Is Questcor Still Undervalued?

It has been approximately a year since the Citron Research report about Questcor Pharmaceuticals  (NASDAQ: QCOR  ) came out, which caused the stock to lose more than half of its value. At the time, most of the industry experts were raising concerns and predicting that Questcor will be another bio-Pharma to go under soon. However, I have always believed that the stock will make a recovery as the drug offered by the company is too important to ignore. In my previous posts about Questcor, I have detailed why I felt the stock will make a recovery. Going forward, I see more growth opportunities for the company, which will support further price appreciation.

What made the company come back to previous highs?
There are three main reasons that have caused the stock to make the recovery, in my opinion. The first and the most important reason is the continued growth in prescriptions and vial shipments. When Aetna decided to stop coverage for Acthar, investors believed that the other insurers will follow Aetna and Acthar will lose insurance coverage. However, most of the insurers continued to cover Acthar, and Questcor was able to increase its prescriptions.

The second reason is the change in the investor perception about the stock. There is a clear change in the mood of investors regarding Questcor. Investors realized that the market overacted to a piece of negative news about the stock, and it presented a buying opportunity. Since the fall year, the stock has been on an upward trend and currently trades at a level higher than a year ago. The underlying growth is solid for the company and based on the expected future growth, the stock is trading at a discount. However, it should be kept in mind that another regulatory action against the company can again bring down the stock price. At the moment, health care costs are a big concern, and Acthar costs about $28,000, which is not exactly a cheap medication.

The third and probably most important reason for the comeback is the expansion opportunities for Acthar. The drug is extremely effective against certain conditions, which do not have conventional treatment. Acthar can be prescribed for a number of conditions, including kidney ailments; a rare seizure disorder that affects infants; and multiple sclerosis, which attacks the brain and spinal cord. An important thing to remember is that the company has not yet captured these markets completely. So, there is room for further growth in these areas.

In addition, Questcor is active in adding more conditions to the label of the drug. Recently, the company started phase 2 trials for amyotrophic lateral sclerosis -- a progressive, degenerative disease that significantly alters one's quality of life. According to the ALS Association, the average life expectancy from the time of diagnosis for someone affected by this disorder is about two to five years. If the company is successful in adding this condition to the label; it will further enhance the portfolio of the company and provide future growth avenue.

The company recently announced its second-quarter results, which substantiates the optimism about the future growth of the business. Its recent quarter earnings per share increased by 96% amounting to $1.35 compared to the same time last year. Furthermore, vial shipments have gone up by 50% compared to the same quarter last year.

Other players working on orphan drugs
There are a number of companies working on orphan drug development -- the orphan drug act was passed in 1983 to encourage companies to develop drugs for rare diseases that affect less than 200,000 Americans. Under the act, companies are offered tax credit, seven years marketing exclusivity and special pricing to cover the development costs.

Isis Pharmaceuticals (NASDAQ: ISIS  ) recently received approval for its orphan drug, Kynamro -- a drug to decrease the inherited cholesterol disorder. The drug is expected to get $136 million in sales in its first year. However, almost all of the proceeds will come from GlaxoSmithKline and Biogen Idec due to the marketing rights for the potential drugs. The stock has more than doubled since the approval of the drug, and the future prospects of the company look good. Recently, Isis reported mid-stage data for its drug, ISIS-APOCIIIRx – the drug reduced bad cholesterol levels by 64% and increased good cholesterol levels by 52%.

Sarepta Therapeutics (NASDAQ: SRPT  ) is working on eteplirsen, a drug to treat Duchenne muscular dystrophy, a rare disease that causes progressive loss of muscle function in young boys. There is a real need for the cure in the market and the drug will be categorized as an orphan drug, if approved. The company will charge between $150,000 and $200,000 for the drug. Sarepta will prove to be an extremely attractive long-term investment as there is no therapy available for the disease. Once the drug is approved, the company will be able to market the drug exclusively for seven years. As a result, there will be massive growth in revenues for Sarepta.

Summary
Questcor is still undervalued, in my opinion. I expect the growth to continue over the next three to five years. As a result, the stock will be trading substantially higher than the current levels. The only concern for Questcor is another regulatory probe into the dealings of the company. If the company is able to deal with this risk then I do not see any other pitfall for Questcor in the near future.

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