Net Positive After QCOR Conference Call; Co. Continues To See Acthar Script Approvals
The 48% decline seen for shares of Questcor Pharmaceuticals (NASDAQ:QCOR) Wednesday prompts the key question of: What to do with the stock now? As a former sell-side analyst, I deal with these kinds of decisions by backing away from the action for a moment and evaluating the stock on its new valuation with the new information, trying to remove any former biases. In other words, the old Buyside axiom applies: “You buy your stocks everyday.” In the case of QCOR, the Bulls have phoned Aetna (NYSE:AET) directly to clarify the new policy bulletin, and have also followed up with other insurers like Anthem, Blue Cross/Blue Shield, Cigna (NYSE:CI), and United Health (NYSE:UNH) to get their stance on reimbursing the company’s primary value driver, H.P. Acthar Gel (Acthar). On its conference call this morning, management emphasized that physicians prescribing Acthar do so on a low volume “case-by-case” basis, and that ensuring health insurance reimbursement for the drug is a key part of the process. The conclusion is that most health insurers will continue to reimburse the product per coverage policy decisions that they made this past summer. Importantly, Aetna will also reimburse for treatment, as long as patients are not able to use corticosteroids to treat illnesses where Acthar is used currently such as multiple sclerosis (MS) flares, nephrotic syndrome (NS), or dermatomyositis/polymyositis (DM/PM). So in fact, Acthar will continue to be reimbursed by Aetna and other major insurers, but doctors will have to document that patients have failed or are intolerant to steroid use, which is fairly easy to do. According to the company on this morning’s conference call, “case-by-case” prescribing is consistent with how Acthar is currently being prescribed, and QCOR is planning to meet with Aetna in the next few weeks to provide information and make sure that patients that meet the coverage hurdles continue to have access to the drug via a doctor’s authorization. Because physicians already use Acthar when other therapies have been exhausted, we believe that the Aetna bulletin was likely released as a reminder to doctors that earlier-line treatments must be tried before prescribing the drug, and that failure/intolerance must be documented. Given that Acthar is already used in the minority of patients that have failed or can’t tolerate corticosteroids (or other front-line therapies), the risk to the company’s current base of sales seems minimal. We note that Medicaid’s recent decision to begin reimbursing Acthar at levels which allow the company to make a profit exemplifies that health insurers, in fact, agree that the drug is a useful product in certain patient populations. Additionally, the new profits from Medicaid patients may serve to offset any lost sales if the Aetna bulletin has an impact – see PropThink’s prior coverage here.
The Bear case from here hinges on Aetna completely clamping down on reimbursement for Acthar’s current base of sales, as well as hindering any penetration into new patients and conditions. In addition, other health insurers must take this same kind of action for the Bear case to fully play out. For sure, the Aetna news suggests that Acthar is now on the radar screen of health insurance companies, and at a minimum the prior lofty growth expectations of Bullish sell-side analysts are likely too high. Numbers may still have to come down for some analysts, however, the massive loss in market cap for QCOR Wednesday (~$1.4B loss) appears to be factoring in this sentiment.
Given these battle lines and QCOR’s current valuation, investors are most likely to decide whether to buy or sell the stock based on the belief that Acthar is, or is not, a growth product going forward. After this morning’s bounce, QCOR is valued at ~ 4.0x the company’s current sales run-rate (annualized 2Q results), therefore, if sales to do not grow from their current base, the stock is fully valued and may even have room to fall back to the mid-$20s. This morning’s conference call offered evidence that growth of Acthar should continue, as the “case-by-case” basis for prescribing Acthar does not change the current high growth sales trajectory the product has been achieving (QCOR sales grew 145% in 2Q 2012). Downgrades from several analysts this morning have taken some pressure off of sales estimates and price-target objectives for the stock, so assuming Acthar can exhibit growth, shares of QCOR could work higher. Expect the stock to firm as analysts reiterate the information from the recent conference call in their notes this afternoon and tomorrow.