Questcor Pharmaceuticals - As Acthar's Uncertainty Decreases, Shares Rally

| About: Mallinckrodt PLC (MNK)
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Shareholders in Questcor Pharmaceuticals (QCOR) are relieved after the company released very strong second quarter results. The rapid growth of its Acthar medication, and increased usage potential for other diseases is comforting to investors.

Investors are still somewhat shocked after shares lost half their value last year in a single trading day after insurer Aetna announced it would no longer be reimbursing the expensive medication.

Shares are still very risky in case a renewed scrutiny event would occur. As society is struggling to cope with rising healthcare costs a $28,000 medication does not come cheap.

Based on the underlying growth, shares are very cheap. Yet if Acthar comes under scrutiny again, large declines will occur. A long straddle strategy might bring the most value for money once the stock settles down.

Second Quarter Results

Questcor generated second quarter non-GAAP revenues of $196.1 million, up 74% on the year before. GAAP revenues rose by 64% to $184.6 million. The acquisition of BioVectra in January of this year added $7.5 million in quarterly revenues. Consensus estimates for GAAP revenues stood at $184.6 million.

The $11.5 million discrepancy in GAAP and non-GAAP revenues are related to a Medicaid rebate liability as a result of Questcor's entry into the Medicaid system.

Non-GAAP earnings per share almost doubled, increasing by 96% to $1.35 per share. GAAP earnings per share rose by 72% to $1.12 per share, comfortably beating consensus estimates of $0.99 per share.

CEO Don M. Bailey commented on the excellent results, "Our commercial expansion effort continues, most recently driven by increasing usage of Acthar among rheumatologists. The foundation for potential additional growth over the near-, medium- and long-term continues to strengthen. The first full quarter of our commercial rheumatology effort generated over 300 prescriptions, marking the best Acthar launch into a new therapeutic area that we have yet experienced."

Looking Into The Results

Revenue growth was driven by an increase in shipments of Acthar, which rose by 50% to 7,050 vials. Questcor stresses that the shipments of vial orders is subject to variation due to the size and timing of individual orders.

Acthar's usage continues to increase among rheumatologists, as the foundation for further growth continues to strengthen. The company saw 300 prescriptions in rheumotology sparking the company to accelerate the entry in the pulmonology business.

Total prescriptions for Acthar were around 2,250, up 35% on the year before. Strong shipment activity at the end of the first quarter continued through the second quarter. The uptick in demand for the rheumatology and polymyositis business are encouraging as well.

The strong financial results allowed Questcor to increase investments in research programs to further clarify the potential immune-modulating properties of Acthar, and applications for other auto-immune diseases. During the quarter, Questcor increased its research & development investments by 44% to $12.2 milling.


The company ended the quarter with $115.6 million in cash, equivalents and short term investments. The company operates with $16.8 million in total debt, for a solid net cash position.

For the first six months of the year, Questcor has seen its GAAP revenues increase by 53% to $319.7 million. GAAP earnings rose to $108.2 million, or $1.79 per share. At this pace annual revenues of $700-$800 million should be attainable, while net earnings could come in around $250-$300 million.

Shares of Questcor have seen an impressive uptick following the release of the results. Shares rose 28% to $67 per share, valuing the business at $4.0 billion. As such, operating assets are valued at $3.9 billion. Based on the full year estimates above, operating assets are valued at 5.2 times annual revenues and merely 14-15 times annual earnings.

Questcor currently pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 1.5%.

Some Historical Perspective

Long term holders of Questcor's stock have seen incredible returns. Shares traded at merely $1 in 2007 and have risen to $50 in 2012 on the back of price increases and increased usage of Acthar.

Shares lost half their value, falling all the way to $20 back in September of 2012 after insurer Aetna (NYSE:AET) announced that it would limit coverage of the drug. Shares quickly rebounded as sales and profits continued to grow. Shares are trading at fresh all time highs, exchanging at $70 per share.

The price hikes of Acthar have resulted in rapidly growing revenues in recent years. Between 2009 and 2012, Questcor has seen rapid growth as annual revenues rose from merely $88 million in 2009 towards $509 million in 2012. Net income came in at $197 million over the past year, resulting in an incredible net profit margin of 39%.

Investment Thesis

Investors are relieved. After the initial shock which Aetna caused last year, by limiting coverage of Acthar, shipments of the product keep increasing at impressive rates. The company also states that insurance coverage for Acthar remained favorable during the quarter.

While Questcor stresses that shipments are volatile over a quarter, and the second quarter might have been a positive outlier, it is actively marketing the product as well.

It is understandable to see some scrutiny from health care insurers like Aetna. Acthar costs something in the region of $28,000 per vial and Questcor earns roughly $10,000 per vial, even after paying tax. And that is just for a 5 millimeter vial.

The price increase of Acthar goes back a long way. Back in 2007 the company raised prices from little over $1,000 a dose towards $23,000 as the market for infantile spasms was just 800 patients a year. The price hike was a necessity to cover the costs as the addressable market was so small.

Yet demand remained firm despite a fifteen-fold in the price, triggering Questcor to aggressively market the product for other diseases such as multiple sclerosis, nephrotic syndrome and rheumatologic conditions. The usage of Acthar is heavily debated as some insurers and doctors claim simple alternatives, which are far cheaper, have the same effect.

As such it is all or nothing for Questcor with one major product supporting the valuation. This is crucial to keep in mind for shareholders. If the company manages to expand the usage of Acthar to other diseases at these very high prices, things are looking rosy for shareholders. Otherwise, the prospects don't look good at all.

Given that I am not in the business of gambling on such an outcome, I remain on the sidelines, but remain fascinated about the news flow. Perhaps initiating a long position in long term straddles might be a good idea once the stock settles down.

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.