It has been a bumpy ride for Questcor shareholders lately. Last week shares tanked 60% within a few minutes, after Citron Research issued a report regarding Aetna’s reimbursiment of QCOR ‘s blockbuster drug, Acthar. Shares of the stock dropped from $50 to $22. The stock rebounded the next few days as analysts reiterated their bullish calls;. Oppenheimer was bullish (until today), more on that below. Today, is yet another bumpy ride. Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR) is down 30% at the time of this writing to $21.14. The Government has launched an investigation into the company’s marketing practices.
LEERNIK SWAN downgraded the company based on the news we reported last week.
They note the following important and concise summary of the situation:
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Government Investigation Increases Risks: We believe today’s news increases risks beyond broader reimbursement risks indicated in our note earlier today. Since Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR) management cannot further comment on the investigation, the risks associated is hard to capture. As highlighted in the previous note, Aetna will no longer reimburse Acthar in indications beyond Infantile Spasms. The change in Aetna reimbursement and flagging of Acthar was driven by: 1) recent price increases; 2) lack of clinical data supporting use in approved indications; 3) lack of support by National Medical Societies (MS, ANA), and; 4) other recent publicity. Based on the reasons for Aetna Inc. (NYSE:AET) flagging Acthar, we believe there is longer term risk that other large insurers may follow suit.
Bottom line: We lower to a Market Perform rating and ~$35 DCFbased valuation to QCOR in order to appropriately capture potential increased Acthar reimbursement risk. Initial contact with Aetna Inc. (NYSE:AET) and Blue-Shield general information lines suggested to us Acthar would continue being reimbursed as a last resort therapy for approved indications (MS, Nephrotic Syndrome, etc.) beyond Infantile Spasm (IS). Subsequently, we spoke directly with Aetna management who indicated they effected a policy change and will no longer be covering Acthar beyond IS, but their general computer formularies had not yet been updated. Aetna indicated the change in reimbursement and flagging of Acthar was driven by: 1) recent price increases; 2) lack of clinical data supporting use in approved inidcations; 3) lack of support by National Medical Societies (MS, ANA),
and; 4) other recent publicity.
The funny/sad thing is Oppenheimer issued a buy last week when the stock was trading above $50, with a price target of $69. Now Oppenheimer is downgrading the stock, after investors lost 50% of their money.
On 9/24, Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR) filed an 8-K announcing that the company became aware of a government investigation relating to QCOR’s promotional practices. Given the uncertainties around the investigation and the potential ramifications associated with any potential wrongdoing, we are lowering our rating to Perform from Outperform and rescinding our PT. While the outcome of this investigation is uncertain, in our view, worst case scenario is that sales of Acthar may be adversely affected if QCOR is forced to change marketing activities in any way following the culmination of this investigation. We believe shares could trade sideways until we get more clarity around this investigation. We will revisit our thesis upon the conclusion of this investigation.
We have no idea what the shares will do. However, the opinion of this author has always been the following regarding small companies with one or two drugs. You need to know a tremendous amount about the company, or have insider information to make money. This is especially true before the drugs receive FDA approval, but is still valid even after the FDA has given its approval to the medicine. Value investors should avoid the stock, unless they call into the expert category.
We also think that Oppenheimer should apologize to investors for their report, although we think this is unlikely to happen.
(Disclosure: no position in any securities mentioned)