Are Short Sellers On to Something at Questcor Pharmaceuticals?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below we take a look at biotech Questcor Pharmaceuticals (Nasdaq: QCOR  ) , which saw a 30% increase in shares sold short among Nasdaq stocks in the last reporting period -- shares that now total more than 45% of its float. After noted short seller Citron Research slammed Questcor's multiple sclerosis drug Acthar in several research reports issued over the past few months, the biotech now trades 58% below its 52-week high.

Questcor Pharmaceuticals snapshot

Market Cap

$1.5 billion

Revenues (TTM)

$344 million

1-Year Stock Return

(23.3%)

Estimated 5-Year EPS Growth

35.8%

Return on Investment

99.2%

Dividend and Yield

$0.80/3.2%

Recent Price

$24.99

Shares Short as of Sept. 28

26.3 million

Shares Short as of Sept. 14

20.3 million 

% Change

29.8%

CAPS Rating (out of 5)

**

Sources: wsj.com, FinViz.com.

Just because the shorts are piling in doesn't mean you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
Questcor's troubles began when Citron published its first missive attacking the biotech this summer, but after losing 40% of its value it made up much of that lost ground. At the time, I suggested that is what happened since Wall Street pros had circled their wagons around Questcor, labeling the charges against it as old news.

The allegation was that Acthar is actually available as a generic and has been for some time, so that despite being approved by the Food and Drug Administration as an orphan drug -- with a $23,000 per dose price tag -- Questcor was engaging in a bit of smoke and mirrors. Citron suggested insurance companies would push back eventually.

Questcor wouldn't be the first company to run into a brick wall of opposition to FDA-approved treatments, as pharmas walk a knife's edge in pricing. Don't charge enough, and the return doesn't justify the risk. Charge too much, and you risk incurring the wrath of those you seek to treat. K-V Pharmaceuticals sought to charge $1,500 for a drug to help reduce the risk of premature births, and it was greeted with a firestorm of indignation that it was trying to capitalize on at-risk mothers and babies. It subsequently cut the price -- but ended up filing for bankruptcy.

Dendreon (Nasdaq: DNDN  ) also hit that wall when it charged $90,000 for cancer treatment Provenge. Over time, Gilead Sciences (Nasdaq: GILD  ) , Seattle Genetics (Nasdaq: SGEN  ) , and even big-name pharmas like Bristol-Myers Squibb  (NYSE: BMY  ) have all dealt with significant pushback when the price tags on their treatments for rare or little-treated illnesses have seemed too high.

Fool's gold
Yet last month when insurer Aetna (NYSE: AET  ) announced that it would stop reimbursement for Acthar except in the case of infantile spasms, it seemed Citron's position was vindicated. Questcor's stock dropped like a rock, losing nearly half its value in one day. While it eventually fell down to $17 a share, it's once again regained some ground, rising to $25, or 45% off its low point.

Moreover, Oxford Health Plans, a division of UnitedHealth Group (NYSE: UNH  ) says it will continue its reimbursement policies for Acthar, suggesting that the drug will not be universally panned as had been suspected. While the loss of Aetna caused the number of paid prescriptions to drop precipitously in September, they remain 30% above the year-ago figure. However, because that decision occurred in the middle of the month, we might see an even greater decline in October.

While Wall Street has jumped back on Questcor's bandwagon, upgrading the stock to a buy, it seems there's a lot of uncertainty surrounding its future. As much as its depressed price looks attractive, there could be other shoes dropping on this stock, so I'd avoid it till the situation clears. We might lose a few points of gain that way, but overall we'll be much better off.

Don't sell yourself short
Share your views below on whether short-sellers should be squeezed 'til it hurts, or if the stock ought to be shorted 'til the sun don't shine.

While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Fool contributor Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services recommend Gilead Sciences and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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