Questcor Pharmaceuticals

01/17/2014 5:00 am EST

Focus: HEALTHCARE

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

For his top pick for the coming year, value investor J. Royden Ward, Chief Analyst and editor of Cabot Benjamin Graham Value Investor, looks to a fast-growing pharmaceutical stock that is under the cloud of an investigation.

Questcor Pharmaceuticals (QCOR) is a specialty pharmaceutical company providing H.P. Acthar Gel (Acthar), a prescription drug for treating autoimmune disorders and other ailments, including MS (multiple sclerosis).

Questcor is in Phase II trials to gain FDA approval to sell Acthar as a treatment for ALS (Lou Gehrig's disease). In 2014, sales will increase 30% and EPS (earnings per share) will jump 38% to $6.32.

QCOR shares have dropped recently, after the report of an investigation by the states of PA and NY, and, in addition, by the Securities and Exchange Commission. Details are few, but the investigation seems to include examining Questcor's labeling and marketing practices.

Realistically, Questcor will lose part of its fight and will be fined and admonished. The outcome will probably have no material effect on the company's sales and earnings.

Questcor shares are now a bargain at 11.8 times current EPS, with a dividend yield of 2.2%. The balance sheet includes minimal debt, but QCOR shares are high risk because of the speculative nature of the company's biotechnology business and the pending investigation. I expect QCOR to achieve my minimum sell price target of $114.85 within two years.

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