When Pigs Have $28,000 Wings

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

Put the blame on mame, boys, put the blame on mame ~ Rita Haywarth

Questcor Pharmaceuticals (NASDAQ: QCOR) can definitely put the blame on a lot of negative publicity - much of it false, malicious, or plain silly - for having lost almost 35% of its market capitalization in 2012, and for losing another nearly 4.5% of its value year-to-date.

This is funny because this is a company that has been beating market expectations for revenue and earnings in each quarter for almost two years now. It has a great product that it acquired for a song and is selling for a trove; it just made some very meaningful backward integration; and to top it all like the crumble toppings on my grandma's blueberry muffins, it pays a tidy dividend too. And yet, nothing seems to go well for this company, while the fact that the company has been exceeding expectations makes it clear that it has strong fundamentals going forward. It is, however, being beaten down by negative news, short sellers and bears alike.

Imagine an Investment Like This

Acthar was a drug that was not wanted by any major Pharma company. Nobody wanted it because they thought it was too difficult to manufacture and didn't have enough sales potential. Back in 2001, when Questcor was looming over bankruptcy fears, it bought Acthar from Aventis, now Sanofi-Aventis, for just $100,000, and a 1% commission on over $10 million of sales per year.

As the range of conditions the drug could treat increased over time, Acthar has produced sales of $865 million, including $424.30 million in the previous year. This product is also growing by more than 100% year-over-year and is well on its way to achieve annual sales of $1.0 billion. Given how the drug has produced large sales, and strong gains, it's only logical that the stock would pull back on any negative news about the drug. Interesting to know that the drug, which about a decade ago sold for $40 a vial, now sells for $28,000 thanks to aggressive marketing from Questcor and increased scope of treatment coverage.

Negative Coverage the Stock Has Endured

Insurer Aetna (NYSE: AET) dropped practically all coverage of Achtar for treating multiple sclerosis and nephrotic symdrome citing no proof of effectiveness. It, however, continues to offer reimbursement for treating infantile spasms, which only accounts for a small percentage of Achtar sales. It contended that Acthar was medically essential only to treat infantile spasms and that it was in no way superior to existing therapies in the 18 other diseases that it was approved for. Acthar has been approved to treat multiple sclerosis, rheumatic disorders, allergies, nephrotic syndrome, and eye and respiratory diseases.

Questcor was also in the news for being investigated by a U.S. agency over its promotional practices for marketing Acthar, sending its shares on a decline, losing almost a third of its value just days after Aetna announced cutback of reimbursements for Acthar.

Then appeared news that Questcor’s top-selling drug to treat infantile spasms, Acthar would be facing competition. A U.S. Food and Drug Administration update specified that, Cerium Pharmaceuticals had sought orphan drug status for a synthetic version of Acthar. The chances that the FDA would overrule its orphan drug exclusivity were slim, and it is hoped that the drug will enjoy that status till 2017.

BioVectra Acquisition (Vertical Integration)

The last news was the most damning for the company, as Acthar represents a majority of their revenues and earnings, and in an effort to remedy the situation, it decided to acquire BioVectra.

BioVectra has been a major supplier for one of the key ingredients for Acthar for almost a decade. The acquisition represents backward integration for Questcor firming up its supply side, giving it control over key raw materials, which can be used for preventing other competition for Acthar from entering the market.

The benefits are two-fold; first, the company will have better control over the manufacturing process and quality. This will allow the company to control the supply side of the drug, and second, the intellectual property of Acthar will be secured. Questcor paid C$50 million to acquire all the outstanding shares of BioVectra, and another C$50 million will depend upon its performance in the next three years. The entire payment has been made from the company’s own cash reserves.

A Growth, Dividend Stock

Questcor pays an annual dividend of $0.80 per share, yielding over 3%, and is one of the high yielding stocks available in the Biotech Pharma industry. Owing to the uncertainties over the dividend tax rates, and to rev up the battered investor confidence, the company decided to move forward its proposed dividend payments from 2013 to 2012 itself. Questcor also generates substantial cash flows from its operations, raking in almost $167 million from operations. Additionally, Questcor has also paid back cash to its shareholders through stock repurchases. During 2012, the company repurchased $243 million worth of shares.

Conclusion

For a stock that has been so heavily shorted, five out of nine analysts following the stock recommend a BUY or OUTPERFORM, and the remaining four recommend HOLD. On account of all the negative publicity the stock has endured, it is trading at a substantial discount. I believe the long-term prospects of the company are solid. Questcor being a dividend stock doesn’t make it any less of a growth stock either, it just happens to be a rare growth stock that also provides a decent dividend. Currently, the stock is trading at a trailing P/E of 9.9 compared to an industry average of 21. At these multiples, I believe the stock is an extremely attractive investment with significant upside potential.


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