We are reiterating our Buy rating and raising our fair value on the shares of QCOR from $65 to $90 based on increased expectations for Acthar Rx growth in the recently launched rheumatology (RA) segment and by assigning a higher P/Sales multiple on the various indications for Acthar based on the significant rates of growth that we have seen to date, and which we believe could continue going forward. Our new $90 FV still represents a forward P/E of ~12x 2014 EPS, which remains a discount to the specialty pharma group at 14x-16x, which we believe accounts for the particular risks within the QCOR story. As the new RA launch continues to build steam in 2014-2015 we believe that the size of the under-served markets in RA could come to dwarf the Multiple Sclerosis (MS) opportunity and even surpass the Nephrotic Syndrome (NS) opportunity in the outer years. We are reiterating our Buy rating and raising our FV to $90 from $65.
Rheumatology continues gathering speed. Having launched their pilot Rheumatology program in 3Q12, QCOR has continued to see Rheumatology segment as the main growth driver for new Rx's of Acthar gel. After deciding late in 3Q12 to expand the program from the initial 10 pilot reps to 55 reps, QCOR saw 1Q13 bring in 140-150 new paid Rxs with that expanding to over 300+ new paid Rx in the first full quarter of sales in 2Q13, making RA the fastest growth segment for Acthar. With each new Rx averaging ~5 vials, we project that this segment will continue its high growth through our forecast period. See table later in this report for our detailed breakdown of Acthar Rx's by indication through 2016.
· Substantial Rheumatology patient population. Though QCOR's usual modus operandi is orphan populations (2K-5K), the size of the potential treatment populations for Acthar in Systematic Lupus Erythematosus (SLE), Rheumatoid Arthritis (RA), and Psoriatic Arthritis (PA), three approved indications within the Rheumatology segment, is significant. QCOR estimat
that the potential target populations in SLE, RA & PA could be as high as ~175K patients combined in the US, or almost 10x the size of the recently launched DM/PM indication (~20K patients).
· Other high priced drugs in rheumatology already. SLE, RA, and PA are chronic autoimmune conditions where it is not uncommon to find prescriptions for Enbrel, Remicade, Humira, and Cimzia, which can run to $20K-$30K per year. Though not quite at Acthar prices, this is a segment where expensive drugs are more common, which may help QCOR in terms of a doctor’s prescribing habits and insurance reimbursement.
Maintain Buy rating, raising fair value to $90 from $65. We have raised our 2013-2016 revenue estimates to $788M, $1,089M, $1,279M, and $1,458M from $760M, $988M, $1,104M, and $1,233M respectively; we have raised our 2013-2016 EPS estimates to $5.35, $7.40, $8.25, and $9.50 from $5.08, $6.50, $7.20, and $8.00 respectively. Our $90 FV is based on a sum-of-the-parts with the various indications for Acthar valued at $78/share, cash (end-'14) at $10/share, and tech/pipeline value of $2/share. Please see our valuations below.