Traders and investors who are have long/short positions in Questcor Pharmaceuticals (NASDAQ: QCOR) are eagerly anticipating the Q1 2013 earnings release set for Tuesday April 30th, 2013, after the closing bell. Wall Street's EPS estimates are $.957 per share (non-GAAP) which represents 57% year-over-year earnings growth for the company relative to Q1 2012. Sales are also expected to be about $158 M, or 64.2% higher relative to Q1 2012.
Although the consensus estimate for this quarter's earnings have been rising along with Acthar sales in recent months, the stock remains damaged by a ratings downgrade ("Buy" to "Sell) by Favus Institutional Research earlier in the month, focusing on the potential for Questcor to disappoint with Q1 2013 earnings due to lackluster Acthar sales. Although it saw a recovery rally last week, Questcor is down 10% in the last month as a result.
Short interest also remains stubbornly high, at ~29.3 million shares (or 51% of float). There are a number of reasons that bears are taking interest in Questcor, including "reimbursement issues" that could potentially damage H.P. Acthar sales, and lawsuits regarding the company's marketing practices. Although these concerns have profusely damaged QCOR since Aetna's policy change in September 2012, the company's sales remain quite strong. The company is also on track to report record revenues and earnings based on the surge in Acthar gel prescriptions we've seen in the last four months.
Source: Bio-Wire, NASDAQ, Bloomberg, Symphony Health
While the uptrend in Acthar sales is quite volatile, the lagging recovery in QCOR price per share is especially astounding when one considers that the stock was trading at $50/share in early September 2012 - when the company was generating just $250,000 per week on their lone product. Bullish analysts like Oppenheimer, which supported the company's valuation on a growth basis, turned their backs on the company after the short sellers descended on the company following the Aetna update. Wall Street seems to be changing its mind yet again, although they are staying conservative by predicting flat top-line growth versus Q4 2012.
The unsustainable short interest in the stock (at 51% of float as mentioned earlier) paves the way for a short squeeze of epic proportions, although this is contingent upon continuing growth in Acthar sales. Investors should also note that the product's exclusivity for the orphan IS indication will expire in 2017, although this event will not wipe out the company's revenues, and may even be extended further out with new potential indications underway. Acthar is also heavily protected by other patents. Note that Questcor has also been constantly underestimated in recent years. Earnings and sales have beat forecasts in eight out of the last eight quarterly earnings releases.
Many investors have also expressed concern that Questcor lacks diversity of revenue due to the fact that it derives its income from Acthar gel alone, although the product's label lays out the huge number of indications that the product sells into. These include the most well-publicized uses - infantile spasms (west syndrome), multiple sclerosis (MS), proteinuria in nephrotic syndrome, dermatomyositis, and polymyositis. Then there are other indications that Questcor has seen lots of potential from, including rheumatic disorders (specifically psoriatic arthritis, rheumatoid arthritis, juvenile rheumatoid arthritis, and ankylosing spondylitis), lupus, serum sickness and others.
In total, Questcor has 19 indications that it can currently sell into with 9 more undergoing R&D. In an article titled "Questcor's Upcoming First Quarter Report: An Investor Reference Guide," Michael Fuller provides more details, along with links to the large number of pro-Acthar reimbursement updates made in the last few months, as well as a broad outlook for Questcor Pharmaceuticals going all the way to the end of 2013. Investors can also see my notes on Questcor's financial undervaluation here.
Although the short interest in QCOR is incredibly high, the market's sentiment will not be able to derail Questcor so long that it continues the performance it's had in the first quarter of 2013. The first quarter earnings release, which is due after the bell on Tuesday (4/30/2013), is very likely to surprise to the upside. Whether or not this will cause QCOR to pop high enough to induce a short squeeze is uncertain, although the fundamentals support a significantly higher valuation for the equity.
Disclosure: Long QCOR
Additional disclosure: Data should be accurate as of 4/19/2013