Questcor Drops On Headline Misunderstanding

| About: Mallinckrodt PLC (MNK)

Questcor (QCOR) tanked just after the open today, falling as much as 15% after a headline crossed the wires from Benzinga stating that a synthetic version of Acthar had been approved by the FDA. The headline was quickly pulled and has now been replaced to reflect the correct information, that the drug received an Orphan Drug Designation, not approval.

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Orphan Drug Designation simply means that the drug meets the definition, as defined by the Orphan Drug Act of 1983. According to the FDA, an orphan drug is a drug developed "for the safe and effective treatment, diagnosis or prevention of rare diseases/disorders that affect fewer than 200,000 people in the U.S., or that affect more than 200,000 persons but are not expected to recover the costs of developing and marketing a treatment drug."

The drug in question, Synacthen Depot, has been approved in Europe since 1998 "for short-term therapy in conditions for which glucocorticoids are indicated in principle, for example, in ulcerative colitis and Crohn's disease, juvenile rheumatoid arthritis, or as adjunct therapy in patients with rheumatoid arthritis and osteoarthrosis. Synacthen Depot may be particularly useful in patients unable to tolerate oral glucocorticoid therapy or in patients where normal therapeutic doses of glucocorticoids have been ineffective." It is currently manufactured and sold by Novartis (NYSE:NVS) in Australia, and Alliance Therapeutics in the U.K.

While this could eventually be a competitor to Acthar in the U.S., that day is likely a long way off. Cerium Pharmaceuticals, which doesn't have a corporate website and did not answer its corporate phone line, will still need to complete clinical trials to show efficacy. A search of did not turn up any studies, either completed or in progress, for Cerium in this indication. Additionally, even when approved, this drug would only compete against Questcor in the infantile spasm market, which made up less than 10% of the new prescriptions shipped in the third quarter.

Questcor has been pummeled lately by reports that insurance companies were reviewing their policies on covering Acthar, and the stock is still down about 60% from its 52-week highs. Short-sellers continue to come after the stock, and many long investors are nervous from the recent rocky ride. However, the company showed strong sales growth in its third-quarter report and recently announced a $0.20 quarterly dividend and an expansion of the stock repurchase plan for up to 7 million shares. Last Wednesday, Jefferies reiterated its buy rating and upgraded the price target to $30. Take this dramatic drop on undramatic news as a buying opportunity.

Disclosure: I am long QCOR. I am short November $28 calls on QCOR. 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.