Questcor Pharmaceuticals, Inc.

November 10th, 2013 Ticker: QCORE (Nasdaq) Price: $ 61.41 Sector: Industry: Pharmaceuticals & Biotech Healthcare

Highlights
Industry leader with solid competitive advantage and great product differentiation: Questcor is a dominant industry leader due to its personnel, experience and financial strengths. The company specializes in therapies for difficult to - treat diseases and focuses on commercializing H.P Acthar Gel, an injectable drugs for the treatment of multiple indications, which is also what the company is the main provider of in the market. Consistent revenue growth: As of 2013, Questcor reports a 3 year average revenue growth of 85%, average profit growth of 107% and average total return of 66%, making it one of the fastest growing companies in the industry. The company is also projected to continue growing for the next 5 years, due to the continual demand for H.P Acthar. Strong financial performance: The companys balance sheet has been remaining debt free for the past five year until 2013 when they acquired Bio Vectra and took on the companys debt. Questcor has been consistently increasing its operating cashflow, sustaining over 50% - profitability and margin ratio, and operating at a healthy liquidity ratio Focus on Research and Development: The companys primary strategy is to focus on developing application for its strongest and most profitable product, Acthar. It continues to seek approval from the FDA to expand Acthar treatments for more indications implementation.

Company description Questcor Pharmaceuticals, Inc., a biopharmaceutical company, provides drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications. It primarily offers, and is the dominant supplier of H.P. Acthar Gel, an injectable drug for multiple special treatments. The company sells its Acthar primarily to specialty pharmacies; and Doral to pharmaceutical wholesalers. Questcor Pharmaceuticals, Inc. was founded in 1990 and is headquartered in Anaheim, California.
Financial Metrics: Price to Sales Price to Book Price to CF Price to Earnings 5 Yr Projected Growth PEG Ratio Dividend Yield Return on Equity Market Cap

5.3 9.8 14.2 14.4 30% .47 1.9% 104.3% 3.623 B

Financial Metrics:

Financial Metrics:

Year Ending 2015 E 2014 E 2013 E 2012 A 2011 A

Revenue 1285.93 1037.26 800.52 509.29 218.2

Revenue Change 23.91% 30% 57.17% 133.45% 89.56%

EPS ($) 7.13 6.55 4.88 3.14 1.27

Change 8.85% 34.22% 55.41% 147.24% 126.78%

P/E 8.81 9.59 12.87 ~ ~

Investment Thesis
From its incredible past performance and bright future outlook, I am confident that Questcor Pharmaceuticals will continue to bring great profit to investors, more specificly for the following reasons: Product differentiation: Questcor has a significant and sustainable advantage over its competitors with its unique, expensive and in high demand products (each Acthar dose costs $28,000) Effective operations and business strategy: The company continues to play to its strength by focusing on developing the application of its special products. It actively invests in research and development, trying to make things better at the current market as well as planning to expand to other countr ies with the demand abroad. Strong balance sheet and financial performance: With an almost debt free balance sheet, high operating margins and generally healthy financial performance, Questcor will be enable the Company to increase investment in research programs to further clarify the potential immune-modulating properties of Acthar and expand its customer base.

Industry Overview
Healthcare industry is composed of companies provides goods and services to treat patients with curative, preventive, rehabilitative, and palliative care. These companies generally belong to two sectors: Healthcare Equipments and Services, and Pharmaceutical & Biotechnology. Companies in Healthcare Equipment and Service sector provide health insurance, manufacture medical equipments, supplies and surgical devices; while those in the Pharmaceutical & Biotechnology sector conduct research, develop and commercialize major drugs, novel therapies and other drugs. The Healthcare industry takes up 12.2% of the S&P 500 with 52 companies in the S&P 500 Healthcare Index. The major sector of the industry is the Pharmaceutical & Biotechnology sector, with a lot of famous companies like Johnson & Johnson, Gilead Science, Abbott Laboratories, etc. Industry Porters Five Forces Threats of entry posed by new or potential competitor is low. The entry barriers are high due to costs associated with research & development of new drugs (i.e. years of investment in R&D for a drug that may/may not work), and strict government regulation (FDA), making it a very unattractive industry to enter. Degree of rivalry among existing firms is high. High rivalry among main companies in the industry as there is little product differentiation and companies have to compete for the same population.

Bargaining power of buyers is medium. Hospitals & other health care organizations buy in bulk quantities and exert pressure on pharmaceutical companies to keep prices in check. Regular patients have lost bargaining power due to price increases in generic drugs. Bargaining power of suppliers is low. Sales for the pharmaceutical industry concentrate in a handful of large players and that has decreased the bargaining power of suppliers. Closeness of substitute products is high. Demand for generic versus brand name drugs has increased because of the costs. Generic drug companies do not have the high costs associated with the research & development of new drugs and that allows them to sell at cheaper prices. The closeness of substitute products is a HIGH competitive force. Growth Drivers The main growth drivers for companies in the Healthcare industry, and especially for Pharmaceuticals & Biotechnology sector include 4 main factors: technological development, product differentiation, the demand of the population, and governmental regulation. Advancement in technology can shorten the adoption curve for new technologies; the benefits of the advancements are clearly visible in terms of smoothening of workflow, ROI, shortening treatment and cutting costs. Product differentiation helps companies to reduce competition and increase profit margin by targeting the pool of customers with specific needs. The change in population, income levels, population age and awareness can result in an increase or decrease in demand for better healthcare services, adoption of health insurance and increase in personal health expenditure. Last but not least, governmental regulations have a long term impacts on the growth of the industry and companies performance by drugs restriction, spending policy, and limiting competition.

Business Overview
Founded in 1990 and headquarters at Anaheim Hills, California, Questcor Pharmaceuticals, Inc. (Questcor) is a leading biopharmaceutical company. The company is focused on the treatment of patients with serious, difficult-to-treat autoimmune and inflammatory disorders. Its primary product is H.P. Acthar Gel (repository corticotropin injection), or Acthar, an injectable drug that is approved by the United States food and drug administration (FDA), for the treatment of 19 indications. Its research and development program is focused on: the evaluation of the use of Acthar for certain on-label indications; the investigation of other potential uses of Acthar for indications not FDA approved; and the expansion of its understanding of how Acthar works in the human body (pharmacology), and ultimately, its mechanisms of action in the disease states for which it is used, or may be used in the future. The company sells Doral, a secondary drug product to pharmaceutical wholesalers, which resell Doral primarily to retail pharmacies and hospitals. It is also working on developing Prolanta for future sales, after acquiring Bio Vectra in 2011. Key markets. With its special Acthar product, Questcor focused on 4 main markets of patients: Nephrotic Syndrome, Multiple Sclerosis, Infantile Spasms, and Rheumatology. These project to be a several billion dollars market, as the demand is gradually upticking for the next five years. The market for Nephrotic Syndrome patients are suffering from significant un met need, since there

are very few FDA approved treatments. There are also a large demand from Multiple Sclerosis patients, as the relapse is occurring to about 400,000 people in the US. Questcor also estimates about 70,000 Dermetomyositic patients, 63,000 Lupus patients, and 65,000 Rheumatoid patients who are needing alternative treatments and can potentially benefit from Acthar. For Infantile Spasms, Acthar is considered the gold standard and is currently used to treat about 40% - 50% patients. Key Strategies: According to CEO Don Bailey, Questcor's strategy is to "grow sales in each of these [current] markets and then add other markets.[6] While Questcor is a company focused almost entirely on a single product, Acthar, its ability to differentiate this product and diversify across several markets will strengthen its sustainability in the long-term. The company has been actively lobbying for more FDA approval on Acthar Treatment. Competition: Acthar's main sales driver is its success in the MS market. However, many of the symptoms that it treats in this market are currently treated using generic steroid medications. In fact, in head to head studies, there were no differences in benefit between Acthar and intravenous steroid therapy. However, Acthar can add benefit when patients cannot be adequately treated with steroid therapy Customers and Distribution: In the U.S., Questcors exclusive customer for Acthar is CuraScript SD. The company engaged Integrated Commercialization Services, Inc. (ICS) to act as its exclusive agent for commercial shipment of its products to its customers. In addition to distribution services, ICS provides the company with related services, including product storage, returns, customer support, and administrative support. Manufacturing: The company has a supply agreement with Cangene bioPharma, Inc. (Cangene) to manufacture commercial quantities of Acthar finished product. Cangene is the companys sole source supplier for Acthar finished product. The company also has a supply agreement with Meda Pharmaceuticals (Meda) to manufacture commercial quantities of Doral. Meda is the companys sole source supplier for Doral. On January 18, 2013, Questcor completed its acquisition of BioVectra Inc. BioVectra is a supplier of specialty contract manufacturing services to the global pharmaceutical and biotechnology industry. They manufactures active pharmaceutical ingredients, or API, chemical intermediates, and bioprocessing reagents. BioVectra has been our manufacturing partner for the API in Acthar since April, 2003. SWOT Analysis

Performance Analysis
SALES GROWTH Since 2008, Questcor has been consistently experiencing tremendous growth in sales revenue. The company dramaticly climbs to new highs from 95.2 millions to 716.6 millions almost 650% in only five years. The net income and operating income went to about the same magnitude of uptick. The success of Questcor as a company is strongly tied to the success of Acthar in growing sales within its indicated markets, and the demand for Acthar was definitely tremendous. Another reason for the massive increase in revenue is that Questcor gradually raised the price of Acthar, from originally almost $2000/dose, to $28000/dose. The demand still persisted. The company is still expect approximately 30% growth in sales for the next few years, as the combined market opportunity for Acthar is estimated at $1.5 billion. Questcor estimates that Acthar can build on markets of $500 million in MS, $100 million for infantile spasms, and over $1 billion for kidney diseases. Questcor plans to capitalize on these opportunities by adding sales representatives for kidney disease, maintaining and growing its presence in the infantile spasms group, and growing indications.[5] Questcor's success in driving Actar sales will be strongly tied to its overall success as a business. BALANCE SHEET & FINANCIAL RATIOS The quick and current ratios of Questcor, despite unstably trending upward and downward throughout different periods, have always remained well above 2. The companys debt ratio have also always stayed under 50%, despite the slight upward trend. The companys short and long term liquidity and ability to finance asset is extremely secured. The company balance sheet has also remained debt free until January 2013, when the company acquired Bio Vectra, its subsidiary manufacturer partner. Bio Vectra has a 2.85% term loan, which will be paid off in 2016. The loan is secured with Bio Vectra accounts receivable and inventory. CASHFLOW ANALYSIS The firms cashflow from operating activities have been significantly trending upward since 2009 from 63 millions to 315 millions, which is about a 400% growth. The companys cashflow from investing activities majorly goes into investing in markerable and equity security, and most recently, to acquisitions. The number turned positive when a short term investment matured. Questcors cashflow from financing activities majorly goes into paying special dividends for share holders adjusted with tax benefits.

Valuation Analysis
COMPARABLE ANALYSIS: COMPARING QUESTCOR WITH 10 PEERS COMPANIES WITHIN THE SAME INDUSTRY

The mean target price of Questcor across multiples is $168.52. We can conclude that Questcor stock is significantly undervalued.

Figure 1. Trading Multiple Comparision

From comparing trading multiple with the industry average, we can also conclude that QCOR is significantly undervalued, given its growth outlook and operating margin.

Investment Risk
Investigation by the U.S. Attorney's office in Philadelphia for its promotional practices. Investors had blown this off as the stock continued to escalate to new highs. However, on Oct. 30 in its conference call and 10-Q filing, it disclosed another attorney's office investigation and the SEC joined in an expanded investigation, so this might be a serious sign. FDA approval and Aetna limitation for Acthar usage can have negative impacts on investors. Limited product pipelines makes the company completely dependent of the sales result of one product.

Recent news
Acquired the rights to Synacthen, a drug from Novartis, that is sold in Europe but not in the United States. Synacthen is similar to Questcors drug, so the company has eliminated one competitor. Expasion of Management Team: David Young, Pharm.D., Ph.D., currently a member of Questcor's Board of Directors, has been appointed to the newly created position of Chief Scientific Officer, and Sian E. Bigora, Pharm.D. has been appointed to the newly created position of Vice President Regulatory Affairs. Dr. Young (56) joins Questcor from AGI Therapeutics plc where he served as Executive Director & President, U.S. Operations for the specialty pharmaceutical company since 2006. Dr. Bigora also joins Questcor from AGI Therapeutics where she served as Vice President, Clinical Research and Regulatory Affairs since 2007.

CONCLUSION

With the past obvious success in its focused strategy, positive growth outlook, significant product differentiation and a healthy balance sheet, I believe that Questcor has proven itself to be a sustainable company and a great investment for investors. I am confident that the stock will continue to grow even more profitable.

Sources: Morningstar, WikiWealth,Capital IQ, WikiInvest, Companys website, New York Time, Yahoo Finance, Bloomberg.