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Why Questcor Pharmaceuticals Inc. Soared Today

By George Budwell – Jan 16, 2014 at 4:37PM

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Why Questcor pharmaceuticals soared today.

Questcor Pharmaceuticals (NASDAQ: QCOR) is up over 10% today on unusually high volume following CEO Don Bailey's presentation at the 32nd annual J.P. Morgan Healthcare Conference. What started out as a fairly routine tour of the company's financials and lead commercial candidate, Acthar Gel, quickly turned into statements that suggest radical changes may be coming to Questcor.

From an investor's viewpoint, the most interesting part is that these statements came completely out of left field, leaving short sellers little room to find cover. In case you are new to this story, Questcor is quite a unique stock in the biotech sector. Despite growing revenues by double-digits over the last few quarters, short sellers have piled into the stock based upon ongoing investigations into the company's marketing practices for Acthar. As a result, Questcor shares have been trading for as little as three times annual sales lately. In the frothy biotech sector, that's basically unheard of.

Questcor's management, however, has actively fought back against short sellers by increasing dividends, instituting a hefty share buyback program, among other measures. Nonetheless, shorts have continued to attack the stock without mercy over the past year.

CEO mildly announces radical changes on the horizon
Mr. Bailey caught many investors off guard today by casually announcing during the company's presentation that Questcor is exploring the possibility of going private. If that wasn't enough, he later suggests that moving the company abroad might be a good idea to lessen the company's tax burden under U.S. Law. While these two bombshells started the rally, I believe what is most profound is Mr. Bailey's acknowledgement that it's time that Questcor moves beyond Acthar. 

What to do with all this cash?
There is no doubt that Questcor has been generating significant revenue from its highly successful orphan drug Acthar. Sales should top $1 billion year over year, once the company announces fourth quarter earnings next month. And so far, Questcor has primarily used this mountain of cash to buyback stock and reward shareholders by increasing dividends. In my view, however, the best way to quiet the critics about investigations into Acthar is to acquire or license another blockbuster drug. That appears to be an avenue Questcor is actively exploring this year.

Foolish final thoughts
With all of the licensing, partnering, and straight-up buyouts going on in the sector right now, Mr. Bailey's statements don't exactly surprise me. And with the company facing mounting criticism over Acthar's marketing, something big was bound to happen this year. Looking ahead, I personally think a merger with a company like Jazz Pharmaceuticals or Shire makes a lot of sense in terms of the synergies such a move would create. Regardless, Questcor definitely woke up the market today and looks ready to generate more debate among investors in 2014.

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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