Another False Alarm For This Biotech Stock?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Questcor Pharmaceuticals (NASDAQ: QCOR) has had a bumpy ride over the past four weeks. The stock has seen a lot of ups and downs since the Citroen research report came out. The latest twist in the tale came when the news came out that Questcor’s lead drug, Acthar, can face generic competition. An update on the FDA website indicated that Cerium Pharmaceuticals had sought orphan drug status for a synthetic version of Acthar. Synacthen Depot, the generic drug by Cerium, is widely available in Europe at substantially lower prices.

As a result, Questcor's stock came down. At the moment, Questcor is extremely volatile, and a small piece of news can bring a 10%-15% swing. The company does not have any other drug in its pipeline, which causes the wild swings in stock price. Questcor generates all of its revenues from Acthar, and any low-priced rival drug can bite into its revenues. It is normal for a stock to be volatile if the company has such a small pipeline. It does not provide the company a cushion to fall back on if sales from one drug start to decline. As a result, investors tend to overreact when it comes to any negative news about Questcor.

What does Synacthen’s Orphan drug status mean for Acthar?

Orphan Drug Designation is meant to advance the development of treatments for rare diseases that affect fewer than 200,000 people in the United States. Without the designation, many drug companies would not find it profitable to pursue treatments for diseases with such small potential markets. Cerium’s success in getting orphan drug status for Synacthen does not pose any commercial threat to Acthar because the drug has not been approved. Cerium will have to conduct Phase 1, 2 and 3 trials and get FDA approval, which can take up to three years. Acthar has marketing exclusivity until 2017 in the Infantile Spasms (IS) condition.

If the company has access to previous data then the drug may be approved without the trials. However, if Cerium has to conduct trials, it will take at least three years for Synacthen to get approved. In addition, there are concerns about the safety profile of Synacthen. The drug contains benzyl alcohol, which can be toxic for infants. Synacthen is not recommended in infants and children up to 3 years old as it may cause toxic and allergic reactions. Presence of a potential toxic ingredient may make it difficult for Cerium to get Synacthen approved for Infantile Spasms.

If Approved, How Much Damage Synacthen can Cause to Questcor?

Doctors prescribe Acthar for multiple conditions. At the moment, the biggest portion of Questcor's revenue comes from Multiple Sclerosis. Behind Multiple Sclerosis in terms of revenue generation, is Nephrotic Syndrome. A major portion of revenues for Questcor comes from these two conditions. Recently, the company has been trying to increase its sales from the Nephrotic Syndrome segment. As a result of an increased sales force, the company has substantially increased sales from the segment. Also, the company generates a small portion of its revenues from Infantile Spasms segment. Almost 6% of total revenues for Questcor come from Infantile Spasms segment. 

Acthar has marketing exclusivity in the segment until 2017. If the worst happens (Synacthen approval plus the elimination of Acthar exclusivity), it will still hurt a small portion of Questcor revenues. I do not believe there is an imminent threat to Questcor from Synacthen. In addition, the company is further diversifying its revenues by focusing on its Rheumatology segment. I believe it is unlikely that the FDA will take away marketing exclusivity from Acthar; as a result, Synacthen will not be able to enter the market before 2017.

Questcor Vs the Rest:

Recently, the BioPharma sector has had mixed fortunes. Sarepta Therapeutics (NASDAQ: SRPT) went through the roof once the trial results of the Duchene muscular dystrophy came out. The company announced that participants in the trial had shown significant improvement. On the other hand, obesity drug makers Vivus (NASDAQ: VVUS) and Arena Pharmaceuticals (NASDAQ: ARNA) lost value due to the poor results of Vivus. Vivus reported poor sales figures for its anti-obesity drug Qsymia, which took the entire sector down. While I think these stocks still have substantial upside potential, there is short-term pressure on both of them.

Another player in the BioPharma sector is Amarin (NASDAQ: AMRN). Amarin has received approval for its fish oil pill and is currently waiting for the NCE status update from the FDA. Once the NCE status issue is resolved, Amarin will make big moves and return handsomely. In the table below, we have compared important metrics.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>QCOR</strong></p> </td> <td> <p><strong>ARNA</strong></p> </td> <td> <p><strong>VVUS</strong></p> </td> <td> <p><strong>AMRN</strong></p> </td> <td> <p><strong>SRPT</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$1.48 Bil</p> </td> <td> <p>$2.00 Bil</p> </td> <td> <p>$1.20 Bil</p> </td> <td> <p>$1.63 Bil</p> </td> <td> <p>$690.49 Mil</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>12.10</p> </td> <td> <p>16.80</p> </td> <td> <p>4.40</p> </td> <td> <p>273.75</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>P/S</strong></p> </td> <td> <p>3.90</p> </td> <td> <p>58.60</p> </td> <td> <p>28580.00</p> </td> <td> <p>N/A</p> </td> <td> <p>15.84</p> </td> </tr> <tr> <td> <p><strong>EPS Growth</strong></p> </td> <td> <p>35.20%</p> </td> <td> <p>29.50%</p> </td> <td> <p>30.30%</p> </td> <td> <p>78.69%</p> </td> <td> <p>93.82%</p> </td> </tr> <tr> <td> <p><strong>ROE TTM</strong></p> </td> <td> <p>113.50%</p> </td> <td> <p>4.00%</p> </td> <td> <p>-44.60%</p> </td> <td> <p>N/A</p> </td> <td> <p>-446.04%</p> </td> </tr> <tr> <td> <p><strong>Debt to Equity</strong></p> </td> <td> <p>0.00</p> </td> <td> <p>0.64</p> </td> <td> <p>0.00</p> </td> <td> <p>24.09</p> </td> <td> <p>0.00</p> </td> </tr> </tbody> </table>

Most of the companies mentioned above are development stage Biopharmaceutical companies. Some of the companies do not have established drugs. As a result, some metrics are not available for these companies. However, all of these companies have potential blockbuster drugs and can prove to be smart picks.

Summary:

Questcor took a brave step in 2007 when the company increased the price of a vial from $1,600 to $23,000. Suddenly, the company transformed from a failure to an extremely attractive investment. Before 2007, the company was not able to generate profits. The drug in question has been around for more than 50 years, but Questcor made its use profitable. Increased profits will surely attract generic competition. However, I believe that Acthar will not face competition from generic producers anytime soon due to its marketing exclusivity. I expect Questcor to remain volatile in the near future. However, I am confident that the company will do well in the long term.

Drive Home with More Analysis

Questcor is one of the most debated names in all of biotech. Its premium priced drug Actharis growing at a torrid pace, and minting money in the process. However, recent events have created significant doubts about Questcor's future. Will insurance companies continue to cover the drug? Will a government investigation lead to huge fines? The Motley Fool highlights these high profile issues inside their brand new premium research report on Questcor. In it, you'll learn about the key opportunities and threats facing the company, as well as multiple reasons to buy and sell the stock. The Fool is providing a full year of analyst updates as key news hits, so make sure to claim a copy today by clicking here now.


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