In The Wake Of An FDA Probe, It's Time Questcor Shareholders Begin To Consider Alternatives

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 |  Includes: ARNA, MNK, MRK, PFE, VVUS
by: Matt Schilling

On Monday, September 24, analysts at Piper Jaffray, Oppenheimer, CRT Capital, Think Equity, and Ladenburg Thalman downgraded shares of Questcor Pharmaceuticals (QCOR). Each of these forms lowered their respected ratings on the stock and set various price targets. Piper Jaffray lowered its rating from an Overweight to a Neutral rating, Oppenheimer lowered its rating from an Outperform to a Perform rating, CRT Capital lowered its rating from a Buy to a Fair Value rating, Think Equity lowered its rating from a Buy to a Hold, and finally Ladenburg Thalman lowered its rating from a Buy to a Neutral. As a result of the multiple downgrades, shares of QCOR reacted quite dismally, trading down roughly 36.28% since the opening of trading on Monday.

Overview: Questcor Pharmaceuticals.

"Questcor Pharmaceuticals, Inc., a biopharmaceutical company, provides prescription drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications. It primarily offers H.P. Acthar Gel, an injectable drug for the treatment of acute exacerbations of multiple sclerosis in adults; to induce a diuresis or a remission of proteinuria in the nephrotic syndrome without uremia of the idiopathic type or that due to lupus erythematosus; and as monotherapy for the treatment of infantile spasms in infants and children under two years of age. The company’'s H.P. Acthar Gel also focuses on rheumatology-related conditions, including collagen diseases and rheumatic disorders. In addition, it offers Doral for the treatment of insomnia. The company sells its Acthar primarily to specialty pharmacies; and Doral to pharmaceutical wholesalers. Questcor Pharmaceuticals, Inc. was founded in 1990 and is headquartered in Anaheim, California (Yahoo! Finance)."

What happened that triggered such a reaction from over five analyst firms to lower each of their respective ratings on the stock? It was noted that "Wall Street reacts to Questor's announcement of a government probe this morning, as a host of analysts lower their ratings. Oppenheimer downgrades the stock to Perform, Piper Jaffray cuts it to Neutral and a sixth firm Leerink Swann reduces it to Market Perform. Leerink cites more than just the federal probe; however, saying in its channel checks the reimbursement risks to Acthar are real".

Why should investors be concerned with a Government probe into the company's marketing practices? The marketing practices of a biotech company coincide directly to the sale of a primary and/or secondary product. In the case of QCOR this probe directly relates to the company's primary product, H.P. Acthar Gel which was responsible for nearly $218 million dollars' worth of sales in 2011, according to the Wall Street Journal. If the marketing practices of such a detrimental drug are going to be questioned by none other than the US Food & Drug Administration, shareholders are going to panic and largest shareholders such as institutions are going to jump ship. This probe is going to affect every shareholder as has been case over the last five trading sessions as the company has lost nearly 62% of its market value since the close of Trading on Tuesday September 18th. Since September 18th the stock is down roughly $31.20/share or nearly 62.20%.

Now that the stock has taken a serious hit, where should potential investors turn? There are several options within the biotechnology and biopharmaceutical sectors that potential investors should consider. First and foremost some of the best known drug stocks also carry some of the best yields within the Dow 30. For example, Pfizer (NYSE:PFE) currently yields 3.60% ($0.88) and Merck (NYSE:MRK) currently yields 3.80% ($1.68). The one thing I like about PFE and MRK is the fact that both companies have increased their dividends at least once in the last year. It should also be noted that from an EPS standpoint both PFE and MRK have surpassed estimates in each of the last four quarters. From a growth standpoint (and in this case potential investors should have an added appetite for risk) Arena Pharmaceuticals (NASDAQ:ARNA) looks very promising at current levels for two reasons. First, it is anticipated that direct competitor VIVUS, Inc. (NASDAQ:VVUS) will not receive EU approval for its drug, Qsymia (the second of two weight-loss drugs approved by the FDA during the summer of 2012), which is makes VVUS less attractive from an acquisition standpoint and limits the global reach of the product as EU marketplace is now a virtual no-fly zone for Qsymia. The second reason to consider ARNA comes in the form of an addressed safety concern, (which was also recently noted by Joseph Dedvujak) physicians will be ones to control the demand for the drug not the patients. By implementing such a mechanism that controls the distribution of the drug, variables such a patient addiction are substantially hindered. The strategy for those looking to establish a position in Arena is one that is based on future sales of the company's drug Belviq. If the drug can surpass sales estimates we could see the stock begin to trade at the $16/share - $20/share in the next 12-24 months.

Disclosure: I am long PFE, ARNA, MRK. 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.