Questcor Pharmaceuticals (QCOR) is a 2013 high-performing biotech that I first wrote about in November 2012. Year to date, revenue is up about 60% over 2012 and share price is up more than 125%. These impressive numbers are mainly due to prescription growth from its flagship product H.P. Acthar Gel(TM) and it's 19 FDA-approved indications including: infantile spasms, acute exacerbations of multiple sclerosis, nephrotic syndrome and the newly-marketed therapeutic area, rheumatology disorders including dermatomyositis/polymyositis (DM/PM), psoriatic arthritis and rheumatoid arthritis.
There are compelling reasons to believe QCOR will maintain its robust 2013 revenue growth including:
- Expansion outside the U.S. for the first time in the company's history
- A pilot program for Acthar GEL treatment of refractory sacrcoidosis, which opens up the pulmonology space for QCOR
- An acquisition of a related drug product Synacthen
- An exciting pipeline with potential catalysts beginning in Q4 2013 and all through 2014
In fact, 2014 is stacking up to be the year Questcor puts it all together. See the chart below.
Several Game Changers Are In The Pipeline
Both On-Label Indications and New Indications
Research and Development Progress:
"Questcor's continued strong financial performance has enabled the Company to increase investment in research programs to further clarify the potential immune-modulating properties of Acthar and identify Acthar mechanisms of action applicable to other inflammatory and auto-immune diseases with high unmet medical need," noted Dr. David Young, Chief Scientific Officer. "The Company is also identifying new patient populations in which to evaluate Acthar through clinical studies. Questcor has funded or has approved funding for approximately 70 research projects, including company-sponsored clinical and pre-clinical studies and independent physician sponsored studies."
Research and development (R&D) investment increased 44% to $12.2 million in the three months ended June 30, 2013, as compared to $8.5 million for the year ago period. R&D investments were $23.0 million for the first six months of 2013, as compared to $14.2 million for the year ago period.
NEW INDICATIONS--Label Enhancement Programs:
- Amyotrophic Lateral Sclerosis (ALS): Questcor commenced screening patients for enrollment into a dose-ranging Phase 2 clinical trial to evaluate the safety and tolerability of Acthar in patients with ALS, often referred to as Lou Gehrig's disease. ALS is a life-threatening, progressive neurodegenerative disease that affects nerve cells in the brain and the spinal cord.
- Diabetic Nephropathy: Enrollment continues in a company-sponsored Phase 2 trial to evaluate the efficacy and safety of Acthar in patients with diabetic nephropathy, one of the most common causes of end-stage renal disease in the United States.
Research Regarding Approved Indications:
- Idiopathic Membranous Nephropathy: Enrollment continues in a company-sponsored Phase 4 trial in idiopathic membranous nephropathy. Patients enrolled in this study are refractory, or non-responsive, to current standard therapies or have relapsed after partial remission on current standard therapies.
- Lupus: Enrollment continues in a company-sponsored multi-site Phase 4 company-sponsored clinical trial to evaluate the efficacy and safety of daily Acthar administration over a 6-month period in patients with persistently active lupus.
- Lupus Exacerbations: Questcor is providing grant support for a prospective independent investigator initiated study evaluating Acthar in the treatment of lupus exacerbations. The Company has been informed by the investigator that this study has recently been completed.
Planning activities related to the initial evaluation of a select grouping of potential Synacthen indications are in process. Questcor will provide further updates on this newly initiated development program as key activities get underway.
Recent Top Analyst Coverage With Current "Buy" Ratings:
1) Lazard (LAZ): Management meetings highlight under-appreciated earnings drivers; raising PT to $85; BUY
2) Bank of America/Merrill Lynch (BAC): Questcor Pharmaceuticals is upgraded from "neutral" to "buy." The target price has been raised from $58 to $80.
3) Piper Jaffray (PJC): Recent weakness is unwarranted as the landscape for Acthar remains favorable: OVERWEIGHT (BUY) rating and $74 PT
4) CRT Capital: BUY rating and $79 PT.
5) Mizuho: An Under Appreciated Opportunity with a PT of $84
Another Seeking Alpha Colleague Suggests that Questcor is one of 3 Takeover Candidates That Pay Dividends While You Wait:
"Questcor Pharmaceuticals is a healthcare name that deserves to be on this list, as it generates some of the highest takeover talk on a day-to-day basis of any name today. Benzinga reported earlier this week that there was unconfirmed chatter of interest from Sanofi (SNY), and although it's been linked to some other names, the latest talk has had the strongest legs. Shares of Questcor are up almost 5% in the past week and 28% over the past three months.
Year-to-date, the stock has more than doubled, as Questcor has generated earnings beats in four of its past five quarters. Questcor is a quality company that offers good growth prospects with a dividend yield just under 2%, so even if takeover chatter stalls, there's still reason to be invested here. Acthar, the company's flagship hormone medication for diseases like multiple sclerosis, saw its sales jump more than 40% last quarter (qoq), and Bank of America/Merrill Lynch upgraded Questcor to a "Buy" on this news last month. BofA's price target on Questcor is set at $80, which represents a 38% upside from current levels. We'll be watching it closely."
- Presently there are adoption risks related to new uses and managed care
- The approval of an AB substitutable biogeneric compound. Response: Research suggests that any generic compound will likely require testing in lengthy clinical trials, the usual regulatory risks, and will not be substitutable so near term concern are unwarranted.
- Concerns about reimbursement pressures from private insurers. Response: Acthar's use is generally prescribed for the most challenging patients and when first line therapies have failed, so reimbursement pressure will be mitigated.
- Investors fear consequences of an investigation into its marketing practices and/or lawsuit(s). Response: If found to be negative, this should be will be worked out for an insignificant figure or could be dismissed.
Catalysts - Growth Drivers
1) The company has launched an already successful new commercial effort for DM/PM, the first of several on-label rheumatology indications, which should evolve into another very meaningful commercial opportunity and drive future growth into 2014.
2) In Q4 2013, Questcor will be launching a pilot marketing program for Acthar treatment of sarcoidosis, which some analysts have pegged as a $500 million or greater revenue opportunity over the next several years. These initiatives alone are plenty to drive revenue growth for the Acthar franchise over the next several years, even without help from their robust pipeline and over sixty different R&D and clinical research initiatives.
3) As such, I would expect a run up into earnings coming in the next few weeks and well into 2014.
Let's Take A Look At The Math
BIOTECHNOLOGY INDUSTRY VALUATIONS
Per the following industry valuations study done by the NYU Stern School of Business earlier this year (2013) based on data from Valueline Database (which I subscribe to), the following are Biotechnology Industry Valuation Parameters which included valuations based on 214 Biotechnology firms:
- Current Average P/E Ratio is 32.89
- Forward P/E Ratio is 47.35
- Expected Industry Growth Rate is 20.28
- Industry PEG Ratio is 1.54
- Average Dividend Yield is .16%
COMPARE THE INDUSTRY RATIOS TO QUESTCOR:
- Current QCOR P/E Ratio is 15.95
- Forward P/E Ratio (using Analyst Consensus EPS for 2014 of $5.81) is 10.16
- Expected QCOR Growth Rate is 30% using 5 Year Analyst Consensus Growth Rate
- Industry PEG Ratio is 1.54; Questcor's is under .30
- Current Dividend Yield for QCOR is 1.69%
Given the enormous disparity between Questcor's valuation parameters and the Biotechnology Industry valuation parameters, Questcor is significantly undervalued. I would value QCOR using a DCF analysis based on projected free cash flow through 2015 with Total Value calculated using terminal multiples of 18x or higher (e.g., 18x to 25x as highlighted below), which reflects my conservative confidence in long-term growth potential and lack of obvious competitive threats, as well as, the potential for some of the new emerging indications that have not been identified.
QUESTCOR VALUATIONS USING INDUSTRY DATA AND ANALYST ESTIMATES:
- Analyst Consensus Estimate for 5 Year Growth is 30%.
- Analyst Consensus EPS Estimate for 2013 Annual is $4.83 (GAAP)
- Analyst Consensus EPS Estimate for 2014 is $5.81 (GAAP)
- Using 30% on top of $5.81 for 2015 EPS Estimate would be $7.58 (GAAP)
Using these three estimates the following Valuation Table can be used to establish forward value based on a range of Price Earnings ratios per the Industry Valuations above.
Low end of the Target Range
High end of the Target Range
NOTE this is 1.0 Equilibrium PEG for QCOR
NOTE this is the Biotech Ind. Average P/E
SOME FINAL PERSPECTIVES FROM QUESTCOR'S CHAIRMAN DON BAILEY -- Excerpts from a note to shareholders 10/7/13:
We believe Acthar has the potential to play a larger role in addressing the autoimmune and inflammatory processes in many serious diseases, and in so doing help many more patients than is currently the case. For example, we now have both the financial and scientific resources to pursue our own internal research programs in diabetic nephropathy and amyotrophic lateral sclerosis (ALS), two devastating conditions for which patients have virtually no effective treatments available to them. We are also working to identify other diseases and disorders where Acthar could possibly play a unique and important therapeutic role.
We have invested heavily in developing an experienced and well-trained commercial team to educate physicians about our growing understanding of Acthar and its ability to help their patients. Our representatives are highly experienced and have often spent most of their careers educating doctors about the proper use of advanced new biological medicines. Physicians are also supported by a growing team of Medical Science Liaisons, most of whom are PhDs, PharmDs or MDs, who respond to medical inquiries and provide technical information to healthcare providers regarding the growing body of scientific and clinical evidence related to Acthar.
We have been rapidly increasing our research and development spending, focused on the basic and clinical science of Acthar and the melanocortin system, rather than on building a pipeline of unrelated products. In 2007 we spent less than $5 million on research and development. By 2012, Questcor spending on research and development had risen to $34 million, and that is budgeted to nearly double to $60 million in 2013. And we expect that spending to continue to grow in the future. This illustrates our firm commitment to rapidly grow our investment in research and development. So what is the potential for Acthar? Well, it is a bit different from the situation at most biopharmaceutical companies. Acthar is an approved product that has been on the market for sixty years, so its safety profile is very well known and is supported by decades of clinical use. However, we clearly recognize that there is a need for more modern data on the efficacy and safety of Acthar in the variety of diseases and disorders for which it is FDA-approved, as well as greater clarity regarding exactly how Acthar works in these patients. We are also identifying potential new indications that may be worth pursuing for Acthar. As a result, we have been dramatically increasing our R&D spending to identify new patient populations who may benefit from Acthar and Synacthen, as well as expand access for the patients who may benefit from these important drugs.
SOME ADDITIONAL THOUGHTS:
Quarterly Earnings, ROE and Net Cash Position/Flow
These have been "off the charts" (being done with virtually no debt leverage). This provides Questcor Management the flexibility to quickly maneuver acquisitions, R&D, and investigate more indications on top of the already Nineteen (19) FDA Approved Indications being pursued. Its EPS has been straight up coming out of the gates like a thoroughbred horse beating analyst expectations in 13 of past 14 quarters. So, any further acquisitions or strategic initiatives will be "icing" on the QCOR cake. Questcor is not only financially able to move quickly on any "low hanging" acquisitions, but I believe that they have some professional M&A pharma staff to make any key acquisition work.
The EPS Estimates
EPS presented here do not take into account Questcor's ability to "lever up" and do a massive share buyback and/or other strategic initiatives.
Impressive EPS Growth
EPS growth has been sustained in spite of Questcor upping R&D from $5mm in 2007 to $60mm in 2013. It is not only sustaining major strategic initiatives, but doing so with rock solid financial performance quarter after quarter, something few, if any, companies of their size can pull off.
Biovectra and Synacthen Potential
The potential here is not really factored into the current EPS potential or the analysis provided here. This would be a bonus if ever announced.
This can also be a significant game changer too (also not priced in here) for all current and future IP and Operating Assets, but certainly has Not been included in analyst estimates (or in this report).
Investors Should Note
During prior conference calls, analysts have been inquiring about plans for the excess cash? With current undervalued share price, and Bailey proving to be one savvy and opportunistic CEO, he could easily orchestrate a significant share buyback (almost a mini-LBO) without taking on an inordinate amount of debt - especially since interest rates are historically low.
Questcor now has the Assets of Acthar, Synacthen and Biovectra to leverage internationally.
QCOR is currently trading at a deep discount to its peers (on a forward PE multiple and an EV/EBITDA multiple basis), based on this analysis. Currently, QCOR shares are trading at a 30% discount to its specialty pharmaceutical industry peers. On an EV/EBITDA multiple, QCOR is trading at a 40% discount to its peers. With Acthar prescription trends continuing to show strong growth, one would have to believe that QCOR's discounted valuation creates an attractive buying opportunity at these levels.
Given that the current "fair value" P/E for Questcor from its recent financial performance and growth of 35-40% and Forward Consensus Growth for the next 5 years of 30% should conservatively be in the 18x to 25x with respectively current P/E's of 18x priced at $86.95 and 25x priced at $120.75. As such, I am very comfortable with a 2013 Price Target of $90 per share using these industry and analyst parameters.