Questcor Pharmaceuticals Breaking $40 And Looking Poised To Begin A New Rally

Aug.22.12 | About: Mallinckrodt PLC (MNK)

On Tuesday shares of the biotechnology company Questcor Pharmaceuticals (QCOR) rallied and traded higher by nearly 6% after Bank of America (NYSE:BAC) reiterated its buy rating on the beaten down stock. As a result Questcor crossed a very crucial level of resistance at $40, a price at which Questcor has had trouble surpassing, and that is also a significant psychological barrier. Therefore, with rising sales of Acthar and its cheapest valuation since September of 2010, Questcor looks poised to rally, by a sizable margin.

Back in June, Questcor broke from $40 and went on to reach all-time highs at $58.91 during the month that followed. It was trading higher in anticipation of higher earnings, and on July 9, when the stock rose 15% to new highs, it was because of the company updating investors on sales of Acthar, which increased to an all-time best 4,710 vials shipped and a 15% premium over its first quarter results. This showed that Questcor was continuing its trend of increasing sales quarter-over-quarter, and that its growth was nowhere near slowing. However, its trend changed on June 10, when short-sellers questioned the company's ethics and explained that Questcor was vastly underselling the competitive threat to its sole drug Acthar, a speculative view that created widespread panic.

For anyone who has followed Questcor over the last few months, you are more than aware of the high volatility, caused by the imbalance of fundamentals and speculation. My purpose, is not to bash the short-seller's opinion (as everyone is entitled to his or her opinion) or question the purpose of the article (seeing as how the stock was overbought and vulnerable to profit taking). Instead, to reiterate my beliefs that Questcor looks poised to trade higher, as the only thing that matters is fundamentals, and the fundamentals of Questcor suggest aggressive growth and a product in Acthar that is nowhere near reaching its full potential.

For biotechnology investors, one of the scariest possibilities that surround an investment is speculation; because unfortunately it doesn't take much in terms of negativity to change the perception of a company. Questcor investors have had to endure this fear first hand due to its fall over the last couple months. However, with the stock trading at a forward P/E ratio of just 10.29, posting earnings growth of 200% and revenue growth of nearly 150% year-over-year, and being valued at levels that appear safe from any short-seller's attacks, it does appear as though Tuesday may be the first day of a long-term rally.

Questcor is still two months from announcing earnings, but before the company announced earnings last quarter, it rallied two months before the company's quarterly results. It rallied because the stock was cheap compared to expectations and investors expected strong sales due to the aggressive expansion of the sales team for Acthar and, contrary to popular belief, its complex manufacturing process that protects it from generic competition. The fact of the matter is that Acthar is a drug that was passed on by virtually all large pharma companies, and Questcor management had the expertise and the courage to develop the candidate. Now, with the company reporting revenue of nearly $350 million over the last 12 months and trading with its cheapest valuation in terms of price/earnings and price/sales the stock looks very attractive, and could be poised to rally into this next earnings report as investors expect sales to continue being strong.

I suppose the key question associated with Questcor is, "if the company is so good then why did it sell off, or trading with a loss of more than 30% since June 9, and hasn't recovered from its loss?" The simple answer is because investors are scared. There is no one who wants to own a stock when shorts attack, and after such aggressive profit taking investors typically choose to wait out the storm or wait for some form of proof that the loss has ended. With that being said, Tuesday's breakout and gains of nearly 6%, over $40 a share, may be the assurance that investors seek. And with earnings getting closer, and expectations set so high, it is very likely that Questcor will experience another run-up similar to the rally in June. Because when it's all said and done, speculation may temporarily cause fear and crush a stock, but fundamentals always prevail, and with Questcor, there are very few biotechs growing at a similar rate and even fewer biotechs that have more upside potential. Therefore, it is my belief that common sense will prevail, and unless some market related event causes the market to crash, then the last two months will soon be an afterthought, and Questcor will answer its critics with fundamental gains due to yet another record quarter of Acthar sales.

Disclosure: I am long [[Questcor]]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.