Insiders Are Dumping Questcor – Here’s Why Print E-mail
By Brian Wilson   
Monday, 14 July 2014 08:16

After a 70% rally since the start of the year, it’s time to reevaluate the valuation of Questcor Pharma (QCOR) and the reasoning behind the sale of ~1.3 million shares by insiders since January 1st.

 

Although investors have questioned the sustainability of this company ever since they started raising price of H.P. Acthar Gel dramatically (from $40/vial in 2001 to $23,000 in 2007!), it appears that the risk is elevating as time goes on. An anti-trust lawsuit, a marketing practice investigation, a looming patent expiry, and over a dozen potential drug-induced patient deaths threaten to crumble the billion-dollar revenue stream that Questcor executives built from their price gouging strategy.

Most recently, Questcor has been coming under fire for failing to disclosure up to 20 potential deaths and six disabilities caused by H.P. Acthar in its financial filings. Because the company derives the vast majority of its sales revenue from this lone product, investors should be very concerned that the company has been trying to hide this information.

There are also various legal troubles plaguing the company’s business model – most notably the United States Attorney’s Office (USAO) and Retrophin litigations. The USAO litigation has been going on since September 2012, when Eastern District of Pennsylvania issued Questcor a subpoena related to the company’s heavy promotion of H.P. Acthar for disease indications outside of infantile spasms (West syndrome.) This could result in a hefty fine, which Mallinckrodt shareholders may end up inheriting.

The Retrophin litigation, which was started in January 2014, is an antitrust lawsuit that is based on Questcor’s acquisition of the synthetic corticotropin gel Synacthen from Novartis in 2013. Retrophin originally wanted to acquire and develop Synacthen, but it was outbid by Questcor. It’s not certain whether this lawsuit will disrupt Questcor’s stranglehold on Synacthen IP in the United States, but it’s certainly possible. And if Retrophin does regain Synacthen, Questcor loses its monopoly on corticotropin.

The last risk is perhaps the most important, because there is no way for Questcor to avoid it. H.P. Acthar is (and was) primarily a treatment for West Syndrome - an orphan disease. After receiving a patent for H.P. Acthar in this indication, Questcor was able to boost the price of the product based on its orphan drug status. When this patent expires in October 2017, it seems unlikely that insurers will continue to reimburse a generic orphan drug at the current price.

Aetna – an insurance company that is only supporting Acthar for West Syndrome – will be one of the first companies to pressure Questcor to slash its prices. We think others could follow once the patent expires.

A merger with an Irish pharmaceutical company called Mallinckrodt PLC (NYSE: MNK) is also scheduled to close in August 2014, from which Questcor shareholders will receive $30 and .897 shares of Mallinckrodt. This will allow H.P. Acthar to keep much of its income in the tax haven of Ireland, but it exposes the combined Mallinckrodt entity to all of the problems described above.

We see this merger as a way for Questcor’s executives to offload the risk they’ve built up since 2007 onto Mallinckrodt and its shareholders while keeping most of the cash they generated throughout this time. This $5.7 B company has already experienced a rapid growth phase throughout the last few years, and the risk/reward looks much less attractive for shareholders now that the H.P. Acthar empire looks ready to collapse.

 

 

 




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