Questcor Drug's Success Thwarts Bear Case
We panned the stock of Questcor Pharmaceuticals early in the year, when its shares were about $15.50 ("Medical Marvel," Feb. 7, 2011). Since then, the drug maker has reported two quarters of impressive growth in sales of Acthar, an injectable drug that Questcor recently started marketing as a treatment for multiple sclerosis and kidney disease. After the Anaheim, Calif.-based company announced Tuesday that June quarter sales leapt 62% year over year, to $46 million, Questcor stock (ticker: QCOR) shot up 25%—finishing the week at $31 and demolishing our bear case and that of Mark Roberts, the usually reliable stock analyst at Off Wall Street Consulting Group.
In Acthar, Questcor's savvy chief executive Don Bailey found a long-approved drug that had been neglected for decades, but had grandfathered approvals from the Food and Drug Administration as a treatment against a long list of diseases. After raising Acthar's price from $1,650 a vial to $23,000, Questcor was able to hire sales people and get doctors to give the drug a try when other drugs were failing their patients. Acthar shipments grew 45% in the June quarter, carrying earnings to $14 million, or 21 cents a share, compared to the year-earlier 14 cents.
"Our miscalculation in initiating a short position," wrote analyst Roberts, as he closed his Questcor position, following the blowout results, "was to underestimate the importance of the law of small numbers." Since Questcor jacked up the price of a treatment to as much as $200,000 for kidney patients, the sales force need only persuade a small number of physicians to try the drug and lift the company's sales. "The market penetration that Acthar must achieve to grow revenue and impress investors was decidedly low," concluded the Cambridge, Mass.-based analyst, "and we should have avoided this idea for that reason." As should have Barron's, too.