Questcor Pharmaceuticals: The Truth Vs. The Noise

| About: Mallinckrodt PLC (MNK)

Let me start right out with this: Over the past few years as an investor, I have also grown into an admirer of Questcor Pharmaceuticals (QCOR) and their management, led by Don Bailey. In my opinion, these are honest people, operating a hard-working company, with a flagship drug product that has proven to be a life-changing therapy for some very desperate patient populations.

That's the simple truth, the way I see things.

Now onto the noise, which once again has reached a decibel level that threatens to drown out the truth, not to mention terrify nervous investors with its roller coaster effect on the share price.

Over the past few years, QCOR has been the target of much controversy. Their marketing practices have been questioned by the Department of Justice in an ongoing investigation, their flagship product Acthar Gel is approaching a billion in sales without the robust clinical trials generally associated with such a lofty revenue plateau, and a relentless barrage of short seller attacks and accompanying articles have accused the company of an incredible range of wrong doing-most or all of which has been debunked when the truth's been revealed.

The Latest, Most Creative and Most Vicious Attack

On February 27 of this year, Citron Research published a report that was extremely damaging to Questcor's share price and called their reputation into question. Citron alleged that after conducting two separate clinical tests on QCOR's flagship product, H.P. Acthar Gel ("Acthar"), utilizing a "world class laboratory", results uncovered that little to no active ACTH was actually found in Acthar. For those new to Questcor, Corticotropin is named as the active pharmaceutical ingredient in the prescribing information for Acthar.

Based on the lab results, Citron then accused Questcor of:

1. Mis-labeling the product
2. Medicare fraud
3. Exposing patients to significant health and safety risks
4. Performing no trials to demonstrate efficacy

Citron went on to conclude:

1. The drug isn't potent due to there being little to no "purified ACTH" in the H.P. Acthar vials that were tested
2. Patients are experiencing a placebo effect and therefore not actually receiving true results from the drug

and the most audacious claim of them all:

3. Acthar faces severe risk of being pulled off the market by the Food and Drug Administration

These are some extremely bold assertions!

Here is what Citron did not release:

1. Name of the laboratory
2. Full documentation proving chain-of-custody, methods of transit and storage that meet prescribing information recommendations
3. The delay in release to the investing public-since Citron allegedly sent the report to the FDA in mid-December.

To me, if Citron were truly concerned about the welfare of Acthar patients or the pocketbooks of insurers, it seems irresponsible on their part to not disclose these findings sooner.

Here are some facts one must ignore in order to believe Citron's claims:

1. More than 3,000 doctors, including rheumatologists, neurologists, nephrologists and pulmonologists, have prescribed Acthar Gel. A majority of them have written multiple prescriptions.

2. Thousands of refractory patients have benefitted from the therapy.

3. Multiple clinical trials for Acthar Gel are underway to bolster the science for new and existing indications. These include ALS, ARDS and some other diseases that have baffled bio-therapeutic research for decades.

Is Citron calling Questcor's management incompetent, and Acthar Gel useless, at the potential hazard for infants with Infantile Spasms, where Acthar Gel is the "gold standard" treatment?

During the 2.5 months that Citron sat on their report, hundreds of infants were treated with Acthar Gel.

One is left to wonder, should Citron be held accountable if patients had trouble with their medication during that time, or has the FDA not intervened because they found no discrepancies with Acthar during that time? The latter is the most reasonable assumption based upon all of the evidence available.


Did the FDA make a rash or improper decision 60 years ago to approve the drug, and then make the same decision again in 2010 when Acthar received orphan designation for Infantile Spasms [IS]?

Is the FDA, who one would assume has ongoing communication with Questcor, so incompetent that they haven't audited quality control procedures at Questcor, perhaps allowing Questcor to alter the production process?

My answer to all of these questions is - extremely improbable!

In response to the placebo argument, many QCOR watchers, myself included, have confirmed that because infants have no ability to measure or communicate the results between a placebo and Acthar, Citron's statement is false. Infants either get better or worse, and it has been well documented repeatedly for decades that Acthar Gel is an effective therapy for IS, which is why the FDA granted Acthar orphan status in 2010. A link detailing why Citrons placebo argument is invalid can be found on page 14 of the document listed here.

It seems highly unlikely that any of these constituencies - patients, the FDA, doctors, and Acthar principal trial investigators-would corroborate Citron's assertions that Acthar is mislabeled, ineffective and should be taken off the market.

These are the four key arguments taken out of Citron's report along with my analysis:

1. "Acthar's label (revised in 2012), by which it gains grandfathered permission from the FDA to sell Acthar in the United States, states it has one active ingredient: Corticotropin, or purified ACTH."

Note that 'purified ACTH' is given prominence in the report by putting it in bold font. Citron claims the prescribing information states that "purified ACTH" is the active pharmaceutical ingredient in Acthar.

Guess what?

The Acthar prescribing information doesn't make that statement. Citron links to the prescribing information, in fact, in that very sentence describing the drug yet their claim is not true.

So what does the prescribing information say?

It says that it is a highly purified sterile preparation.

The prescribing information goes on to state that Acthar is an ACTH analogue. Any person with a science background (MDs, for example, pharmacists, or any of the FDA reviewers), understands that an analogue is similar, but not identical, to a drug that is produced in natural environments. The FDA and the Controlled Substance Act have definitions that cover that word also.

By placing the word "purified" in front of ACTH, instead of keeping it where it is in Citron's report, effectively the meaning's been changed from A to B:

A. This biologic requires purification to get rid of any potential foreign substances, viruses, and other harmful contaminants.

B. An accusation that QCOR extracts only polypeptide chains of 39 amino acids without breaking any of the chains, except of course, the other chains like a B-Growth hormone that is usually attached to ACTH in a biologic system.

Essentially, in order for Questcor to extract what Citron deems as "purified Acthar" [B.], QCOR needs to break up the molecular structure of the biologic. This would cause a number of discrepancies that would ultimately render the drug useless. Therefore, extracting "purified ACTH" is not possible.

Why is this important? Well, by using deductive reasoning, the accuser is manipulating terminology to suit a particular need.

2. Citron states: "Questcor is lying to the FDA about the active ingredients and since they state there may be other active ingredients it requires an NDA [New Drug Approval]"

This is an excerpt from the FDA approval letter to Questcor in 2010:

"NDA 022432

Under the Pediatric Research Equity Act [PREA] (21 U.S.C. 355c), all applications for new active ingredients, new indications, new dosage forms, new dosing regimens, or new routes of administration are required to contain an assessment of the safety and effectiveness of the product for the claimed indication(s) in pediatric patients unless this requirement is waived, deferred, or inapplicable.

Because this drug product for this indication has an orphan drug designation, you are exempt from this requirement." [Emphasis added by author] (Source: FDA NDA Approval Letter.)

This excerpt reiterates that Acthar does not require safety and effectiveness assessments. However, Questcor would have to disclose new indications, dosage forms, dosing regimens and routes of administration.

This essentially makes it clear that even if there are other active ingredients in Acthar that have not yet been identified, the company is not required to disclose them unless there are reported efficacy or health and safety issues. As of present day February 2014, there are no known statements, from either physicians or patients, claiming the drug isn't performing properly (excluding the known and listed side effects).

3. "To our knowledge, Questcor has not presented clinical evidence that deamidated corticotropin is safe or effective for the treatment of infantile spasms, nor are we aware of any general recognition of such safety or efficacy."

Questcor provided quite a bit of clinical data during the approval process. They made changes/additions to the labeling as requested by the FDA, and finally satisfied the FDA requirements. In other words, the FDA is satisfied with Acthar Gel as a safe and effective treatment with 19 indications including IS. It is Citron that is not satisfied.

In my opinion, Citron is blatantly baiting Questcor into divulging their production process. In doing so, they are demanding the full list of active ingredients in Acthar Gel, a list which QCOR has stated they do not have and are conducting clinical trials to clarify. Citron is accusing QCOR of secrecy on a topic where QCOR freely admits incomplete knowledge on exactly how Acthar Gel works.

4. "Questcor's Acthar Gel Product Is Adulterated"

In my opinion, this is the most outrageous of Citron claims. From what can be seen in Citron's report, it does not seem like the laboratory tests claim Acthar is adulterated. Due to the fact that the chain-of-custody, the process the vials underwent and the methods of testing used for the two vials have not been disclosed, this accusation appears groundless on all fronts.

In the email sent to Bloomberg by Steve Cartt, the COO of Questcor Pharmaceuticals, he clearly states:

"Each Acthar lot meets FDA-mandated specifications which have not changed over several decades."

If the process for manufacturing Acthar, approved by the FDA in the 2010 review and orphan designation, is deemed acceptable, why does Citron - with no knowledge of the process - believe the formulation has changed? The truth is, this is simply a gambit used to induce fear in the market.

Additional Truths

Overall, it appears that Citron Research's latest report was written for the sole purpose of driving down Questcors share price. Whether the goal of Citron was to initiate or cover a short position is left open for public opinion.

The conclusions of the Citron report have once again been successfully debunked by investors in Questcor. Real facts are used to support the arguments that Citron's assertions are incorrect and no word manipulation was used. These are all things Citron Research cannot claim.

I look forward to the short duration of this QCOR share price dip. The share price will follow the same pattern as it has after all the previous Citron attacks. A sharp dip, followed by a rebound to even higher levels, based on the continued performance of the company and the continued expansion of Acthar Gel prescriptions to additional compromised patient populations.

  • The drug works.
  • Scripts are growing year over year.
  • Clinical research is expanding.

If you are long QCOR, the above is where to focus, because these are the indisputable truths. All the rest is simply noise generated by short sellers.

Disclosure: I am long QCOR.

Business relationship disclosure: This article was written by me and collaborated upon by members of an investment group. The article expresses both my personal views along with those of other investors who had valuable information to share. Research was done by a select few individuals and used by me to produce this publication.

Disclaimer: The points mentioned within this article are opinions founded on publicly available information (government websites, research publications) and not to be construed as fact. Research was gathered from a multitude of sources, including peer discussion, and used to express my personal views on this matter.