Is Questcor Pharmaceuticals a Bargain or Bust?

Shares of Questcor Pharmaceuticals (Nasdaq: QCOR  ) hit a 52-week low on Wednesday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
Disneyland has Mr. Toad’s Wild Ride, and Questcor shareholders now have their own version, although it's not nearly as fun.

Questcor has gone from being within a few dollars of a new 52-week high to a brand new 52-week low -- all in a matter of days. Questcor lost nearly half of its value last Tuesday following an announcement from Aetna (NYSE: AET  ) that it would no longer cover the multiple indications for Questcor's Acthar gel, save for one. At $23,000 per treatment, Acthar gel is extremely costly for health insurers like Aetna to cover, and fear spread quickly that other insurers may eventually follow suit. Questcor denied it would be a major problem, as Aetna's coverage accounted for just 5% of total sales.

However, that was just the beginning of Questcor's issues. Later that week, Questcor announced a probe by the U.S. government into the company's marketing practices -- specifically, the company's use of a $23,000 price tag on Acthar gel across all indications because of its status as an orphan drug that's without competition. As my Foolish colleague Keith Speights points out, probes into marketing practices wound up costing Johnson & Johnson (NYSE: JNJ  ) $2.2 billion and Amgen (Nasdaq: AMGN  ) $780 million for their deceptive practices. Questcor shareholders have every reason to be concerned.

How it stacks up
Let's see how Questcor stacks up next to one of its closer competitors, Pfizer (NYSE: PFE  ) .

QCOR Chart

QCOR data by YCharts.

As you can see, even with the drop Questcor is vastly outperforming Pfizer.

Company

Price/ Book

Price/ Cash Flow

Forward P/E

Dividend Yield

Questcor Pharmaceuticals

8.1

7.7

4.9

0%

Pfizer

2.3

11.5

10

3.5%

Source: Morningstar.

You might think that Questcor is far and away the greatest value since sliced bread in the health care sector, but there's a lot that could derail its growth. If anything, an ongoing probe into its marketing practices from the U.S. government could result in fines and a huge reduction in the price of its leading drug, Acthar. There's also the vindication received from Andrew Luck, head of Citron Research, who questioned Questcor's marketing practices back in July.

Pfizer, on the other hand, won't offer nearly the same growth rate as Questcor, but has a broad spectrum portfolio -- including multiple sclerosis pain treatments -- and pays a sizable 3.5% yield.

What's next
Now for the $64,000 question: What's next for Questcor Pharmaceuticals? That question depends entirely on the results of the U.S. government's probe and whether other managed health care companies decide to drop coverage on Acthar similar to what Aetna has done.

Our very own CAPS community gives the company a two-star rating (out of five), with 89.4% of members expecting it to outperform. I’ve yet to make a CAPScall on Questcor, and given the uncertainty surrounding the company, I won’t be making one today, either.

There are simply too many unknown variables here to make a reasonable call in either direction. Questcor does have an FDA-approved orphan drug that's generally free from competition. On the flip side, it also has to contend with a federal probe and dropped managed-care coverage concerns. Until this situation sorts out, the best place to be is on the sidelines with Questcor on your watchlist.

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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.

The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of, and creating a diagonal call position in, Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2012, at 3:14 PM, RHMASS wrote:

    When you cited Citron research to boost your point, that's where you lose your credibility. The head of this "research" outfit had a history in which he was barred from doing work in the commodity market for two years due to inappropriate conduct. He was also sued by another firm for misappropriation of a few checks. Later that we dismissed. Clearly he is a short using trumped up charges against legitimate cos to affect its share price. Aetna's bulletin doesn't say it would not reimburse the drug, but allow its use after the first line drug was proven ineffective. That was always the case, so there is no new issue here.

    As far as the fed investigation goes, you practically act as the jury to determine QCOR's guilt already with multiple million/billion fine established already. The last time I checked, we are still living in a country to be innocent until proven guilty. I think the timing for Citron's trumped up "alert" followed by the Fed investigation serve shorts splendidly. Your article echoing Citron's point also is not coincidence. I wonder if you hold a position in QCOR, short most likely. We shall see.

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