Questcor's Growth Could Lead To Its Downfall

Feb. 6.13 | About: Mallinckrodt PLC (MNK)

I'm sure most investors of Questcor (QCOR) are familiar with its story. For those who aren't familiar with Questcor it is a pharmaceutical company that is involved in the manufacture of a seldom used drug called H.P Acthar Gel. Questcor obtained the drug over a decade ago for only $100,000 and through marketing and price increases it has turned the drug into a profit generating machine. Questor enjoys margins that would make Apple (NASDAQ:AAPL) blush. In the third quarter of 2012 sales were 140 ($M) with gross margins of 132 ($M), these extreme margins have led to some bad publicity but I'll leave that for other people to discuss.

When looking at Questcor's financials you see a company that is growing extremely fast, with a decent dividend, and also happens to be attractively valued. There has been some concern recently about insurance companies possibly limiting their reimbursements of Acthar Gel for certain conditions but this doesn't really concern me. So what is the problem? The concern I have with Questcor is its continued dramatic increases in sales. In the last 3 years Acthar Gel's quarterly sales have gone from just over 20 million to 140 million. Here lies my main concern with Questcor, it has done such a remarkable job promoting Acthar Gel for a variety of new uses besides infantile spasms there is no doubt that the competition has been taking notice. This is problematic since Acthar Gel has been around for over 50 years and there is no patent protection on the drug. If sales continue to rise it's only a matter of time before competitors decide it is financially viable to attempt manufacturing generic copies. I say attempt because it will be extremely difficult to get a generic approved by the FDA. Premarin, which is another hormone medication isolated from an animal, has yet to have a generic approved and it has been around since the forties.

Two things stand in the way of someone trying to produce a generic version of Acthar Gel. First, manufacturing will be extremely difficult. Questcor's CEO has stated that isolation of the hormone from the pigs pituitary glands is a trade secret. To help protect their manufacturing secrets, Questcor recently acquired BioVectra which helps in the manufacturing process of Acthar Gel. Second, the FDA would most likely require studies to prove efficacy. Studies take time and are very expensive. There are few companies with the resources to attempt a generic. One such company would be Novartis (NYSE:NVS), which has a similar drug called Synacthen available in Europe. Synacthen does have some substantial differences when compared the Acthar Gel and there are no plans to enter the market in the United States.

In conclusion I think Questcor is one of the most attractively priced growth stocks available. I don't see how any competitor could enter the market with in the next 3 years, but beyond that it is more difficult to determine. However, when one invests in Questcor it is important to remember it is a drug company without a pipeline, that gets all its sales from one drug, and that drug lost patent protection decades ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.