Before you read this
article, I want to disclose the fact that I am indirectly long QCOR through the
sale of April 26.00 put options. By the end of this article, you will
understand why I am playing the long side of QCOR and why I believe that the
stock has at least 30% upside in the short to medium term, if not more.
-Brian Wilson, Author
The History &
My personal interest in Questcor began with the giant drop
that the stock saw on September 19th, 2012. Another giant plunge in
QCOR resulted in the writing of this
article, which gave a general overview of the situation that had dropped
QCOR shares by about 65% of their value in only a few trading sessions.
What triggered the selloff was an alteration to Aetna’s
reimbursement policy for H.P Acthar Gel. Acthar gel (repository corticotropin
injection) was no longer covered for the treatment of infantile spasms,
multiple sclerosis, and other indications related to the diagnosis and
treatment of adrenocorticotropic hormone-related conditions.
After digging a bit deeper into the real implications of
this lone policy shift, I realized quite quickly that QCOR had overreacted
quite dramatically to this news. This was also being exacerbated by reports put
out by third parties like Citron
Research, who implied that Acthar sales were going to get destroyed by more
reimbursement changes. The widely held notion that Acthar sales were in deep
trouble suppressed QCOR for quite some time, dropping it as low as
Smelling a bear raid, I began to publish more articles on
the topic while Questcor battled the bears with a new 4% dividend and a $7
million expansion of their share buyback program. This
one, which I published on Seeking Alpha, provided some details on the
investment picture for QCOR. This included Questcor’s statement that Aetna’s
policy change would have minimal impact on the financial performance of the
company (with just 5% of sales at risk).
QCOR recovered in in October 2012, and continued to perform
well. Healthcare insurers didn’t take away more reimbursements on Acthar gel,
and shorts began to get squeezed out of their positions. This takes us to Q4
2012 earnings, which were released on February 26th 2013.
Acthar Continues to
be a Cash Cow
Despite Aetna’s move against Acthar gel, the product saw
record sales in Q4 2012 which resulted in a total of $160 million in Acthar
sales for the last quarter 2012. This brought 2012 sales to a total of $509
million, representing 133% top-line growth in FY 2012 versus FY 2011. $509
million in revenues, including the $72 million that was subtracted as sales
reserves, is very impressive for a 1.8 billion dollar company. This is
especially true if you factor in the incredible top-line growth that Questcor
Even more impressive in my book is the ridiculous amount of
cash that the company generates from its growing pool of Acthar sales revenue.
Questcor’s expenses in 2012 totaled $184 million, which put the company’s
aggregated EBITDA profit margin at ~58%. At the root of this is low COGS (Cost
of Goods Sold), which was a lowly 6% throughout 2012.
Flush with cash, I anticipate possible expansion of Questcor’s
already-great 3.22% dividend, and more buybacks.
Questcor is a $50 or
$60 Stock Given Fair Valuation
Although QCOR has come a long way since the bear raid that
occurred in September 2012, it has a long way to go to reach its old valuation
just north of $50/share.
Despite some new controversy that was introduced with Aetna’s
reimbursement change in late 2012, Questcor has been able to continue grow
Acthar sales substantially. With the dividend, it’s also giving another layer
of value for shareholders who have supported the company throughout the recent
If Questcor returns to its old valuation, current
shareholders will gain 60%. Although I think QCOR is intrinsically worth $50-60
per share based on Questcor’s sheer ability to generate cash, the market has
not forgotten about the downright scary price action that we saw in September
2012. This lingering fear, as well as the uncertainty over Aetna’s stance on
Acthar gel, leads me to believe that QCOR will rally to $40/share in the short
to medium term. This is my unofficial “price target”.
Still, a rally to $40/share is substantial for shareholders
who are interested in QCOR today. Given its current price, this would give
investors a good chance at 30% in gains before 2014.
The Takeaway: QCOR is
a Favorable Long
While I don’t like giving price targets, I feel that my
bullishness on QCOR is supported quite well by the company’s financials and I
would be very surprised if the QCOR 26.00 April 2013 puts that I sold get
exercised before expiration on April 20th. QCOR is undervalued, and
I expect it to reach $40/share or more by 2014 as stated earlier.
Obviously it’s important for any prospective shareholder to
realize that every investment carries risk, and QCOR is no exception. Questcor’s
weakness is its lack of diversity, which means that its revenue is 100% exposed
to Acthar Gel’s prospects.
While this is a negative, it can also work to the favor of
QCOR shareholders. Acthar is a blockbuster product, and continued success virtually
guarantees appreciation of QCOR stock. The bearish argument against QCOR has yet
to be realized, and Questcor’s performance in the healthcare industry is
implying the complete opposite.