Close To New Highs, Should You Like This Biotech?

Sherrie 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 a particularly fascinating history, having been at the center of controversy for the better part of its existence. For several years, investors have enjoyed large returns, and the company has marketed its only product, Acthar, with exceptional success. As it approaches new highs, should you take notice?

The Center of Controversy

Questcor Pharmaceuticals markets and develops Acthar Gel. It's a treatment for infantile spasms and multiple sclerosis, rheumatoid arthritis and nephrotic syndrome. Questcor acquired Acthar Gel in 2001 for just $100,000, and has produced sales of $550 million over the last 12 months alone.

Questcor has been at the center of controversy, as bearish investors argue that cheaper drugs work just as well if not better than Acthar at treating each of its indications. Moreover, tightening insurance coverage, fears of generic competition, and aggressive marketing tactics have made the stock’s future rather controversial. These controversies pushed shares from $52 to $18 in September 2012.

Nonetheless, since 2001, shares of Questcor have traded higher by 7,200%, which goes hand-in-hand with a drug, Acthar, which has increased in price from $50 a vial to $28,000. Questcor has recovered from its 2012 lows and is now trading near $50.

Is It Really That Bad?

The short case for Questcor is obvious: Acthar is too expensive; the company is too reliant on Acthar; the company’s pipeline is not largely developed. These problem areas sound like another company, Alexion Pharmaceuticals (NASDAQ: ALXN), a company with just one genetic disorder drug, Soliris, which has a price tag over $400,000.

The investment perception for these two companies is quite different, as investors anticipate a $25 billion buyout for Alexion but then worry about Questcor’s $3 billion market capitalization. However, there are a lot of similarities between the two companies, since both rely on a single product used in various indications.

Both Alexion and Questcor have top-line growth of 40% year over year, but Alexion trades at 17 times sales, while Questcor trades at 5 times sales. Moreover, Questcor is trading at just 10 times next year’s earnings, and Alexion at 32 times next year’s earnings. Therefore, Questcor is cheaper, but the lingering questions surrounding its business practices and the future of Acthar often scare investors.

What To Do?

As an investment, I genuinely like Questcor Pharmaceuticals. The stock is essentially flat over the last year, yet its fundamentals have continued to grow. Hence, making the stock cheaper.

In addition, many of investors concerns back in September about falling sales after tightened insurance coverage have not materialized. The company has since implemented a dividend of 2% and continues to buy back its stock, something we have yet to see from Alexion.

Lastly, I really like the company’s recent acquisition of Synacthen. This acquisition removes an overhang that could have been a threat to many of the company’s indications for Acthar. Questcor can now use the two drugs in synergy, marketing the better of the two for specific indications.

With that said, I think Questcor is valued attractively and has already proven itself as a continued growth company. Moreover, the manufacturing process used with Acthar – including spare animal parts and hormones – makes it exceedingly difficult to replicate, and Questcor has not been forthcoming with its manufacturing process. Therefore, Questcor faces no competition, much like Alexion. But it's still priced very reasonably, unlike Alexion. As a result, with all things considered, I think Questcor should be on you biotech watchlist.

Sherrie Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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