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Questcor: Risk and Reward
12/26/2013 7:00 am EST
HP Acthar Gel is a drug that is approved by the FDA to treat 19 different conditions—including infantile spasms, multiple sclerosis, nephrotic syndrome, and rheumatology indications, such as psoriatic arthritis and rheumatoid arthritis, explains Briton Ryle in The Wealth Advisory.
Although Questcor Pharmaceuticals (QCOR) is currently a one-drug biotech, the firm is expanding its studies of HP Achtar Gel, to grow its market share in lupus and Lou Gehrig's disease. And Acthar Gel is likely to be approved for other conditions as well.
It's not the drug that attracted us to Questcor, it's the revenue and earnings growth. Over the last three quarters in 2013, total revenue came in at $135 million (1Q), then $184 million (2Q), and in the last quarter, $236 million (3Q).
In 2012, quarterly revenue was $90 million (1Q), $112 million (2Q), $140 million ($3Q), and $160 million (4Q). Put simply, at 80% a year for three years, that is phenomenal revenue growth.
But there is a fly-in-the-ointment in the form of an expanded investigation into Questcor's marketing practices.
Questcor had been under investigation by the Pennsylvania office of the US Attorney General. Then, on October 29, Questcor disclosed that the US Attorney's office for the Southern District of New York, and the Los Angeles office of the Securities and Exchange Commission, had joined the earlier investigation.
There are a few things to note here. First, this type of investigation is not uncommon. According to one source, there were 21 settlements for marketing violations between 2010 and 2012. The average fine was $250 million. And, if we exclude the three largest settlements, the average fine was $136 million.
Neither of these amounts will put Questcor out of business, that's for sure. And, at the lower range amount, it may even come as a relief, as a large uncertainty would be removed (that is, if there is a fine).
The second thing to note is that these types of investigations take an average of three years to complete. The initial probe is a year old, so it could be two more years before any conclusion is reached. Questcor is poised to sell a lot of Acthar Gel in the next two years.
Third, two days after the expanded investigation was announced, analysts at Piper Jaffray raised their price target from $74 to $85, saying the firm “...remains positive on the company in the absence of clear evidence that Questcor's promotional practices deviate meaningfully from industry norms.”
The bottom line here is that we believe the reward far outweighs the risk to Questcor shares. $60 is likely an attractive entry point and offers 50% to our $90 price target.
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