Questcor Buyout Shocks Short Sellers

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Activist short seller Andrew Left's Citron Research frequently uses the phrase: "It's never a problem until it's a problem." Monday's news about specialty pharmaceutical firm Mallinckrodt's  (NYSE: MNK  ) acquisition of Questcor Pharmaceuticals (NASDAQ: QCOR.DL  ) put a new twist on the saying -- and caused serious problems for investors heeding Citron's advice.

Mallinckrodt plans to buy Questcor for $30 per share in cash plus throw in another 0.897 shares of its stock for each share held by Questcor shareholders. That equates to $86 per share, which is higher than the highest level Questcor's stock has ever been and represents a 27% premium over the closing share price on April 4. That's great news for Questcor investors, but horrible news for those who sold the stock short based on Citron's online articles.

Source: Questcor Pharmaceuticals. 

A tale of two perspectives
Some could look at Questcor's ascendance of the past few years as a story of a solid management team taking a drug that's been around for decades and creating fantastic new opportunities. Acthar gel was indeed first approved by the Food and Drug Administration back in 1952. And under CEO Don Bailey's helm, Questcor has successfully pursued several new markets for the drug, resulting in the company's stock shooting up more than 1,300% over the last five years.

Others, particularly Citron Research, hold another perspective altogether. Citron first blasted Questcor in July 2012, alleging that the company was "a scheme, not a business." According to Citron at that time, Questcor's stock would hit single digits within 18 months. 

What actually happened over the next 18 months? Citron continued to regularly publish articles attacking Questcor's marketing of Acthar. There were some times along the way where Citron's argument appeared to possibly be on track. In September 2012, Aetna announced its decision to only reimburse for use of Acthar as a treatment for infantile spasms because of lack of documented efficacy. More recently, Citron cited a lab study that allegedly found little to none of the active ingredient, ACTH, that is supposed to be in Acthar in samples of the drug.

Citron's negative articles certainly took their toll on Questcor. Investors experienced a roller-coaster ride over the last couple of years, with the stock losing 20% or more of its value multiple times. However, Questcor never hit single digits and only once drifted below $20 per share for a short period.

Last laugh?
Quite a few people seem to have agreed with Citron. As of March 14 of this year, Questcor's short percentage of float stood at 38.3%. With this week's development, though, investors holding a bullish viewpoint appear to have the last laugh. Anyone who bought shares before Citron's first allegation and held on would now have gains in the neighborhood of 60%.

That laugh would have likely been even jollier without the issues raised by Citron, though. Mallinckrodt's offer price is only 18 times trailing earnings. That's dirt cheap for a biotech buyout.

Last year's big biotech deal between Amgen  (NASDAQ: AMGN  ) and Onyx went for a price tag of $9.7 billion net of Onyx's cash. Onyx had just reported a loss in the previous quarter on revenue of $153 million.

By comparison, in its last quarter Questcor reported earnings of almost $90 million on revenue of $242.8 million. And it's not that things were slowing down. That revenue figure reflected a 50% year-over-year increase. Earnings were 45% higher than the same quarter in the previous year.

Probably the key difference was that Amgen paid for what it saw as a solid and bright future for Onxy's Kyprolis. Several analysts think the multiple myeloma drug will hit peak annual sales of over $2 billion within the next several years.

Thanks in no small part to Citron Research, there's a cloud hanging over Acthar that makes its future appear less solid and bright. As a result, Questcor fetched a lot less than it could have if there wasn't any uncertainty.

However, if history is any guide, Questcor -- and now Mallinckrodt -- won't face as dire an outcome as the short sellers predict. Some current Questcor shareholders might decide to hang on for the ride with the Mallinckrodt stock coming their way soon. Others might choose to take the money and run. Taking hefty profits is never a problem. 

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Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

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 April 08, 2014, at 7:27 PM, EquityBull wrote:

    Mallinckrodt CEO said they did extensive internal and 3rd party due diligence on QCOR in all areas (financial, drug, quality, production, etc) and everything checked out 100%. Citron was on a witch hunt, period. When the first allegations didn't tank the stock enough they came up with another allegation and then another. Hopefully Citron had a huge short and now is toast.

    If not, expect his next move to continue pounding the table on QCOR and saying that Mallinckrodt will get destroyed when he is proven right. He'll target Mallinckrodt as his next short and try to get back some of the cash he lost on this witch hunt.

  • Report this Comment On April 09, 2014, at 5:46 PM, awallejr wrote:

    I took issue with your last article on Questcor when you made the INCORRECT assertion that there was a FDA investigation with QCOR over Citron's materially false accusations. And now you apparently do not know the difference between a merger and a buyout.

    MNK and QCOR are MERGING. This does not mean QCOR shareholder's are price capped. They are free to continue holding the shares of the new company and share in the continued growth of QCOR's business and MNK's.

    All that needed to be agreed upon was a proper valuation of each others shares for the conversion. I think they did use a number that factored out Citron.

    Shorts were never going to leave this company alone. This deal crushes them and finally gets the share price to where it would probably be trading at if not for the shorts. The shorts simply no longer have any viable thesis. I warned them several times to cover.

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Keith Speights

Keith began writing for the Fool in 2012 and focuses primarily on healthcare investing topics. His background includes serving in management and consulting for the healthcare technology, health insurance, medical device, and pharmacy benefits management industries.

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