Although most pharmaceutical stocks on the Nasdaq edged higher in yesterday's trading, Questcor Pharmaceuticals (Nasdaq: QCOR) dropped as low as $29.44 per share and closed the trading session 4.5% lower. This was a direct reaction to a downgrade of QCOR from "Buy" to "Sell" by Favus Institutional Research based on the notion that Questcor's upcoming Q1 earnings report is going to surprise Wall Street to the downside - possibly due to reimbursement related issues or on large Acthar orders that were filled at the very end of Q4 2012.
Based on data currently available, I think they are ignoring the elephant in the room - the sheer commercial success of Acthar.
Questcor is a specialty pharmaceutical company that focuses on the treatment of patients with difficult-to-treat autoimmune and inflammatory disorders with its flagship product H.P. Acthar Gel (repository corticotropin injection). The gel is being used for quite a few conditions although the primary indications for the product include West syndrome, multiple sclerosis, and nephrotic syndrome (to induce diuresis).
Although analyst opinion on the stock has generally been bullish, the market continues to suppress the price of QCOR, ignoring the fact that Acthar gel sales are significantly higher than they were when the stock was trading over $50/share. Although the trend is a bit erratic, Acthar sales continue to move up significantly.
Questcor's ridiculously low COGS (Cost of Goods Sold) of ~6% as of Q4 2012 implies that we should see the growth in Acthar sales reflected quite strongly in the company's top and bottom-line results.
If the revenue figures are consistent with the spike in Acthar prescriptions we've been seeing, expect deep double digit quarter-over-quarter revenue growth that could easily continue into the next quarter, given that the trend in Acthar continues.
The average analyst estimates that Questcor will post $160 M in the next quarterly earnings release, which is virtually flat growth relative to last quarter's revenues of ~$160 M. This isn't that surprising if you consider that many of the analysts have not really been updating their revenue/earnings trajectories. The most up-to-date data suggests that growth will not only be positive, but quite tremendous.
Although there has been some criticism over the fact that this company derives its revenues from a single product, consideration must also be given to the notion that the drug is diverse in its target indications. In addition to the three indications mentioned earlier, we are seeing H.P Acthar used in rheumatic disorders, collagen diseases, dermatologic disease, allergic states, ophthalmic diseases, and respiratory diseases as well.
Since Questcor has only recently expanded into some of the newer indications, we should expect Acthar to gain more traction in these fields over time as Questcor's sales reps gain experience and develop deeper relationships with healthcare providers.
It's because of this that I expect Acthar to continue an erratic (but upward) trend going into the second quarter of 2013. The market's delayed reaction to the positive data from the first three months of 2013 suggests that QCOR common will take a longer period of time (3-4 months) to price in the intrinsic worth of Acthar's market potential and momentum.
Another aspect that I find encouraging about Questcor going forward is the situation with the short positions, which seem to exist based on the notion that reimbursement policy changes can still crush Acthar's growth in 2013. Short positions peaked at the start of 2013, and have been moving down quite gradually through the last few months.
This trend implies that this argument is starting to fall apart, albeit slowly. There is still some "bearish overhang" from the change in Aetna's reimbursement policy in September 2012 that may prevent QCOR from rallying too much ahead of Q1 2013 earnings, but it looks like a pretty good medium- to long-term value play.
Disclosure: Long via Short Puts
Additional disclosure: via short puts