Questcor Pharmaceuticals: How Can Such A Profitable Company Be So Risky?

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Anaheim, California-based Questcor Pharmaceuticals Inc. (QCOR) was formed on November 17, 1999 when Cypros Pharmaceutical Corporation and RiboGene Inc. merged to become one integrated company.

Questcor's lead drug is H.P. Acthar Gel (repository corticotropin injection).

The company also markets Doral (quazepam) which is indicated for the treatment of insomnia characterized by difficulty in falling asleep, frequent nocturnal awakenings, and/or early morning awakenings.

Nearly 100% of the company's revenues are generated from Acthar.


Questcor acquired H.P. Acthar Gel, from Aventis Pharmaceuticals Inc., now Sanofi (NYSE:SNY), in 2001 for $100,000 and a 1% royalty on annual sales of over $10 million. Questcor was able to obtain the drug at such a low price because Aventis was planning to discontinue Acthar due to poor sales.

During 2005, Questcor divested its "non-core pharmaceutical products," Nascobal (cyanocobalamin), Ethamolin (ethanolamine oleate) and Glofil-125 (sodium Iothalamate I-125 Injection), in accordance with its new central nervous system (CNS) strategy. With the divestiture, Questcor personnel could exclusively focus on supporting H.P. Acthar Gel and building Questcor's new CNS portfolio. Questcor claimed it was continuing to evaluate opportunities to acquire currently marketed products and to build a pipeline of commercially attractive development opportunities.

Instead Questcor saw Acthar as a one-drug pipeline.

Acthar gel is a purified preparation of adrenocorticotropic hormone (ACTH), obtained from the pituitary glands of pigs. The drug has been described as a "byproduct of the meatpacking industry."

Acthar was originally approved by the United States Food and Drug Administration (FDA) in 1952. Over the years, the drug has received FDA approvals for the treatment of 19 indications. Of those 19 indications, Questcor currently generates substantially all of its net sales from three indications: the treatment of proteinuria in idiopathic types of nephrotic syndrome, the treatment of acute exacerbations of multiple sclerosis in adults, and the treatment of infantile spasms in children under two years of age. With respect to nephrotic syndrome, the FDA has approved Acthar 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."

In 2007, Questcor filed an application with the FDA to obtain orphan drug status for Acthar as a treatment of infantile spasms. The FDA grants orphan status to drugs that treat diseases affecting less than 200,000 people. Orphan status provides a company with seven years of marketing exclusivity. At the same time, the company filed its application with the FDA, Questcor raised the price of Acthar from $1,650 per vial to $23,000 per vial, a rather substantial price increase. During October 2010, the FDA granted Questcor's orphan drug application. Questcor then initiated an aggressive marketing strategy hoping to transform Acthar into a blockbuster drug.

It looked like 2012 was going to be a great year for Questcor. Shares of Questcor had risen more than 150% during the past year. On January 6, 2012, Questcor announced that paid Acthar prescriptions for multiple sclerosis were up approximately 165% year-over-year compared to the fourth quarter of 2010. Paid Acthar prescriptions for nephrotic syndrome increased by approximately 145%. Business was so good that the company planned to nearly double the number of its nephrology representatives by the spring of 2012.

Then questions regarding Acthar's efficacy and the company's aggressive promotion of the drug began to arise. On January 11, 2012, the website,, questioned and criticized Questcor's marketing and business practices, as well as the significant profits Questcor insiders received. StreetSweeper also announced that it had initiated a short position in Questcor. StreetSweeper said it had "sold 80,599 shares of QCOR short at an average price of $41.46 a share in anticipation of a future decline in the stock price."

On January 11, 2012, Questcor shares closed at $34.51, down from $40.56 on January 10. Nearly 14 million shares were exchanged on January 11. In contrast, approximately 1.7 million shares were traded on January 10.

Questcor announced that it became aware that an investor blog was preparing to issue a report regarding the company's marketing and business practices. The company said that it was "committed to providing access to Acthar to patients who need it, and marketing Acthar in accordance with regulatory requirements and industry standard practices."

On January 13, 2012, Questcor confirmed that the company had granted a telephone interview to the publisher of the StreetSweeper on January 16. The StreetSweeper would publish a two part report based on the interview on January 17 and January 19.

Questcor stated that the company would either initiate its own investigation into the charges alleged by StreetSweeper or dismiss them. Questcor stated that the short sale of the company's stock by StreetSweeper in advance of the report, "smacks of manipulation" and the company was considering legal action.

By January 16, 2012, Questcor made it clear that the company was very suspicious of StreetSweeper. Questcor transmitted a news release claiming that the company received a communication from an individual representing herself to be associated with StreetSweeper on January 9, 2012. The individual requested that Questcor provide responses to a series of questions about the company by January 10, 2012. Due to management's schedule, StreetSweeper was offered an opportunity to have the questions answered by January 16, 2012. According to Questcor, StreetSweeper distributed this statement on January 11, 2012 rather than waiting for the answers to its questions:

"TheStreetSweeper would like to reward its loyal followers by offering them advance notice about its newest investigative report. The first story in a detailed two-part series on Questcor Pharmaceuticals will be released early next week, with the second installment scheduled to appear soon after that. The first article raises serious questions about the aggressive marketing practices that QCOR has used to generate explosive - but potentially unsustainable - growth in prescriptions for its only drug. The second story further examines Questcor's business practices, while taking a hard look at the leaders who have struck it rich as a result of the company's controversial growth strategy. Important Disclosure: TheStreetSweeper has sold 80,599 shares of QCOR short at an average price of $41.46 a share in anticipation of a future decline in the stock price."

Questcor stated that the company was unable to determine the exact nature of StreetSweeper, its ownership structure, or its revenue sources. Questcor claimed that the website provided no information on these topics, and standard listings about it were "limited and opaque." Based on its examination, Questcor believed that the website listed people that it claimed were associated with it, one of whom the website and media reports identified as a felon who pled guilty to two conspiracy charges - for securities fraud and money laundering - and who later pled guilty to racketeering charges related to stock manipulation, another of whom had the same name as an individual who, according to media reports, was arrested recently for kidnapping and extortion, and another of whom had the same name as an individual who, according to media reports, was involved in extensive litigation regarding fraud, defamation, and slander. In the release, Questcor also stated that the exact nature of the relationships between these individuals and StreetSweeper was unclear. Questcor also questioned whether the website's purpose was journalistic or was intended to further the economic interests of short sellers without regard to accuracy, a practice referred to as "short and distort."

In the release, Questcor stated that the company maintained a policy of not commenting on trading activity in its stock and did not intend to make a regular practice of engaging with short sellers. Questcor explained that the company was concerned about the apparent tactics of StreetSweeper and its background. However, in this case, Questcor believed that responding to the short seller's questions and publicly disclosing the content of the questions and answers was in the best interest of the company's shareholders. Questcor answered StreetSweeper's questions, albeit sometimes vaguely, and defended the company's marketing strategy and regulatory compliance program.

Among the many issues addressed, StreetSweeper's most valid criticism was that Questcor substantially increased the price for Acthar claiming it as an orphan drug used for a rare disease, but marketed Acthar for more common disorders without realigning the $27,000 price.

Analysts at several firms were critical of the StreetSweeper report. Leerink Swann maintained its "Outperform" rating of the stock stating that StreetSweeper provided no new information that would change the firm's outlook on Questcor. Jefferies also maintained its "Buy" rating and $50 price target for Questcor. Oppenheimer said TheStreetSweeper's allegations were unfounded. The firm maintained its "Outperform" rating and $53 price target.

Questcor had great news for shareholders on February 3, 2012. The company announced that it expected to report year end annual net sales of approximately $218 million and operating income of approximately $111 million to $113 million for 2011, as compared to $115.1 million in net sales and $53.8 million in operating income for the year ended December 31, 2010.

On April 24, 2012, Questcor had more good news, reporting that its first quarter profit increased significantly from a year ago. The company's net sales grew to $96 million in the first quarter of 2012. Net sales for the first quarter were $96.0 million, up significantly from $36.8 million, the net sales for the first quarter of 2011.

Business was booming. On June 14, 2012, Questcor announced the company's initial commercialization plans for Acthar in the treatment of rheumatology-related indications already approved by the FDA.

Acthar is indicated for multiple FDA-approved rheumatology-related conditions, including its use as adjunctive therapy in psoriatic arthritis, rheumatoid arthritis, juvenile rheumatoid arthritis, and ankylosing spondylitis. Acthar is also approved by the FDA as acute or maintenance therapy in selected cases of systemic lupus erythematosus and systemic dermatomyositis (polymyositis). Questcor believes Acthar has the potential to help patients suffering from these serious, difficult-to-treat disorders who do not respond adequately to, or experience problematic side effects from, current treatments.

Questcor announced that the company would hire a rheumatology sales force with 12 rheumatology reps, a national sales director and two regional sales managers; The company would start a pilot rheumatology selling effort in mid-July 2012 with an initial focus on the rare and closely related neuromuscular disorders dermatomyositis (DM) and polymyositis (PM).

On July 9, 2012, Questcor stock hit a 52-Week High reaching $58.91 a share, but the next day, Questcor hit a sour note. On July 10, 2012, Questcor shares plummeted after short seller Andrew Left's Citron Research predicted that Questcor shares would fall to become "a single digit stock in 18 months or less." On that day, nearly 21 million Questcor shares were traded.

Citron claimed that Questcor was very vulnerable to competitive threats from generic equivalent competition. The short seller also alleged that the company relied on a "desperate and unscientific basis for expanding markets." Citron believed there would be "insurance industry pushback" due to the high price of Acthar. Citron also claimed that Questcor lacked intellectual property protection for H.P. Acthar Gel, that the company's marketing amounted to an " utter abuse of the system," and there was an absence of "meaningful R&D."

Citron had many criticisms and concerns about the future of Questcor. Chief among them was the claim that a synthetic ACTH has been available in Europe for over 10 years. Produced by Novartis (NVS), Synachten Depot, (tetracosactrin zinc phosphate complex) is the first corticotrophic preparation produced entirely by synthesis. Although it contains only the first 24 of the 39 amino acids contained in the naturally occurring ACTH molecule, tetracosactrin displays all the pharmacological properties of endogenous ACTH.

Citron claimed that it has interviewed experts who believed that "the path to the market in the United States for this formulation (would be) relatively, short, simple, and not particularly costly." The short seller also maintained that Synachten Depot sells for 1/30 or less than the price of Acthar.

Citron claimed that Novartis was in the process of bringing Synachten Depot to the United States, which would be devastating to Acthar sales due to the extreme price differential between the two drugs.

Citron did not mention that Synachten Depot was not recommended for children less than three years old since it contains benzyl alcohol, which can cause toxic and allergic reactions, such as gasping syndrome. There have also been a number of severe side effects, including death, associated with synthetic ACTH. The new drug would also probably be required to be tested in lengthy clinical trials.

Despite the negative reports from StreetSweeper and Citron, Questcor released outstanding numbers again on July 24, 2012. The company reported second quarter 2012 net sales of $112.5 million, up significantly from the second quarter 2011 net sales of $46 million. Net income for the second quarter was $41.5 million or $0.65 per diluted common share, compared to $13.9 million, or $0.21 per diluted common share for last year's comparable quarter.

About two months later, two events had a devastating impact on Questcor stock. On September 19, 2012, Citron Research reported that Aetna Inc. (NYSE:AET), the nation's third largest insurer, had recently revised its policy concerning Acthar, which would severely limit coverage of Questcor's only drug. On September 14, 2012, Aetna issued a Clinical Policy Bulletin stating that Acthar was "not medically necessary" for certain conditions for which it had been prescribed. As a result, Aetna would limit Acthar coverage. The insurance company would no longer reimburse Acthar for most diseases. Aetna maintained that Acthar was only medically necessary to treat infantile spasms, the drug was not superior to other less expensive therapies for the 18 other diseases that Acthar was approved to treat. Although Aetna accounted for about 5% of Acthar prescriptions, the market panicked. Questcor trading was halted due to volatility after shares dropped by over 55%. Nearly 64 million shares of Questcor were traded on September 19.

To make matters even worse, on September 24, 2012, Questcor announced in a Form 8-K filed with the US Securities and Exchange Commission (SEC) that the U.S. government had initiated an investigation into the Company's promotional practices. On September 21, 2012, Questcor became aware of an investigation by the United States Attorney's Office for the Eastern District of Pennsylvania regarding the company's promotional practices. Following the September 24 announcement of this investigation, Questcor received a subpoena from the USAO for information relating to our promotional practices. Questcor stated that it was cooperating with the USAO with regard to this investigation. After the news of the investigation, Questcor's stock plunged the most in 20 years to close at $19.08 per share on September 24, 2012, a one-day decline of 37%. Over the next few days, Questcor stock continued to decline until it reached a 52-week low of $17.25.

As a result, several shareholder class action lawsuits have been filed against Questcor. Generally, the litigation alleges violations of federal securities laws, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, including allegations that the company issued misrepresentations to the market which had the effect of artificially inflating the market price of Questcor stock from April 26, 2011 through September 21, 2012, that Questcor failed to adequately disclose that the company lacked clinical evidence to support the use of Acthar for indications other than infantile spasms, that Questcor engaged in questionable tactics to promote the sales and use of Acthar in the treatment of multiple sclerosis and nephrotic syndrome, and as a result, the company lacked a reasonable basis to make positive statements about Questcor or its outlook, including statements about the effectiveness of and potential market growth for Acthar.

On September 26, 2012, a putative class action lawsuit was filed against Questcor and several of its officers and directors in the United States District Court for the Central District of California. The suit, John K. Norton v. Questcor Pharmaceuticals, et al. was brought on behalf of shareholders who purchased the company's common stock between April 26, 2011 and September 21, 2012. The complaint alleges that Questcor and certain officers and directors violated the Securities Exchange Act by making allegedly false and/or misleading statements concerning the clinical evidence to support the use of Acthar for indications other than infantile spasms; the promotion of the sale and use of Acthar in the treatment of multiple sclerosis and nephrotic syndrome, as well as the company's outlook and potential market growth for Acthar. The complaint seeks damages in an unspecified amount and equitable relief against the defendants. This lawsuit has been consolidated with four subsequently-filed actions asserting similar claims.

On October 2, 2012, another shareholder filed a lawsuit on behalf of the company against certain officers and directors in the Superior Court of the State of California, Orange County, captioned Monika do Valle v. Virgil D. Thompson, et al. The complaint asserts claims for breach of fiduciary duty, abuse of control, mismanagement and waste of corporate assets, as well as from allegations relating to sales of Questcor common stock by the defendants and repurchases of company common stock. The complaint seeks an unspecified sum of damages and equitable relief.

On October 4, 2012, another shareholder filed a lawsuit in the United States District Court for the Central District of California captioned Gerald Easton v. Don M. Bailey, et al. The suit asserts claims substantially identical to those asserted in the do Valle suit. This lawsuit has been consolidated with five subsequently-filed actions asserting similar claims under the caption: In re Questcor Shareholder Derivative Litigation.

On October 24, 2012, another shareholder filed a lawsuit on behalf of the company against certain officers and directors in the Orange County, California Superior Court Orange County, captioned Jones v. Bailey, et al. The suit asserts claims substantially identical to those asserted in the do Valle case.

Other lawsuits against Questcor include In re Questcor Securities Litigation. On January 4, 2013, the district court issued an order appointing the West Virginia Investment Management Board and Plumbers & Pipefitters National Pension Fund as Lead Plaintiffs in that consolidated securities action.

In the company's Form 10-K, Annual Report for the fiscal year ending December 31, 2012, Questcor states that the company believes "that the probability of unfavorable outcome or loss related to this litigation and an estimate of the amount or range of loss, if any, from an unfavorable outcome are not determinable at this time. Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business."

Despite all the bad news, the profits keep soaring at Questcor. On October 23, 2012, Questcor reported that 3rd quarter was up 135% over the third quarter of 2011. Earnings for the third quarter of 2012 were up 160% compared to 2011, and Acthar shipments increased 92% over the same period last year.

On November 2, 2012, Questcor stock fell by over 7% after Benzinga erroneously reported that Cerium Pharmaceuticals' synthetic version of Acthar, Synacthen Depot, had been approved by the FDA when the agency only gave the drug orphan drug designation. Acthar currently has market exclusivity until 2017. Cerium is a small Maryland corporation run by Gregg Lapointe, a former Questcor board member.

On December 6, 2012, Citron Research reported that Prime Therapeutics, the largest privately-held pharmacy benefits manager in the United States, recently issued a case study summary that found 96% of Acthar prescriptions were unnecessary with regard to Acthar prescriptions. Prime's partnership with Blue Cross and Blue Shield covers 20 million people nationwide with an annual drug expenditure of $12.4 billion.

On December 27, 2012, Blue Cross/Blue Shield of Michigan denied coverage of Acthar Gel for steroid-responsive conditions, claiming the clinical need was not proven. Coverage would still be provided for treatment of infantile spasms. The big question for Questcor in 2013 is how many other insurance companies will follow suit.

Questcor started off the new year with the announcement that it had acquired BioVectra Inc., a Canadian pharmaceutical company, for an upfront payment of $50 million. An additional $50 million could be paid to BioVectra, depending on its meeting financial milestones over the next three years.

BioVectra is a supplier of contract manufacturing services to the global pharmaceutical and biotechnology industry and manufactures active pharmaceutical ingredients ((API's)), chemical intermediates, and bioprocessing reagents. BioVectra has been Questcor's manufacturing partner for the API in Questcor's H.P. Acthar Gel for nearly a decade. Questcor claimed that the acquisition will enable Questcor to further secure the manufacturing process trade secrets surrounding Acthar.

Questcor's acquisition of BioVectra was a good move. The acquisition provides the company with vertical integration, third party manufacturing capabilities and further secures Acthar manufacturing trade secrets.


On February 26, 2013, Questcor reported that net sales for the fourth quarter of 2012 were $160.5 million, compared to $75.5 million for the same period in 2011.

Net sales increased primarily due to expanded prescribing of Acthar by nephrologists in the treatment of nephrotic syndrome, as well as continued prescribing by neurologists in the treatment of MS relapses and infantile spasms. Net sales also benefited from the initiation of commercial activities focused on the use of Acthar by rheumatologists in the treatment of on-label rheumatology-related conditions.

While Acthar net sales in multiple sclerosis posted greater than 40% year-over-year growth, multiple sclerosis prescriptions softened by approximately 8% from the third quarter, after almost five years of sequential quarterly growth, and nephrotic syndrome became the largest contributor to net sales.

GAAP earnings for the fourth quarter of 2012 were $1.03 per diluted common share, compared to $0.48 per diluted common share for last year's comparable quarter.

Net sales for the full year of 2012 were $509.3 million, compared to $218.2 million in the full year of 2011.

Cash flow from operations for the full year of 2012 was $219.0 million, compared to $85.6 million for the full year of 2011.

GAAP earnings per share for the full year of 2012 were $3.14 per diluted common share, compared with $1.21 per diluted common share for the comparable period of 2011.

The Future

Most analysts see a bright future for Questcor. On April 17, 2013, Bank of America/Merrill Lynch rated Questcor as a "Buy" with a $40.00 price target over the next year. On April 8, 2013, Favus Institutional Research downgraded Questcor from a "Buy" to a "Sell," expressing concerns about Questcor's Q1 results. On March 12, 2013, Roth Capital reiterated its "Buy" rating for Questcor after the company released an abstract focusing on Acthar as a first-line treatment for multiple sclerosis, Roth Capital believes the data shows that Acthar is much more potent than ordinary steroids. On March 1, the Jefferies Group maintained their "Buy" rating for Questcor and increased their price target for the company's stock to $38 up from $30. On February 21, 2013, Janney Montgomery Scott initiated coverage of Questcor with a "Buy" rating and a $40 price target, and Mizuho Securities upgraded Questcor to a "Buy" rating up from a "Neutral" rating. Mizuho also increased their price target for Questcor to $41 up from $28. On February 27, Ladenburg Thalman increased their price target for Questcor to $38, up from $33. The firm has a "Buy" rating for Questcor. On February 21, 2013, The Street upgraded Questcor from a "Hold" rating to a "Buy" rating.

Despite all the negative news, 2012 was a great year financially for Questcor. The company shipped 6,330 vials of Acthar during the fourth quarter 2012, up 88% compared to 3,360 vials in the year ago quarter. For the full year of 2012, Questcor shipped 20,741 vials of Acthar, up 94% compared to 10,710 vials in 2011.

According to Questcor, Acthar is most commonly prescribed by physicians as a treatment alternative for patients with certain auto-immune conditions in whom first-line therapies have not provided the intended treatment outcome and an additional FDA-approved treatment alternative is needed. Despite the highly critical Prime Therapeutics study released in December 2012, Questcor claims that insurance coverage for Acthar continues to remain favorable for these patients.

Questcor's strong financial performance has enabled the company to invest in research programs to further clarify the potential immune-modulating properties of Acthar and identify Acthar mechanisms of action applicable to other inflammatory and auto-immune diseases with high unmet need.

Questcor currently has approximately 35 company-sponsored clinical and pre-clinical research projects underway. Key company-sponsored clinical programs are in process for lupus, diabetic nephropathy, amyotrophic lateral sclerosis (ALS), also referred to as Lou Gehrig's disease.

My chief criticism of Questcor is the company's myopic focus. Questcor's vision cannot seem to see beyond Acthar. Questcor views Acthar as a full-blown pipeline.

For me, diversification is a cardinal rule of investing, and it doesn't matter if it is an individual investing in the stock market or a pharmaceutical company investing shareholder dollars in the development of a pipeline. One should not concentrate all efforts and resources in one area as one could lose everything, or as Miguel de Cervantes wrote in Don Quixote, "It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket."

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.

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