Questcor Pharmaceuticals Looks Ready to Make New Highs Following Q1 Outperformance

| About: Mallinckrodt PLC (MNK)

Anaheim, California-based Questcor Pharmaceuticals Inc. (QCOR), a biopharmaceutical company whose primary product Acthar® helps patients with serious, difficult-to-treat medical conditions, announced its March 2011 quarterly report after the market close yesterday. Earnings at 20 cents beat the street consensus estimate of 17c and revenue was in-line at $36.8 million versus the $36 million analyst estimate. Both revenues and earnings also came in slightly above my estimate of $35.6 million and 17c-18c that I wrote about after the company announced preliminary operating metrics for the March 2011 quarter after the market close on April 4th.

Acthar® 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 508 prescription written in the March 2011 quarter, followed by 89 for IS and 18 for NS. This is slightly above the 500, 88 and 18 new prescriptions respectively the company estimated in its preliminary March 2011 quarterly report. Also, the company reports that new paid prescriptions for MS treatment were up 120% year-over-year and are accelerating with 44% sequential growth in the latest March 2011 quarter. Analyst estimates are for 38% revenue growth in 2011 and 26% in 2012.

The analyst projection of 77c for the FY ending December 2011 appears too conservative, especially given the strong current quarter outperformance and the optimistic statements from the company about the future. Assuming that the company reports between 85c-90c for FY 2011, and with almost $2 in cash and cash equivalents, the stock currently trading at just over $19 is trading at a cash-adjusted forward P/E of just under 20. While this is near the top-end of its PE range that it has traded in recently, it is also almost half the 38% revenue growth projected for the company in 2011, and hence the stock appears undervalued based on projected growth. Also, ‘technically’ the stock has shown remarkable resilience after gapping up strongly from $15 the morning after the announcement of preliminary operating metrics about three weeks ago, as it has been consolidating in a narrow band between $18.65 and $19.40. Hence, the bias is towards the stock getting stronger in the interim based on these operating metrics, and I would consider it a ‘cautious’ buy at these levels.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in QCOR over the next 72 hours.