4 Reasons to Buy Questcor: Earnings, Buyback, Balance Sheet, Pipeline

Mar. 4.08 | About: Mallinckrodt PLC (MNK)

After the market closed on Monday, Questcor (QSC) announced financial results for its fiscal 2007 fourth quarter ended December 31, 2007. The Company posted revenue of $27.1 million, an increase of 697% from the year-ago quarter, and net quarterly profit of $0.45 per diluted share (including a tax gain of $0.20 per share). These results compare to revenue of $3.4 million and a net quarterly loss of ($0.06) per diluted share, in the year-ago quarter fourth quarter.

The earnings turnaround was a huge upside surprise to Wall Street, as the company beat our earnings estimate for the quarter by $0.03 (excluding the tax gain), and our revenue estimate for the quarter by $3.15 million, and the stock price rose strongly after hours.

In addition, the drug company said Monday its board of directors authorized the repurchase of up to 7 million shares of its common stock.

The buyback represents about 10 percent of the company's outstanding shares. As of Dec. 31, the company had 70.1 million shares outstanding.

"Our Board's decision to authorize this repurchase program reflects our commitment to building value for our common shareholders," said Don Bailey, President and CEO. "This decision follows our repurchase in February of all of our outstanding Series A Preferred Stock from Shire Pharmaceuticals. Our progress to date with our new strategy for Acthar has allowed us to devote resources to our investments in research and development programs that have the potential to enhance long-term shareholder value. In addition, our progress has put us in a position to authorize this repurchase program, which we believe represents an excellent use of our resources and has the potential to generate improved returns to our shareholders," Mr. Bailey concluded.

During the fourth quarter, the new orphan-drug-style pricing model strategy for ACTHAR, exceeded our initial conservative estimates, and the results for the quarter suggest that the drug has even added some unexpected sales beyond the IS and OMS markets.

As of February 29, 2008, the Company's cash, cash equivalents and short-term investments have grown to approximately $37 million and its accounts receivable balance was approximately $18 million. Remember, the Company provides 60 day payment terms to the distributor of the Company's products in the United States and thus we expect Cash amounts to build substantially during each quarter. The cash balance as of February 29, 2008 is net of the $10.3 million of cash used for the repurchase of the Series A preferred shares. Company further expects that it will have cash generated from operations of approximately $40 million to $50 million in 2008.

This amazingly strong and cash-rich balance sheet affords the company many additional investor friendly options to enrich shareholder value.

Indeed, company has taken first steps in that direction with the repurchase last month (Feb 2008) of the outstanding 2,155,715 shares of Series A Preferred Stock, which now opens the door to a possible takeover of QSC by a larger Biopharma company. In addition to the 7 Million share common stock buyback announced Monday, with cash growing at these fast rates, the future may see additional buy back programs and a stock dividend could also be initiated in addition to the buy backs. Finally, accretive drug acquisitions may also be in the cards with some of the cash that builds up.

About its pipeline, company stated that development efforts on QSC-001, Questcor's proprietary orally dissolving tablet [ODT] formulation of hydrocodone and acetaminophen for the treatment of moderate to moderately severe pain in patients with swallowing difficulties (about 30-40% of ALL pain patients), progressed well in the quarter. Currently, Questcor's goal is to initiate pivotal trials during 2008 with QSC-001.

QSC-001, is a unique orally disintegrating "fast-melt" tablet formulation would enter what is is currently the largest prescription market in the United States, with 113 million prescriptions annually with a dollar value of over $1.9 BILLION per year. The product is being formulated by EURAND N.V. using proprietary delivery technology. QSC owns worldwide commercialization rights on this product, and are pursuing a fast 505b2 regulatory pathway to market.

The future seems bright for Questcor, and given a very favorable balance Sheet, and favorable valuation levels, A BUY rating is re-issued on QSC.

Disclaimer: Author's financial firm, Independent Financial Consultants [IFC] is long QSC.