Does This Biotech Deserve This Pounding?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It looks like biotech shorts have found themselves a new punching bag in Questcor Pharmaceuticals (NASDAQ: QCOR). After the September 18th Citron Research report Questcor dropped over 55% before trading was halted and traded below the 52 week low of $24.14 and closed at $26.35 on almost 30 times average volume.
Questcor produces H.P. Acthar Gel (repository corticotropin) indicated for uses in infantile spasms, multiple sclerosis, rheumatology, and a kidney disease called nephrotic syndrome. Achthar is its sole drug. A single vial now costs $23,000 up from $1,650 in 2007.
Questor was rapidly defended by Oppenheimer, Lazard Capital, Leerink Swann, and Jefferies; but once again Citron Research gave longs an object lesson in the dangers of biotech investing. This time, they cited an Aetna clinical policy bulletin review dated September 14th that said Aetna would not be reimbursing most uses of Acthar with the exception of West Syndrome (infantile spasms). Basically, in the revision Aetna said Acthar was only medically necessary for West Syndrome and that they find all 18 other FDA approved uses experimental.
Later in the day, Questcor responded saying that Aetna only accounts for 5% of shipped prescription and would not materially affect the company. They also said they were continuing to review the Clinical Policy Bulletin.
If other insurers were to jump on Aetna’s bandwagon this could certainly damage the company’s profits as most of their prescriptions lately have been for multiple sclerosis and nephrotic syndrome, not West syndrome. The company had just reported last week that August shipments rose by 33% from July and all paid prescription uses were up except for use in infantile spasms.
Like Dendreon (NASDAQ: DNDN) in the past, Questcor has been subject to wild swings based on reimbursement issues. Just on September 4th, Questcor stock rose 10% on news that Medicaid would require substantially lower rebate fees from Questcor.
The backstory on Dendreon is a rollercoaster ride from the FDA approval in April 2010 of Provenge, a monoclonal antibody treatment for prostate cancer, which took the stock above $57.00 to its present share price hovering around $5.00. The stock then gradually sagged until Medicaid agreed on reimbursement for the pricey treatment of $90,000.
Then the rollout was plagued by physicians' hesitancy to prescribe it (especially since they didn't want to be stuck with the bill before reimbursement) and the stock price plunged. The company still has work on similar monoclonal treatments for breast cancer and bladder cancer but the costs of building their three FDA approved manufacturing centers as well as sales and marketing expenses have hung heavy on the stock. The current EPS is a negative $2.10.
For years Dendreon longs have been hoping for a buyout by some canny big pharma company but competing treatments for prostate cancer continue to dim the prospects for a return to the 52 week high of $17.04.
Unlike Dendreon, Questcor actually has earnings, with a P/E of 15.38 and a forward P/E is 7.29. StreetSweeper earlier this year caused another huge stock drop when it questioned Questcor’s marketing and sales. As of August 31st, the short interest was already 42%.
On the positive side, return on assets was 64.56% and quarterly revenue growth was 144.60% year over year and quarterly earnings growth was 199.20% year over year. The company has been buying back shares over four years amounting to over 25% of shares and the company has no debt.
Having been in this name in the past I remembered how it took months to recover from the StreetSweeper article in January attacking their price increases and sales strategy. In March the company wrote in an SEC filing to reassure investors over lower than expected February prescription numbers,
"The number of paid prescriptions for Acthar in each therapeutic area is volatile, and the company cautions investors to not view data for a single month or a single quarter as representative of a trend or otherwise being predictive of future results. The company believes that investors should consider the company's results over several quarters when analyzing the company's performance."
The company eventually rallied with news that the sales force would expand to 109 reps and that they would investigate even more uses for the gel in diseases like lupus.
The Final Takeaway
Questcor may have usurped Dendreon’s role as drama queen of the biotechs here. And it’s certainly a better buy today than yesterday if you believe in Achtar’s potential uses in new indications. High priced treatments like Acthar will continue to be moving targets and due diligence is critical. The company reports again on October 22nd.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.