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Over the last few years, Questcor Pharmaceuticals (NASDAQ: QCOR.DL ) has been a successful single-product drug company. This fact was put on display in the company's third-quarter earnings, yet news of a broader federal investigation spooked shareholders and sent Questcor's stock lower. So, with strong growth, and considering the possible outcome of this investigation, is Questcor worth the risk?
Incredible growth (momentum)
Questcor's Acthar has 19 indications, many of which are orphan diseases. While other biotech companies grow by developing a pipeline of candidates, Questcor seeks growth by expanding the uses of Acthar. So far, the plan has worked.
In the last three years, Questcor has a three-year annualized revenue growth-rate of nearly 80%. Naturally, as a product approaches blockbuster status, sales growth begins to slow. Yet, with $620 million in trailing 12 month sales, Acthar is starting to gain momentum as new indications with rheumatologists and nephrologists gain traction.
For example, we already know that Acthar has great year-over-year sales, but sometimes a good way to see growth is to track quarter-over-quarter progress. This is unpopular with analysts and investors because certain factors such as insurance payments, drug supply, and distribution channels may play a role in performance. Yet, for companies that are truly executing on all cylinders, seeing significant growth, quarter-over-quarter performance will show increased momentum.
In the last three quarters, excluding sales from Questcor's manufacturing subsidiary BioVectra, sales of Acthar have been $227.3 million, $188.6 million, and $126.7 million, respectively. In the third quarter alone, sales grew 21% over the second quarter, showing continued strength.
How does Acthar's growth compare?
In comparison, let's look at two other orphan products from Alexion Pharmaceuticals (NASDAQ: ALXN ) and Regeneron Pharmaceuticals (NASDAQ: REGN ) , Soliris and Eylea. Granted, both Soliris and Eylea are already blockbusters, but neither are at their expected peak sales potential.
Soliris is Alexion's only marketed product, treating rare blood and genetic disorders. This is a product that has consistently grown quarter-over-quarter as it expands into global markets, most recently posting sales of $400.4 million in the third quarter. This represents 8% growth quarter-over-quarter, and if we back up even further to the second and first quarters of 2013, Soliris has had quarter-over-quarter growth of 9% and 6%, respectively.
In the case of Regeneron's Eylea, it prevents blindness in various patient populations. During its last quarter, sales were $330 million, a 5% rise over the prior quarter. Moreover, if we back up to the first quarter of 2013 and fourth quarter of 2012, sequential growth was 14% and 13%, respectively.
Therefore, both Regeneron and Alexion's key drugs -- two of the industry's most watched momentum stocks -- have slower sequential growth than Questcor's Acthar. Moreover, Acthar is actually catching both in quarterly sales, likely to become the latest orphan blockbuster.
Why the loss?
Given Acthar's impressive growth, why is it that shares of Questcor declined double digits after earnings?
The performance isn't valuation-related, Questcor trades with a market cap of just $3.6 billion, or 5.5 times sales. In comparison, both Alexion and Regeneron have market caps over $24 billion, or 16 times annual sales.
Hence, the losses are not in relation to fundamentals, but rather news of a larger investigation.
Last year, the U.S. Attorney's Office for the Eastern District of Pennsylvania announced an investigation into what many believe is the marketing practices for Acthar. So far, nothing has happened, no verdicts, or even a charge has come from this investigation.
Last year, news of this investigation coupled with tightened insurance coverage by Aetna took shares from over $50 to below $20. Today, shares are around $60, as fundamentals continue to grow, yet still investors showed concern when news that the U.S. Attorney's Office for the Southern District of New York and the L.A. SEC Office have joined the investigation.
While investors may be afraid of these developments right now and should factor them into their analysis, I believe that it is important to realize that such investigations can take time to play out. Also, some might assume that more agencies mean more trouble for Questcor, but consider the timing of the government shutdown and budget cuts, putting more pressure on any one agency, it is possible that more agencies mean that no single agency is capable of carrying the weight.
With all things considered, it could take many years for any investigation to complete and have an outcome. By then Questcor's fundamentals might have grown many times over if it continues to expand Acthar into new regions with additional indications.
At nine times next year's earnings, it does appear that shares of Questcor have appropriately priced the risk that comes with this investigation. Companies with less growth such as Alexion and Regeneron trade at a multiple far times greater. Thus suggesting that fear of the unknown could be the reason for the misaligned valuation. While this overhang is likely to keep shares cheap, so long as Questcor continues to grow, it seems appropriate that its stock will follow. If we use past performance as a guide, investors should like the prospects of Questcor maintaining its growth, and of course keep an eye on how the investigation plays out.
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