By Jake King
Shares of Questcor Pharmaceuticals (QCOR) have started to rise to more realistic valuations in the new year (as PropThink expected), breaking $31 dollars on Tuesday as the market gets comfortable with Acthar's profit-generating prospects and the company's fundamentals. PropThink covered Questcor extensively last year and suggested that fair value for shares of the H.P. Acthar maker was in the high $30 or $40 range. Bears have battered the company for Acthar's premium pricing and potential reimbursement pressures, but the vast majority of payers continue to acknowledge Acthar as a real last-ditch treatment for patients with serious medical conditions. In fact, just last week, BlueCross BlueShield of Illinois updated its policy on Acthar, deeming the product necessary for the treatment of infantile spasms and in other indications where there are medical contraindications or intolerance to first-line treatments (typically corticosteroids).
QCOR proved in 3Q12 that reimbursement for Acthar remained strong, beating estimates on both the top and bottom line and sending the shorts packing. Since then, the company has remained fundamentally sound, and a company filing from early January expounded on a number of business milestones indicating that growth was likely to continue:
- Questcor stated that 4Q12 held "record vial shipments of H.P. Acthar Gel." Based on discussions with industry sources, we believe that the strong vial shipments were consistent throughout 4Q, and continue to indicate the trend.
- Patients "continued to have access to Acthar through commercial insurance, Medicare, Medicaid and other government programs." While the shorts continue to harp on this facet of the QCOR story, it's becoming less and less of a concern, and 4Q results could support this claim.
- Questcor is expanding its pilot rheumatology sales force, which PropThink opined was likely as the product proved out in the real-world. Questcor is expanding its rheumatology sales force from the initial pilot force of 12 to 50. This not only indicates a larger market, but greater demand for Acthar.
- The company discussed briefly the closing of its BioVectra acquisition. Revenues for the third-party Acthar manufacturer, which Questcor now fully owns, were ~$20M in 2012, and the CEO of BioVectra had stated prior to being acquired that he expected revenues of more than $40M in 2013. The cost savings - vertical integration - and long-term revenue potential are expected to be a key contributor to earnings power and growth.
In addition, recall that Acthar's Medicaid rebate was cut from 100% to 23.1% last September. The company was selling approximately $14M worth of Acthar to Medicaid patients quarterly, in which the company was absorbing 100% of the costs, but now is adding ~$10M (77% of those sales) to operating profit per quarter. This calculation does not factor in growth, and given the profitability on these sales, we expect the company to promote more heavily to the Medicaid segment going forward. Like the BioVectra acquisition, the Medicaid rebate benefit now significantly adds to earnings power and growth prospects.
Questcor will report 4Q12 and full-year earnings next Tuesday, and we wouldn't be surprised to see the strong growth trends show up in the earnings results. The "record" number of vials shipped in 4Q, as indicated by the company, is not something the shorts are going to want to face next week, hence, we would expect QCOR to work higher into earnings. Should sales of Acthar demonstrate that the product is continuing to gain traction, analyst price targets could rise in kind, with the stock potentially getting back to historic highs. Questcor's Acthar business is firing on all cylinders, fundamentals are looking strong (as are technicals) and perhaps most importantly, we're starting to see the heavy short interest moving on; based on 3Q12 results alone, we believe QCOR is fairly valued in the high $30's. Strong 4Q results could indicate that the stock could power through this level.
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