Questcor: The Bear Theses Continue To Unravel

| About: Mallinckrodt PLC (MNK)

By Jake King

Questcor Pharmaceuticals' (QCOR) purchase of Synacthen, a synthetic melanocortin receptor agonist, from Novartis (NYSE:NVS) on Tuesday is good news for the $2 billion drug developer, fortifying its position as the sole supplier of a key treatment for a number of inflammatory and autoimmune diseases. Since last year when the stock tanked on insurance reimbursement concerns, Questcor has time and again shaken off the risks that bearish investors have so adamantly spotlighted, from payer resistance to competition for the company's lead and only product H.P. Acthar Gel, and the stock has responded in kind. QCOR has been a high-conviction pick for PropThink (see prior coverage) since the sell-off in 2012. Buying the dip then had returned more than 80% before Tuesday's news, and PropThink readers who have held on through the long-term volatility are now up more than 100%.

The announcement Tuesday that Questcor had acquired Synacthen and Synacthen Depot for $60 million up front and an additional $75 million-plus in milestone payments sent QCOR soaring almost 40%, before the stock slowly declined through the rest of the day. But now that Questcor has nipped a potential competitor, we believe the stock should continue to climb toward the $50 level. The threat of a competitor in a space that Questcor dominates solely created an overhang on the stock, and was certainly part of the bear thesis. With that out of the way, Questcor's P/E multiple should expand as risks continue to dissipate. As evidence of the dwindling negative outlook on QCOR, the stock's short interest is at its lowest since last year when the stock imploded. The bottom line is that QCOR remains cheap, Acthar is a growing product, and the risks that once overhung the name have largely disappeared. We expect investors to keep buying the name, and analysts are one by one coming back as constructive.

We see four key reasons for continued appreciation from QCOR:

  1. Questcor remains cheap relative to growth. QCOR currently carries a forward P/E of just 11.4x (2013 consensus EPS estimate of $4.01 in 2013) and a PEG (P/E to growth ratio) of a meager 0.57. Pharma growth stories typically carry PEG ratios upward of 1.5+, thus Questcor remains inexpensive compared to its growth prospects. The risks that, until yesterday, still weighed on the stock appear to be abating.
  2. The long-term bear thesis and largest risk to Questcor was that insurance companies would continue to crack down on Acthar reimbursement. That has failed to materialize almost a year after Aetna limited Acthar's coverage in September 2012. In fact, we've seen more payers supporting Acthar reimbursement. United Health (NYSE:UNH) confirmed reimbursement for all Acthar indications just 10 days ago on June 1, and the same is true for BlueCross BlueShield of Kansas.
  3. Questcor continues to grow Acthar sales with expansion into previously untapped indications. In February, we outlined how and why expansion was occurring, driven primarily by growth into rheumatology and nephrology. The company expanded its rheumatology and nephrology sales teams significantly early this year, noteworthy because both indications are particularly lucrative due to the necessity for more Acthar vials per treatment (see details here). Questcor, in fact, quadrupled its rheumatology sales force from 12 to 58 reps, and the company had its best April ever in part due to this expansion. In addition, the company has put more capital into R&D -- Questcor doubled its R&D spend from 2011 to 2012 -- for just that reason, expanding Acthar's application even further.
  4. Finally, the acquisition of Synacthen was a key strategic and defensive move for Questcor, eliminating a potential competitor while increasing its own capacity for franchise growth. Potential generic or branded competition for Acthar was another key to the Questcor bear thesis, and as evidenced by QCOR's reaction on Tuesday (the stock jumped 38% at the open), we suspect short-sellers scrambled to cover as one of the tenants to their position fell through.

Fifty dollars now represents a major target as investors get comfortable with Questcor's growth, and we expect shares to continue to gravitate toward this psychological/historical resistance level. QCOR touched $57 in mid-2012, and given that Acthar revenues have grown significantly since then and its application continues to expand (plus a stock dividend and share repurchase program), revisiting those all-time highs is not out of the question before the year is out. PropThink had previously suggested that QCOR could move toward the high $30-$40 range, which was right on the mark ahead of this event. You can find all of PropThink's prior coverage here.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at