Questcor Going Up Even After Earnings

| About: Mallinckrodt PLC (MNK)

Questcor Pharmaceuticals (QCOR) has blown away earnings expectations and the stock is up 28%. The market had very pessimistic expectations for the company regarding it's largest product, H.P. Acthar Gel.

The stock fell from $50 to $18 per share after Aetna (NYSE:AET) announced last year that it would no longer reimburse patients for the Acthar Gel. The Acthar Gel can be used for a variety of medical issues such as MS or arthritis. The issue was that Aetna did not believe the gel to be an effective form of treatment.

After this happened, there was an expectation that many other insurers would follow Aetna. However, it's clear that none of this has done any damage to Questcor's earnings. Analysts were expecting the company to earn 99 cents per share. Instead, the company earned a $1.35 per share, which is a 36% increase over analyst estimates.

Shipments for Acthar Gel were 7,050 in Q2, which is a 50% increase over the same quarter in 2012. So clearly the pessimism priced into the stock was way overblown.

I believe the reason why Acthar Gel is performing so greatly is because of the fact that it has multiple uses. It's meant to treat everything from spasms to arthritis. This essentially allows the company to market its product to a wide array of patients.

With the stock now trading close to $67, many investors might be taking some profits. There is nothing wrong with this given that this was 34%+ increase in the share price. However, is there still room for price appreciation?

I believe that Questcor still has some room to move up and that it can hit $85 per share. One of the reasons I like Acthar gel is not only because it has plenty of uses right now, but it has potential to treat various other medical issues.

This rapid success has encouraged us to accelerate our entry into pulmonology, where we recently announced a pilot commercialization effort for respiratory manifestations of symptomatic sarcoidosis, a labeled indication for Acthar. We also continue to assess additional indications on the Acthar label for other commercial opportunities, as well as explore the use of Acthar for possible new indications, as demonstrated by the initiation of our Phase 2 study in amyotrophic lateral sclerosis (ALS). This is our second phase 2 trial, as we continue to proceed with our trial in diabetic nephropathy.

-Don M. Bailey, President and CEO from report

The company is planning to find uses that will allow them to market their products toward people with problems such as diabetes and lateral sclerosis. If the company can actually prove Acthar is effective at treating these problems, the shipment volume will continue to skyrocket.

Currently there are 17 locations across the country participating in the Phase 2A study, which will help understand the effects compared to a control group. The company is about to start Phase 2 on its ALS study as well. There will be a 40 patient test group over a three week period. Depending on the results, the patients will then move to a 28 week trial. The fact that it is moving onto Phase 2 is a huge positive.

Now let's take a look at the valuation here. This year analysts were predicting the company to earn $3.96 per share. Given the recent blowout in earnings, this will likely be revised upward. Even assuming a $4 EPS, this gives us a 16.5 P/E ratio. I honestly believe this to be a pretty good valuation given the future prospects that this company has. Even if we don't factor in a potential for new uses, the shipment volume is still very strong. If Questcor can achieve additional uses for Acthar, I believe EPS can move towards $5 per share since you have a larger patient base.

At $85 per share, this is a 17 P/E ratio, which still might seem high, but keep in mind, the current sales growth more than justifies such a valuation. A 17 P/E is reasonable given what other comparable companies are valued at. Jazz Pharmaceuticals (NASDAQ:JAZZ) is trading at a 17 P/E ratio, which is priced for its future growth. NPS Pharmaceuticals (NASDAQ:NPSP) has a forward P/E of 41. QCOR's future growth is being underestimated at this price. The market should recognize that sales growth is strong without the prospect of new medical uses for Acthar. Imagine the growth potential when Acthar can be used to treat additional medical problems.

My future EPS estimate is assuming a 25% increase in earnings. This is about a $58 million increase in earnings going forward. I believe this feat is very achievable given the market for diabetic nephropathy. Decision Resources, a pharmaceutical consulting firm, believes the market for diabetic nephropathy and various other diabetic issues is suppose to grow to $5.5 billion in 2018. In 2008, the total sales volume was $3.2 billion. So the trend is going up and there will be a clear need for new treatments in this space.

A $58 million earnings increase is enough to justify a price of $85 per share. This would take the P/E to 17, but the ratio is more than reasonable for the future growth prospects. The company has grown shipment volume of Acthar Gel by 50% and I don't believe there will be a slowdown anytime soon. Investors have the opportunity to earn over a 20% return on Questcor.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.