Strong Fundamentals Support A Future Recovery In Questcor Print
By Brian Wilson, Lead Contributor   
Tuesday, 04 December 2012 01:17
Questcor Pharmaceuticals (NASDAQ: QCOR) has been a particularly speculative investment in the biotech sector after September 19th 2012, when the healthcare company Aetna changed its insurance policy bulletin with respect to Questcor’s flagship product H.P. Acthar Gel, which only offered reimbursement for Acthar in the treatment of infantile spams (also known as West Syndrome).
Although the company statements indicate that this change in reimbursement policy only threatened to reduce Acthar Gel sales by about 5%, the stock managed to drop 48% in just one trading session on fears that other health insurers would follow suit. Since Acthar Gel is so vital to the financial success of Questcor, it’s understandable that the market had quite a panic over this notion of changes in reimbursement policy.

The company also saw a panic-inducing governmental probe into the company’s marketing practices, as disclosed in a Questcor 8-K filing. This caused the stock to drop an additional 37%, bringing QCOR to an incredibly low $19.08/share. Analysts, who had 12-month price targets on QCOR north of $60/share prior to Aetna’s reimbursement policy change had to drastically change their outlook and opinion on Questcor as it became more apparent that the market was absolutely terrified of this company, and would keep its stock suppressed for quite some time.

Combating the huge rise in short interest, Questcor management subsequently expanded its share buyback program and issued a $.20/share quarterly dividend. The market also began to saw some divergence in opinion on QCOR stock, with certain commentators suggesting that the giant selloff was a “severe overreaction” to a lone threat to Acthar gel revenue, and that the company had become incredibly undervalued. Adding to the forces that wanted to push shares higher after its enormous drop was the aforementioned dividend which gave QCOR a 4.19% yield at the time, as well as an enormous jump in short positions that would have to eventually be reversed. Between September 14th and September 29th, the total number of QCOR shares sold short increased by over 6 million, bringing total short interest to about 45% of float. QCOR remains at this level of short interest today, although the stock has recovered some of its lost ground and closed at $25.66/share yesterday.

Although a lot of speculators were anticipating additional reductions in reimbursement coverage for Acthar, there were no policy changes from other heathcare insurance companies that implied that they would follow the route that Aetna took. United Healthcare issued an update on November 1st that specifically addressed HP Acthar Gel, and showed no indirect threats to its sales revenue or growth.

Questcor saw a recent jump in bearish speculation after it was reported on November 30th that Aetna was going to continue its stance on Acthar gel, deeming it necessary only in the treatment of West Syndrome. The stock is about 11% lower as a result, and offers a buying opportunity for investors who don’t expect the drug to see any negative pressure from other insurance policy bulletin updates in the future.

QCOR’s financial suggests extreme undervaluation of the company, especially after the most recent drop. Analysts generally expect the company to see 25% top-line (or revenue) growth in 2013 relative to 2012, which makes the company’s price-to-earnings ratio of 9.91 look incredibly attractive. It’s also worth noting that the reimbursement ordeal has shaved off about$25 off of Questcor’s stock price since mid-September. This equates to a reduction of ~1.4 billion in the company’s valuation. While there are other temporary factors that contributed to the stock’s demise, like ongoing concerns about Acthar gel’s marketing practices, it’s quite apparent that Questcor is a cheap stock for investors that have a long-term outlook. There is also huge short squeeze potential, since there are roughly 26 million shares still short the stock that have to continuously pay 3.12% in negative dividend yield on top of the standard interest expense on short positions.

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