The Pharmaceutical Company With Huge Growth

By George Liu - June 19, 2012 | Tickers: AMGN, CELG, QCOR, TEVA | 0 Comments

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Amgen (NASDAQ: AMGN), Celgene (NASDAQ: CELG), and Teva (NYSE: TEVA) are some of the largest biopharmaceutical companies in the industry. All of them have individual market caps in upwards of $29B and have a huge variety of products. Amgen has such products as Aranesp and ESPOGEN for human therapeutics. Celgene relies on a pipeline of drugs such as REVLIMID and VIDAZA to treat cancer and immune-inflammatory related diseases. Teva focuses on such products as Copaxone and Provigil. Yet, despite the diversification of these major biopharmaceutical companies, the industry has started to shift from the conventional strategy of simply diversifying drug portfolios. Intstead, many companies are now starting to focus on producing one major drug and finding multiple uses for it. At the forefront of this new shift is Questcor Pharmaceuticals, a company whose growth and stock performance has far outpaced that of its major biopharmaceutical peers. 

Questcor Pharmaceuticals (NASDAQ: QCOR) is a biopharmaceutical company that sells two products: H.P. Acthar Gel, which is its flagship product, and Doral, which is used to treat insomnia.  Questcor has been a favorite among mutual funds as its stock has experienced 8 consecutive quarters of increasing mutual fund ownership and it had a 4% YOY increase in mutual fund ownership for its first quarter of 2012. The appeal of Questcor's business is apparent upon closer analysis of the company, but some significant negatives also pop up. So is Questcor a good investment?

Positives

Questcor Pharmaceutical's main revenue-generator is its H.P. Acthar Gel, which is already approved as a treatment for 19 different symptoms. H.P. Acthar Gel was also designated with orphan drug status by the FDA for Infantile Spasms, which alone is estimated by Questcor to be a $100M market; this orphan drug status expires on October 15, 2017. H.P. Acthar Gel currently has no therapeutically equivalent counterpart and, as noted by Questcor's presentation at the Jefferies 2012 Global Healthcare Conference, the production of biosimilar pathways to the H.P. Acthar Gel by competitors is nearly impossible. For one, it is extremely difficult to reverse engineer H.P. Acthar Gel, which is not well characterized. Production of H.P. Acthar Gel or a near-counterpart also requires complex pharmacology as well as extensive clinical testing. H.P. Acthar Gel basically has a monopoly on a lot of the markets of the 19 symptoms it can be used to treat, a competitive advantage which is not likely to be lost in the near future. 

H.P. Acthar Gel also has huge potential and can very well develop into a billion-dollar drug. Its key markets are Nephrotic Syndrome, Multiple Sclerosis, and Infantile Spasms. Questcor estimates that the market sizes for Nephrotic Syndrome and Multiple Sclerosis are at least $1B each. Moreover, H.P Acthar Gel's opportunity in the rheumatology market is also estimated at roughly $1B. Add up the simple math, and the potential total market opportunity for Acthar Gel can very well total at least $3B. Currently, market penetration of H.P Acthar Gel is low: in the first quarter of 2012, H.P. Acthar Gel had only $96M in net sales, a figure which was actually up 161% YOY. Moreover, Questcor's R&D budget is currently being used to fund clinical trials that could prove the effective treatment of 40 other diseases by Acthar Gel. There is still massive room for H.P Acthar Gel to grow.

Questcor Pharmaceuticals is also extremely profitable and has excellent financials. For its first quarter of 2012, Questcor reported a 94% gross margin, one which provides it with excellent operating leverage; Questcor currently has a 49.4% Annual ROE and a 55.3% Annual Pre-Tax Margin. Questcor’s earnings growth is phenomenal, with a 205% YOY increase in its 2012 1Q EPS and a 197% average EPS growth rate for the last 3 quarters. The same goes for its sales: Questcor posted a 161% YOY increase in its 2012 1Q sales figures. Questcor is also debt-free.

 Negatives

The entire health of Questcor Pharmaceuticals revolves around the continuing growth of its H.P. Acthar Gel; Doral, its other product, generates insignificant sales to the extent that it wasn’t even mentioned during Questcor’s presentation at the Jefferies 2012 Global Healthcare Conference. Moreover, Questcor has no plans to diversify its product portfolio and its sole strategic goals are to promote Acthar and find new uses for it. Although there is very little danger of detrimental effects resulting from this sole focus on the H.P. Acthar Gel in the near term, the sustainability of this business model is questionable over the long term.

Moreover, Questcor Pharmaceuticals has been criticized by many for exponentially increasing the price (1300% literally overnight) of its H.P. Acthar Gel after it achieved orphan drug status. One dose of H.P Acthar Gel now costs more than $25,000. When TheStreetSweeper announced a report on Questcor Pharmaceuticals in January, the company's stock dived more than 14.9% that trading day. Since then, Questcor Pharmaceuticals has gone to extensive lengths to refute the claims of TheStreetSweeper's report and defend its business practices. However, the controversy surrounding the drastic price increases of H.P. Acthar Gel may potentially continue to be a problem in the future.

The Verdict

Overall, I would strongly recommend investors look into Questcor Pharmaceuticals as a potential investment due to the strength and opportunity of its H.P. Acthar Gel and the strong financials of the company.

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