By Ramu Iyer
Questcor Pharmaceuticals (QCOR) came out with strong results in the first quarter of 2012, and recently experienced a spike in its share price when it launched its flagship drug H.P. Acthar Gel in the promising rheumatology space. First-quarter adjusted earnings of $.58 per share were 16% higher than consensus estimates, and more than 200% higher on an annual basis. Net sales jumped by more than 160% to $96 million, against the consensus estimate of $90 million. The company's policy is to reward shareholders through share repurchases, and approximately $20 million was returned to shareholders during the quarter. The company ended the first quarter with $223.7 million in cash and cash equivalents. The consensus estimate for earnings per share in 2012 is $2.43. Likewise, the consensus estimate for 2013 is $3.45 per share.
Questcor concentrates on the areas of treatments for multiple sclerosis, nephrotic syndrome and infantile spasms. Its flagship drug, H.P. Acthar Gel, is approved by the FDA in the U.S. for 19 different conditions. The company also manufactures Doral for insomnia. Research and development efforts are concentrated on additional clinical trials for Acthar Gel and clinical trials indicate that the drug could be effective for the treatment of as many as 40 additional diseases. The company has provided positive indications for the commercialization of its rheumatology treatment, Acthar, and analysts are excited by the prospects for the drug, as well as the ability of Questcor to handle it successfully. Although the drug is still in an experimental stage, if the company obtains FDA approval, it could turn into a multi-billion dollar drug. This has led analysts to increase their consensus EPS estimates from $3.18 per share to $3.39 per share for 2013.
Looking at the company's fundamentals, there is good reason to believe that the stock is presently undervalued. For one thing, its PEG is only 0.7 compared with 4.5 for the pharmaceutical industry as a whole. The forward P/E ratio is high by industry standards, but can be justified by the projected EPS growth for the next two years. The company also has a rising return on equity, along with rising margins, which are higher than average for the pharmaceutical industry. Analysts are positive on the stock with Oppenheimer currently rating Questcor as an "Outperform" and Jefferies & Company rating it a "Buy." Moreover, there has been considerable institutional interest in buying the stock. Liquidity ratios are satisfactory, and the management is sound.
In the first quarter of the current year, shipments of Acthar rose by more than 100% on a year-on-year basis, and the company reports that the increase has continued into the second quarter, with shipments in May 21% higher than in December 2011. In the first quarter of 2012, revenue per vial of Achtar rose to $23,500 from $18,000 compared with the same quarter in the previous year. For comparison, a vial stood at $20,500 last fall. As a result, revenue has risen sharply in each of the past four quarters.
A substantial amount of the company's growth is related to the company's focus on selling Achtar as a treatment for nephritic syndrome, which is a lucrative market, since the condition affects two out of every 10,000 people and, within two to 20 years, can cause irreversible damage to the kidneys. To drive sales in the nephrotic syndrome market, the company increased its sales team from five agents to 28 agents. The result was a 72% increase in shipments in May 2012 compared with December 2011. Paid prescriptions in the first quarter were up to 238, compared with 146 in the fourth quarter of the previous year. This means that revenue could total $175 million, and the increase in the sales team should ensure strong growth for the rest of the year.
In 2010, the company increased its sales force for multiple sclerosis to 77 agents, and this has driven paid prescriptions to 1,000 in the first quarter of 2012, compared with 231 in the first quarter of 2010. Shipments to multiple sclerosis patients were up more than 10% in May 2012, compared with December 2011. This kind of growth has the potential of providing annual revenue of $170 million. Because it only has a single digit market share, Questcor believes that there is plenty of room for growth and plans to increase the sales team to 100 agents so that it can reach out to the estimated 200,000 people who are believed to suffer relapses each year.
Even with the growth in the nephrotic syndrome and multiple sclerosis markets, the company believes that surreal potential for Acthar is in the treatment of rheumatology where it sees a billion-dollar potential in the treatment of diseases like lupus. A small sales team is being set up to explore the opportunity. In addition, the company is also looking at opportunities for treatment in dermatology and ophthalmology.
If you are considering investing in biotechs, you could consider Alkermes (ALKS), which has approximately 20 drugs in the research and development pipeline for the treatment of central nervous system disorders such as depression and schizophrenia. In the potentially lucrative and large obesity market, Lorcaserin, which is made by Arena (ARNA), has just received FDA approval. Vivus (VVUS), meanwhile, is awaiting FDA approval for Qnexa, and Orexigen (OREX) is awaiting FDA approval for Contrave.
Investments in the biotech sector are risky, but, if you wish to add a biotech stock to your investment portfolio, I would have no hesitation in recommending Questcor. The company has a well-established track record of solid performance, which will help minimize the downside while maximizing the upside.