Shares of Questcor Pharmaceuticals (#QCOR) have been slowly gaining ground since their large drop last month on reports that Aetna (#AET) limited coverage for QCOR's drug H.P Acthar Gel. Shares are trading in an ever tightening range forming an ascending triangle which indicates that a strong move in the stock price could be happening in the near future.
Repeated blog posts from noted short selling firm Citron Research claiming that other insurers may be following in AET's footsteps have resulted in a series of Bear raids providing astute traders with buying opportunities. Citron's assertions aside it should should come as no surprise that insurance companies are in the process of reviewing guidelines and updating paperwork for the year ahead since we are in the fourth quarter of the year.
Chart Pattern
The chart below (data and charting via TD Ameritrade ThinkorSwim) shows the QCOR hourly price movement since September 20th:
The bear raids on several different dates clearly form a lower support range in the ascending triangle which began to form starting on October 5th. For the past week QCOR's stock price has been hovering in the $24 to $26 range forming the top of the triangle pattern. Generally, the potential move when such a pattern breaks is equal to the difference between the high and low of the pattern itself. The triangle above has a $9 range from the lows of $17.25 to the $26+ range indicating that a pattern break has room to move by +/- $9.
Third Quarter Earnings Results
QCOR reported it's third quarter earnings today.
- Earnings per share were 91 cents - beating consensus estimates by 17 cents per share.
- Revenues were $140.3 million - beating consensus estimates by $12.55 million.
You can listen to the conference call for the next seven days on the Questcor website.
On the conference call, we learned that the company will no longer be offering monthly updates on vial shipments and insurance coverage. Management stated that since the Nephrotic syndrome market has begun to mature, they are confident that the sales numbers are stable and headed in the right direction, and therefore are eliminating the extra disclosures. Recall that Citron implied that the monthly updates were perhaps a sign of an unsteady business that could vanish soon. Management has soundly refuted this claim by returning to a more traditional Quarterly reporting cycle.
Management did not offer future revenue guidance except to say that the rheumatology market, which is the newest indication that QCOR is actively marketing, shows promising initial signs and should continue to see growth as the sales effort builds. Management gave examples in both Nephrotic syndrome and MS of patients who, after failing earlier lines of treatment, were prescribed Acthar and saw dramatic benefits from the treatment.
Looking Ahead
Looking ahead, investors will no longer receive monthly QCOR shipment updates. This move should help stabilize the stock as investors judge the company's sales trajectory on a quarter by quarter basis rather than month by month. Given QCOR's expanded sales force in nephrology and rheumatology, the sales trajectory for the drug is likely to continue in the positive direction in the months ahead. QCOR's board recently authorized an increase to their share repurchase program and initiated a quarterly cash dividend. Given QCOR's current stock price, the company is likely to purchase several million more shares in the coming months, decreasing the float, and adding to the upward pressure on the stock.
A potential negative force on the stock is the ongoing U.S. Government probe in to QCOR's promotional practices. Our view is that, while the probe may ultimately be settled by the company paying a fine, the timing of such settlement is likely to be several months away and the size of any ptoential fine will be commensurate with the size of the company. Management's reiteration of the proper use of Acthar as a second line therapy for patients not helped by other medications is a positive sign in light of this investigation. The company has stated that it will not be commenting on the ongoing investigation other than through regulation FD compliant channels.
The technical indicators on the chart suggest that QCOR has upside room to move to the $35 range with initial resistance at $30 and again at $33. As Q4 continues, expect more insurance carriers to issue policy clarifications, and expect the likes of Citron to use these changes to try to depress the stock price again. Each successive attempt should produce weaker and weaker reaction as the market grows accustomed to these tactics. Investors who are bullish on the stock would do well to maintain buy orders at prices $1.50 to $2 below the current trading price to take advantage of these short term dips.
In the wake of today's earnings release, there may be some short term profit taking by those who got in near the lows. Under this scenario, watch for the support line to be tested. Downward dips should become smaller and smaller until the pattern definitively breaks. Our view is that the pattern is more likely to break to the upside rather than to the downside due to the strong results posted this quarter and the share repurchase program which adds upward pressure on the stock.
Disclosure: This analysis does not constitute investment advice, investors are cautioned to make their own investment decisions based on their personal situations. The authors hold positions in QCOR and may buy or sell shares or options in the future.
