Questcor: Primed For A Rebound

| About: Mallinckrodt PLC (MNK)
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By Ishtiaq Ahmed

Questcor Pharmaceuticals (QCOR) reported its third quarter results on October 23, 2012. As expected, the company reported stellar results and showed no signs of revenue growth slowing. In our last piece about this company, we stated an expectation that it would soon begin to report impressive revenue figures. Additionally, we also predicted that physician coverage for Acthar would increase, as physicians become more likely to prescribe the drug.

Questcor has developed the habit of not only meeting such expectations, but actually exceeding them. Last quarter this was certainly the case. Let's look at the company's earnings results and the associated changing mood of the Street regarding this stock.

Third Quarter Results

Questcor reported extremely impressive revenues of $140.3 million for this period, representing an increase of 135 percent compared with the same quarter last year. Meanwhile, net sales for the nine months ending September 30, 2012 were $348.8 million, showing an increase of 145 percent from the last year. Net sales for the same period last year were only $142.6 million. Furthermore, total vials shipped by the company showed an increase of 92 percent from the same quarter last year. Questcor has been getting the majority of its revenues from its Multiple Sclerosis segment. Recently, the company has been trying to increase sales from its Nephrotic Syndrome department as well. From the results reported by the company, it looks like Questcor is achieving considerable success in this area.

For the last year, Acthar vials sold for Nephrotic Syndrome numbered 269. However, for the first three quarters of 2012, the company has already sold 887 vials of Acthar for the treatment of Nephrotic Syndrome. This can largely be attributed to a more successful Nephrotic Syndrome department sales force.

In addition, the company has experienced remarkable growth in revenues from its Multiple Sclerosis segment. The company sold 3,090 vials for Multiple Sclerosis in 2011. However, for the first three quarters of 2012, the company sold 3,401 vials for Multiple Sclerosis. Questcor reported earnings of $0.91, beating the analyst estimates by more than 21 percent.

Dividend and Share Repurchase Program:

Questcor used $58.1 million in cash to repurchase 1,484,300 shares of common stocks in open market transactions during the third quarter. The shares were bought at an average price of $39.15 per share. Questcor also increased its common stock repurchase program to seven million shares. The authorized amount includes the 3.2 million shares that remained from under the prior authorization. On September 28, 2012, Questcor announced a regular quarterly dividend of $0.20 per share. Based on the stock price on October 31, 2012, Questcor presently yields 3.25 percent, which is a particularly attractive number in the healthcare sector. At present, Questcor has a conservative and manageable payout ratio of 22 percent, based on earnings.

Changing Mood on the Street

Impressive quarterly results reversed some of the negative sentiment about this stock, resulting in increased the price targets from analysts. Jefferies Group increased its price target from $28 to $30, citing an increase in sales and an accompanying decrease in the share count. Analysts at Ladenburg Thalmann upgraded Questcor's rating from neutral to a buy, and now have a $33 price target on the stock. Additionally, analysts at Piper Jaffray have a $43 price target on the stock.

What Could be the Negatives?

Questcor decided against disclosing its monthly Acthar sales in order to counter pressure on the stock from short sellers. However, such a maneuver can bring the transparency of all company sales into question thereby deterring investors. The company plans to follow the quarterly disclosure of Acthar sales. Questcor has seen phenomenal growth in sales in the previous two years. However, in the coming years, we may see a slight decline in the revenue growth. It will be extremely difficult for the company to maintain its current revenue growth rate. Nevertheless, I believe the coverage for the drug will remain high. As I have mentioned in my previous articles, the biggest threat for Questcor comes from insurance coverage. However, the new policy update from UnitedHealth Group (UNH) allayed fears, as it did not follow Aetna (AET) in stopping coverage for Acthar. Another important factor to keep in mind is the investigation into Questcor's marketing practices.


Questcor stock has been extremely volatile recently, and investors remain concerned about its the future direction. As I stated, the insurance coverage and investigation into the marketing practices will play an important role for Questcor. However, I believe the market has been extremely harsh to the stock recently.

At the current price levels, Questcor represents a great opportunity to make substantial profits. The stock has extremely attractive fundamentals and multiples. It has P/E of 10.1 and P/S of 4.0. In addition, the company has recorded extremely impressive revenue and earnings growth of 31.8 percent and 35.2 percent, respectively. A recent announcement by UnitedHealth Group strengthens my belief that the drug will receive coverage from insurance companies. Future prospects remain bright for Questcor, and I expect it to hit $30 mark soon.

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

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ishtiaq Ahmed, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.