Sometimes when I'm short a stock, I make jokes with my investing buddies. Sometimes we say things like, "massive insiders dumping", "government investigations", and "Citron Research piece coming" - all things you'd like to see when you're positioned short on a stock based on the fundamentals and looking for quick catalysts to your (and your wallet's) validation.
In this case, we happen to have all three. Questcor Pharma takes the cake as possibly the best situation to go short that I've seen all year; and this is coming from a guy that was short J.C. Penney (JCP) and Amarin (AMRN) at one point.
Questcor Pharmaceuticals (QCOR) is a company that is focused on the implementation and sale of its sole drug, H.P. Acthar Gel.
From Questcor's website:
We are a biopharmaceutical company focused on the treatment of patients with serious, difficult-to-treat autoimmune and inflammatory disorders. Our efforts are currently focused on the fields of neurology, nephrology and rheumatology, areas of medicine which have significant unmet medical needs.
Our main product is H.P Acthar® Gel (repository corticotropin injection), a naturally-derived formulation of adrenocorticotropic hormones used in a variety of disorders having an inflammatory component.
We are currently supporting research in a number of rare conditions, where there is significant unmet need for treatment alternatives to standard therapies. We are also actively supporting research efforts to better understand disease processes and therapeutic mechanisms of action in conditions where Acthar might potentially play a role in treatment.
Questcor currently carries a market cap of about $3.6 billion. Questcor has traded well over the past year for its investors, shaking off uncertainty around its drug and its marketing practices since they were questioned in 2012. It has yielded an astronomical 122.6% since the beginning of 2013 for investors - as well as insiders who hold stock.
So, what it H.P. Acthar, Questcor's Sole Drug?
Acthar (repository corticotropin injection) is natural source ACTH (adrenocorticotropic hormone) in 16% gelatin to provide a prolonged release after intramuscular or subcutaneous injection.
Acthar is currently approved in the U.S. for the treatment of acute exacerbations of multiple sclerosis in adults, and as monotherapy for the treatment of infantile spasms in infants and children under 2 years of age. It is also indicated to induce a diuresis or a remission of proteinuria in nephrotic syndrome without uremia of the idiopathic type or that due to lupus erythematosus, for use during an exacerbation or as maintenance therapy in selected cases of systemic dermatomyositis (polymyositis), as well as indicated for the treatment of several other diseases and disorders.
We'll get more into Acthar in a bit - but the main short thesis here with Questcor is that we have is a stock trading at its all-time highs, with some major potential problems standing in its way.
Questcor issued its third quarter financials after market on Tuesday, and by all accounts hit a grand slam. QCOR crushed analyst expectations on EPS and revenue and shipped more of their Acthar gel than ever for the quarter. Almost every metric that you could imagine for Questcor was up.
Yet, Wednesday, the stock has been hit as much as 17% on news that a formal investigation launched in 2012 has now widened.
And, that's just the beginning.
Regulatory Agencies Investigating
Questcor had already shaken off news of an investigation in 2012, when the U.S. attorney's office in eastern PA was looking into the way the company was promoting itself and its product. It survived a bear raid and was trading at all time highs until yesterday, when it was announced that two other offices had piled onto the investigation - the U.S. attorney's office in southern New York, and the L.A. branch of the SEC.
Management, for the most part, made no ongoing commentary about the investigations.
It's tough to logically come up with a scenario where an ongoing investigation in the company that is yielding no potential for action has two other offices join the investigation. It's surely not a good sign for Questcor.
Maybe it's nothing, right? It's not like Questcor's product is questionable or has insiders dumping shares like mad for millions of dollars, right? Wrong.
Citron's Bear Case
Say what you want about Citron Research and those like it, but if you're long a stock, you don't want to be caught holding it when someone like Citron goes short and offers analysis as to why.
As early as July of 2011, the bears were out in full bore against Questcor - led by Citron Research publishing this analysis of Questcor.
Citron, in 2011 pointed out that QCOR is far from a "traditional" pharma company due to the fact that it was simply founded on being a sales channel for Acthar. Citron's argument was that the company had "all of its eggs in one basket" - an argument that holds true now as Acthar still is the company's primary breadwinner.
And, this particular egg, Acthar, was apparently found at a biopharma garage sale. Citron then goes on to point out that Questcor acquired the rights to the 60 year old drug, Acthar, from Aventis in 2001 for $100,000. They claim the market for the drug was dwindling at the time.
How bout that old saying, "one man's trash is another man's treasure?". So, if what Citron says to this point is true, we have a company valued at $3.6 billion based on a drug that was purchased as "one man's trash". Since then, Questcor has focused on implementing Acthar for numerous other indications, with plans of building the company around it, as they seemingly have.
Citron said it best:
In order to believe in the Questcor story's long term potential, an investor would have to believe that Acthar, a 60 year old drug:
- Is not subject to price elasticity
- Can continuously be expanded to new markets
- Cannot be synthesized
- Cannot be manufactured as a generic
- Will never face competition
- All of this without government (FDA or DOJ) or insurance industry scrutiny
They finished their write-up with a note that marketing expenses (what the company is currently being investigated for), were at about $6,100 a vial, which constituted five times the original price of the drug before Questcor took it over. In short, Citron (and possibly the regulators) are claiming that QCOR's drug is all hype and no substance.
In the past, Citron has offered a "series" of reports on companies like Arthrocare and Amedisys. On the news of Questcor's investigation widening, it isn't off the table that Citron and other bears could continue to issue bearish analysis of the company, further piling on and driving the stock price down. You don't want to be caught holding long if this happens; especially when Citron and others start to look over the subsequent insider transactions since their last report and, more importantly, since the initial investigation into the company was announced.
Continued Insider Selling
Meanwhile - while Questcor continues to move ungodly amounts of it's sole drug that 13 years ago was considered nearly worthless - CEO and President Don Bailey has been having a field day selling stock - either by choice, or by planned option exercises.
Let's have a look at the analytics behind the insider transactions at Questcor since Citron published their original report in 2011.
According to Yahoo! Finance, over the last 6 months, there have been zero insider purchases, and a total of 414,687 shares sold. At today's price of around $60/share, that's about $24 million worth the stock in the last six months.
Looking into the last two years gives us even more insight as to just, exactly, how Don Bailey has been faring personally while his company is under investigation and his shareholders are at risk. I'll give you a hint: he's probably not having trouble making ends meet in the last couple of years.
|Insider Transactions Reported - Last Two Years|
"Wow", you're probably thinking to yourself, "that's a ton of stock sales over the relatively short period of two years".
You're right, it sure is. For those not interested in doing the math, Don Bailey, Questcor's CEO, in the midst of regulatory investigations, has (again, either by choice or through a planned selling program) sold over $20 million in stock - mostly from options that he has acquired - including a whopper of sale in May of 2013, during the height of the investigation, for more than $6.6 million dollars.
Something about that doesn't sit right with me.
Again, this could be through planned stock sales, but it's the fact that it's happening and yielding the executives millions in the face of a major investigation that's bothersome. As you can see, many of the sales go hand and hand with option awards - but receiving this type of stock based compensation while major questions loom about your company is questionable behavior for a CEO that wants to show integrity.
In addition, there's numerous other officers and directors that have yielded a pretty penny on Questcor; all the while as we find out that regulators have broadened their investigation into the company and shareholders pay the piper to the tune of over 13% on Wednesday's trading.
That 13% loss, could just be the beginning for QCOR longs.
If it walks like a duck and talks like a duck, it might not exactly be a long-term investment opportunity - I think Jim Cramer said that. Aside from that, if that particular duck is trading at its all time highs under potentially demonstrable false pretenses, that duck could actually turn out not to be a duck at all - rather the ultimate short sale scenario.
If I told you from the get-go that there was a drug that could be bought for $100k and turned into a $3.6 billion company, you would have told me I was insane. No analyst with half a brain would believe that line of logic - no need to even pay attention to how they plan on doing it. If the drug's been around for 60 years, someone would have already figured out a way to make it a success if it was possible to do in a legal and ethical way.
Then, tack onto that fairy tale the fact that regulatory agencies have now widened the scope of their investigation into the company and its practices. For the icing on the cake, the CEO has made himself over $20 million in stock sales over the last two years - more than 200 times what Questcor initially paid for it's one and only drug.
Something stinks here, and when something stinks, QTR shorts hard. I initiated a short position in QCOR today at $60 and wish all investors caution and the best of luck when investing in either side of the QCOR story.
Remember, stories that are too good to be true, generally aren't.