This Annual Report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in other sections of this Annual Report on Form 10-K. Words such as "may," "will," "should," "could," expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this Annual Report on Form 10-K, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Annual Report on Form 10-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, set forth in detail in Item 1A of Part I, under the heading "Risk Factors."

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes to those statements contained elsewhere in this Annual Report on Form 10-K.

Overview

Questcor is a biopharmaceutical company whose primary product helps patients with serious, difficult-to-treat medical conditions. Our primary product is H.P. Acthar® Gel (repository corticotropin injection), or Acthar, an injectable drug that is approved by the U.S. Food and Drug Administration, or FDA, for the treatment of 19 indications. Of these 19 indications, we currently generate substantially all of our net sales from three indications:

• Multiple Sclerosis (MS): Acthar is indicated "for the treatment of acute exacerbations of multiple sclerosis in adults. Controlled clinical trials have shown H.P. Acthar Gel to be effective in speeding the resolution of acute exacerbations of multiple sclerosis. However, there is no evidence that it affects the ultimate outcome or natural history of the disease." We experienced significant growth in MS prescriptions in 2011 and currently intend to expand the size of our neurology sales force in 2012.

• Nephrotic Syndrome (NS): Acthar is indicated "to induce a diuresis or a remission of proteinuria in the nephrotic syndrome without uremia of the idiopathic type or that due to lupus erythematosus." According to the National Kidney Foundation, nephrotic syndrome can result from several idiopathic type kidney disorders, including idiopathic membranous nephropathy, focal segmental glomerulosclerosis, IgA nephropathy and minimal change disease. Nephrotic syndrome can also occur due to lupus erythematosus. In this Form 10-K, the terms "nephrotic syndrome" and "NS" refer only to the proteinuria in nephrotic syndrome conditions that are covered by the Acthar label of approved indications. We experienced significant growth in NS prescriptions in the fourth quarter of 2011 and currently intend to expand the size of our nephrology sales force in the first half of 2012.

• Infantile Spasms (IS): Acthar is indicated "as monotherapy for the treatment of infantile spasms in infants and children under 2 years of age." We continue to support this vulnerable patient population. We believe that a significant percentage of the $124 million in free drug we have provided through the National Organization of Rare Diseases, from September 2007 through December 31, 2011, has been used to treat IS. We support the IS community through other initiatives. In February 2012, we were awarded the first-ever Corporate Citizenship Award presented by the Child Neurology Foundation. This award honors our long-term commitment to support the child neurology community as well as our specific efforts to fund education and research related to IS.

We are exploring the potential initiation of a commercial effort in rheumatology, as Acthar is approved for the following rheumatology-related conditions:

• Collagen Diseases: Acthar is indicated "during an exacerbation or as maintenance therapy in selected cases of systemic lupus erythematosus, systemic dermatomyositis (polymyositis)."

• Rheumatic Disorders: Acthar is indicated as "adjunctive therapy for short-term administration (to tide the patient over an acute episode or exacerbation) in: Psoriatic arthritis, Rheumatoid arthritis, including juvenile rheumatoid arthritis (selected cases may require low-dose maintenance therapy), Ankylosing spondylitis."

We are committed to improving outcomes for patients with serious, difficult to treat diseases, and we continue to explore additional markets for other on-label indications. In addition, we are exploring the possibility of pursuing FDA approval for additional indications not currently on the Acthar label, where there is high unmet medical need.

Our other product is Doral® (quazepam), which is indicated for the treatment of insomnia characterized by difficulty in falling asleep, frequent nocturnal awakenings, and/or early morning awakenings. We own the U.S. rights to and have modest sales of Doral.

Results of Operations

Years Ended December 31, 2011, 2010 and 2009

Net Sales. Net sales, which we derive from our sales of Acthar and Doral, were
$218.2 million in 2011, compared to $115.1 million in 2010 and $88.3 million in
2009. The following table sets forth our net sales for the years ended
December 31, 2011, 2010 and 2009, respectively (in thousands):



                                                   Years Ended December 31,
                                               2011          2010          2009
       Revenue                               $ 268,827     $ 154,806     $ 138,220

       Less sales reserves:
       Provision for Medicaid rebates           46,481        37,159        40,814
       Provision for chargebacks                   142           106         5,029
       Provision for Coverage Gap Discount         348            -             -
       Provision for Tricare rebates             1,691         1,202         3,530
       Co-payment assistance and other           1,996         1,208           527

       Total sales reserves                     50,658        39,675        49,900

       Net sales                             $ 218,169     $ 115,131     $  88,320

2011 compared to 2010: Net sales of Acthar increased by approximately 89.7% to $217.7 million for the year ended December 31, 2011 from $114.7 million in 2010. The increase in net sales was attributable to increased vial demand from CuraScript SD, our distributor for Acthar. We shipped 10,710 vials for the year ended December 31, 2011 as compared to 6,696 vials shipped for the year ended December 31, 2010.

While we do not receive complete information from CuraScript SD regarding prescriptions by therapeutic area, we believe increased demand was driven by strong prescription growth in each of our primary therapeutic areas: MS, NS and IS. During the year ended December 31, 2011, we estimate that the number of paid prescriptions for Acthar to treat MS exacerbations increased to 3,090 from 1,212 in the twelve months ended December 31, 2010. We believe this growth was attributable to both (i) an increased number of physicians knowing about and prescribing Acthar through the efforts of our expanded sales force educating physicians who treat patients with MS regarding the efficacy of Acthar, and
(ii) physicians experiencing positive outcomes for their patients for whom they prescribed Acthar to treat MS exacerbations. In addition, during 2011, we commenced a pilot selling effort of five sales representatives in Nephrology and, in the third quarter, we expanded this effort to a total of 28 sales representatives. During the twelve months ended December 31, 2011, our nephrology selling effort resulted in approximately 269 paid NS prescriptions, a significant increase over the 30 paid NS prescriptions during the twelve months ended December 31, 2010. We also experienced a strong year with respect to IS prescriptions, with 427 paid IS prescriptions during the twelve months ended December 31, 2011, an increase over prior year of 367 paid IS prescriptions. These prescription figures are based on internal Company estimates and are subject to change as discussed in the "Important Notes Regarding Prescription Data" to the prescription table on page 6 of this report.

Net sales for the year ended December 31, 2011 were also positively affected by increases in the price we charge Curascript SD for Acthar. On January 3, 2011 and June 1, 2011, we increased the price of Acthar by 5%. We also increased the price of Acthar on December 27, 2011 and currently charge Curascript SD $27,064 per vial.

Net sales for the year ended December 31, 2011 were also positively impacted by a percentage decrease on our sales related reserve. We utilize a multi-step approach to determine our sales reserves each quarter, which includes an analysis using a predictive model, a review of Medicaid and other invoices received during the quarter and an estimate of in-channel inventory. In 2011, we reserved against 18.8% of our gross revenue for sales-related reserves, a decrease from the 25.6% in 2010. This decrease was primarily attributable to greater use of Acthar to treat adults suffering from MS and NS relative to the

number of Acthar vials used to treat infants suffering from IS and the fact that adults have a lower Medicaid incidence rate than infants. The decrease in total sales reserves as a percent of gross revenue was also due to an increased number of vials distributed through our patient assistance program, as such free vials do not affect gross revenue and are not considered in our sales reserve model.

We believe that approximately two-thirds of our growth in net sales from 2010 to 2011 was due to increased vial shipments, with the remainder of our net sales growth due to both pricing and the reduction in our sales-related reserve percentage. However, it is difficult to ascribe the sources of net sales growth to these individual factors as the factors might not be independent.

While we have announced our intention to expand our MS and NS sales forces in 2012. Our prescription growth trend may not continue and/or our sales force expansions intended for 2012 may not be successful. The process of significantly expanding a sales force in the biopharmaceutical industry is complex. We modify and re-allocate individual sales territories across our enlarged sales force, which can cause temporary disruptions in our selling efforts. Additionally, while the cost of our new sales representatives impacts our operating expenses immediately, there can be a delay in the expected ability of our new representatives to increase our net sales due to the time it takes for us to train the new representatives and for the new representatives to establish relationships with prescribing physicians within their territories.

Acthar orders may be affected by several factors, including inventory levels at specialty and hospital pharmacies, greater use of patient assistance programs, the overall pattern of usage by the health care community, including Medicaid and government-supported entities, the use of alternative therapies for the treatment of IS, and the reimbursement policies of insurance companies. Our specialty distributor ships Acthar to specialty pharmacies and hospitals to meet end user demand. We track our own Acthar shipments daily, but those shipments vary compared to end user demand and because of changes in inventory levels at specialty pharmacies and hospitals.

2010 compared to 2009: Net sales of Acthar increased by approximately 31% to $114.7 million for the year ended December 31, 2010 from $87.6 million in 2009. The increase in net sales for the year ended December 31, 2010 was due to an increase to 6,696 vials of Acthar shipped, up from 5,973 vials shipped in 2009, a reduction in the per vial rebate liability for both Medicaid and TRICARE, and a reduction in the number of Medicaid fee for service prescriptions. This increase was partially offset by an increase in our Medicaid Managed Care Organization rebate, which became effective on March 23, 2010.

During 2009, we expanded our MS sales force to support our increased sales efforts related to the use of Acthar for the treatment of exacerbations associated with MS. Our increased sales efforts and our initiatives to educate MS specialists about the treatment benefits of Acthar resulted in a significant increase in sales of Acthar to treat select MS exacerbation patients for the year ended December 31, 2010 as compared to the same period in 2009. During the year ended December 31, 2010, new paid Acthar prescriptions processed by our reimbursement support center for the treatment of MS exacerbations increased by approximately 118% as compared to 2009. In order to build upon these positive prescription trends, we further expanded our sales organization during the second half of 2010, resulting in a sales organization of 77 sales representatives as of the end of 2010.

Cost of Sales and Gross Profit



                                        Years Ended December 31,
                                   2011           2010           2009
                 Cost of sales   $  12,459      $   8,013      $  7,017
                 Gross profit      205,710        107,118        81,303
                 Gross margin           94 %           93 %          92 %

Cost of sales was $12.5 million for the year ended December 31, 2011, as compared to $8.0 million for 2010 and $7.0 million for 2009. We include in cost of sales material costs, packaging, warehousing and distribution, product liability insurance, royalties, quality control (which primarily includes product stability testing), quality assurance and reserves for excess or obsolete inventory. Our gross margin was 94% or $205.7 million in 2011, as compared to 93%, or $107.1 million in 2010 and 92%, or $81.3 million in 2009. The increase in gross profit in 2011 as compared to 2010 and 2009 is primarily the result of continued growth in paid prescriptions for all three primary therapeutic areas. The increase in cost of sales was primarily due to an increase in product stability testing and royalties on Acthar net sales, offset by a decrease in the proportionate amount of distribution costs relative to net sales. We expect our cost of sales, in absolute dollars, to increase in future periods due to increased costs associated with product stability testing and, in the event of increased net sales, higher royalty payments. The manufacturing process for Acthar is complex and problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters, and environmental factors.

Selling and Marketing. Selling and marketing expenses were $56.7 million for the year ended December 31, 2011, as compared to $31.5 million in 2010 and $19.3 million in 2009. The increase of $25.2 million in 2011 as compared to 2010 is due primarily to increases in headcount-related costs, including increased incentive payments to our commercial team and increased bonus compensation for other Company employees, and costs associated with our expanded sales and marketing effort. During the latter part of 2010, to further build on positive prescription trends, we increased the size of our Specialty Sales Force, which calls on neurologists, from 38 representatives to 77 representatives effective November 2010. Additionally, in March 2011, we assembled a Nephrology Sales Force that promotes Acthar exclusively to nephrologists for use in treating NS. Our initial Nephrology Sales Force was comprised of five representatives and, based on the results of their efforts, we significantly expanded our NS selling effort. Specifically, we hired approximately 23 additional representatives for our Nephrology Sales Force and have given a limited supportive selling role to the 77 representatives in our Specialty Sales Force. While we have announced our intention to expand our MS and NS sales forces in 2012, our prescription growth trend may not continue and/or our sales force expansions intended for 2012 may not be successful. The process of significantly expanding a sales force in the biopharmaceutical industry is complex. We modify and re-allocate individual sales territories across our enlarged sales force, which can cause temporary disruptions in our selling efforts. Additionally, while the cost of our new sales representatives impacts our operating expenses immediately, there can be a delay in the expected ability of our new representatives to increase our net sales due to the time it takes for us to train the new representatives and for the new representatives to establish professional relationships with prescribing physicians within their territories. We expect selling and marketing expenses to increase in future periods.

The increase in selling and marketing expenses of $12.2 million in 2010 as compared to 2009 was also due primarily to increases in headcount-related costs and costs associated with our expanded sales and marketing effort.

General and Administrative. General and administrative expenses were $17.7 million for the year ended December 31, 2011, as compared to $10.3 million in 2010 and $10.6 million in 2009. The increase of $7.4 million in 2011 as compared to 2010 is due primarily to increases in headcount and headcount-related costs, including increased bonus compensation for our bonus-eligible employees, to support our growth.

Research and Development. Research and development expenses were $16.8 million in 2011, as compared to $10.9 million in 2010 and $9.7 million in 2009. The increase in research and development expenses in 2011 as compared to 2010 was primarily due to increases in headcount related costs, including increased bonus compensation for our bonus-eligible employees, to support our efforts to explore the use of Acthar as a therapeutic alternative for the treatment of NS, costs incurred associated with the initiation of our Phase IV dose response clinical trial for idiopathic membranous nephropathy, offsetting a reduction in costs which occurred during 2010 associated with the IS sNDA. Costs included in research and development also include costs associated with the funding of medical research projects to expand our knowledge of the therapeutic benefit of Acthar in current and new therapeutic applications, product development efforts and regulatory compliance activities.

We manage and evaluate our research and development expenditures generally by the type of costs incurred. We generally classify and separate research and development expenditures into amounts related to medical affairs, regulatory, product development and manufacturing costs. Such categories include the following types of costs:

• Medical Affairs Costs - Medical affairs costs, which include activities related to medical information in support of Acthar and its related indications.

• Regulatory Costs - Regulatory costs, which include compliance and clinical related expenses.

• Product Development Costs - Product development costs, which include contract research organization costs and study monitoring costs.

• Manufacturing Costs - Manufacturing costs, which include costs related to production scale-up and validation, raw material qualification and stability studies.

For the year ended December 31, 2011, approximately 36% of our research and development expenditures were for medical affairs costs, 12% was spent on regulatory costs, 37% was spent on product development costs, and approximately 15% was spent on manufacturing costs.

For the year ended December 31, 2010, approximately 43% of our research and development expenditures were for medical affairs costs, 25% was spent on regulatory costs, 12% was spent on product development costs, and approximately 20% was spent on manufacturing costs.

For the year ended December 31, 2009, approximately 43% of our research and development expenditures were for medical affairs costs, 34% was spent on regulatory costs, none was spent on product development costs, and approximately 23% was spent on manufacturing costs.

We plan to continue our research and development efforts to support the use of Acthar as a therapeutic alternative for the treatment of proteinuria in NS. See "Business - Overview." We anticipate that these research and development efforts will result in a significant increase in research and development expenses through 2013. We may also pursue clinical trials to evaluate the use of Acthar to treat other therapeutic uses, including conditions that are not currently on the label of approved indications for Acthar.

The expenditures that will be necessary to execute our development plans are subject to numerous uncertainties, which may affect our research and development expenditures and capital resources. For instance, the duration and the cost of clinical trials may vary significantly depending on a variety of factors including a trial's protocol, the number of patients in the trial, the duration of patient follow-up, the number of clinical sites in the trial, and the length of time required to enroll suitable patient subjects. Even if earlier results are positive, we may obtain different results in later stages of development, including failure to show the desired safety or efficacy, which could impact our development expenditures for a particular indication. Although we spend a considerable amount of time planning our development activities, we may be required to deviate from our plan based on new circumstances or events or our assessment from time to time of a particular indication's market potential, other product opportunities and our corporate priorities. Any deviation from our plan may require us to incur additional expenditures or accelerate or delay the timing of our development spending. Furthermore, as we obtain results from trials and review the path toward regulatory approval, we may elect to discontinue development of certain indications or product candidates, in order to focus our resources on more promising indications or product candidates where we are most likely to demonstrate safety and efficacy. As a result, we are unable to reliably estimate the amount or range of the cost and timing required to complete our product development programs.

Share-based compensation costs. Total share-based compensation costs for the years ended December 31, 2011, 2010 and 2009 were $7.3 million, $3.7 million and $3.0 million, respectively. This increase was primarily due to a significant increase in the number of employees participating in our equity compensation programs. For the year ended December 31, 2011, we granted options to employees and non-employee directors to purchase approximately 1.5 million shares of our common stock at a weighted average exercise price of $16.89 per share, which was equal to the weighted average of the fair market value of our common stock on the date of each grant. In addition to stock options, we also granted restricted stock awards to certain employees. The total share-based compensation costs related to these restricted stock awards for the years ended December 31, 2011, 2010 and 2009 included $163,000, $50,000 and $11,000, respectively. The following table sets forth our share-based compensation costs for the years ended December 31, 2011, 2010 and 2009, respectively (in thousands):

                                                     Years Ended December 31,
                                                   2011         2010        2009
        Selling and marketing                    $   4,236     $   952     $   719
        General and administrative                   1,884       1,832       1,699
        Research and development                     1,206         955         623

        Total share-based compensation expense   $   7,326     $ 3,739     $ 3,041

Total Other Income. Total other income for the year ended December 31, 2011 was $0.6 million, as compared to $0.5 million for 2010 and $0.9 million for 2009. The increase in total other income of $0.1 million in 2011 as compared to 2010 was the result of an increase in miscellaneous income offset by a lower yield on our cash, cash equivalent and short-term investment balances year over year. The decrease in total other income of $0.4 million in 2010 as compared to 2009 was the result of a lower yield on our cash, cash equivalent and short-term investment balances year over year, offset by a reduction in costs which occurred during 2009 associated with a gain on sale of product rights.

Income tax expense. Income tax expense for the years ended December 31, 2011, 2010 and 2009 was $34.2 million, $19.3 million and $15.5 million, respectively, and our effective tax rate for financial reporting purposes was approximately 30.0%, 35.5% and 36.8%, respectively. The decrease in our effective income tax rate is due to the Internal Revenue Code, or IRC, Section 199 Income Attributable to Domestic Production Activities deduction credit which increased to 9% for 2011 and 2010 as compared to 6% in 2009, the reduction in our state income tax rate because beginning in 2011, California allows for a single apportionment factor and most of our sales are sourced outside of California, and finally, we recorded a one-time tax credit during 2011 for the costs incurred in obtaining the orphan drug designation.

Liquidity and Capital Resources

Cash and cash equivalents, short-term investments and working capital as of December 31, 2011 and 2010, respectively, were as follows (in thousands):

Financial Assets:



                                                        Years Ended December 31,
                                                          2011              2010
  Cash and cash equivalents                           $      88,469       $  41,508
  Short-term investments                                    121,680          73,324

  Cash, cash equivalents and short-term investments   $     210,149       $ 114,832

Select measures of liquidity and capital resources:

                                         Years Ended December 31,
                                           2011              2010
                 Current assets        $     265,600       $ 143,499
                 Current liabilities          55,721          31,511

                 Working Capital       $     209,879       $ 111,988

                 Current Ratio                  4.77            4.55
. . .