Questcor's Achtar Sales Are Accelerating: Stock Will Likely Consolidate Before Heading Higher

| About: Mallinckrodt PLC (MNK)

Questcor Pharmaceutical (QCOR), a biopharmaceutical company whose primary product Achtar® helps patients with serious, difficult-to-treat medical conditions, announced preliminary operating metrics for its March 2011 quarter after the market closed yesterday.

Specifically, it reported $48.6 million gross sales for the quarter, and anticipated that sales reserves for the quarter will be at about average percentage levels when compared to the three quarters following the March 23, 2010 adoption of “Patient Protection and Affordable Care Act of 2010” and “Health Care and Education Affordability Reconciliation Act of 2010.” Those two laws - collectively called the “Healthcare Reform Acts” - resulted in a revision to the sales reserves set aside by the company for the provision of Medicaid rebates, charge-backs, Tricare rebates (for military health plans) and co-payment assistance.

A review of the SEC filings by the company reveals that the sales reserves set aside averaged 26.7% for the last three quarters of FY ending December 2010. Applying that to the $48.6 million gross sales projected by the quarter for the March 2011 quarter translates to $35.6 million in net sales for the quarter. Applying that to the income statement, assuming operational expenses of $16-18 million projected by the company, results in projected earnings of 17-18c for the quarter. This compares favorably to analyst estimates of $33.6 million and 15c for the March 2011 quarter.

Of the $115.1 million in net sales reported by QCOR for FY 2010, $114.7 million were from the sales of the company’s primary product H.P. Achtar® Gel (repository corticotropin injection), and the remaining miniscule $0.4 million were from Doral® indicated for treatment of Insomnia. Achtar® is approved by the FDA for treatment of 19 indications, but most of the company’s sales are from three indications: the treatment of Multiple Sclerosis (MS) in adults, the treatment of Infantile Spasms (IS) in children under two years of age and the treatment of Nephrotic Syndrome (NS).

Of these, the treatment of MS constitutes the highest sales with more than 500 vials sold in the March 2011 quarter, followed by 88 for IS and 18 for NS. The company reports that new paid prescriptions for MS treatment were up 115% year-over-year and are accelerating with 40% sequential growth in the latest March 2011 quarter. New paid prescriptions for NS are also growing strongly at 65%+ year-over-year, although at much lower levels; new paid prescription for IS are holding steady at 85-90 every quarter. The number of vials shipped overall for Achtar® increased sequentially from 1,680 vials in the December 2010 quarter to projected 2,010 vials for the March 2011 quarter, approximately 20% sequential growth.

Thus, the 40% sequential growth in paid prescriptions suggests acceleration in Achtar® sales going forward. Analyst estimates are for 30% revenue growth in 2011 and 25% in 2012.

With projected 72c in annual earnings for the FY ending December 2011, and almost $2 in cash and cash equivalents, the stock traded after-hours yesterday after the announcement at above its all-time high at over $17 at a cash-adjusted forward PE of just approximately 20. This is near the top-end of its PE range that it has traded in recently and the stock is at an all-time high, suggesting that despite the strong operating performance projected by the company for the just completed March 2011 quarter and indications for strong quarterly revenue growth for the future based on new prescription growth, the stock may be a bit ahead of itself and will likely consolidate in the $15-18 range before it goes higher.

The company CEO, Don M. Bailey, is scheduled to present today at 8:00 am ET at the Needham Healthcare Conference.

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