Pigs Get Fat, Hogs Get Slaughtered -- What Is Questcor?

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Selling people what they normally can have for free or for a nominal amount is a surefire way to make money. Think bottled water, especially the purified kind from the tap.

There aren't many products this blatantly marked up. One of the few that comes close is eyewear, as I discussed in October. At first glance, most drugs seem like they would fit this category as well, which explains why biotech firms with promising pipelines can captivate Wall Street even before bringing any products to market.

Alas, hefty expenses for research and development complicate the situation. They are a drag on profits, and they typically take precedence over dividends.

That's why Questcor Pharmaceuticals (NASDAQ: QCOR), which trades at just over six times forward earnings and ten times trailing earnings and which newly sports a 3.1% dividend yield, pops up on many investors' radars.

It's all about the pigs

Questcor has made its millions with one simple drug: Acthar, which is extracted from pigs and generically known as adrenocorticotropic hormone (ACTH).

Secreted by the anterior pituitary, Acthar is a peptide hormone, meaning that its chemical structure is similar to those of protein subunits. Like all hormones, it has multiple far-reaching effects, but its main market is the treatment of infantile spasms known as West syndrome.

Developed by meatpacking giant Armour & Company, Acthar has been on the market since the 50s, but Questcor has only held the marketing rights since 2001. In what has to be one of the best pharma deals of the 21st century, it gave previous owner Aventis, now Sanofi-Aventis (NYSE: SNY), only $100,000 and agreed to a 1% royalty on sales over $10 million.

The Acthar story has been covered in depth in this New York Times article, but here it is in a nutshell.

In 1950, the Nobel Prize in Medicine and Physiology is awarded jointly to Edward Calvin Kendall, Tadeus Reichstein, and Phillip Showalter Hench “for their discoveries relating to the hormones of the adrenal cortex, their structure, and biological effects.” Hench finds that cortisone, a hormone made by the outer layer of the adrenal gland, helps treat arthritis, but because it is hard to make, he proceeds to test ACTH. It works too.  

In 1952, Armour wins approval from the FDA for highly purified (“H.P.”) Acthar in gel form. The drug proves effective for multiple conditions, but new competition relegates it to orphan drug status for the treatment for infantile spasms, a niche so small that Acthar is a persistent money-loser.

Questcor purchases rights to Acthar and increases the price until it achieves profitability. It also starts marketing Acthar for 18 other approved indications, including multiple sclerosis and nephrotic syndrome, which results from kidney disorders of unknown causes. In most cases, Acthar is positioned as a drug of last resort when less expensive options have failed. Insurance companies push back, so Achthar dedicates 30 of its 329 employees to helping patients get their insurance to pay for Acthar.

Questcor continues to increase the price of Acthar, which now stands at $28,400 per vial. That's an over 700-fold increase from the time Questcor purchased rights to Acthar. Questcor costs over 600 times as much as its competition in the market for infantile spasms, and the Times reports that “a course of treatment for nephrotic syndrome can run $250,000, while a shorter treatment for a multiple sclerosis relapse typically costs $40,000.”

In September, insurer Aetna announces that it will only pay for Acthar to treat West syndrome. This use of Acthar only accounts for 10% of the drug's sales. Worried that other insurers will follow suit, investors exit their Questcor positions and the shares tumble.   

Can this pig fly?

Acthar's a cash cow, but Questcor really is a one-trick pony. (We're not done with the animal idioms yet.) The company's only other product is the sleeping aid Doral, which generated roughly $1.15 million in net sales in the calendar year 2010; I reached this number using data from the company's 2011 annual report, which states that Acthar generated 99% of the $115 million in net sales that year, the last for which the company broke out Doral sales.

Doral isn't exactly the new kid on the block, either. It was invented by Schering-Plough, now a subsidiary of Merck & Co., in the 70s. And Questcor outsources the manufacturing to Swedish company Meda AB. 

To its credit, with its recently announced acquisition of contract manufacturer BioVectra, it does manufacture some Acthar itself on Canada's pastoral Prince Edward Island, the island where Anne of Green Gables lived, although its other existing partnership with contract manufacturer Cangene appears intact.

It is unclear how many scientists are employed by Questcor and how many projects the company is funding. Questcor's website is awfully vague about its research pipeline, but the 2012 annual report suggests that Questcor’s research centers on finding new applications for Acthar, for example, treating epilepsy, ALS (Lou Gehrig’s disease), and lupus, besides aiming to “evaluate the use of Acthar for on-label indications.”

Either way, a search for "Questcor" on the National Institute of Health's research database PubMed turns up only nine hits, five by the same individual author in the same journal between 2000 and 2003. For reference, the two professors whose labs I have worked in collectively have 80 publications on PubMed.

Time to pig out on Questcor?

Given that Acthar is such a cash cow and that Questcor is seemingly so affordable, should investors pig out on this stock?

I’m voting no. The clock is ticking for Questcor. To paraphrase the 2011 annual report, the seven-year exclusivity period for Acthar ends in October 2017, and the FDA can still approve other ACTH formulations to treat infantile spasms if they demonstrate clinical superiority. After all, Acthar is no longer subject to patent protection.

Pigs get fat, but hogs get slaughtered, and it's not clear how tenable Questcor's business will be or what its future holds post-2017. I'm not wagering any money on this one.

Fool blogger Jonathan Lim is long MRK. 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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