Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Buy, Sell, or Hold: Questcor Pharmaceuticals

By Selena Maranjian - Nov 24, 2012 at 2:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does the great potential here outweigh the significant risk?

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Questcor Pharmaceuticals (Nasdaq: QCOR) today and see why you might want to buy, sell, or hold it.

Founded in 1990 and based  in Anaheim, Calif., Questcor has a market capitalization of about $1.6 billion. It's a biopharmaceutical company targeting  conditions such as multiple sclerosis, nephrotic syndrome, collagen diseases, rheumatic disorders, and infantile spasms. One of its key products is its Acthar Gel, an injectible drug. Over the past year, Questcor shares have dropped 36%, leading some to wonder whether it's a bargain.

One reason to consider buying Questcor is its business. With the world's population growing, getting older, and living longer, demand for health-care products and services is likely to remain in demand.

Another plus is that unlike many biotech companies, Questcor actually has products on the market, generating revenue. Its flagship product, Acthar, is seeing its sales grow very rapidly. And Questcor isn't relying just on that. It's moving into rheumatology now, too.

Lots of numbers in its financial statements look good: Revenue and earnings have been growing at accelerating rates, recently topping 80%. Free cash flow has gone from  a loss of $14 million in 2006 to a positive $40 million in 2009 to $166 million in the past 12 months. Profit margins were very sizable even a few years ago, but they've been getting even stronger, with net margins recently at 39%. Returns on assets, equity, and invested capital: all hefty and growing.

Questcor's brand-new dividend is another attraction, recently yielding a solid 3.1%. There are only a few dozen  dividends of that size or greater among health-care companies. You can certainly do better, such as via PDL BioPharma's (Nasdaq: PDLI) hefty 8% yield, but its future is a bit uncertain, as the company's revenue growth has slowed and some valuable patents will be expiring soon.

Then there's valuation. With the stock down so much lately, it looks attractive. Its recent P/E ratio of 10 is about half its five-year average P/E, and its forward P/E of 7 is about half of that of the S&P 500.

Of course, all is not completely rosy for this company. The stock was just about slashed in half on a single day in September, when insurer Aetna (NYSE: AET) said it would limit coverage for Acthar. It's true that Aetna represents only about 5% of Acthar sales, but its decision has many wondering whether other insurers will follow suit, which could be disastrous. The company, so far, is maintaining that this decision won't have much of a material effect on its business. It might be right -- UnitedHealth Group (NYSE: UNH), for example, recently tweaked its Acthar policies in only minor ways.

Another worry is a recent investigation into Questcor's marketing practices, accompanied by some lawsuits. Even if the company emerges victorious, these kinds of things can sap its time, energy, and resources -- like cash. My colleague Keith Speights has noted, for example, that just settling can be costly, with Amgen (Nasdaq: AMGN) paying a $780 million settlement last year, and Pfizer (NYSE: PFE) paying $2.3 billion.

Those factors reflect another: volatility. If you can't stomach sharp swings in a stock's price, perhaps look elsewhere.

The role of Acthar in Questcor's revenue is another worry: If it takes a big hit, so will the company. It's always good to have a more diversified revenue base, to dilute risks. Indeed, news of a new generic competitor recently knocked the stock down some. And other competition exists, too -- it another, better drug for MS comes along, that will be bad for Questcor.

Hold (off)
Given the reasons to buy or sell Questcor, it's not unreasonable to decide to just hold off on it. You might want to wait for the investigation into its marketing practices to be resolved, and for it to be clear whether other insurers will limit Acthar's reimbursement. You might want to see a wider range of products in its stable, too.

The verdict
I'm holding off on Questcor for now, but I'm intrigued as well. Everyone's investment calculations are different, though. Do your own digging and see what you think. Questcor may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pfizer Inc. Stock Quote
Pfizer Inc.
$51.72 (0.47%) $0.24
Amgen Inc. Stock Quote
Amgen Inc.
$211.32 (1.21%) $2.53
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$464.73 (1.00%) $4.62
PDL BioPharma, Inc. Stock Quote
PDL BioPharma, Inc.
Aetna Inc. Stock Quote
Aetna Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.