Why Questcor Pharmaceuticals Inc. Shares Skyrocketed

Questcor shares soar after agreeing to be bought out, but that still may not be the end of this story.

Sean Williams
Sean Williams
Apr 7, 2014 at 12:55PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Questcor Pharmaceuticals (UNKNOWN:QCOR.DL), a biopharmaceutical company focused on developing therapies to treat autoimmune and inflammatory disorders, skyrocketed as much as 32% after announcing this morning that it had agreed to be acquired by Mallinckrodt (NYSE:MNK).

So what: According to the terms of the deal, Mallinckrodt will divvy out $30 per share in cash and 0.897 Mallinckrodt shares in exchange for each share of Questcor. Furthermore, Mallinckrodt will also purchase unexpired Questcor stock options, bringing Questcor's total purchase price to approximately $5.6 billion, or a 27% premium to Friday's closing price. The deal, which is yet to be approved by either company's shareholders as of yet, would be immediately accretive to Mallinckrodt's 2014 earnings and would be significantly accretive thereafter.

Now what: Short-sellers in one of the most heavily short-sold stocks within the Nasdaq Composite just got their head thumped, plain and simple. The interesting thing, however, is that Questcor has backed well off its buyout price and is now trading at close to 10% below that level as of this writing. Part of that could be the double-digit decline in Mallinckrodt shares, but it also tells me that short-sellers believe the deal will either be voted down by Mallinckrodt shareholders, or that the ongoing investigation into the marketing of Acthar Gel by the Food and Drug Administration could throw a monkey wrench into the deal. Questcor's profits and cash flow have never been much of a question, but its lack of diversity -- one approved drug for 19 indications -- has always bothered me just in case something bad did happen to Acthar. As such, despite the arbitrage opportunity, I personally see far too much downside risk and too little upside reward to consider investing in Questcor here.