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Edited by Adam Isaac

Questcor (NASDAQ:QCOR) sunk almost 50% on September 19, 2012 after Aetna (NYSE:AET) announced that it was going to stop coverage of Acthar for certain conditions. The company announced in the policy bulletin that Questcor's Acthar gel was medically essential for only infantile spasms. Aetna's policy bulletin suggested that the medicine is not superior to other therapies in the 18 other conditions that it was approved to treat. The policy document was immediately utilized by short sellers, and a negative report was issued. The market also took the news badly, and the stock lost almost half of its value in one day. However, the stock has already started recovering and the conference call by the company has helped to clear the issue. As I mentioned in my previous article, there remain strong prospects for the drug.

Acthar is a unique drug that does not compete with other treatment agents. Acthar should be used for patients who have been through other treatment regimes such as steroids. The drug is prescribed only to patients for whom the primary treatment has had no effect. Once the physician and patient reach for Acthar as a treatment approach, they have normally tried the primary treatments to no advantage. Acthar is high-priced product which is used in a very limited population. The conference call also clarified that the reimbursements for Acthar are never routine, and it works on a case by case basis. As the company announced, that Aetna only constituted 5% of the total reimbursements for Acthar. Other insurance providers would have to follow suit in order to justify such large fall in price. However, other insurers have not shown any sign of stopping coverage of Acthar.

In addition, the company emphasized that the policy decision was interim. It is likely to be reviewed in October, where the company hopes it will be overturned as negotiations carry on with the company. The usual reimbursement process for an Acthar prescription is very labor intensive, and the company has a team of over 30 reimbursement specialists working on the process. This grueling procedure to secure Acthar coverage or individual prescriptions has been ongoing constantly since late 2007. Requirements for achieving coverage for an Acthar prescription have amplified over time. The company contributes in the Medicaid program. It formerly announced that Medicaid will bring down its reimbursement rates for Acthar gel. This means that insurance companies will have to cover a lower ratio of the total cost. Questcor will get considerably more proceeds from sales to the government. As a result, the operating results of the company will be further improved as the company is already experiencing a healthy growth in sales.

Questcor Stock Price:

(click to enlarge)QCOR Chart

QCOR data by YCharts

Financial Highlights:

According to the earnings report, the firm recorded sales of $112.5 million due to the expanded physician usage of Acthar gel. The usage saw increase mainly in idiopathic nephrotic syndrome and MS exacerbations. The increase in sales was over 200% as compared to the last year, when the firm recorded sales of $46 million. Net income for the quarter was $41.5 million or $0.65 per diluted share, in contrast to $13.9 million, or $0.21 per diluted share for last year's equivalent quarter.

However, net sales for the first six months were $208.4 million, as compared to $82.8 million in the first six months of 2011. The company used $156.1 million in cash to buy 3.7 million shares of its common stock in the open market, at an average price of $41.85 per share, during the second quarter. Shares outstanding were 59.7 million at June 30, 2012 and 62.3 million at June 30, 2011.

Questcor dispatched 4,710 vials of Acthar during the quarter, up 94% compared to 2,430 vials in the same quarter last year. Quarterly vial batches are subject to considerable deviation due to the volume and timing of specific orders received from the company's distributor. The timing of these orders can considerably influence net sales and net income in any particular quarter. Channel inventory in the second quarter looks to be in the regular range.

Questcor Revenue:

(click to enlarge)QCOR Revenue Chart

QCOR Revenue data by YCharts

Summary:

As I have stated in my earlier article, Questcor has a unique product which faces very low competition at the moment. There remain huge growth prospects for the company due to the lower market penetration. In addition, the company is in a very healthy financial position. At the moment, there is no long term debt at the balance sheet of the company. Revenue has shown a strong growth trend. The company has surprised the market in its previous six earnings announcement, and I expect the trend to continue. I believe the stock will hit $40 again soon as the pressure of the news fades.

Source: Questcor: Primed For A Big Bounce