What's Going On With Questcor?

| About: Mallinckrodt PLC (MNK)

Edited By Adam Isaac

Questcor Pharmaceuticals (QCOR) provides drugs for the treatment of multiple sclerosis, infantile spasms and nephritic syndrome indications. It mainly offers H.P. Acthar Gel, which is an injectable drug for the cure of acute exacerbations of multiple sclerosis in adults. The Gel helps to induce diuresis or remission of proteinuria in the nephrotic syndrome for the treatment of infantile spasms in infants and children under two years of age. The company's H.P. Acthar Gel is also used on rheumatology-related conditions, including collagen diseases and rheumatic disorders.

Questcor stock fell almost 50% on Wednesday, September 19, 2012. A fall of this magnitude is a rare occurrence and sometimes baffling. However, in the case of Questcor, the fall is due to the market reacting to just one piece of bad news. Is the fall in price justified? I do not believe so. In order to explain my view, I have conducted some research and collected the following details.

Reimbursement issues:

Questcor stock fell after the news hit the market that Aetna (NYSE:AET) has limited the reimbursement on the drug. Aetna claimed the drug is not significantly more effective than other treatments available in the market for Infantile Spasms. The insurance company also suggested that it is medically unnecessary to treat certain other conditions which are present on the label of the drug. At the moment, Acthar is approved to be prescribed for 19 conditions and Infantile Spasms is one of the conditions it is widely prescribed. The company claims that only 5% of the business is generated from Aetna and operations will not be significantly impacted by the news. Here, I agree with the stance of the company.

Even if the insurance reimbursements stop at Aetna, the fall in price is way too much exaggerated. A 50% fall in the stock price for a concern about one of the minor revenue contributors is obviously an indication of panic among investors. In order to justify the fall in the price, the firm will have to take a significant hit in its revenue generation capability, which I do not see here.

However, if the other insurers such as WellPoint (WLP), Cigna (NYSE:CI) and UnitedHealth Group (NYSE:UNH) follow Aetna's step and decline reimbursements, the company can have some trouble and revenue will be affected.

Threats and Opportunities:

The biggest threat for the company is its over reliance on one product. Almost all of revenues for Questcor come from the sales of Acthar. The only other product in the portfolio of the company is Doral, which contributes a tiny portion of revenues for the company. Questcor markets Doral for the cure of insomnia. The company sells its Acthar mainly to specialty pharmacies and Doral to pharmaceutical wholesalers.

The revenues have seen exponential growth. In the previous year, Questcor recorded revenue growth of 142%, which was followed by 152% growth in the previous quarter. However, the revenues are too much focused on a single product. Reliance on just one product exposes the company to the risk of declining revenues if this product faces a slowdown in sales.

Along with the threats, there remain considerable opportunities for the company. Acthar gel can be prescribed for 19 conditions, and the company is working on adding more conditions to the label. Questcor has expanded two sales forces, and the company is building a third sales force in rheumatology. The drug has a magnificent clinical profile. It helps treat patients who do not respond to other medicines. In addition, there is not a great deal of saturation in the market, and considerable room exists for Questcor to augment its revenues.


It is truly astounding to see a firm with such great potential fall so low with one piece of bad news. I believe that the growth prospects of the firm are still solid, and the drug is still widely prescribed. In addition, the firm is expected to record healthy revenue growth, which it has already shown over the past two years. The analyst community is collectively adamant that the firm will do well in the long run, and record healthy growth. Oppenheimer has a target price of $65.

The company has no debt issues, and is attractively priced with a low trailing P/E of 12.8. It has nifty profit margins. I believe the market has been extremely harsh in order to justify this price fall. A lot of bad things will have to come together to justify the decline, but they did not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.