Questcor: The Non Orphan, Orphan Drug Company

Up to now, I've told anyone who would listen that they should avoid orphan drug companies, and stick with big disease and big opportunities. But a recent event is changing my mind.

In August, a perennial money loser, Questcor (QSC), announced a change in the pricing of therapeutic gel Acthar. Acthar is approved to reduce muscle spasms from multiple sclerosis, but is mostly used off-label to successfully treat infants who suffer or die from convulsions. The change was radical and led to a 13-fold increase in sales.

As a result, in roughly five weeks this money loser generated revenues and profits in Q3 that were off the charts -- $14.8 million in sales and about $8.8 million in profit.

QSC's forecast was a bit convoluted as 30% of prescriptions are from Medicaid and the price seems to stay low for these patients, but when I run the numbers I see $60 million in profits for the coming 12 months, giving it a forward P/E of seven.

I am still very uncertain how the market is going to value the company -- although I need to disclose that I do own shares in this. Is the company going to pursue a business model like orphan-drug-megastar Genzyme (GENZ), with a P/E north of 100? Or pay shareholders back with large dividends? Or what?

Technically, Acthar doesn't even have orphan drug status -- the company is applying for that to the FDA. But the company is right that insurance companies and other payers won't let babies die and demand for Acthar hasn't fallen in the face of the price increase.

I don’t think the company knows what business model it will ultimately pursue, but Questcor has begun to hit the investment conference trail so we may learn more in the coming months.

My natural bias is still against orphan drug outfits, but I've recommend just a couple in my newsletter -- although this puppy has yet to make the list. You just may want to keep an eye on it.

QSC 1-yr chart:

Comments

[MSpatient]

"Acthar is approved to reduce muscle spasms from multiple sclerosis..."

Right from the start of the article, it is clear that Mr. Shulman doesn't really know what he is talking about. Acthar is FDA approved for treament of MS exacerbations which are not described as 'muscle spasms.' He is confusing 'Infantile Spasms' with 'Multiple Sclerosis.'


"Technically, Acthar doesn't even have orphan drug status -- the company is applying for that to the FDA."

Again, severely unresearched, inaccurate information. Acthar was awarded Orphan Drug Status in July 2003. What Questcor applied for is an FDA-approved indication for the treatment of 'Infantile Spasms' which is a rare form of epilepsy in children.


"But the company is right that insurance companies and other payers won't let babies die and demand for Acthar hasn't fallen in the face of the price increase."

The fact is that demand has fallen at least 30% since July, before the implementation of the 1500% price increase in August. It would be my guess that demand will not likely return to the same levels anytime soon. And Questcor is seeing about 90% insurance coverage.

Consider this, on the same day that a SEC Form 4 was filed by the Senior VP-Finance and CFO of Questcor reporting sales of over $1 million worth of stock, two investor articles were published on the web. Interesting timing indeed.