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 (MNK) acquisition of Questcor Pharmaceuticals (NASDAQ: QCOR) 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 (AMGN 0.60%) 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.
