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The recent history of Questcor (NASDAQ: QCOR) is filled with quite a few events that have moved the stock, including many outside opinions that have made it somewhat difficult to update headlines and incorporate them into an impartial viewpoint on the stock. As you may know, Questcor trades almost exclusively on news of its marketed flagship product H.P. Acthar gel, which is a treatment for multiple sclerosis relapses, infantile spasms (West Syndrome), and nephrotic syndrome.

I started following the hysteria over QCOR in September, forming a viewpoint of my own over time (which I'll elaborate on momentarily). To anyone who is newer to the QCOR drama, here is a condensed timeline to put everything in context:

  • September 18 - Oppenheimer puts a bullish $69 price target on the stock, citing confidence that Acthar is not at major risk of negative changes to reimbursement policy. QCOR closed at $50.52/share.
  • September 19 - "D-Day for the bears" if you will. This is the day that the health insurance provider Aetna altered their reimbursement policy on Acthar gel, limiting it to the treatment of infantile spasms. Oppenheimer is proved wrong, and I wrote a few more details about the analysts' opinions here if you're interested. QCOR closed at $26.35/share.
  • September 24 - Questcor gets slammed again on news of a government probe, disclosed in their 8-K. Analysts get much more bearish, perceiving this as a sign of increased risk to reimbursement policy for Acthar gel. QCOR closed at $19.08/share.
  • September 27 - QCOR hits the 52-week low of $17.25/share.
  • September 28 - Questcor management authorized a $.20/share dividend and a beefed up repurchase plan (now 7 million shares instead of 3.2.). QCOR closed at $18.47/share.
  • October 5 - United Health releases a policy update bulletin which gets mixed reactions, but is ultimately perceived as neutral (which is good for QCOR). QCOR closed at $19.40/share.
  • October 9 - Analysts start to get bullish again, like Jefferies which upgrades QCOR to a buy. Short-squeeze that I mention in an article on this day begins to occur. QCOR closes $20.96/share.
  • October 19 - Citron writes a heavily bearish piece on Questcor, using a document from Humana to scare the market into thinking that Acthar was at risk of a negative reimbursement policy change from them. There's more about that here, if you want more details. QCOR closed at $24.99/share.
  • October 23 - Questcor reports third quarter earnings, and provides some much-needed clarity on the company's situation. QCOR closed last Monday at $25.93.

Now that we've gone over the history (again), lets start delving into Questcor's fundamental picture with all the knowledge we've obtained.

First, we should check out the sales revenue figures from the Q3 2012 report. The company's total revenue was $140.3 million - a 135% increase relative to Q3 2011. Year-on-year GAAP earnings growth was even higher, at 160%. The company's statements implied continued confidence that this trend would continue.

"Overall, our commercial expansion effort continued to show progress during the third quarter," said Don M. Bailey, President and CEO of Questcor. "Health care providers are expanding their usage of Acthar as an FDA-approved treatment alternative for patients with idiopathic types of nephrotic syndrome, MS relapses and rheumatology related conditions. We also continue to support patients suffering from infantile spasms."

Also, consider the charts that the company provided that showed the trends in new shipped prescriptions. This distinguishes paid and reimbursed Acthar prescriptions:

Nephrotic Syndrome (and related conditions) New Rxs

Paid

Fully

Rebated

Total

2010

Q1-10

11

0

11

Q2-10

4

1

5

Q3-10

8

0

8

Q4-10

7

0

7

Total 2010

30

1

31

2011

Q1-11

18

1

19

Q2-11

45

4

49

Q3-11

60

2

62

Q4-11

146

19

165

Total 2011

269

26

295

2012

Q1-12

238

14

252

Q2-12

314

24

338

Q3-12

335

17

352

Multiple Sclerosis (and related conditions) New Rxs

Paid

Year-Over-Year

Growth in Paid Rx

Fully

Rebated

Total

2010

Q1-10

231

196%

12

243

Q2-10

304

145%

24

328

Q3-10

323

129%

19

342

Q4-10

354

66%

24

378

Total 2010

1,212

118%

79

1,291

2011

Q1-11

508

120%

49

557

Q2-11

751

147%

58

809

Q3-11

886

174%

46

932

Q4-11

945

167%

44

989

Total 2011

3,090

155%

197

3,287

2012

Q1-12

1,000

97%

51

1,051

Q2-12

1,110

48%

41

1,151

Q3-12

1,291

46%

49

1,340

Infantile Spasms (and related conditions) New Rxs*

Paid

Fully

Rebated

Total

2010

Q1-10

89

48

137

Q2-10

95

66

161

Q3-10

92

78

170

Q4-10

91

68

159

Total 2010

367

260

627

2011

Q1-11

89

71

160

Q2-11

106

79

185

Q3-11

112

69

181

Q4-11

120

51

171

Total 2011

427

270

697

2012

Q1-12

112

71

183

Q2-12

96

73

169

Q3-12

102

70

172

(Source: Questcor's Q3 earnings report press release)

The first thing to note is that Questcor investors have to pay the most attention to healthcare policy for Acthar's treatment of Multiple Sclerosis relapses, which is the bulk of the product's revenue and revenue growth. Yes, the Aetna policy update will remain, but the United Health policy update didn't imply that we would see all major insurance companies follow suit.

The only elephant left in the room is the government probe which is concerned with Questcor's marketing practices. This is referenced in Questcor's investment risk section, since litigation fees can add up to dramatic sums. Still, this probably isn't as traumatic of an investigation as you might think (assuming it does amount to something). It's being conducted by United States Attorney's Office for the Eastern District of Pennsylvania, which has an interesting history of litigation against pharma companies in particular.

Consider their case against Cephalon, settled in 2008 for $425 million. Cephalon promoted off-label use of THREE drugs between 2001-2006. While we don't know what the DA's office has exactly, we can incorporate the possibility that they have nothing on Questcor. The market is subconsciously shaving a few hundred million off of Questcor's market cap due to this litigation risk alone.

Assuming that Aetna ends up as the only insurer that changes its Acthar gel reimbursement policy, and that the United States Attorney's Office for the Eastern District of Pennsylvania doesn't get any dirt on Questcor, we'd probably see QCOR return above $40/share or so in 2013. The counter-rally isn't finished yet.

Note: Short interest also looks like it's reached a peak. 26.3 million shares were short on Sept. 28, only 25.7 million were on October 15.

Source: Putting Questcor's Counter-Rally Into Perspective