By Andrew McDonald, Ph.D., Ning Yang, Ph.D.
Given today's stock price, the shorts have undoubtedly won the battle, but have they won the war? Ultimately, that question may take some time to answer as the impact of the recent Aetna announcement and the government investigation is reflected in Questcor's (QCOR) earnings. At $19.00 per share, with 62MM shares outstanding, cash of $114.7M as of June 30th, no debt and Q2 net sales and diluted EPS of $112.5M and $0.65, shares of Questcor are trading at a revenue multiple of 3.28 and a forward earnings multiple of 4.81. Clearly, investors are expecting a very dismal outlook for Questcor, given the incredibly depressed valuation. This outlook is particularly dismal considering the exceptional growth rate the company has been delivering. Investors undoubtedly think that Acthar sales in the non-infantile spasm (IS) indications are going away, but are they?
Prior to the stock moving from the low $50s to where it currently sits, the shorts had talked about potential changes by payers regarding their coverage of Acthar. Curiously, the shorts foretold the "Aetna decision" and even the government investigation. How did they foresee these events? One very real possibility is that they instigated these activities. It is highly plausible, and many in the institutional investment community believe, that they were behind these activities. There are two very large hedge funds that are believed to be the main drivers, and it is believed that they created a self-fulfilling bet against Questcor. Certainly, from a fear and headline perspective, they have been successful. Consider the following: analysts from the hedge funds rumored behind the short position were badgering management teams of HMOs, like Aetna, during breakout sessions at investor conferences with an agenda to pressure them to make changes. I've also heard they were badgering high-prescribing physicians about their Acthar prescribing habits attempting to influencing treatment decisions. I assume that these same hedge funds contacted representatives in the U.S. government demanding an investigation of Acthar promotional practices. I suspect that when you are a billionaire hedge fund manager that makes political donations, the folks in Washington may do you a favor once in a while.
Whether or not you believe my thesis, eventually Questcor's earnings will speak louder than anyone's words. The question is, will the Aetna decision start a domino effect whereby other HMOs will no longer reimburse for Acthar in non-IS indications? Only time will tell, but consider that the stock valuation reflects that they will. Based on telephone conversations that I've had, I know that some medical directors at other HMOs think the Aetna decision will impact others. But, consider that these medical directors collect a salary for denying patients insurance coverage on behalf of their employers. It is their job to deny coverage to make money for the HMOs. Of course they are saying they will do their job - that's how they get paid and they are biased in their responses.
Consider that there are other variables to that support reimbursement by HMOs, albeit under a prior authorization plan. Consider the following. First, Acthar does have the label for these indications, and while there may not be large-scale, randomized clinical data to support Acthar in all of these indications, there are certainly published accounts of steroid refractory patients benefiting from Acthar therapy. Once a patient fails steroid therapy, they often have no further options and must now suffer with their very painful and debilitating disease. These patients have no other option but to try Acthar. Acthar works in some of these patients.
Pharmacologically, Acthar, as a highly purified preparation of adrenocorticotropic hormone (ACTH), stimulates the adrenal cortex to secrete cortisol, corticosterone, aldosterone, and a number of weakly androgenic substances. It behaves in ways that corticosteriods do not. According to its FDA labeling for multiple sclerosis (MS) relapses, corticosteroids are front-line therapy for acute exacerbations of MS. Acthar is used for those patients who cannot tolerate the side effects of high-dose corticosteroids; or have been treated unsuccessfully with corticosteroids in the past; or have difficulty receiving IV medication due to poor venous access. As a result, Acthar is a highly-specialized, very-low-volume, premium-priced drug for patients that have debilitating disease with no other treatment option. The reimbursement process has always been handled on a very intensive, case-by-case basis for this population. Despite that initial denials occur frequently (medical directors doing their job), the coverage decisions are often appealed successfully because there are no FDA-approved alternatives to Acthar. After all, patients need to be treated with the only other medicine that may help them. It is hard to imagine that how Aetna's published policy change is going to vanish Acthar sales in the non-infantile spasm (IS) indications. Yet, this is what the stock price is reflecting.
Overall, we think that the recent QCOR's stock free fall is incredibly overblown and reflects a worst-case scenario. The company releases vial shipment every month. We will therefore start to separate fear from reality as we see how many vials had been shipped in the months to come. Can the stock return to the low $50s in the near term? Maybe not this month or the next but in 1-2 quarters? I think so. If the sales don't fall off a cliff, but continue upward, I expect this stock to more than recover. Frankly, if the shorts were in fact behind this deterioration, why wouldn't they now get long and make even more money on the ride back up?