Why Questcor Pharmaceuticals’ Shares Were Crushed -- Again

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of biopharmaceutical company Questcor Pharmaceuticals (Nasdaq: QCOR  ) are getting throttled, down as much as 34%, following a press release from the company that the U.S. government is probing its marketing practices.

So what: The past few days have been an exceptionally ugly stretch for Questcor. Last week, the company lost nearly half its value in a single day after reporting that Aetna (NYSE: AET  ) would discontinue coverage on all indications of its lead product, Acthar, save for one indication. Questcor countered the news by noting that Aetna only comprises about 5% of all sales, and that the news should be a non-factor.

However, today’s news of a government investigation of its promotional practices is genuinely disconcerting, because it puts the spotlight back on Citron Research which raised questions regarding Questcor’s marketing practices months ago.

Now what: Now I think you avoid Questcor like the plague until we have some sort of resolution from the U.S. government’s investigation. More often than not, companies targeted by Citron wind up heading lower, and Questcor’s premium price for its Acthar, more than $20,000 per treatment, is bound to rile up the skeptics. Don’t be fooled by a single-digit forward P/E or a high growth rate in the meantime.

Craving more input? Start by adding Questcor Pharmaceuticals to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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  • Report this Comment On September 24, 2012, at 5:03 PM, WCoastGuynCA wrote:

    I have to believe that Aetna is just the first of a number of carriers that will eventually reduce the coverage on Acthar. I expect the company's share price will soon be back to the single digit range.

    This is one falling knife that you don't want to try to catch until further details are known.

  • Report this Comment On September 24, 2012, at 10:52 PM, TruffelPig wrote:

    With a 40% short float, a P/E of 9, and after reading the Citron "research" report I say - lemons can be squeezed too.

    For example, Citron does not understand that formulating peptide drugs is more difficult than small molecule drugs Also, delivery and stability issue make formulation much more challenging.

    For example, Citron does not understand that there are two type of hormones: steroids and peptides. How can that be due diligence on a research report.

    The research scientists mentioned in the report should be proud to be in such an exact neighborhood and the third one gets the hormone story also wrong.

    The side effects of steroids can be severe and they do not work with all patients. Having an alternative albeit expensive is of great value, in particular if you suffer from potentially deadly diseases such as multiple sclerosis.

    Anyhow, this just to show that the Citron report isn't really all that great. Next let us see what that government inquiry into marketing is. Finally, October 22 show time - earnings.

  • Report this Comment On September 25, 2012, at 7:03 AM, NotTheDroid wrote:

    There is a lot of speculation around this stock right now, however, I did a lot of research last week and I think it's worth sharing the highlights. Please note, I originally bought for a long position on Thursday @$28, sold most of it @34 and held a couple hundred free shares, just to see. Oops, I actually knew better. Anyway, that's my full disclosure.

    My background is 15 years as a Managed Care Consultant working with large Payers and their medical directors, execs, etc.

    First, Aetna's new policy. Very plainly, it's correct. Acth is not and never has been considered a primary drug for MS. The factual error in it refers to it's bibliography. They used the 2006 QCOR Prescribing Instructions, instead of the updated 2008 version. Note, no notable difference that would cause Aetna to backtrack. Their medical director did his job without malice.

    Second, QCORs conference call. Well, simply put, all those analysts did not recieve any actual answer. QCOR simply repeated the same thing repeatedly. Did they lie? No, their answers were accurate, reflect that Acthat is not a primary, and their must be a pre-auth for a Doc to prescribe it. Never has been different.

    So what's the problem then? Why the hub bub?

    Their is a simple answer, yet it's elusive to most. I had to scour the FDA filings, QCOR's presentations and SEC filings, other Ins. Co's PI's, etc.

    Again, simply put, ACTH was first approved for multiple indications back in the 1950s. What indications? The stuff QCOR lists 3rd in their PI. Stuff... FDA doesn't have any of that info, except in a file cabinet somewhere in Warehouse 13.

    Also, ACTH was approved for MS back in 1973. However, that info is also in Warehouse 13.

    In the early 2000s, QCOR bought the exclusivity rights to ACTH, with an orphan drug designation to test it's responsiveness to IS (similiar to MS in root cause but not the same). QCOR was smart to think they should have success with IS.

    Please lookup what orphan drug status actually means though. It helps. Basically, Orphan means a disease and a possible treatment only impact a small % of the population. Pharmacy companies are provided 7 year exclusivity, to recoup their R&D, if approved, and then sold.

    Here comes the kickers...

    1) Yep IS is responsive.

    2) There are some bad side effects regardless of what you are using it to treat.

    3) It costs $20k to $50k per vial.

    4) MS sufferers, who were not responsive to Corticosteroids, bought very cheap ACTH which was a last resort drug that did wonders.

    Key word in #4 is cheap.

    See once, ACTH was approved for IS, it became very expensive and QCOR had exclusivity right for 7 years.

    Now, if you happen to be an MS sufferer, you know that ACTH actually works great, even if you are responsive to corticosteroids. Better even.

    If you are an insurance company, well, that's a different story. For years, you had ACTH prescibing information and coverage for MS. It was cheap, so who cares if a Doc prescibes steroids or ACTH. Whatever he thinks is best...

    I think you know where this is going now but let me be precise.

    Thirty Seven (37) of the largest Payers were denied their premium rate increases, by Obama's director of HHS. We aren't talking small change here, and we all wanted cheaper insurance. Most of these Payers were requesting 10 to 20% increases to cover the costs of implementing other gov't mandated regulations. HIPAA 5010 (should be done now), ICD10 (in progress), new Health Exchanges, etc. They were approved for 2 to 4% increases instead and lots of folks are taking pay cuts now.

    Regardless of that, without those rate increases, a $20k to $50k vial is just not in the budget. If absolutely necessary, then with a prior auth, maybe. Otherwise, use steroids.

    So, yes, I also expect other insurers to follow suite, when they release their new PI bulletins, over the next 6 months. This isn't a malice thing, it's business.

    Lastly, I actually sent an email to a friend last Thursday night outlining all this and commenting that the marketing QCOR did, must have been exceptional. They actually kept docs and insurance companies going with ACTH for MS, long after jacking the price to astronomical levels.

    QCORs own documents and filings back that up. Their sales/marketing staff has tripled, and more, over the last few years. Wow!

    My advice to my friend was to sell in Friday morning runup, as these things will be brought to light soon, and we don't want to be caught with our pants down. So, we sold.

    Monday, the announcement that the gov't would be investigating...

    My take on that is also very simple. QCOR will be cleared or pay some small fine for some small thing. I see nothing in their materials that is false... agressive yes, false... nope.

    However, it's too late now, the cat is out of the bag. They took something as cheap as asperin, got exclusivity to prescibe it for something more serious than a headache, then started charging the headache sufferers 10,000x what they were paying last year. I mean no disrepect to MS sufferers, I'm making a point.

    That won't last, and other insurance companies will follow suite, QCORs growth may continue but they will need to accomodate in some way and their profit margins will shrink.

    Let's not forget about the exclusivity period expiring. Anyone who looks at the insider selling may think that something must be wrong with this company. However, I posit that you would do the same thing. Your business model, and sole profitable product, has a shelf life of 7 years only. You are more than halfway through that. Once it is over, GSX or others, can start selling ACTH again... a lot cheaper. Yep, I'd be selling all options and warrants I had too. Again, no malice by their execs, they are just being smart.

    Finally, were is this stock going? Do I have advice to all of you? I don't know, and no. I won't touch it again, except as a trading stock. It may go back to $50, or it may hit $5, as smart money is realizing all that I just wrote.

    Your guess is as good as mine but I don't think this is a long term part of any portfolio and that's the extent of my advice.

    Do your own due diligence before deciding to use any information I provided. Wikipedia can start you out, links to other info at bottom of their page on ACTH. FDA filings available are almost solely based on IS but you can find some reference to MS, etc. here and there. Web searches will provide other info on Rx for MS and other indications. Ins Co's PI's are on the web. Hit next page a few times on Google to find old links on ACTH, before it was tested and approved for IS. Yada yada. and let me know if you walk away with anything different than I did... I'm actually interested. Post your findings here...

    Take care and happy investing.

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