Questcor: How The BioVectra Acquisition Will Help The Company

| About: Mallinckrodt PLC (MNK)
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By: Ahmed Ishtiaq

Questcor Pharmaceuticals (QCOR) was on its way to have a blockbuster year, when the stock took a plunge after some negative reports came out about the companythe. Till that time, the stock had gained about 30% in 2012 and would have gained even more. However, the Citroen report and a probe into the marketing practices of the firm took the stock down. As a result, Questcor finished 2012 with losses of over 30%. Since the fall, the stock has been trading below $30, despite impressive earnings reported by the company at the end of the last quarter.

The market is still bearish about the stock in the short term. Recent options activity indicates that investors believe the stock will drop in the short-term. Investors have bought a lot more January put options than call options. January put/call options ratio stands at 4 to 1, and for every one call option traded, there were four put options. This clearly indicates that the market expects the stock to underperform during January. Questcor has been a very attractive stock for short sellers and traders due to the high volatility. However, the company has kept its efforts to augment the business through different means. Questcor has announced that it will acquire BioVectra Inc. Let's see how this acquisition will help the company.

BioVectra Acquisition

BioVectra develops and manufactures a range of specialty chemicals, advanced intermediates. The company also provides custom synthesis and manufacturing services for biopharmaceutical companies. Its products include protein-targeted chemistries and transformation-separation systems, enzymes, enzymatic substrates, specialty chemicals and neurochemicals. In addition, the company offers custom organic synthesis, natural product extraction and purification, and enzyme isolation and purification. BioVectra is involved with many confidential custom manufacturing alliances with several multinational pharmaceutical and biotechnology companies. The company provides cGMP manufacturing for API's, Intermediates, and Natural Product Extractions.

BioVectra has been the manufacturing partner for Acthar gel for almost a decade. The acquisition represents vertical/ backward integration for Questcor. The company has decided to acquire an important supplier, which will reduce one layer from its supply chain. Questcor will get considerable benefit from the transaction. First, the company will have increased control over the manufacturing procedure and capacity. This will allow the company to control the supply of the drug in an effective way. Second, the intellectual property of Acthar will be protected. Although BioVectra was a trustworthy long-term partner - a danger of misconduct always remains.

Questcor will pay C$50 million upfront for all the issued and outstanding shares of BioVectra. The payment for the acquisition will be made from the cash reserves of the company. The deal could be worth C$100 million in total. BioVectra shareholders can receive up to C$50 million over the next three years, based on the financial results of the company. Overall, the deal looks beneficial to the company in the long-term. However, the success of any acquisition depends on the ability of the management. If the Questcor management is able to integrate the business properly, then it can generate significant synergies for the company.

What the Analysts say about the Stock?

There is a stark contrast between the expectations of analysts and bears. Most of the analysts believe that the stock will do well, and they have maintained their buy ratings with substantially high price targets. Lazard have reaffirmed buy ratings for Questcor, and they have a price target of $74 for the company. Furthermore, analysts at Jefferies group have reiterated their buy rating. However, Piper Jaffray has maintained their neutral rating for the stock, with a price target of $45. Price targets offered by these analysts offer an opportunity for substantial gain. At the moment, the stock is trading close to $26. I believe that the stock is trading at a significant discount at the moment, and it has substantial upside potential.


Questcor stock is beaten down by short sellers and bears. As a result, the stock is trading at a substantial discount. The company has beaten market expectations in each quarter for almost two years now. Furthermore, Questcor is expanding the market for its drug, and new considerations are being added. I believe the long-term prospects of the company are bright. However, the stock may remain low in the short-term. I expect the company to report another quarter of impressive operations, which should give a nice lift to the stock price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.