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Coverage Initiation: Questcor Pharmaceuticals (QCOR)
Value Line is initiating coverage of Questcor Pharmaceuticals (QCOR) in The Value Line Investment Survey. The biotechnology company was formed in 1999 through the merger of Cypros Pharmaceutical Corporation and RiboGene Inc. In 2001, Acthar Gel was acquired from Aventis. This product is now the company’s core offering. In fact, in 2005, Questcor sold several products, specifically Nascobal, Glofil and Ethamolin, to QOL Medical, so that it could focus its efforts on Acthar and, in the process, becoming something of a one-trick pony.
The move appears to have worked, however, as just two years after the divestiture and business refocus, Questcor reported its first full-year profit. It has remained profitable since. So while the biotech is highly dependant on just one product, Acthar appears to be a solid one on which to rely. The company has another product, Doral, which is indicated for the treatment of insomnia, but it only owns the U.S. rights to the drug and sales are minimal compared to Acthar.
Acthar is an injectable drug approved by the U.S. Food and Drug Administration for the treatment of 19 so-called indications (illnesses). The company derives substantially all of its revenues from the sale of this one product in the United States. Although Questcor does not have foreign operations, it owns the worldwide rights to Acthar, which could provide an additional avenue for growth in the future. Of the 19 indications, most of the company’s sales are derived from just two, the treatment of acute exacerbations of multiple sclerosis in adults and the treatment of infantile spasms in infants and children under two years of age.
The company reports that Acthar and steroids are the only drugs currently approved for the treatment of multiple sclerosis exacerbations. Further, management believes that many child neurologists who treat infantile spasms consider Acthar the “treatment of choice.” Although other treatments are also used, the company reports that only one other product is approved for the treatment of IS. Questcor continues to examine other indications for Acthar that it can promote; two that it notes are Nephrotic Syndrome and Systemic Lupus Erythematosus.
Acthar is not the type of drug that one walks to the local pharmacy to acquire. For multiple sclerosis, the treatment lasts for one to two weeks and costs between $40,000 and $50,000. As of September, 2011, the company estimates that this indication represents about 65% of sales. The treatment course for infantile spasms lasts two to four weeks and costs between $100,000 and $125,000. Prescriptions for Acthar’s indications are likely to be similarly expensive. Thus, it doesn’t require many sales to create a significant amount of revenue.
As of the third quarter of 2010, Questcor had over 100 sales representatives, the bulk of which were dedicated to Acthar’s use in multiple sclerosis. The company believes that multiple sclerosis represents a $500 million market, while infantile spasms could be a $100 million market. These estimates provide plenty of room for growth, however; management notes that Nephrotic Syndrome could dwarf the two of them combined, as it is a potential $1 billion market. A sizable sales team is dedicated to just this indication as Questcor seeks to expand its sales here.
The biotech has hitched itself to just this drug, as it has stated that it is not looking at other products. Although there appears to be plenty of room for growth with Acthar, should there be problems with the drug for any reason or a better treatment for any of its indications is found, Questcor’s business would clearly suffer. That said, this decision coupled with Acthar’s long history (it was first approved by the Federal Drug Administration in 1952) and the niche markets it is currently serving make Questcor a far more conservative biotech investment than many of its peers—many of which do not have any drugs approved for use and are simply exploring novel products.
Of note, too, is the fact that, as of September 2011, Questcor had no debt and had been repurchasing shares. Although many biotech companies have little debt, these types of companies often fund themselves via the sale of shares. To be in a position to buy back shares is reasonably impressive and shows a commitment to rewarding shareholders. That said, the stock has advanced steadily since late 2009, when it was around $3.00 a share. The shares traded for nearly ten times that just two years later in late 2011. The stock has clearly moved fast and far.
With a novel product filling unique niches, Questcor might even be an interesting acquisition candidate for a larger company. Indeed, if it can build a business in the Nephrotic Syndrome market, it will move from serving niche markets to a fairly material one. Such an outcome, of course, is only speculation, however, interested subscribers are encouraged to review Value Line’s regular quarterly reports to monitor Questcor’s progress, and keep an eye out for Supplemental reports providing insight into fast-breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.