Money McBags was traveling yesterday (as he will be on Friday as well, so columns this week may be a bit come and go, like Boy George at a gloryhole) but he wanted to finally get to his write-up of QCOR’s Q which the company announced last week to much fanfare (and by much fanfare, Money McBags means a “fuck you very much” sell off by investors who obviously didn’t read Money McBags’ last note on QCOR where he said to EXPECT A BAD Q.  To be precise, he said: “the stock could get really cheap again after Q4 when people sell on the disappointing Q and thus it could provide a nice entry point.“  So does one pat themselves on the back with one hand or two?).

As for the Q itself, well it was what it was as eps came in at $.12 non-gaap which was down from $.14 eps in last year’s Q1 and below Money McBags’ $.14 estimate for this Q so um, what went wrong?  One word:  Volume.  And not volume of scrips written (though that was actually on the low end, which Money McBags will get to later, and if we’re lucky, he’ll also get to this later), but volume of new hires as the cost to double the sales force was ~$2MM higher than Money McBags’ had estimated.   And remember, this is why Money McBags said they were going to have a bad Q because their cost guidance just didn’t really make sense and if Money McBags had trouble interpreting it, it is no surprise sell side analysts did since if they were any good at their jobs, they would be writing dick jokes for free on the internet instead of being paid for their shitty work (and with that, Money McBags just fisted himself).

As for revenue, net sales were up only 13% (which was more than actual vials were up, but again Money McBags will get to that later, and he still promises to get to this later too), which is not what Money McBags likes to see in a growth company, especially one that had sales up 30% for the year because a declining growth rate is as positive for a growth company as  The Big Short was to Wing Chau or the invention of the airplane was to Buddy Holly.  QCOR said there were two reasons for slower growth with the first being just general lumpiness in quarters which tend to be lumpier than a polyorchid’s nutsack.  They basically have one distributor who orders the fuck out of new vials many at a time and QCOR has no control over it and they received a big order on the last day of Q3 and another big one on the first day of Q1 2011, so Q4 in between was the unluckiest of Pierres.  The second reason for a slower growth rate was that they were training their new sales force and as part of that, they disrupted sales territories by introducing new reps which will make them more efficient in the long-run, but in the short-run, it caused some sales people to be pushed out of their territories and thus lose relationships and that shit takes time to rebuild.  Anyway here are Money McBags’ thoughts on the Q:

1.  To say their revenue was fucking confusing, would be an insult to the word confusing.  Net sales were up 13%, but vials were up only 3% so um, come again?  And as always, if you’re Nicky Whelan then please, come again.  Here is the deal: To get to net sales from gross sales, you have to deduct out reserves for Medicaid, Tricare, co-payment assistance, chargebacks, and a rainy day.  That reserve as a % of gross sales fell from 28% in Q3 to 25% in Q4, which is hella odd since they were supposed to have upped their reserve by an additional ~$2.6MM over normal reserving for the recent addition of 28 states to Medicaid due to health care reform.  So Money McBags is more confused than Caitlin Upton at a geography bee.

If we just look at the numbers (and Money McBags went back through the Qs and Ks for the past year to create the tables below, which took away from his viewing of all things Charlie Sheen, so just know sacrifices were made for you the reader), there is some weird shit going on.  This is a table of the last three years of growth in vials and net revenues:

Gross sales ($000s) Vials Price/Vial Net Sales Net Sales/ Gross Sales Y/Y Vial Growth Y/Y Net Sales Growth
FY 2008 $ 133,252 5,830 $ 22.86 $ 95,248 71%
FY 2009 $ 138,220 5,973 $ 23.14 $ 88,320 64% 2% -7%
FY 2010 $ 154,806 6,696 $ 23.12 $115,131 74% 12% 30%

What is interesting is that this “growth” company has really only grown vials ~15% in two years with MS growing >100%.  What is more interesting is that net sales is giving the illusion of stronger growth and that is simply because they are reserving less per vial.  What is even more interesting is Sara Jean Underwood, but that isn’t relevant here.  Anyway, all of this can all be explained in theory because only ~10% of MS patients they treat are on medicaid while ~50% of IS patients are, so as MS grows, the reserving as a % of gross sales should be lower, but is this really growth?

Here is a look at this year:

Gross sales Vials Price/Vial Net Sales Net Sales/ Gross Sales Y/Y Vial Growth Y/Y Net Sales Growth
Q1 2010 $33,461 1,446 $ 23.14 $ 26,244 78% 1% 13%
Q2 2010 $38,837 1,680 $ 23.12 $ 28,316 73% 7% 12%
Q3 2010 $43,687 1,890 $ 23.11 $ 31,274 72% 40% 126%
Q4 2010 $38,821 1,680 $ 23.11 $ 29,297 75% 3% 13%
FY 2010 $154,806 6,696 $ 23.12 $    115,131 74% 12% 30%

Q3 had a huge spike which was because in Q3 last year they had issues with reserving and with IS and in Q3 this year they received a large order from their distributor so some of that should have been in Q4.  If we add together Q3 and Q4 to get rid of some of the lumpiness, the second half of the year saw vials grow 20%, which is perhaps the first real growth about which they have been talking, but that led to a 50% jump in net sales due to just reserving a lower % of gross sales and having to overreserve in Q3 last year, so we have to be careful about what we are looking at here (because we don’t want to get caught looking at this).

There are three of answers to this question though, so it might not look as strange as Bruce Jenner’s face.  First of all, as mentioned before, only about 10% of MS patients qualify for the reimbursement whereas ~50% of IS patients do.  So as MS grows, the % of reserves should shrink.  Secondly, the Medicaid rebate going from 110% to 100% reduced the required reserves on a per vial basis across the board, so whoop-de-dam-doo.  Finally, QCOR got better pricing from Tricare which caused those reserves to be lowered.  So the explanations are there, but it just seems a bit squishy to Money McBags especially when trying to forecast this shit.  Does he use a 75% number to get from gross to net, an 80% number with MS growing, shit Money McBags is flying blinder here than Amelia Earhart, and he’s not even sure what that means.

2.  The new MS sales force really began selling 11/1/10 but due to building new relationships, it wasn’t until February of 2011 that they started to see any lift.  On the call QCOR said Achtar prescriptions are tracking ahead of Q4 2010 and well ahead of Q1 2010 which is titriffic.  They also said any salesforce issues should be through their system by Q2, so we might have to wait another 6 months before we can see the real results of their new strategy.

3.  Costs are way above what Money McBags guessed and this is a new run rate, so that fucking blows like Bree Olson in Lex The Impaler 6.  Money McBags had a bump for the new sales force, but not enough, but he didn’t have the ginormous jump in R&D which QCOR said should see a significant increase due to a phase 4 nephrology trial and a phase 2 diabetes trial which could boost R&D costs by $5MM to $7MM, so um, ugh.

4.  They have no fucking idea how big MS can be as they have no idea right now what kind of traction they will get with their new sales force.  This is a quote from the call:

predicting the actual number of MS prescriptions is very difficult, and we think there’s a high range of possible outcomes. If we gave you the full range, it would sound so wide as to be even not helpful at all. With IS, there’s always been a significant quarter-to-quarter variability, and NS is small numbers anyway. So, the real key would be MS, and we really would have a very difficult time

So Money McBags might as well just throw darts at a board like Wall Street analysts because if the company has no idea how their new salesforce is going to perform, he’s not sure how writing dick jokes while wondering if Brooke Mueller is looking to get back in the dating scene, gives him any kind of edge.

5.  Money McBags did promise he would have more on this.

6.  They now have 5 full-time nephrology sales people who understand the nephrology space, so it will be interesting to see if they get traction.

So what the fuck do we do here?  No really, Money McBags actually has less of an idea about this than he has about the Riemann Hypothesis or why Russia hates fine art.  Here is what Money McBags is fairly certain of, Kate Upton is hot.  But here is what he is fairly certain of with QCOR:  Their SG&A should run ~$13.5MM a Q so it should be $54MM for the year.   R&D should grow and be bumped up by ~$5MM, so maybe ~$16.5MM for the year.  So operating costs should be up ~34%, which is not really what Money McBags wanted to see, but he understands investing in growth involves more than buying a Marisa Miller wall calendar.

As for revenues, fuck if Money McBags knows as it sounds like not even QCOR knows.  Money McBags has been forecasting off of gross sales, but he is not quite sure now how many vials of MS vs. IS they sell to even be able to do that anymore.  What Money McBags knows is that ~55% of net sales are MS (according to the CEO on the call), but only ~10% of those sales need reserving, so in terms of actual vials, MS is probably more like ~40%.  So as this grows, the reserve percent should shrink and net sales should rise faster than vials sold (in theory of course).  Anyway, Money McBags will take a complete swag here, ignore gross sales and reserving, and say MS net sales grow 35% and IS grows 10%.  In that scenario, we get ~$143MM in revenue and with 94% gross margins and op costs at ~$71MM and taxes ~37%, that yields only $.62 eps for the year, way fucking down from Money McBags’ $.90 guess from before the Q as his cost estimates have just ramped the fuck up.  But shit, they just doubled the sales force, so that MS guess could be way fucking low (and again QCOR management said it is a wide range), so what if MS grows net sales 80%?  In that scenario, QCOR will earn $.90 per share.  So which will it be?  Honestly, Money McBags has no fucking idea.

Here is what Money McBags knows.  This management team has always seemed honest, shareholder friendly, and smart about the business.  QCOR has a drug with a fairly inelastic demand curve in IS and is growing rapidly in MS and could have a huge market in NS.  Qadaffi may be a lunatic, but he knows how to choose his guards (which has nothing to do with QCOR, but whatever).  The reserving issue is confusing, the numbers don’t always tie as QCOR doesn’t get all of the prescription data, and the lack of growth in vials over the past year is odd (though now is when the salesforce is ramping up so this could be the inflection point).  At the low end, QCOR is trading ~20x Money McBags’ estimate which would be for 24% net sales growth, so not horribly out of line, especially as they have ~$2 per share in cash.  At the high end, QCOR is trading at only ~13.5x Money McBags’ estimate for what would be 50% net sales growth.  Money McBags still thinks in the long run this company succeeds, but he is at a bit of a loss right now how properly gauge anything.

So management, Money McBags knows you are reading this (because they already announced the new cast of Dancing with the Stars so you don’t need to be on the chat boards trying to find out anymore) and invites you to explain to him the gross sales to net sales reserving issues, the seeming lack of strong growth in actual vials sold, the way to estimate vials of MS, the R&D spend for 2011, and how to understand warlock time (though that is likely above your pay grades).

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