholesaler level. It is also difficult to accurately forecast our customers’ future demand. We believe, however, as a result of Ethamolin supply in the wholesale channel, our revenues from sales of Ethamolin may be adversely impacted in the near term. Beginning in March of 2002, the remaining on hand inventory of Inulin failed to meet certain specifications under Food and Drug Administration (“FDA”) regulations and as such we were unable to ship Inulin to our customers. Included in Inventories at September 30, 2002, is Inulin active pharmaceutical ingredient (“API”), which we are waiting for FDA approval to use in the production of the final product. Unless we are able to obtain approval on this API of Inulin in a timely fashion, it will be unlikely that we will be able to sell Inulin in the future.

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         Contract research and grant revenue decreased to $17,000 for the quarter ended September 30, 2002 from $59,000 for the quarter ended September 30, 2001. This decrease was partly a result of us receiving less reimbursement from the Small Business Innovation Research (“SBIR”) grant due to a decrease in activity with our GERI compound research projects in the quarter ended September 30, 2002. Additionally, for the quarter ended September 30, 2001, we recognized contract research revenue under our June 2001 Letter of Understanding with Fabre Kramer to jointly pursue the development and commercialization of Hypnostat™ and Panistat™. In June 2002, we signed a License Agreement with Fabre-Kramer Pharmaceuticals under which Fabre-Kramer controls the development of Hypnostat and Panistat.

         Royalty revenue for the quarter ended September 30, 2002 was $9,000, as compared to $4,000 for the quarter ended September 30, 2001. Royalty revenue represents sales of Pramidin® in Italy, under our license agreement with Sirton. This license agreement expired in accordance with its terms in June of 2002, and we are currently in discussions with other potential partners for Pramidin. Royalty revenues for the quarter ended September 30, 2002 also reflect royalties earned in connection with our license agreement with Ahn-Gook Pharmaceutical Co., LTD, our Korean licensee for Pramidin, which is marketed as Emitasol™ in Korea. Services revenue from a related party was $50,000 for the quarter ended September 30, 2002, representing this quarter’s revenue resulting from the $200,000 payment made by VSL Pharmaceuticals, Inc. (“VSL”) for certain promotional activities we undertook to support the launch of VSL#3™. We have a remaining balance of $50,000 from such payment, which will be recognized as revenue ratably through December 2002.

         Total revenues for the quarter ended September 30, 2002 increased $2,527,000 or 191% to $3,848,000 from total revenues of $1,321,000 for the quarter ended September 30, 2001.

         Cost of product sales increased to $645,000 or 75% for the quarter ended September 30, 2002 from $369,000 for the quarter ended September 30, 2001. This increase was a result of greater overall material costs due to the higher product sales for the quarter. However, cost of product sales as a percentage of net product sales decreased to 17% for the quarter ended September 30, 2002 from 29% for the quarter ended September 30, 2001, primarily due to a change in product mix for the quarter ended September 30, 2002 as compared to the quarter ended September 30, 2001.

         Sales and marketing expenses for the quarter ended September 30, 2002 were $1,713,000, which represents an increase of $975,000 or 132% as compared to $738,000 for the quarter ended September 30, 2001. This increase is primarily due to salary and other costs associated with the expansion of our sales and marketing departments and increased marketing costs to support our newer products, Acthar and VSL#3.

         General and administrative expenses for the quarter ended September 30, 2002 were $1,206,000, which represents a decrease of $87,000 or 7%, compared to $1,293,000 for the quarter ended September 30, 2001. The decrease is primarily due to the legal fees incurred in the quarter ended September 20, 2001 related to the Acthar product acquisition, which were not incurred in the current quarter.

         Research and development expenses for the quarter ended September 30, 2002 were $791,000, which represents an increase of $152,000 or 24%, as compared to $639,000 for the quarter ended September 30, 2001. This increase is due to costs and expenses related to the manufacturing site transfer of Acthar, offset by decreased internal research and development activities. Under our agreement with Aventis Pharmaceuticals, Inc. (“Aventis”), Aventis manufactured and supplied Acthar through July 2002. Aventis filled one final lot of Acthar that is included in Inventories at September 30, 2002. It is anticipated that this final lot, along with the inventory of Acthar on hand as of September 30, 2002, will be sufficient to meet expected demand through early 2004. We have identified a new contract manufacturer of Acthar finished product and have begun to transfer the final fill and labeling process from Aventis to this new manufacturer. As part of the original Asset Purchase Agreement with Aventis, we will acquire a certain amount of the API for Acthar. This bulk product originally manufactured by Aventis will be transferred to the new final fill manufacturer. It is anticipated that this new contract manufacturer will complete the transfer and begin supplying finished product using the API manufactured by Aventis to us no later than mid-2003. We are also in the process of identifying potential new manufacturers for the API. The manufacturing development costs incurred in the quarter ended September 30, 2002 relate primarily to these site transfer and validation costs. Once the site transfer to the new final fill manufacturer and the new API manufacturer are complete and they begin to supply Acthar to us, the cost of the product is expected to increase. On November 4, 2002, we met with the FDA to discuss our manufacturing transfer plan for Acthar. In connection with that meeting, the FDA approved our Supplemental New Drug Application filed on September 27, 2002, to extend the labeled shelf life of Acthar from twelve months to eighteen months from the date of manufacture.

         Non-cash amortization of deemed discount on convertible debentures issued March 15, 2002 for the quarter ended September 30, 2002 was $130,000, there was no such expense in the prior year period.

         Interest expense, net, decreased by $34,000 to $11,000 for the quarter ended September 30, 2002 as compared to $45,000 for the quarter ended September 30, 2001.

         Other expense, net, increased by $162,000 to $151,000 for the quarter ended September 30, 2002 as compared to net other income of $11,000 for the quarter ended September 30, 2001, primarily due to the other-than-temporary loss taken on our

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investment in Rigel Pharmaceuticals, Inc. (“Rigel”), in the current quarter. We recorded an other-than-temporary loss of $186,000 on our Rigel equity securities investment for the quarter ended September 30, 2002.

         Rental income, net, increased to $66,000 for the quarter ended September 30, 2002, from $38,000 for the quarter ended September 30, 2001, primarily due to greater rental income in the current quarter.

         Nine months ended September 30, 2002 compared to the nine months ended September 30, 2001:

         During the nine months ended September 30, 2002, we incurred a net loss of $2,430,000 or $0.06 per share, as compared to a net loss of $6,131,000 or $0.21 per share for the nine months ended September 30, 2001, an improvement of $3,701,000 or 60%.

         For the nine months ended September 30, 2002, net product sales increased $7,955,000 or 272% to $10,885,000 from $2,930,000 for the nine months ended September 30, 2001. The increase in product revenues was due primarily to increased units sales of Ethamolin and Acthar, which was introduced in the third quarter of 2001. The increase of unit sales over the prior period was partially due to a shipment of a backorder in early 2002 and a price increase in June 2002. During the nine months ended September 30, 2002 we shipped backorders outstanding at December 31, 2001 amounting to $334,000 for Acthar and $408,000 for Ethamolin. Without these backorders, product revenues would have been $10,143,000, an increase of $7,213,000 or 246% over the nine months ended September 30, 2001. Effective June 24, 2002, we increased our list price for Ethamolin and Acthar. From the date of the notification of the price increase through June 30, 2002, we received $3,231,000 of Acthar and Ethamolin orders of which $777,000 had shipped prior to June 30, 2002. The remaining orders of $2,454,000 were fulfilled in July 2002.

         Contract research and grant revenue decreased $198,000 or 58% to $143,000 for the nine months ended September 30, 2002 from $341,000 for the nine months ended September 30, 2001. This decrease was primarily the result of us receiving less reimbursement under the SBIR grant due to a decrease in activity with our GERI compound research project in the nine months ended September 30, 2002.

         For the nine months ended September 30, 2002, we recognized $250,000 in technology revenue related to the License Agreement with Fabre-Kramer. During the nine months ended September 30, 2001, we recognized $90,000 in technology revenue related to a payment under our license agreement with Tularik, Inc. for the sale of our antifungal drug discovery program. Royalty revenue for the nine months ended September 30, 2002 was $15,000, a slight increase as compared to $9,000 for the nine months ended September 30, 2001. Royalty revenue represents sales of Pramidin® in Italy, under our license agreement with Sirton. This license agreement expired in accordance with its terms in June of 2002. Royalty revenues for the nine months ended September 30, 2002 also reflect royalties earned in connection with our license agreement with Ahn-Gook. Services revenue from a related party was $150,000 for the nine months ended September 30, 2002. This amount represents the recognition of year to date revenue resulting from the $200,000 payment made by VSL for certain promotional activities we undertook to support the launch of VSL#3. We have a remaining balance of $50,000 from such payment, which will be recognized as revenue ratably through December 2002.

         Total revenues for the nine months ended September 30, 2002 increased $8,073,000 or 240% to $11,443,000 from total revenues of $3,370,000 for the comparable period ended September 30, 2001.

         Cost of product sales increased to $1,800,000 or 79% for the nine months ended September 30, 2002 from $1,008,000 in the nine months ended September 30, 2001. This increase was a result of greater material costs due to higher product sales for the current period. However, cost of product sales as a percentage of net product sales decreased to 17% for the nine months ended September 30, 2002 from 34% for the nine months ended September 30, 2001, primarily due to a change in product mix.

         Sales and marketing expenses for the nine months ended September 30, 2002 were $4,741,000, which represents an increase of $2,525,000 or 114% as compared to $2,216,000 for the nine months ended September 30, 2001. However, as a percentage of revenue, sales and marketing expenses decreased to 41% for the nine months ended September 30, 2002 from 66% for the nine months ended September 30, 2001. The increase in dollars is primarily due to salary and other costs associated with the expansion of our sales and marketing departments, and increased marketing costs to support our newer products, Acthar and VSL#3. We had a headcount of 30 individuals to support the commercial sales of our five products as of September 30, 2002, compared to a headcount of 18 individuals to support three products as of September 30, 2001.

         General and administrative expenses for the nine months ended September 30, 2002 were $3,953,000, which represents an increase of $893,000 or 29%, compared to $3,060,000 in the nine months ended September 30, 2001. The increase was primarily related to non-cash charges for stock-based compensation of $243,000 for the nine months ended September 30, 2002 and increased investment banking costs associated with potential product acquisitions, financing opportunities and other general and administrative expenses.

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         Research and development expenses for the nine months ended September 30, 2002 were $2,107, 000, which represents a decrease of $69,000 or 3%, as compared to $2,176,000 for the nine months ended September 30, 2001. Since the completion of our merger with RiboGene in 1999, we have reduced our focus on research and development of non-marketed products and reduced our headcount accordingly. The decrease was due to lower salary and related expenses related to our research and development activities, offset by increased manufacturing costs related to the Acthar site transfer. The manufacturing development costs incurred for the nine months ended September 30, 2002, relate primarily to site transfer and validation costs.

         Non-cash amortization of deemed discount on convertible debentures for the nine months ended September 30, 2002 was $305,000 pertaining to amortization of the deemed discount related to the convertible debentures. There was no similar expense in the nine months ended September 30, 2001.

         Interest income (expense), net, decreased by $11,000 to $3,000 for the nine months ended September 30, 2002 from $14,000 for the nine months ended September 30, 2001, primarily due to a lower return on invested cash.

         Other expense, net, increased by $265,000 to $261,000 for the nine months ended September 30, 2002 from net other income of $4,000 for the nine months ended September 30, 2001, due to the receipt of profits arising from short swing stock trades executed by one of our 10% shareholders, offset by the $367,000 other-than-temporary loss taken on our Rigel equity securities investment.

         Rental income, net, decreased to $212,000 for the nine months ended September 30, 2002, from $600,000 in the comparable nine months ended September 30, 2001, due to the receipt of a sublease termination fee of $130,000 by the former sublessor of our Carlsbad facility and a $250,000 payment receipt for vacating our Hayward facility in May 2001.

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Liquidity and Capital Resources

         We have principally funded our activities to date through various issuances of equity securities, which, through September 30, 2002, have raised total net proceeds of $46.2 million, and to a lesser extent through product sales.

         At September 30, 2002, we had cash, cash equivalents and short-term investments of $9,336,000 compared to $10,571,000 at December 31, 2001 (including a compensating balance of $5,000,000). At September 30, 2002, our working capital was $7,062,000 compared to $2,479,000 at December 31, 2001. The increase in working capital was principally due to the issuance of $4,000,000 convertible debentures coupled with increased product sales for the period, and the repayment of our note payable. Currently we use cash earnings/(burn) as a measure of our performance. Cash earnings/(burn) is defined as net loss excluding certain non-cash charges (depreciation and amortization, non-cash amortization of deemed discount on convertible debentures, and non-cash stock based compensation.). Our cash burn for the quarter ended September 30, 2002 was $603,000, an improvement of $1,102,000 as compared to our cash burn of $1,705,000 for the quarter ended September 30, 2001. Our cash burn for the nine months ended September 30, 2002 was $893,000, an improvement of $3,543,000, as compared to our cash burn of $4,436,000 for the comparable period in 2001.

         As a result of the merger with RiboGene, we assumed $5 million of long-term debt financing with a bank. The note required us to make monthly interest payments, at prime plus 1% (5.75% at December 31, 2001), with the principal payment due at the end of the three-year term (December 2001). The note had a 90-day extension period, and the note’s term was extended to March 2002. We paid the note in full on January 18, 2002.

         In January 2002, we entered into a revolving accounts receivable line of credit. Under the agreement, we can borrow up to the lesser of 80% of our eligible accounts receivable balance or $3,000,000. Interest accrues on outstanding advances at an annual rate equal to prime rate plus four and one-half percent. The term of the agreement is one year. As of September 30, 2002, we had no borrowings under this line of credit.

         We lease four buildings with lease terms expiring between 2004 and 2012. Annual rent payments for all of our facilities in 2002 are estimated to be $1,449,000. We utilize the Union City facility as our headquarters and the Carlsbad facility as our warehousing and distribution center. Annual rent payments for 2002 for these facilities total $660,000. We have subleased laboratory space and laboratory equipment in Hayward, California for a term of six years and anticipate that we will receive $949,000 in 2002 as sublease income to be used to pay the annual rental expense of $651,000 in 2002. The Lee’s Summit facility was closed in May 2001 and this facility is currently available for sublease. Lease payments under the facility in Lee’s Summit, Missouri will total $138,000 for 2002.

         We also hold 83,333 shares of Rigel Pharmaceuticals, Inc. (NASD: RIGL) common stock that we received in conjunction with the agreement to sell Rigel exclusive rights to certain of our proprietary antiviral drug research technology. As of September 30, 2002, the shares had a market value of $1.60 per share, and are classified as a security available-for-sale.

         On March 15, 2002, we issued $4.0 million of 8% convertible debentures to an institutional investor and Defiante Farmaceutica Unipessoal L.D.A. (“Defiante”), a wholly-owned subsidiary of Sigma-Tau Finanzaria S.p.A (“Sigma-Tau”). We will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. The debentures are convertible into shares of our common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). The debentures mature on March 15, 2005.

         We may redeem the debentures for cash prior to maturity after March 15, 2003, provided the average of the closing sale price of our common stock for the twenty (20) consecutive trading days prior to the delivery of the optional prepayment notice to the holders of the debentures is equal to or greater than $3.16 per share, and we have satisfied certain equity conditions. At the end of the term of the debentures, under certain circumstances we may redeem any outstanding debentures for stock. We may redeem the institutional investor’s debenture for stock at maturity, provided the total aggregate number of shares of our common stock issued to them (including shares issuable upon conversion of their debenture and shares issuable upon exercise of their warrant) does not exceed 7,645,219 shares (representing 19.999% of the total number of issued and outstanding shares of our common stock as of March 15, 2002). We may redeem Defiante’s debenture for stock at maturity, provided the market price of our common stock at the time of redemption is greater than $1.50 per share (representing the five day average closing sale price of our common stock immediately prior to March 15, 2002).

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         We issued warrants to the institutional investor, Defiante and the placement agent to acquire an aggregate of 1,618,987 shares of common stock at an exercise price of $1.70 per share. The warrants expire on March 15, 2006. The warrants issued to the institutional investor and Defiante were assigned a value of $843,000. The warrants issued to the placement agent were assigned a value of $82,000. The warrants were valued using the Black-Scholes method with the following assumptions: a risk-free interest rate of 5%; an expiration date of March 15, 2006; volatility of 0.72; and a dividend yield of 0%. In connection with the issuance of the debentures and warrants, we recorded $641,000 related to the beneficial conversion feature on the convertible debentures. The total amount of the deemed discount on the convertible debentures as a result of the warrant issuance and the beneficial conversion feature amounts to $1,484,000. The beneficial conversion feature and warrant value will be amortized over the term of the debentures.

         Based on our internal forecast and projections, we believe that our cash on hand and the cash to be generated through the expected sale of our products will be sufficient to fund operations for at least the next twelve months. Our future funding requirements will depend on many factors, including: the timing and extent of product sales, our ability to receive product timely from our contract manufacturers, any expansion or acceleration of our development programs; the acquisition and licensing of products, technologies or compounds, if any; the results of preclinical studies and clinical trials conducted by our collaborative partners or licensees, if any; our ability to manage growth; competing technological and market developments; costs involved in filing, prosecuting, defending and enforcing patent and intellectual property claims; the receipt of licensing or milestone fees from current or future collaborative and license agreements, if established; the timing of regulatory approvals; and other factors.

         We may seek additional funds through public or private equity financings or from other sources. Should this occur, there can be no assurance that additional funds can be obtained on desirable terms or at all. We may seek to raise additional capital at any time, even if we do not have an immediate need for additional cash at that time.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Our exposure to market risk at September 30, 2002 has not changed materially from December 31, 2001, and reference is made to the more detailed disclosures of market risk included in our Annual Report on Form 10-K for the year ending December 31, 2001, as filed with the Securities and Exchange Commission on March 19, 2002.

ITEM 4.   DISCLOSURE CONTROLS AND PROCEDURES

         Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision 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 pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date we carried out our evaluation.

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PART II.   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

         Not applicable

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

         Not applicable

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

     In October 2002, we amended and restated our bylaws, adding what are commonly referred to as “advance notice” provisions. These advance notice provisions require that in order for a shareholder properly to present at an annual meeting of shareholders (a) prospective nominees for election to our Board of Directors or b) other proposals or resolutions to us, the shareholder must submit a notice to our Secretary concerning the proposed nomination or proposal at least sixty (60) days and no more than ninety (90) days prior to the anniversary date of the date on which we first mailed our proxy materials for our immediately preceding annual meeting of shareholders. The notices for annual meetings and special meetings must set forth certain specified information as to each person the shareholder proposes to nominate for election or re-election as a director and each other proposal to be submitted to a vote of the shareholders.

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ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

(b)

Reports on Form 8-K

                           None

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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.

CERTIFICATIONS

Certification requirements set forth in Section 302 (a) of the Sarbanes-Oxley Act.

I, Charles J. Casamento, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Questcor Pharmaceuticals, Inc.;
	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and

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b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Timothy E. Morris, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Questcor Pharmaceuticals, Inc.;
	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”);and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Exhibit Index

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