Tuesday, December 11, 2007

Questcor's Senior VP and CFO, George M. Stuart, becomes the 1st Insider to Cash Some Profit

On December 6, 2007, George Michel Stuart sells 187,308 shares of QSC stock for $1,123,848. Stuart, the Senior Vice President of Finance and Chief Financial Officer of Questcor Pharmaceuticals, has been with Questcor since September 2005. Although cashing out for over a million dollars sounds like a lot of money, Stuart still has a position with 281,250 shares which carried a value of $1,687,500 at opening of trading today when the stock price was $6.00.

UPDATE: On December 10, 2007, Stephen LaHue Cartt sold 14,202 directly-owned shares of QSC stock for $85,354 and 35,400 Cartt Family Trust shares for $212,400. Cartt, the Executive Vice President of Commercial Development, has been with Questcor since March 2005. Cartt was the first executive hired at Questcor after the former CEO Jim Fares had been hired in February 2005. Currently, George M. Stuart and Stephen Cartt are the only executives remaining who had been brought on board by Jim Fares during 2005. (I wonder if they are in it for the long haul, or if they will be some of the next folks to jump ship.) Cartt also sold 75,000 shares today at $5.75 for $431,250. Those are some pretty pennies. Unlike Stuart who sold 40% of his total shares, Cartt sold a modest 16.5% of his position keeping 557,186 shares valued $3,064,523 at today's close of $5.50.

To make this story more interesting, remember that Questcor's stock price in August was a measly $.45-$.60 and looked like it just might crumble. But somehow, the stock has soared since the announcement of the 3rd quarter earnings in November. With a 1000%+ run-up, who would blaim Stuart for taking advantage of the opportunity to realize some gain. I would not be surprised at all to learn that other longtime investors have done exactly the same thing recently.

With the recently filed SEC Form 4, investors are probably concerned that the wind may be falling out of the sails and that the stock price will fall like it did briefly today to $4.55. At today's lowest dip, Stuart's remaining shares would have been valued at $1,279,688.

There are two ways to look at this: (1) This might provide another buying opportunity to those investors who believe that Questcor's unusual earnings in the 3rd quarter will be repeated for several quarters to come. (2) This may send a message to investors that insiders, especially those who are responsible for the finances of the company, may acknowledge the possibility that Questcor cannot, or will not likely, repeat their recent performance.

How you view this event truly depends upon what you believe. Personally, I believe that Questcor has exploited Acthar's orphan drug status to explode profits to an unrealistic level thus gaining the attention of Wall Street and bio-investors. Questcor's justification for the 1347% price increase in August was based primarily on the previous year's income losses, the nature of which is debatable. Throughout 2007, several of Questcor's executives and board members have resigned, presumably due to the failure of their management strategy.

But that doesn't keep the hopeful from touting Questcor's potential value, as in the following article published the very same day which Stuart's SEC Form 4 was filed reporting his recent sell-off of stock. Michael Anagnostakis, an independent stock broker/consultant in Newburgh, NY, thinks that Questcor is an "Undiscovered Biopharma Diamond in the Rough."

Michael Anagnostakis is the "founder and Principal owner of Independent Financial Consultants [IFC], a financial money management firm founded in 1988 that specializes in uncovering undervalued small cap equities. He has degrees in Economics and CS from NYU. The firm, its employees, and its clients, can and do hold long positions in the equities it uncovers."

From Manta On demand -
3 Brookside Ave, Newburgh, NY 12550-3018
Phone: (845) 565-7378
SIC: Security Brokers, Dealers, and Flotation Companies
Line of Business: Broker Dealer
As: Independent Financial Consultants
Est. Annual Sales: $180,000
Est. Employees: 2
Est. Employees at Location: 2
Contact Name: Michael Anagnostakis
Contact Title: Principal

Here is Mr. Anagnostakis' article with some commentary of my own -

"The joy of finding a hidden , unknown, undervalued treasure is universal in human nature. Whether one is in search of an antique, or a work of art, or a small Bio/Pharma company that is just turning the corner to large profitability, that search can be a long and tedious one. But, in each case, when finally discovered, the rewards can be tremendous!!

"One such hidden, unknown, undervalued Bio/Pharma company that has made an amazing transformation in its model of operation, and that is now leading to a dramatic profit story, is Questcor (Amex: QSC).

"Questcor Pharmaceuticals, Inc., (QSC) is a specialty pharmaceutical company, and focuses on novel therapeutics for the treatment of diseases and disorders of the central nervous system. It owns and markets two products in the United States, H.P. Acthar Gel and Doral.

"H.P. Acthar Gel is a source of adrenocorticotropic hormone and is used in various conditions, including the treatment of periodic flares associated with multiple sclerosis, infantile spasm [IS], opsocus myoclonus syndrome [OMS],and various forms of arthritis. Acthar also has various other labeled indications and uses in certain endocrine disorders, rheumatic disorders, collagen diseases, allergic states, ophthalmic diseases, respiratory diseases, hematologic disorders, neoplastic diseases, edematous states, and gastrointestinal diseases.

  • Acthar has only one FDA-approved indication which is for the treatment of periodic multiple sclerosis exacerbations. Within the MS market, Acthar is not the first choice among the majority of MS patients and their doctors for that purpose. Acthar is an old drug and has been around since the 1950's. Questcor purchased Acthar from Aventis in 2001 and was not involved in discovering it's usefulness in Infantile Spasm. However Questcor is currently focusing their attention on the use of Acthar for the treatment of Infantile Spasm and hope to gain FDA approval for that indication.
"Doral is a product indicated for the treatment of insomnia, characterized by difficulty in falling asleep, frequent nocturnal awakenings, and/or early morning awakenings.

"The basis of the companies new business model centers around Acthar and the Company has a registered trademark on H.P. Acthar Gel.

"For years, the company was hemorrhaging money at a rate of $1 million per month and ran quarterly losses. Starting in May of this year, three impressive changes to the business model, changed all that and transformed the company going forward. Questcor is now very profitable and generating large positive cash flows!

"On May 25, 2007, the Company completed the reduction in its field organization from 45 sales representatives to 10 product service consultants and 3 medical science liaisons. The Company expects this reduction to generate annual cash savings between $4.0 million and $5.0 million. In addition, other cost reductions are expected to increase the annual cash savings to a range of $5.0 million to $6.0 million.

  • The sales reduction appears to be a reversal of the sales increase in 2006. These are not employees who had been with the company for an extended period of time. The product service consultants are most likely the ones responsible for investigating insurance coverage for patients prescribed Acthar. If insurance won't pay, then the consultant refers the patient to NORD (National Organization for Rare Disorders) who administers their assistance program. If the patient qualifies with undisclosed income/resource requirements, then NORD grants coverage through their program.
"During July 2007, the Company began utilizing CuraScript, a third party specialty distributor, to store and distribute Acthar. Effective August 1, 2007, the Company no longer sells Acthar to wholesalers and all of the Company’s proceeds from sales of Acthar in the United States are received from CuraScript. The Company sells Acthar to CuraScript at a discount from the Company’s list price. CuraScript sells Acthar primarily to hospitals and specialty pharmacies. Product sales are recognized net of this discount upon receipt of the product by CuraScript. CuraScript has 60 days from when product is received to pay the Company for their purchases of Acthar.

  • Control distribution = better control price.
"In August 2007, the company announced a new strategy and business model for Acthar, and initiated a new pricing level for Acthar. Under this new orphan-drug-style pricing model strategy, the sales price to CuraScript, increased to $22,222 per vial based on a list price of $23,269 per vial. The list price prior to the new pricing level was $1,650 per vial.

  • 1347% increase!
"Results were explosive in the third quarter ended September 30, 2007. Net sales of Acthar for the three month period ended September 30, 2007 totaled $14.6 million as compared to $3.8 million during the same period in 2006. The increase in net sales resulted from the initial success in the implementation of the new strategy and business model for Acthar. Total net sales were $14.8 million for the three month period, as compared to $4.0 million for the same period in 2006. In addition, the gross profit margin percent increased to 90 percent for the quarter ended September 30, 2007 as compared to 77 percent for the same period in 2006. Further, SG&A expenses have decreased due to the reduction in its field organization and other cost reductions outlined above. Net income applicable to common shareholders totaled $8.4 million, or $0.12 per fully diluted share, for the third quarter of 2007, compared to a net loss applicable to common shareholders of $(1.5) million, or $(0.03) per share, for the third quarter of 2006. As of September 30, 2007, Questcor has 69,296,099 million fully diluted common shares outstanding.

"During the quarter ended September 30, 2007, Medicaid rebates and government chargebacks, related primarily to activity prior to the implementation of the new Acthar strategy and thus resulted in a one time increase in net sales and net income by $4.5 million, or $0.07 per fully diluted share. Future sales may comprise of about 30% Medicaid cases and we have thus factored in recognition of minimal, if any net sales on these units within our revenue forecasts.

  • So the Q3 net income of $8.4 million includes a one-time increase of $4.5 million leaving $3.9 million net income a more realistic expectation if sales repeat at the same level hereforward.
"Since the close of the third quarter, the viability of this new pricing model has been further confirmed by sales data for October and November, which shows a consistent level of ordering and insurance reimbursement experienced since the implementation of the new strategy. Indeed, data suggests that sales may have even accelerated from the initial September period with unexpected sales beyond the IS and OMS markets.

  • Stocking up by specialty and hospital pharmacies does not necessarily indicate that end-use demand has increased. In fact during Questcor's presentation at the BMO Conference on December 4, the CEO explained that patient demand had remained at 425-475 units per month which is an approximate 30% decrease from the months preceeding the price increase.
"Although no drug is approved in the United States for the treatment of IS, Acthar is not indicated for, but is used in treating patients with infantile spasms (“IS”), a rare form of refractory childhood epilepsy. Despite lack of indication, Acthar is the "gold-standard" for use in such cases by many Neurologists, with company holding an estimated 40%-45% of the IS market. No generic competition is ever likely due to high barriers to entry. A complex, multi-step manufacturing process involves extensive proprietary knowledge and thus is tremendously difficult to reproduce. With minimal Doctor and patient education initiatives, company may be able to expand usage within IS to the 50% level.

  • "Gold standard" was the term used during the BMO Conference, but there is not evidence of this as absolute truth. In fact, the CEO was unable to sufficiently answer one Dr. Levine's questions regarding the market for IS treatment in the U.S. and abroad. A CEO who doesn't have a grasp on the competition...not very reassuring in my book.
"Additional future growth prospects are very promising:

"In June 2006, the Company submitted a Supplemental New Drug Application (“sNDA”) to the FDA and is currently pursuing formal agency approval for Acthar in the treatment of IS. On November 9, 2007, the Company met with the FDA to further discuss its sNDA. At the meeting, the FDA concurred with the Company’s suggested pathway to preparing a complete application for FDA review, which will involve submission of additional gathered data on past trial information to the FDA. No drug is approved in the United States for the treatment of IS. Currently, no additional clinical trials are needed and due to the long safety and efficacy record of Acthar, we expect possible FDA labeling for IS use in the first quarter of 2009. Under such labeling, penetration of the IS market in the United States could approach 90%-95% over time.

  • So after receiving the non-approval action letter in May, Questcor finally met with the FDA to discuss their application on November 9 immediately preceeding the release of their Q3 earnings. Timing does not simply happen by accident.
"Company should also be able to pass along smaller incremental price increases over time, adding to future growth rates.

  • Smaller incremental price increases? Wasn't 1347% enough?!! Already a typical course of treatment is expected to cost $100,000.
"Additionally, growth prospects internationally may be available in the future due to the lack of a completely safe alternatives worldwide.

  • "Completely safe alternatives"? I would challenge Questcor to make a concrete claim that Acthar is a completely safe treatment choice.
"Further, Acthars anti-inflammatory properties may lead to future further indications.

  • Always possible, but Questcor has yet to pursue any other indications in the 6 years since purchasing rights to Acthar Gel.
"Next, the Company is also developing new medications, including QSC-001, a unique orally disintegrating "fast-melt" tablet formulation of hydrocodone bitartrate and acetaminophen for the treatment of moderate to moderately severe pain, to be used with patents that have swallowing difficulties (30-40% of ALL pain patients). This is currently the largest prescription market in the United States, with 113 million prescriptions annually. The product is being formulated by EURAND N.V. using proprietary delivery technology. QSC owns worldwide commercialization rights on this product, and are pursuing a 505b2 regulatory pathway to market. This is a relatively fast to market program, and we anticipate meaningful results to hit in the second half of 2009.

  • One medication does not qualify as plural medicines. Enough said.
"Lastly, the Company is in early stages of developing additional new medications using strategies that generally require lower capital investment when compared to traditional development programs.

"At the close of the third quarter on September 30 2007, the Company’s cash, cash equivalents and short-term investments were approximately $10,592,000 and its accounts receivable balance was $14,149,000. Current assets to current liabilities ratio was 5.86 to one and is growing stronger at a fast rate in the forth quarter. Company has no LTD. As of November 30, 2007, the Company’s cash, cash equivalents and short-term investments have grown to approximately $20 million and its accounts receivable balance was approximately $24 million. Remember, the Company provides 60 day payment terms to the distributor of the Company’s products in the United States and thus we expect Cash amounts to build substantially by the end of the fourth quarter.

"Given a very favorable balance Sheet, and favorable valuation levels, based on our above analysis and earnings estimates, A BUY rating is indicated on the stock of QSC, which had a closing price of $6.00 on Friday December 7, 2007. Based on the Bio/Pharma industry average PE of 27 for the universe of only those PROFITABLE Bio/Pharma firms (on a trailing 12 month basis), our price target on QSC for year-end 2008 is $31 per share. For the year-end 2009, our QSC target price is $57 per share.

Disclaimer: Author's financial firm, Independent Financial Consultants [IFC] is long QSC.

***Note the above article was not written by THIS blog's author, it is merely taken from SeekingAlpha site.

Then there is Michael Shulman's article The Non-Orphan, Orphan Drug Company which reveals sloppy research in itself.

So you may ask - "Lisa, why do you care so much about this minor drug company?"

Well, it is because Questcor Pharmaceuticals appears to have...

(1) used misleading justifications for increasing their price of a drug which they didn't research and develop and which has modest costs incurred to manufacture.
(2) exploited Acthar's orphan drug status to implement a greedy business strategy which is currently serving as a money-magnet....that's money ultimately taken from patients both insured and uninsured.
(3) provided extremely generous salaries and bonuses to executives and boardmembers while later claiming extreme income losses.
(4) created a stockmarket flurry to attract investors and to validate their business model.
(5) made several savvy investors a great deal of money in the process.

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