After Citron Research released a negative report on Questcor Pharmaceuticals, Inc.'s (QCOR) drug Acthar on Wednesday, September 19, Questcor's share price was nearly crushed, closing at $26.35 - a 47.84% loss in a single day. The intra-day low was $22.26, which represented a 56% drop compared to the previous day's closing of $50.52.
According to the Citron Research: "Aetna (AET) drops coverage for Questcor's only drug, for indications now generating 95% of Questcor revenue. HP Acthar for multiple sclerosis and nephrotic syndrome will not be reimbursed."
However, Questcor immediately commented as follows:
"The Company is continuing to review the Clinical Policy Bulletin related to Acthar from Aetna Inc. ("Aetna"). Currently, the Company does not believe that the bulletin represents a material change in insurance coverage for Acthar by Aetna. In 2012, Aetna has accounted for approximately 5% of the Company's shipped prescriptions for Acthar. Based on its current assessment of the Clinical Policy Bulletin, the Company does not believe that the bulletin will have a material impact on the Company's results of operations."
Questcor said it will conduct a conference call to discuss the reimbursement process for H.P. Acthar Gel prescriptions. Later, Leerink Swann said it's confirmed with Aetna that Acthar is reimbursed as a second-tier drug and Acthar sales are still seeing more prescriptions written, according to the news also released by Seeking Alpha.
While more time is required to find out the facts and evaluate the impact on QCOR with Aetna's coverage of Acthar, yesterday's trading for QCOR with 63.96M share exchanged, compared to the 30-days average of 1.55M, along with the wild price movement (-56% intra-day), the situation gave option traders a great opportunity to profit.
While option volume is reaching extreme levels on both calls and puts, we have decided to wait two-three more trading days to establish our position. For calls and puts buyers now, the much increased implied volatility makes it harder for buyers to profit after the stock price settles and volatility crushes down, even if they bet the direction right. However, it would be too dangerous now to be sellers for calls and puts simply because of the continuous wild swing of the share price.
Our strategy to profit from this kind of opportunity is to wait for two-three more trading days until the share price settles down to the normal trading level - and then set up a covered short put position with favorable risk/reward ratio to take advantage of increased short-term volatility and the ultra-oversold situation with a margin of safety.
For example, if QCOR settles down after two-three days with the trading price range around $20-22, we will set up a covered short put spread of short put $18 and put $16. For now, we will continue to monitor developments and update our options play when the opportunity comes.