Is Questcor A Good Investment?

Feb.19.14 | About: Mallinckrodt PLC (MNK)

Questcor (QCOR) is probably one of the most volatile stocks in the market- the stock has had massive swings in price over the past year. However, almost always, the stock gains after the earnings announcement. The reason behind this is the consistent growth in earnings. The company has been beating estimates on a consistent basis and the earnings have been growing at an impressive rate. Year to date, the stock is up over 36% and the company is going to report earnings on February 25. I am expecting another impressive quarter from the company due to the strong demand for Acthar. However, we might not see a big increase after the earnings announcement as the stock has had a big increase in price as the earnings approach.

Earnings Growth, Threat and future Growth

Questcor is reporting its earnings in about a week, and I expect the company to once again report impressive growth in earnings. In the recent healthcare conference organized by JPMorgan (NYSE:JPM), the company gave update about the expected earnings. While talking to investors, the management indicated that the fourth quarter earnings will be substantially higher than a year ago. For the last quarter, the company reported year-over-year revenue growth of 68%, I believe the growth rate for the fourth quarter will also be in the same range. Despite the growth in earnings, the stock has always been a target for the short sellers, and it has crashed on more than one occasion in the past.

The reason quoted for the bear case is the company's dependence on a single drug - however, an important fact that is always omitted is that this drug can be prescribed for 19 conditions, and the company has not even completely captured three conditions out of the 19 eligible conditions. The second argument is that the drug is too expensive - orphan drugs are expensive for a reason - these drugs are used for a small target market and the companies spend massive amounts of cash on researching and developing these drugs. As a result, orphan drug act allows the companies to charge premium pricing for these drugs. These are essential life-saving drugs and the insurance coverage is unlikely to be rescinded. As a result, I believe the fear about the insurance coverage is a little overblown.

Moving on to the business segments - despite the fear about the insurance coverage, the company has been recording massive growth in vial shipments - Vial shipments during the last quarter showed 45% year-over-year growth. If these growth figures were for one quarter, then we could say that the growth was due to some very favorable event; however, the consistent growth in vial shipments and the earnings surprises in the ten out of last eleven quarters suggest that the business model is strong.

As far as the future growth is concerned, as I mentioned above, the company is yet to fully capture the three segments out of the 19 conditions it can be prescribed for. At the moment, the majority of the revenue comes from Nephrotic Syndrome, Multiple Sclerosis (MS), Rheumatology, and Infantile spasms. The Rheumatology segment is relatively new and it is growing at an exceptional rate - growth in this segment was about 43% during the third quarter while the vial shipments for Nephrotic Syndrome and MS increased by 7% and 4%, respectively.

In the JPMorgan Healthcare Conference, Questcor clearly underlined the future growth prospects - the company has estimated approximately 35,000 eligible patients in the Nephrotic Syndrome segment and about 250,000 patients eligible under the rheumatology segment. So, the target market is sufficient and the growth opportunity is present for the company. Questcor charges around $28,000 for Acthar per vial -- looking at the target market size, it is safe to assume that the revenue potential is huge. However, it is difficult to estimate how many of these patients will be on Acthar during the next twelve months. As a result, it is hard to speculate how much the contribution will be in terms of cash and revenue growth. The company is aggressively marketing the drug and trying to bring these patients to the pool of patients already using Acthar, and the continued growth in earnings shows that Questcor has been successful in expanding the reach of its drug.

Dividend growth and cash flows

The added advantage to hold the stock is its impressive growth in dividends. The company is now returning cash to its shareholders. Questcor has distributed $53 million as dividends during the last twelve months showing an increase of 121%. Questcor is new to the dividend paying stocks list and there is a lot of room for the dividend growth. Income investors might want to take a look at this stock, as I believe the impressive growth in free cash flows will support the future growth in revenues. The company has also done treasury stock operations worth $19 million during the last year. Therefore, Questcor has distributed a total of $72 million to its shareholders. Questcor has recently announced a dividend of $0.30 per share for the fourth quarter of 2013.

The operational cash flows of Questcor have increased from $219 million to $316 million trailing twelve months showing an increment of 45%. After subtracting the capital expenditures from the operational cash flows, Questcor has a net balance of $313 million as free cash flows with an increase of 44% from the last year.


As I mentioned above, there are a few companies that can match the earnings growth shown by Questcor. If we value the company based on the business then I believe it is undervalued as there are no signs of a slowdown in earnings growth. However, it should be kept in mind that Questcor has been an easy target for short-sellers and press, and the questions about its marketing practices in the past has caused the stock to plunge. However, every time the stock has gone down, the company has come out of the slump stronger. The growth opportunity for Questcor is real and its efforts to increase the label for Acthar are likely to open new doors for future growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.