Short Sellers Flee Questcor on Sentiment Reversal

was one of the most heavily shorted stocks on the NASDAQ according to the most recent data set from May 31st 2013, with 22.15 M shares short out of a float of 53.6 M share (41%). Investors should note also note that this was after a significant decline in short interest throughout the month of May, as the April 30, 2013 data show 27.15 M shares short QCOR.

QCOR trading has been very erratic in the last two months, although it has clearly favored the bulls – especially after last week’s rally in reaction to the acquisition of a competing product. We will discuss this later in the note.

We think that the recent move towards the upside was justified, due to Questcor’s most recent developments. The bearish scenarios that inspired many short sellers to attack the stock have not (and may not) play out, which provides some potential for stability going into the second half of the year.

In the last three quarters, the bearish thesis was based on the shaky (and “collapsible”) reimbursement situation for very expensive Acthar prescriptions – at $28,000 per vial. Aetna (AET) was the first company that started to put these concerns of “warfare” with the insurance companies into overdrive with their infamous reimbursement policy change in September 2012, which removed reimbursement for Acthar prescriptions outside of the infantile spasms indication. This threat was clearly reflected by the massive decline in QCOR stock at that time, although the idea that other insurance companies would follow Aetna’s example became less and less feasible as we saw no additional policy changes that adversely affected Questcor’s business model. Most recently, we saw UnitedHealth confirm a continuation of its coverage on June 1st too, which helped drive bullish sentiment in recent trading.

Also important was the acquisition of a synthetic corticotropin gel known as Synacthen from Novartis (NVS) for $135 M, which triggered last week’s more sustained rally into the mid $40/share range. Questcor shareholders were terrified at the potential introduction of a synthetic version of corticotropin gel due to the low manufacturing costs and the ability for competitors to deeply undercut H.P. Acthar’s $28,000 price. Since this threat has been removed (for now), investors generally expect Questcor to retain its financial strength for quite some time.

The Takeaway
Questcor Pharmaceuticals’ business is primarily focused on their animal-derived corticotropin (or adrenocorticotropin, ACTH) gel product, known as H.P. Acthar Gel. Although attractive to the analysts that were covering the company based on financials, Questcor didn’t receive the kind of mainstream attention from the biotech investor community until Aetna took action against the company’s marketing practices.

QCOR stock has generally recovered from last year’s smackdown, which is why we’ve become less enthusiastic about the upside and more concerned about the potential for the company to disappoint. Third party prescription data shows that Acthar has been doing very well this month (especially last week) – likely as a result of Acthar’s introduction to a number of new indications in recent months, although it’s worth noting that the “weak hand” shorts are likely to have covered at this point.

Also note that Questcor’s valuation has increased dramatically, and is approaching $3 B. Based on the new price per share, the new dividend yield of 2.2% does not draw nearly as much interest. Note that the yield was originally 4% after it was introduced by company management to discourage short selling of QCOR stock and the reassurance of shareholders of the company’s financial strength.

Questcor is still inexpensive based on the financial data that the company is producing, but the “easy money” has been made since the initial drop in September 2012.