Conventional investing theory says that biotech companies should not be evaluated on the basis of their financial numbers but on the basis of their future potential. The numbers provide a very good platform for investment evaluation provided, of course, that they are interpreted correctly. The stock is currently trading at a trailing P/E of around 30 and a forward P/E of around 12 with an operating margin of over 50% and a return on equity in excess of 45%. I would consider the operating cash flow of around $85 million to be adequate because the company has only one principal product on which to focus. You should also take into account that these sales are generated by prescriptions that only number in the hundreds. You should keep in mind that sales for Acthar actually dropped in the first quarter of 2012 though the company has explained this as an anomaly.
For a biotech company like Questcor concentrates on drugs that are intended for medical conditions that are specific and difficult to treat, the measure of success is very simple. The drug either works or it doesn't. And the approval from the FDA for 19 indications is testimony to the effectiveness of Acthar for a number of different medical conditions. The National Multiple Sclerosis Society says that H.P. Acthar Gel suits patients who are unable to tolerate the side effects of high dose corticosteroids, are not responding to the treatment with corticosteroids or opt for the convenience of injecting themselves. This means that Acthar is actually for almost all the subcategories of patients who cannot use other similar drugs.
I would think that medical conditions that are difficult to treat and make excellent niches for biotech companies who have the technology and expertise to develop appropriate medication. The size of the niche is going to determine the size of the returns for investors. And I have to admit that many of these focused companies do not get the same attention from financial analysts and investing companies as they should. After all, from the point of view of an investor, returns are returns whether the stock in which they invest is obscure or glamorous. Acthar is a multi-use drug developed in 1952 and Questcor bought the manufacturing rights in 2001 from Adventist. Questcor tweaked in the drug and, after receiving FDA approval, started to market it. Many tests in connection with rheumatic disease and ophthalmic conditions are still in progress. Lest I forget, Questcor is by no means a one product company. Their second drug Doral which is used in the treatment of insomnia may not be as glamorous as Acthar but it has a good reputation in medical circles as an effective treatment for patients who suffer from short-term sleep disorders.
It is now time to turn our attention to companies that either compete with Questcor or could pose a threat to its prospects. The biggest weakness that Questcor has is its huge dependence on one single drug and multi-product pharmaceutical companies could well threaten the success that Questcor has had so far. Take for instance companies like Sanofi (SNY) or Novartis AG (NVS) or Abbott Laboratories (ABT). All of these very large companies are extremely sound financially and produce a wide range of drugs for both prescription and over-the-counter use. Their current stock prices and price/earnings ratios as well as their size make them competitively more attractive investments. In addition, there are treatments for multiple sclerosis that compete directly with Acthar. Take for instance Tysabri which is marketed by Biogen Idec (BIIB) and is one of the most powerful treatments available today. Biogen has a market cap in the region of $30 billion and trades at a forward price/earnings ratio of approximately 18 times. In addition, it has a diversified product range and has yet another drug for the treatment of multiple sclerosis that is currently under trial.
Questcor is actively pursuing additional FDA approvals for Acthar and is beefing up its marketing and sales strategies in its quest for growth. However, I would not make a further investment in Questcor at the current stock price, because there is insufficient room for a significant upside at this price. In fact, there is a strong case to be made for a strategy of short selling small and hot biotech stocks. It seems to me that Questcor management did not fully understand the potential of the drug and did not achieve the position in the market that they could have managed. Despite this, if I had an existing investment in Questcor, I would hold on to my investment at least to the start of their next fiscal because there are unlikely to be any unfavorable developments till then. I should bring to your attention that a recent report showed that Questcor is one of the most short sold biotech stocks in the present market.
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