Questcor Pharmaceuticals derives nearly all its revenue from a
single drug -- Acthar -- that has no patent protection. In its
filings with the Securities and Exchange Commission, Questcor
concedes that there is "limited clinical evidence" for the drug's
effectiveness for its on-label indications, relative to newer
treatments, and that more studies could take years.
Meanwhile, Questcor is under investigation by the Justice
Department for its promotional practices.
So how is it that Questcor last year more than doubled its
revenue? How is it that earnings per share last quarter -- at
$1.35 -- were roughly double levels of a year ago? How is it that
Questcor keeps adding major clusters of new patients for Acthar?
And how is it that Questcor stock, which ended May around $34,
has soared to near $66?
"It's a unique company," said Jim Molloy, analyst with Janney
Montgomery and Scott.
Acthar -- Questcor's meal ticket -- is derived from the
pituitary glands of pigs. The drug is marketed to patients with
rare and serious conditions, many of whom are unresponsive to
other treatments. Key conditions treated are flare-ups of
multiple sclerosis, infantile spasms and nephrotic syndrome, a
In targeting patients with serious conditions and few
therapeutic alternatives, Questcor has enviable pricing power. A
vial of Acthar currently costs about $29,000. One course of
treatment can take a single vial in some cases of MS flare-ups or
perhaps seven or eight on average for nephrotic syndrome, the
drug's top revenue generator.
When Don Bailey took over as Questcor CEO in 2007, the price
for a vial of Acthar was $1,650. Almost immediately, Questcor
raised the price to $23,000. Suddenly, a company that was
struggling to stay afloat had found a pricing elixir.
In 2010, the FDA reviewed Acthar's old label, which allowed it
to market for dozens of different medical conditions. The drug
was originally approved by the FDA in 1952, when testing was less
thorough. After review, the FDA reduced the number of on-label
indications to 19.
Questcor got down to work finding patients within those 19
indications who could most benefit from the drug.
"Acthar seems to be an option for patients who don't respond
well to steroids or other treatments. We also look for
difficult-to-treat disorders where there can be a devastating
outcome," Bailey said. "It's not curative. But patients feel
better. It usually means relief of symptoms."
Last year, patients with nephrotic syndrome -- a condition
that can lead to kidney loss -- contributed $243 million to
Questcor sales. Multiple sclerosis patients suffering acute
flare-ups accounted for $207 million. Revenue from treating young
children suffering from infantile spasms was nearly $43
Acthar treated just 7,000 patients. This year, says Bailey,
that number should grow to 10,000.
Expanded Use For Acthar
Across its indications, the drug is used in patients with
serious, difficult-to-treat autoimmune and inflammatory
disorders. The recent excitement around Questcor revolves around
its success with a new disease category: rheumatology conditions
that include lupus and rheumatoid arthritis. Sales growth has
"They're on track to sell $100 million in the first nine
months of 2013 for rheumatology, which they weren't even treating
until the second quarter of 2012," said analyst Molloy. That's
just a start. Rheumatology sales can grow to $500 million by
2016, Molloy estimates.
Questcor typically markets to a narrow cohort of high-need
patients. In rheumatoid arthritis, for example, Questcor targets
patients with severe symptoms who don't respond to other
treatments. That's a group of 65,000 out of 1.3 million
rheumatoid arthritis sufferers, Bailey estimates.
Bailey continues to look for new patients within the 19
FDA-sanctioned treatment conditions. He indicates there may be
dermatology and ophthalmology marketing thrusts ahead.
What About Rivals?
As Questcor grows, its revenue honeypot gets ever more
enticing to potential rivals. So why hasn't there been any
Oppenheimer & Co. analyst Akiva Felt reasons that rivals
may be deterred by "the complexity of the manufacturing process."
That process, noted CEO Bailey, is "protected by trade secrets."
Bailey contends that trade secrets can offer stronger protection
Still, investors should be aware that generic competition
could appear suddenly and unannounced for the off-patent Acthar.
The FDA would not need to give Questcor notice of a filing for
And there are other risks. Analyst Felt says that with
Questcor "there's always been a fear" that insurers would change
policies and decline reimbursement.
However, this hasn't happened widely. "The reimbursement
environment is favorable for us and has been stable for years,"
said Bailey. He emphasizes that insurers weigh cases
individually. And in cases in which Acthar is the treatment of
last resort, they have been disinclined to deny coverage.
Due in part to premium pricing, Questcor's margins are high.
Its pre-tax operating margin was 61% in 2012, then dipped to 48%
in the first quarter of this year and bounced to 62% in the
second quarter.Does this make Questcor a takeout target? Or does
it make Acthar a prime target for generics manufacturers? Those
could be the key questions for investors.
Potential acquirers, notes Felt, could be dissuaded by
Questcor's lack of patent protection .
"Acquirers would have to get comfortable with the unique
intellectual property situation," Felt said.
In SEC filings, Questcor reports receiving a subpoena last
September from the U.S. Attorney's Office for the Eastern
District of Pennsylvania "requesting documents pertaining to an
investigation of our promotional practices."
Asked which specific "promotional practices" were under
investigation, Questcor executives declined comment.
Bailey did say the investigation could run for some time.
"They typically run for years and years," he noted. A spokeswoman
for the U.S. Attorney's Office said it was that office's policy
to neither confirm nor deny whether investigations were
Analysts note that such inquiries -- if there are negative
findings -- can result in hefty fines. Asked if a $200 million
fine was possible, as another analyst had indicated might be
possible, Molloy replied that "a couple of hundred million would
The impact of any such fine would shrink with time. Molloy,
for example, estimates that Questcor revenue could approach or
exceed $1.4 billion by 2016. At Questcor's current high margins,
any such fine would look manageable.