Questcor's (QCOR) first quarter earnings report is scheduled for release April 30 and it will set the direction for the future of the company. Given the tumultuous ride investors have experienced with the stock since September and the importance of this earnings report as a direction setter for the company, this article presents a summary of first quarter events and some upcoming catalysts.
My general thesis for this presentation of events?
A recent dip in price per share represents a rare buying opportunity, given a strong growth company with a trailing 9 P/E, no debt, and multiple consecutive quarters of top line and bottom line analyst beats.
An active and pivotal first quarter saw:
- Publication of many insurance coverage additions/updates-all 30 reviewed for this reference guide support reimbursement for key indications and the 19 indications listed in the prescribing information for Acthar Gel. Acthar is Questcor's flagship product, from which substantially all revenue is derived (see Insurance Coverage below for detail);
- Publication of important studies and professional journal articles-bolstering the position of Acthar as an effective second line treatment for the most challenging patients suffering from a wide range of inflammatory and autoimmune disorders (see Timeline of Pivotal Publications and Discussions below for detail);
- Expanded R&D initiatives-Questcor is sponsoring an estimated 70 studies, with ALS and diabetic nephropathy studies, among others, exhibiting early but game changing potential (see Research and Development below for detail);
- Significant expansion in sales force-which has historically led to equally significant expansion in revenue; the company added 40+ reps in Q1 and over 100 since July 2012. A seasoned M&A executive was also hired, principally to explore outside-U.S. potential for Acthar.
- Institutional Share Accumulation-notably Bank of New York Mellon and BlackRock (see Large Shareholder Positions below for detail).
- Dividend increase from $.20 to $.25 per share announced in February.
In addition, QCOR buttoned down control of its manufacturing process with the purchase of Biovectra, its key contract manufacturer.
Questcor is a biopharmaceutical company focused on therapies for patients with serious, difficult-to-treat autoimmune and inflammatory disorders. Their primary product is H.P. Acthar Gel (repository corticotropin injection), an injectable drug with 19 indications approved by the U.S. Food and Drug Administration (FDA).
Of these 19 FDA-approved indications, the company currently generates revenue from the following indications: nephrotic syndrome (NS), acute exacerbations of multiple sclerosis (MS), infantile spasms (IS), and several rheumatology related Conditions with current focus on dermatomyositis and polymyositis (DM/PM).
There have been many Medicare additions, Medicaid additions, and other insurance coverage updates in the first quarter 2013. Thus far, all of the updates support Acthar's prescribing information (PI) and its 19 approved indications, in tiered coverage levels, and other step therapy determinations. Updates we reviewed are detailed in Table 1.
Table 1: Insurance Coverage Updates for Acthar
Acthar is currently under review for addition to Medicaid formularies in a few states, with decisions imminent after the Drug Utilization Review (DUR) meetings conclude. Three such states and dates for review are detailed in Table 2.
Table 2. Sampling of State Medicaid Formularies Currently Reviewing Acthar
Pennsylvania Medicaid (Note: the link takes you to the list of drug pdfs under review.)
Timeline of Pivotal Publications and Discussions
The Myositis Association (TMA) hosted a live discussion with Dr. Todd Levine about the efficacy of Acthar treatment for myositis patients. Acthar is the only FDA-approved drug for myositis. Dr. Levine published a paper on the topic which was reviewed during discussion.
TMA also announced Questcor's funding pledge to support research grants and educational initiatives.
The American Academy of Neurology's (AAN) 2013 conference included web video discussions with Dr. Florian Eichler regarding the benefits of using ACTH in the treatment of MS beyond the scope of steroids, and Dr. Regina Berkovich regarding an important Acthar pulse therapy study referenced under Research and Development (NCT01049451).
Apollo Medicine Vol 10, Adrenocorticotropic hormone (ACTH): A forgotten tool in the treatment of proteinuric nephropathies.
Research and Development
Questcor released a detailed 10k for 2012, documenting new and continuing research and development efforts to better understand current Acthar indications and expand into new indications. Questcor indicated 70 studies and trials are underway in the recent shareholder proxy filing.
Many of these studies and trials-most notably ALS where animal trials were very encouraging and diabetic nephropathy--have potential to be game changers for Questcor, engaging entirely new patient populations in areas where existing treatments are limited and ineffective for a significant number of patients.
Research and development highlights from the 10k:
- Amyotrophic Lateral Sclerosis (ALS). Questcor expects to file an IND and initiate a proof-of-concept trial of Acthar for ALS in the first half of 2013.
- Idiopathic Membranous Nephropathy (IMN). Phase 4 clinical trial evaluating Acthar for the treatment of proteinuria associated with treatment-resistant IMN. There are additional third party studies focusing on the safety and efficacy of Acthar in focal segmental glomerular sclerosis (FSGS), and IgA nephropathy.
- Systemic Lupus Erythematosus (SLE). Phase 4 clinical trials evaluating Acthar for the treatment of SLE. First patient enlisted January 2013.
- Diabetic Nephropathy (DN). Agreement with the FDA for an investigational new drug application to evaluate the safety and efficacy of Acthar in treating DN.
- Infantile Spasms (IS). Investigator-initiated study aimed at establishing quality of care indicators for IS (approved Acthar indication).
- Multiple Sclerosis Pulse Therapy. Investigator-initiated studies aimed at establishing efficacy for Acthar Gel to prevent MS exacerbations.
- Cognitive Protection/Autism, and Traumatic Brain Injury (TBI). Investigator-initiated studies aimed at establishing efficacy for Acthar Gel to control symptoms.
- Chronic Migraines. Investigator-initiated studies aimed at establishing efficacy for Acthar Gel in patients whose migraines are refractory to anti-seizure medications and who failed multiple other treatments, including Botox.
- Pharmacology of Acthar. In-house non-clinical and clinical pharmacology studies to expand understanding of Acthar mechanism(s) of action for each indication and to better understand why Acthar acts different, and perhaps more effectively, than first-line steroids and potentially other melanocortin peptides.
The Clinical Trials website (clinicaltrials.gov) has updated information regarding many of the research and development efforts cited above, including: Systemic Lupus (NCT01753401); Membranous Nephropathy (NCT01093157); Idiopathic Membranous Nephropathy (NCT01386554); Systemic Lupus Erythematosus (NCT01769937); MS Pulse therapy (NCT01049451); Myositis (NCT01637064); Chronic Migraines (NCT01813591); Neuroprotection With ACTH in Acute Optic Neuritis (NCT01838174).
In the coming months, additional updates are expected, including:
- June 2013.
Final data collection for Phase 2a of a placebo controlled study on Diabetic Nephropathy (NCT01601236).
The Children's Hospital of Chicago will complete a data collection studying preventive capabilities in children at risk for Infantile Syndrome (NCT01367964).
- December 2013.
Final data collection for a Phase 4 study measuring the reduction of proteinuria in patients with idiopathic FSGS (NCT01155141).
Mayo Clinic completion of a dose-finding pilot study of patients with Idiopathic Membranous Nephropathy (NCT00805753).
The investor lawsuit was consolidated and in March 2013 a 'stay' order was entered while a motion to dismiss proceeds.
The Court's January 4, 2013 order Consolidating Actions and Appointing Lead Counsel appointed The Weiser Law Firm, P.C. and Johnson & Weaver, LLP as Co-Lead Counsel.
All proceedings, including motion practice and discovery, in In re Questcor Shareholder Derivative Litigation, Case No. CV12-01716 DMG (FMOx), are hereby stayed until the earlier of the following events: (A) any of the Defendants files an answer to any operative pleading in In re Questcor Pharmaceuticals, Inc. Securities Litigation, No. 8:12-cv-01623-DMG (FMOx) (the "Securities Class Action"); or (B) the latest operative pleading in the Securities Class Action is dismissed in its entirety with prejudice.
Source: Pacer (Note account needed to access court documents).
Large Shareholder Positions
The Million Share Club membership has increased again with the March 2013 first quarter filings. Bank of New York Mellon added 377k and now owns 1.2 million shares.
In the previous quarter, Deerfield and BlackRock initiated large stakes and then added to them. Notably, in the first quarter, BlackRock again increased their holdings by over 330k shares to 5.3 million.
While still early in the reporting cycle, it is apparent that most large shareholders are still accumulating. Showing a solid trend, 24 institutions bought 1.3 million shares and 14 have sold 250k shares (817k increased, 497k new, 217k decreased, and 41k sold out).
Source: SEC filings as of April 22.
Short Interest increased 3.1 million shares in the last two weeks, amid many strange accusations on message boards where aliases are commonly used. It's my contention this was a last ditch effort to salvage their other 24 million short shares on the heels of a second record quarter and the upcoming earnings report next week.
The new short positions equate to over 5% of the outstanding shares in less than two weeks, without any negative news, and only positive catalysts in the first quarter thus far.
Source: Nasdaq short interest
Questcor has experienced two solid quarters of growth since the original Citron short attack last summer. Questcor experienced no disruption to their business from these attacks, much to the dismay of the naysayer shorts, who can be credited perversely with the current buying opportunity.
Revenue growth expectations for 2013 are significant, with 40+ new sales reps, proven take up in Nephrotic Syndrome and Rheumatology disorders, accretive Biovectra earnings, and the Medicaid rebate reduction to 23.1%, effective January 1.
Questcor is positioning for future growth by creating a dedicated and more sophisticated reimbursement center to handle increased volume, and increasing their R&D budget to expand the number FDA-approved indications for inflammatory and autoimmune disorders.
Fundamentally, the company is sound with no debt, over $100 million on the balance sheet, and a low cost of sale. The current forward PE of 5 and PEG Ratio of .24, confirmed on various websites, are also based on low estimates for 2013 earnings that have not been updated by analysts... yet. Even with these outdated earnings estimates, Questcor is undervalued by at least 50%. The share price should right now be in the analyst's target price range of $50 to $74.
Long-term, and given the 2013 growth estimates are maintained, it's easy to imagine a PPS over $100 while maintaining a PE ratio of 15 to 20, which would still on the low side for the biopharma sector.
QCOR is a rare buying opportunity, courtesy of relentless and misleading short attacks which are rapidly losing their impact.