Is Questcor's Recovery Rally Exhausted Yet?

 |  About: Mallinckrodt PLC (MNK)
by: Bio Insights

The huge bear raid that brought shares of Questcor Pharmaceuticals (QCOR) from over $50/share in mid-September to 52-week lows of $17.25 seems to have reversed into a recovery rally that started in the beginning of October. Shares closed last Friday (Oct. 19) at $24.99/share, representing a 35% rally since Oct. 1.

I last wrote about the recovery rally on Oct. 9, when shares were trading just above $21/share on an update from United Health that revealed no immediate threats to the sales revenue of Questcor's flagship product, H.P. Acthar Gel. This was important, since the original reason for the ~40% drop on Sept. 19 that started the bear raid had to do with Aetna's healthcare reimbursement policy update, which stated that Acthar Gel would be reimbursed for the treatment of West Syndrome but not for Multiple Sclerosis or Nephrotic syndrome. This made investors very cautious on the outlook for Acthar Gel sales revenue, which is Questcor's only real source of revenue.

To mitigate the damage to its own shares, Questcor announced a quarterly dividend of $0.20/share on Sept. 28 as well as a 7 million increase in its share buyback plan. This also counteracted the negative sentiment about the SEC probes, and gave the shorts something new to worry about -- dividends (at roughly 4%/year in yield). As you may know, anyone who shorts a stock with a dividend has to actually pay it to reimburse the original shareholder, so shorts would have to pay 4% on top of the interest they pay on the position to begin with.

Still, the bears are fighting tooth and nail for every uptick. Some are attempting to twist the news around to their favor as well, like Citron Research. It seems to be grasping for straws on its bearish outlook for QCOR, which is rumored to be influenced by a short position held by Citron's Andrew Left. Indeed, the most recent update to Citron's Questcor story has an intimidating title: "Questcor: When things go from Bad to Worse, and Even Worse."

The post originated on Oct. 17 in reaction to United Health's policy update from Oct. 5, and was updated on Oct. 19 to reflect a new document from Humana's website. The Humana document adds Acthar Gel to a list of treatments that require preauthorization before delivery, but makes no changes to Humana's actual reimbursement policy. This means that it's nothing like Aetna's policy update, and does not actually deliver the kind of doom and gloom that the Citron article's title would warrant -- very disappointing.

Since United Health didn't validate the bearish thesis either (the thesis being the heathcare reimbursement "domino collapse" for Acthar Gel) earlier this month, we can still say that Aetna's policy update was the only catastrophic event for Questcor that is tangible and dangerous to Acthar Gel sales revenue in the long run. Still, this was only 5% or so of the product's sales revenue, and it's difficult to argue that a 5% drop in revenue equates to anything close to a ~50% decline in share price. This is excluding the new dividend that QCOR now pays.

If Aetna is the only policy update that removed Acthar Gel use for MS and other diseases (besides West Syndrome), then the shorts who got in after Sept. 19 are in big trouble when the market revalues the company with some notion of stability for Acthar Gel sales volume. Keep watching Questcor for news of any actual policy updates. The speculation is getting quite intense these days.

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.