What Happens To Questcor Now?

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By Brian Wilson, Contributor   
Tuesday, 25 September 2012 02:39
icon_SeekingDirectionQuestcor Pharmaceuticals, Inc.(NASDAQ:QCOR) shares plunged and lost more than a third of their value Monday after the company announced that it has become aware of a U.S. government investigation involving the Company's promotional practices. This disclosure comes just days after Aetna Inc. (AET) tightened its reimbursement criteria for Questcor's primary drug. QCOR generates nearly all of its revenue from “H.P. Acthar Gel” (aka Acthar), an injectable drug approved for various conditions including multiple sclerosis, a kidney disorder and infantile spasms. Additionally, Bronstein, Gewirtz & Grossman, LLC announced that it is investigating potential claims on behalf of purchasers of the securities of Questcor Pharmaceuticals, concerning potential violations of federal securities laws.

The autoimmune and inflammatory disorder drug company had experienced an enormous drop in share prices earlier (on September 19th) in reaction to the news that the health insurance giant Aetna (NYSE: AET) withdrew reimbursement on the company's flagship product, which treats epileptic spams in infants, multiple sclerosis relapses, and nephrotic syndrome. The “infant spasm” condition is also known as West syndrome, and is thought to be caused by an enigmatic dysfunction of a patient's GABA neurotransmitters. Additional evidence points to hyper-production of Corticotropin-releasing hormone instead (or a combination of the two). Acthar targets the latter, and has been approved by the FDA for the treatment of West syndrome.

Aetna's unexpected reimbursement policy update for Acthar in the treatment of West syndrome included the following four-part justification (which can be found here):

  • Aetna considers repository corticotropin (H.P. Acthar® Gel) medically necessary for West syndrome (infantile spasms)
  • Aetna considers repository corticotropin not medically necessary for diagnostic testing of adrenocortical function because it has not been shown to be superior to cosyntropin for this purpose.
  • Aetna considers repository corticotropin not medically necessary for corticosteroid-responsive conditions because it has not been proven to be more effective than corticosteroids for these indications.
  • Aetna considers repository corticotropin experimental and investigational for all other indications because its effectiveness for these indications has not been established.

While Aetna does consider Acthar (which is composed of corticotropin gel) a necessary option for doctors in the treatment of West syndrome, the competing hormone gel cosyntropin (marketed as Cortrosyn by a private company called Amphastar Pharmaceuticals) is considered by Aetna to be just “on par” with Questcor's corticotropin.

Reimbursement on Acthar represents a threat to the company's financial prospects, because this move will essentially remove previous financial incentive to treat Aetna-insured infants affected by West syndrome with Acthar. If Cortosyn is just as good as Acthar, according to Aetna (and some doctors), there should be no reason to choose the more expensive alternative, patent-protected Acthar gel.

As if that weren't bad enough, speculation over other health insurance providers has started too. If Aetna can successfully remove a more expensive treatment for West syndrome, why can't United Healthcare do the same? Panicking shareholders are surely mulling these thoughts in their heads while securities lawsuits are being filed against the company for its negligence with regards to this issue. After months strong performance, Questcor shares are utterly crushed.

For those who are not involved in QCOR, the question to ask is whether or not the market's panic over Questcor's new problems is worth this much of the company's value. QCOR's market cap was about $3.1 billion prior to Aetna's policy update, so prior to the government inquiry news, was the sentiment change worth about $1.3 billion worth of damage?

Doral (quazepam) is the company's other marketed product, but this “ancient” 1970's sleep medication has been many-times outclassed since its inception. Doral doesn't offer Questcor or its shareholders any real value. Considering that the company didn't consider this product worth mentioning a single time in the press release version of their last press-released quarterly earnings report, we can infer that Acthar is the only thing we should care about when analyzing QCOR.

On the other hand, the prospects for the very high-margin product Acthar are enormous. In Q2 2012 relative to Q2 2011, Acthar doubled in sales volume and brought the company's quarterly revenue to a respectable figure of $112.5 million (which paved the way for an income of $41.5 million - triple the figure posted in Q2 2011). Adding to the bright side is the company's continuing stock repurchase program, which used a huge pile of $156 million to buy back around 6% of outstanding shares (~3.7 million). Still, the best comment in the last quarterly report was found in the company's description of Acthar's sales growth:

“Net sales for the second quarter were $112.5 million, reflecting expanded physician usage of H.P. Acthar® Gel (repository corticotropin injection) in the treatment of serious, difficult-to-treat autoimmune and inflammatory disorders, most notably idiopathic nephrotic syndrome and MS exacerbations. “

Note that Aetna's decision was about Acthar Gel in the treatment of West syndrome. If the company is performing on the heels of MS and Nephrotic Syndrome treatment, Aetna's decision wouldn't have done anywhere near $1.3 billion worth of “true” damage. Another press release by Questcor gave company figures that pointed out another comforting fact – only 5% of Acthar gel sales volume can be attributed to Aetna. Were other major stakeholders dropping shares in anticipation of Monday's other bad news? Many wondered how a 5% drop in sales volume could equal a 40% drop at the time-- unless the company was lying or holding back information. The only thing that seemed clear was that that the market sold QCOR as if other health insurance companies were about to pull their reimbursement of Acthar as well.

Much of the price action can be attributed to Questcor's enormous short interest too, which was sitting around ~36% of open shares. It's a messy process to figure out where these short positions were established (and what prices these bears were looking for before exiting), but the company's rise from ~$43/share at the start of September to ~$50/share prior to the “Aetna crash” probably trapped many of them in the red. After the massive price drop, they are in a much better position and  can either choose to ride the recent trauma to QCOR for a longer period of time or to exit with the small fortune they were handed.

Even now, many think the QCOR selling was overdone and not really justified by the reimbursement situation alone. There are also doubts that the lawsuits being filed against Questcor management will live up to the hype, or that Aetna's change in policy will direct other companies to do the same, but that may only result in stubborn bears waiting for additional reimbursement policy changes to be announced. Those looking to play QCOR on the long side will have a stressful wait ahead.

Once the dust settles, if someone can point out and clearly explain the recent discount to QCOR, that would give bulls a significant advantage. In addition, if Acthar can hold on to its patients with West Syndrome, its more rapid growth in other therapeutic areas could be enough to carry QCOR much higher. Those are all very big, open ended questions at this point.

Interestingly however, analysts who actively cover the stock weighed in after all the action on Monday. Roth Capital Partners chopped its price target to $47 from $62, but left its buy unchanged.

“In light of recent developments we anticipate the volatility of Questcor shares will continue to increase in the near-term. Although we do not believe the fundamentals of the company have changed significantly, risks have increased due to expanded uncertainties,” wrote Roth analyst Yale Jen.

Ladenburg Thalmann, which had lowered its price target to $45 from $57 just last Thursday, was even bolder, removing its target altogether. The firm likewise downgraded the stock to neutral from buy.

“In our view the U.S. government investigation, coupled with recent potential reimbursement headwinds, create great uncertainty around an investment in Questcor shares. We believe it could take some time until the Street gains clarity on the implications of these two issues,” wrote Ladenburg’s Juan Sanchez.

 

Disclosure: None

 





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