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 focused on the treatment of patients with serious, difficult-to-treat autoimmune and inflammatory disorders. 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 FDA approved indications, we currently generate substantially all of our net sales from the following indications:

• 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.

• Multiple Sclerosis (MS): Acthar is indicated "for the treatment of acute exacerbations of multiple sclerosis in adults. Controlled clinical trials have shown Acthar 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."

• 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 $262 million in free drug we have provided through the National Organization of Rare Disorders, from September 2007 through December 31, 2012, 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.

• Rheumatology Related Conditions: Acthar is approved for the following rheumatology related conditions: (i) Collagen Diseases: Acthar is indicated "during an exacerbation or as maintenance therapy in selected cases of systemic lupus erythematosus, systemic dermatomyositis (polymyositis)" and (ii) 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), and Ankylosing spondylitis."

We continue to explore additional markets for other on-label indications. In addition, we are exploring the possibility of pursuing FDA approval for indications not currently on the Acthar label that are related to the treatment of other serious, difficult-to-treat autoimmune and inflammatory disorders having 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, 2012, 2011 and 2010 Net Sales. Net sales, which we derive from our sales of Acthar and Doral, were $509.3 million in 2012, compared to $218.2 million in 2011 and $115.1 million in 2010. The following table sets forth our net sales for the years ended December 31, 2012, 2011 and 2010, respectively (in thousands):

                                             Years Ended December 31,
                                          2012         2011         2010
Revenue                                $ 582,097    $ 268,827    $ 154,806
Less sales reserves:
 Provision for Medicaid rebates           58,205       46,481       37,159
 Provision for chargebacks                   467          142          106
 Provision for Coverage Gap Discount         943          348            -
 Provision for Tricare rebates             5,090        1,691        1,202
 Co-payment assistance and other           8,100        1,996        1,208
Total sales reserves                      72,805       50,658       39,675
Net sales                              $ 509,292    $ 218,169    $ 115,131

2012 compared to 2011: Net sales of Acthar increased by approximately 133.8% to $508.9 million for the year ended December 31, 2012 from $217.7 million in 2011. The increase in net sales was attributable to increased vial demand from CuraScript SD, our distributor for Acthar. We shipped 20,741 vials for the year ended December 31, 2012 as compared to 10,710 vials shipped for the year ended December 31, 2011. While we do not receive complete information regarding prescriptions by therapeutic area, we believe increased demand from CuraScript SD was driven by strong prescription growth in each of our NS and MS therapeutic areas.
Net sales for the year ended December 31, 2012 were also positively affected by increases in the price we charge CuraScript SD for Acthar. We increased the price of Acthar on December 27, 2011 by 6.5% and on May 15, 2012 by 5%, and currently charge CuraScript SD $28,430 per vial.
Our net sales are also impacted by the amount of our sales reserves, which are deducted from revenue in the calculation of net sales. During the years ended December 31, 2010, 2011 and 2012, the largest component of our sales reserves related to our provision for Medicaid rebates. This provision is impacted by two factors. First, our business mix across therapeutic areas affects our provision for Medicaid rebates since the percentage of patients that are enrolled in Medicaid varies by therapeutic area. Specifically, a lower percentage of adults are enrolled in Medicaid than are infants. As such, the growth in our NS and MS sales relative to IS sales has resulted in an overall lower percentage of sales being attributable to patients enrolled in Medicaid. Second, the rebate amount for Acthar affects our provision for Medicaid rebates. For the year ended December 31, 2012, we recorded a provision of 12.5% of our gross revenue for sales-related reserves, a decrease from the 18.8% in the year ended December 31, 2011. During the years ended December 31, 2010, 2011 and 2012, the Medicaid rebate amount equaled 100% of the Average Manufacturer Price, or AMP, of Acthar which approximates the amount we charge to CuraScript SD. As such, we did not generate any net sales in connection with Medicaid business. During the first quarter of 2013, the Medicaid rebate amount for Acthar was reset from 100% of the AMP of Acthar to the basic rebate amount of 23.1% of AMP.
We believe that approximately three-quarters of our growth in net sales from 2011 to 2012 was due to increased vial shipments, with the remainder of our net sales growth being due to the increase in the percentage of our product sales that are not subject to Medicaid rebates as described above, as well as increased product pricing. However, it is difficult to ascribe the sources of net sales growth to these individual factors as the factors might not be independent.
We believe that Acthar represents a promising potential therapy for patients suffering from the difficult-to-treat, on-label medical conditions for which we currently promote Acthar. Acthar, however, remains relatively unknown to physicians who practice in the relevant medical specialties. As a result, we have expanded our sales force in order to increase our ability to educate such physicians about Acthar's potential benefit to their patients. It is unclear whether this will continue to result in increased net sales. 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.
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, 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. As a result of the variation in order patterns, in channel inventory levels may be positively or

negatively affected. For example, in late December 2012, we received and shipped two orders of Acthar for a total of 360 vials. We believe that distribution channel inventory was at the high end of the normal historic range as of December 31, 2012.
2011 compared to 2010: Net sales of Acthar increased by approximately 90% to $217.7 million for the year ended December 31, 2011 from $114.7 million for the year ended December 31, 2010. The increase in net sales was due to an increase in the number of Acthar vials shipped from 6,696 vials shipped in 2010, up to 10,710 vials shipped in 2011, 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.
Our increased detailing 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, 2011 as compared to the same period in 2010. During the year ended December 31, 2011, new paid Acthar prescriptions processed by our reimbursement support center for the treatment of MS exacerbations increased by approximately 155% as compared to 2010.
Cost of Sales and Gross Profit

Years Ended December 31,

                   2012         2011         2010
Cost of sales   $ 28,555     $ 12,459     $  8,013
Gross profit     480,737      205,710      107,118
Gross margin          94 %         94 %         93 %

Cost of sales was $28.6 million for the year ended December 31, 2012, as compared to $12.5 million for 2011 and $8.0 million for 2010. 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 and gross profit was 94% and $480.7 million, respectively, in 2012, as compared to 94% and $205.7 million, respectively, in 2011 and 93% and $107.1 million, respectively, in 2010. The increase in gross profit dollars is due to continued growth in paid prescriptions for all of our indications. The increase in cost of sales was primarily due to an increase in net sales coupled with an increase in the cost for outside product potency testing and an increase in royalties on Acthar net sales, offset by a decrease in the proportionate amount of distribution costs relative to net sales. We continue to expect our cost of sales, in absolute dollars, to increase in future periods due to increased costs associated with outside product potency testing, 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 $114.1 million for the year ended December 31, 2012, as compared to $56.7 million in 2011 and $31.5 million in 2010. The increase of $57.4 million in 2012 as compared to 2011 is due primarily to increases in headcount-related costs and costs associated with our expanded sales and marketing effort. We primarily include in sales and marketing expenses headcount-related costs, promotional costs and physician program costs. We have expanded our sales force and expect selling and marketing expenses to increase in future periods.
The increase in selling and marketing expenses of $25.2 million in 2011 as compared to 2010 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 $33.6 million for the year ended December 31, 2012, as compared to $17.7 million in 2011 and $10.3 million in 2010. The increase of $15.9 million in 2012 as compared to 2011, as well as the increase of $7.4 million in 2011 as compared to 2010, is due primarily to increases in headcount and headcount-related costs to support our growth, including increased bonus compensation for our bonus-eligible employees, and increased legal costs.
Research and Development. Research and development expenses were $34.3 million in 2012, as compared to $16.8 million in 2011 and $10.9 million in 2010. The increase of $17.5 million in research and development expenses in 2012 as compared to 2011 was primarily due to increases in headcount and headcount-related costs to support our efforts to explore the use of Acthar as a therapeutic alternative for the treatment of NS and costs incurred associated with the following clinical studies: (1) the initiation of our Phase 4 dose response clinical trial for idiopathic membranous nephropathy, (2) the initiation of our pilot safety and efficacy study of Acthar in patients with diabetic nephropathy, and (3) the initiation of our study exploring

the efficacy, safety and pharmacodynamics of Acthar in system lupus erythematosus. Costs included in research and development also include costs associated with the funding of medical research projects to better understand 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 all FDA interactions.

• 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, 2012, approximately 42% of our research and development expenditures were for medical affairs costs, 8% was spent on regulatory costs, 39% was spent on product development costs, and approximately 11% was spent on manufacturing costs.
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.
We plan to continue to expand our research and development efforts to support the use of Acthar as a therapeutic alternative for the treatment of NS. In 2011, we started a Phase 4 dose response clinical trial for idiopathic membranous nephropathy and in 2012, we started a pilot safety and efficacy study of Acthar in patients with diabetic nephropathy and proteinuria. These clinical trials 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 candidates. As a result, the amount or ranges of cost and timing to complete our product development programs and each future product development program is not estimable. Share-based compensation costs. Total share-based compensation costs for the years ended December 31, 2012, 2011 and 2010 were $15.8 million, $7.3 million and $3.7 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, 2012, we granted options to employees and non-employee directors to purchase approximately 1,899,909 shares of our common stock at a weighted average exercise price of $36.16 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, 2012, 2011 and 2010 were $1.8 million, $163,000 and $50,000, respectively. The following table sets forth our share-based compensation costs for the years ended December 31, 2012, 2011 and 2010, respectively (in thousands):

                                               Years Ended December 31,
                                              2012          2011       2010
Selling and marketing                    $    5,360       $ 4,236    $   952
General and administrative                    7,467         1,884      1,832
Research and development                      2,965         1,206        955
Total share-based compensation expense   $   15,792       $ 7,326    $ 3,739

Total Other Income. Total other income for the year ended December 31, 2012 was $0.7 million, as compared to $0.6 million for 2011 and $0.5 million for 2010. The increase in total other income of $0.1 million in 2012 as compared to 2011 was the result of an increase in the average cash balances on hand for 2012 as compared to 2011 resulting in higher interest income. 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.

Income tax expense. Income tax expense for the years ended December 31, 2012, 2011 and 2010 was $99.6 million, $34.2 million and $19.3 million, respectively, and our effective tax rate for financial reporting purposes was approximately 33.5%, 30.0% and 35.5%, respectively. The increase in our effective income tax rate in 2012 as compared to 2011 is due to an increase in nondeductible expense, the absence of research and development tax credits in 2012, and the one-time tax credit recorded in 2011 for the costs incurred in obtaining the orphan drug designation. The decrease in the effective tax rate in 2011 as compared to 2010 is due to 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, 2012 and 2011, respectively, were as follows (in thousands):
Financial Assets:

                                                         Years Ended December 31,
                                                            2012               2011
Cash and cash equivalents                           $      80,608           $  88,469
Short-term investments                                     74,705             121,680
Cash, cash equivalents and short-term investments   $     155,313           $ 210,149

Select measures of liquidity and capital resources:

                           Years Ended December 31,
                              2012               2011
Current assets        $     237,276           $ 265,600
Current liabilities          90,399              55,721
Working Capital       $     146,877           $ 209,879
Current Ratio                  2.62                4.77

Until required for use in our business or returned to shareholders through our dividend, share repurchase program or other method, we invest our cash reserves in money market funds and high quality commercial, corporate and U.S. government and agency bonds in accordance with our investment policy. The objective of our investment policy is to preserve capital, provide liquidity consistent with forecasted cash flow requirements, maintain appropriate diversification and generate returns relative to these investment objectives and prevailing market conditions.
The decrease in cash, cash equivalents and short-term investments was primarily due to the repurchase of 6,759,861 shares of our common stock through our approved stock repurchase plan for $261.8 million, offset by an increase in net sales

and the related cash generated from operations. The decrease in our working capital was primarily due to decreases in our cash, cash equivalents and short-term investments, offset by increases in our accounts receivable, inventories, and sales-related reserves.
Our collection terms on our accounts receivable are net 30 days, with approximately 100% of our accounts receivable and net sales generated by our distributor for Acthar, CuraScript SD, which in turn sells Acthar primarily to specialty pharmacies.
We expect continued growth in our research and development expenses. However, we anticipate that cash generated from operations and our existing cash, cash equivalents and short-term investments should provide us adequate resources to fund our operations as currently planned for the foreseeable future. During the period from October 1, 2012 through December 31, 2012, we repurchased the following shares of our common stock:

                                                                    Total Number of
. . .