Questcor's Acthar Is One Hot Drug

Jul.13.12 | About: Mallinckrodt PLC (MNK)

I started looking more deeply into Questcor (QCOR) when Citron Research published an article bashing the Company on July 10th. Citron's article had such a powerful effect, that the stock dropped 22% that day, and then another 5% the next day.

This was interesting to me because biotech analysts at Jefferies, Piper Jaffray, Oppenheimer and Roth Capital were very bullish on the stock. Then Citron Research, who is very knowledgeable but isn't a biotech specialist, publishes a report that decimates the share price. Many Questcor longs must have had very weak hands, or didn't realize what kind of company they were investing in.

JMP Healthcare Conference Presentation

Questcor is presenting at the JMP Securities Healthcare Conference today. You can listen to the Company's webcast at 11AM from its website. The Company also posted the conference presentation. Looking at Acthar's sales numbers is very impressive.

The Company's flagship product, Acthar gel, sold a whopping 4,710 vials in Q2-2012. That's 14.5% more than the 4,111 sold in Q1-12, and 93.8% more than the 2430 sold in Q2-11. Questcor prices each vial on average around $25,000, so that will put Q2-12 revenues conservatively at about $110 million for a record quarter.

Questcor's gross margins are absolutely insane at approximately 94% of revenues, so that would put the Company's Q2-12 gross profit at about $103.4 million.

These numbers are so phenomenal that it's no wonder that stock skeptics like and are writing articles saying it's too good to be true. However, it is true. wrote a negative article similar to Citron's about six months ago saying Questcor's success won't last. But since then, the Company has had record quarter after record quarter, and there have been no reports of a competing drug attempting to muscle in.

Acthar is helping many people. The proof is in the pudding. If it wasn't helping people, then word would get around in medical journals and doctors would stop prescribing such an expensive drug. However, the opposite is happening. Doctors and their patients are lining up to buy Acthar, that's evident by the booming sales growth. Questcor has proven that Acthar is here to stay.

Just One Drug

There is a definite risk of investing in QCOR. It's a company with concentrated assets. In fact, Acthar is pretty much its only significant asset. But it is a wonderful drug that's doing a lot of good for patients who suffer from multiple sclerosis, nephrotic syndrome, and infantile spasms.

Potential Competition

Citron says it would be easy for competition to come into play with a generic version of Acthar. Sun Trust, also a Questcor bear, says that it doesn't believe a generic form of Acthar will come but Novartis has a drug used in Europe that could compete with Acthar. However, Novartis hasn't made an attempt to start trials for that drug in the US. There have been no reports of any pharma company looking to start trials of a drug to compete with Acthar. Both Jefferies and Roth Capital believe that a competitor won't materialize. Jefferies says it believes the technical and commercial hurdles against generic competition remains high.

Acthar Is Difficult To Copy

Questcor says Acthar is very difficult to copy and no other pharmaceutical company knows how to make it. The Company says it found a secret way to extract Acthar from the pituitary of pigs and uses a secret manufacturing process. I believe Questcor. It makes sense to me that other pharma companies don't know how to recreate such a drug. That's why pharma companies with unique, successful drugs are often bought out, so the bigger pharma companies don't have to try and recreate the drug in their own labs and conduct expensive trials. Questcor makes so much money and at such high margins, I'm sure other companies have experimented to recreate Acthar but to no avail.

Even if a competitor manages to come out with a drug to compete for Acthar's customer base, it would take several years to finally come to market. In the meantime, Acthar sales are still in the early innings. The Company is ramping up its research to hit other markets with Acthar. The next market it is looking to get into is the Rheumatology market. Looking at the job listings page, you can see how the Company is looking to expand. The Company has medical science liasons and Acthar salespeople in every corner of the US. It would be tough for a competitor to try to break in.

Acthar Sales Growth Will Continue

Questcor is on track to repeatedly beat its previous quarters in revenues and earnings. Next quarter it will probably deliver over 5,000 vials, and then over 6,000 the quarter after that. And this is only in the United States. The whole world can benefit from Acthar once Questcor starts branching out into other countries.

It has been six months since wrote an article that decimated the stock, and look at how the Company has grown. Another six months could go by after the Citron article with still no competitors showing up and still having record breaking quarters. By then the stock could be trading between $65-$75 per share. I rate QCOR a Strong Buy.

Disclosure: I am long QCOR.