Questcor Pharmaceuticals (QCOR) has been subjected to a lot of criticism lately, but still, the stock is up more than 100% in 2013. In September 2012, Questcor declared that it was being investigated by the U.S. Attorney's Office (USAO) for the Eastern District of Pennsylvania in connection with the marketing practices for its sole product, Acthar. This news didn't have any long lasting impact as the company's share price continued its upward trajectory and grew more than 100% in a year.
However, on Oct. 30 conference call, Questcor revealed another attorney's office investigation and the L.A. SEC joined in an expanded investigation. As a result, Questcor's share price has depreciated nearly 24% since then. Moreover, the latest data released by NASDAQ shows that short interest has risen by more than 14% in just 15 days. However, I think that the sudden hike in shorts has left Questcor prone to a short squeeze, and shorts may well be forced to run for cover in the near future as its bull run looks set to continue in 2014.
Investigation doesn't affect the future
While it's understandable that recent developments have instilled fear in investors' minds, it may not have any negative impact on Questcor's immediate future. Last year, the news of investigation took shares from over $50 to below $20, but Questcor rose again and is now trading at around $54. However, so far, nothing has happened, as Questcor hasn't been found guilty of anything and no one knows how much time it will actually take before Questcor is penalized. It could take several years for any investigation to come to an end and by then, Questcor's stock price might have grown considerably, given its strong prospects.
Also, investors may assume that multiple agencies joining forces for the investigation means trouble for Questcor and ruling out these recent developments by calling it a 'coincidence' may be irrational. However, the recent government shutdown and budget cuts may have put excessive pressure on any one agency, thus making it incapable to carry out the investigation on its own.
Insiders selling the stock have made the situation worse for Questcor. Just a couple of weeks before this revelation, insiders such as CEO Don Bailey sold millions of dollars worth of shares and this may have convinced investors that the ongoing investigations will have a negative impact on Questcor's future. Selling stocks just before the disclosure looks suspicious; however, investors should remember that Questcor was trading at an all-time high just around the time when insiders started selling.
This isn't unusual, as insiders tend to sell their holdings when the stock is flying high. For example, Gilead Sciences' insiders were selling just before they made a major breakthrough in the development of an oral medicine for the treatment of hepatitis C. Gilead (NASDAQ:GILD), just like Questcor, was hovering around its all-time highs when five of its insiders started selling.
Soaring sales and juicy fundamentals
While other biotech giants enhance their margins by developing a pipeline of drugs, Questcor looks for growth by increasing the uses of Acthar. Presently, Acthar is approved for 19 different indications, and the company's plan to expand its uses has worked wonders as Questcor reported a year-over-year growth of 65% in sales in the most recent quarter. Obviously, as sales grow, Acthar will fall prey to the law of numbers and slow down. However, it is beginning to increase momentum as new indications with nephrologists and rheumatologists gain traction.
Furthermore, Questcor has an operating margin of approximately 55%, and with a market cap of over $3.1 billion and over $620 million in trailing twelve-month sales, Questcor has a trailing P/E ratio of 12.24. Thus, it's quite probable that if the investigations don't yield an outcome in the near future, the company's fundamentals may lure in new investors, which will ultimately result in a spike in its share price.
So, investors should ignore the noise around Questcor as its fundamentals look good. Also, the company has been aggressively pushing Acthar for more indications and this is yielding results as the previous quarter's results show. Analysts are also quite optimistic about Questcor's future and its earnings are expected to grow at an annual rate of 31% for the next five years, which is very impressive for a stock that trades at a P/E of just 12. Hence, investors with a long-term focus should definitely consider buying Questcor irrespective of the investigations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.