The Non Orphan, Orphan Drug Company: Questcor (QSC)

Up to now, I've told anyone who would listen that they should avoid orphan drug companies, and stick with big disease and big opportunities. But a recent event is changing my mind.

In August, a perennial money loser, Questcor (QSC), announced a change in the pricing of therapeutic gel Acthar. Acthar is approved to reduce muscle spasms from multiple sclerosis, but is mostly used off-label to successfully treat infants who suffer or die from convulsions. The change was radical and led to a 13-fold increase in sales.

As a result, in roughly five weeks this money loser generated revenues and profits in Q3 that were off the charts -- $14.8 million in sales and about $8.8 million in profit.

QSC's forecast was a bit convoluted as 30% of prescriptions are from Medicaid and the price seems to stay low for these patients, but when I run the numbers I see $60 million in profits for the coming 12 months, giving it a forward P/E of seven.

I am still very uncertain how the market is going to value the company -- although I need to disclose that I do own shares in this. Is the company going to pursue a business model like orphan-drug-megastar Genzyme, with a P/E north of 100? Or pay shareholders back with large dividends? Or what?

Technically, Acthar doesn't even have orphan drug status -- the company is aplying for that toi the FDA. But the company is right that insurance companies and other payers won't let babies die and demand for Acthar hasn't fallen in the face of the price incerase.

I don't think the company knows what business model it will ultimately pursue, but Questcor has begun to hit the investment conference trail so we may learn more in the coming months.

My natural bias is still against orphan drug outfits, but I've recommend, just a couple, in my newsletter, ChangeWave Biotech Investor -- although this puppy has yet to make the list. You just may want to keep an eye on it.