Is Questcor a Good Investment?

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Questcor Pharmaceuticals (UNKNOWN: QCOR.DL  ) has been one of the best performing companies in the orphan drug category. The company has been able to increase revenue at an extremely impressive rate, and the growth is likely to continue in the near future. Questcor is now slowly becoming a stock that offers price appreciation as well as a healthy dividend yield. As a result, the company is attracting a diverse set of investors -- both growth hunters and income investors are equally attracted toward this stock.

Increasing dividend: A sign of growing cash flows?
Questcor has announced an increase of 20% in its quarterly dividend, which will take the annual dividend to $1.20 per share ($0.30 per share each quarter). Based on the current stock price of around $59, the dividend yield of the stock is about 1.70%. Taking into account the more attractive yields offered by big pharma companies, the yield offered by Questcor is very low. However, Questcor is a relatively new player in the dividend club. The company announced its first dividend in the third quarter of last year. During the current year, this is the second time the company is increasing its quarterly dividends.

A rapid increase in dividends usually indicates two things: a shift in strategy (the company is not seeing many growth opportunities and decides to distribute cash to its shareholders) or the company is confident about the future cash flows to meet both dividend needs as well as growth opportunities. I believe second is true for Questcor – it's growing its cash flows at an impressive rate, and there is still a lot of room for growth in revenues.

A look at Questcor's cash flow statement  indicates that it's very strong -- free cash flow at the end of the last year was just $218 million, which has now grown to $256 million in the previous 12 months. At the same time, the company's dividend obligations were just $38 million, which puts the payout ratio based on free cash flows at just below 15%. If we take into account the announced increase of 20%, the dividend obligation will go up to about $46 million, and the payout ratio will remain below 20%.

A lot of room to grow revenues
Questcor gets all of its revenues from one drug: Acthar gel -- a drug that can be prescribed for 19 indications. However, at the moment, the company is relying mostly on three conditions. Nephrotic syndrome (a kidney related disease), infantile spasms (a disease affecting infants and causing death at a young age), and multiple sclerosis (a disease affecting brain and spinal cord). The company has been growing revenue at an impressive rate from these segments and there is still considerable room for growth in these areas. However, Questcor is not sitting idle and has already started efforts to increase sales from another condition (the rheumatology segment).

Acthar can also be prescribed for rheumatology conditions -- there is a wide range of rheumatic diseases. Last quarter was the first full quarter of rheumatology efforts and recorded shipment of 300 vials, making it the best debut by the company in any of the segments. Furthermore, Questcor has hired a small team  of five to 10 sales representatives to expand into pulmonolgy for symptomatic sarcoidosis (a disease affecting organs, most commonly the lungs). Sales from the pulmonolgy segment will start to come in the fourth quarter of the current year. While there is still room to boost revenue from the current three major areas, Questcor looks set to grow revenue from new conditions as well. As a result, I believe the revenue growth for Questcor will not slow down any time soon.

Other orphan drug considerations
Another player in the orphan drug category is Alnylam Pharmaceuticals (NASDAQ: ALNY  ) , which is focused on developing RNA-based therapies. Over the past 12 months, the stock has gained about 250% due to the positive news about Alnylam's pipeline. The most attractive drug in the pipeline is ALN-TTR, a drug intended to cure TTR amyloidosis, or ATTR) -- a mutation in genes that affects the important organs and tissues of the body, including nervous and cardiac tissue. At the moment, phase 2 trials are ongoing for the drug, and the study is at an advanced stage.

There is a significant unmet medical need present -- as a result, the drug is expected to be a game changer if the trials give the desired results. At the moment, the only early-stage treatments for the disease are liver transplant and Pfizer's drug tafamidis, which is approved in Europe. If ALN-TTR receives FDA approval, Alnylam plans to market it in North and South America, Europe, and the rest of the world. However, the company has formed an exclusive alliance with Sanofi to advance the program in Japanese and broader Asian markets.

Another important player is Isis Pharmaceuticals (NASDAQ: IONS  ) . The company received approval for its orphan drug, Kynamro, at the start of the year. It is the company's first drug to make it to the market. The drug is prescribed for the patients with a genetic disease that causes high cholesterol. However, Kynamro is not the company's only exciting news -- there have been some other developments that have investors excited. Isis has reported extremely impressive results from other drugs in the trial phases. There is a significant unmet medical need for these drugs and the company will be able to generate substantial revenues.

Bottom line
Questcor continues to grow revenue and the investor confidence in the company is quite high at the moment. In my opinion, the company will continue to grow and over the next three years, we will see Questcor become a solid player in the dividend club as well.

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