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Is Questcor Pharmaceuticals a Good Investment?

Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR) made our list of terrible twenty stocks earlier this week. Shares of the drug manufacturer have lost more than 60% over the past three months, and are currently a favorite of short sellers – the stock sports a short interest over 30%. These declines come at an interesting time for Questcor, when many investors were buying into the notion of the company’s “multi-functional” drug, Acthar. As evident by the company’s stock price, many were also feeling a bit bearish, a notion that can be seen when analyzing the hedge fund industry.

Questcor had announced 2Q results that put net sales at $113 million versus $46 million, and EPS of $0.65 versus $0.21 for the same period last year. Questcor’s trailing P/E is at 10, with a forward P/E at 5. Based on unrevised estimates, the company is expected to grow EPS by 125% this fiscal year and 46% next year. The prospects look good on a P/E and estimates basis, and the stock has even been one of Polaris Capital’s top picks for 2Q, but the feeling is not mutual, which can be seen by looking at the actions of other funds over this time frame.


The top fund, by shares, in Questcor at the end of June was Orbimed Advisors at 1.3 million. Orbimed had decreased their 1Q position by over 20%. Also unloading shares, 43% to be exact, was Palo Alto Investors. Ken Griffin and Israel Englander also dumped shares – 46% and 84%, respectively.

Looking back even further to 1Q 2012, when the company was still trading at elevated levels based on its single drug, we see that other top names may have noticed the unsteadiness of the stock then. These include D.E. Shaw, who closed out his position all together, Jim Simons of Renaissance Technologies – dumping 93% of his previous quarter’s stake – and Steven Cohen dumping 83%.

Up until a week ago the stock had traded in a range between $40-$60 for the entire year, but is now down 50% year to date. Why did it take investors so long to see the writing on the wall? It appears many funds and insiders were skeptical during the second quarter, with a number of insider sales also occurring over this period.

The company has a lot riding on its only drug – Acthar – that treats infantile spasms. In an attempt to diversify its offerings, Questcor also markets the drug for multiple sclerosis flare-ups and is funding an exploratory study for patients whose kidney problems are caused by diabetes. Last week, the company’s stock price took a beating after insurer Atena Inc. announced it would limit reimbursement of Questcor’s drug only to costs associated with the treatment of infantile spasms.

In the news, Jefferies Group downgraded the company from a ‘buy’ to a ‘hold’. Jefferies had confirmed that Aetna would not reimburse the company for Acthar’s secondary treatment offerings, and that there was little to no room for Questcor to be able to reverse the policy decision. On the back of the Atena news, Questcor announced that the U.S. government was investigating its promotional practices, driving the company’s stock down another 35% to below $20 a share, tumbling from the $50 mark it hit just one week earlier.

A couple of Questcor’s key competitors include AmerisourceBergen Corp. (NYSE:ABC) and Forest Laboratories, Inc. (NYSE:FRX). These companies are larger and more diverse than Questcor, and as a result trade at lower P/S ratios, with Forest at 2.2x and AmerisourceBergen at 0.1x, while Questcor trades at 8.2x. Forest is trading at a trailing P/E of 13, but has a forward P/E of 24. Carl Icahn recently won a seat on the Forest Labs board after a bitter proxy fight. The infamous activist investor claims the company is ill-prepared to generate new growth.

AmerisourceBergen rose its full year EPS guidance to $2.80-$2.84, from $2.74-$2.84, due to modest revenue growth. The company trades at a trailing P/E of 15 and a forward P/E of 12.5. Goldman recently downgraded the company citing overvaluation.

Two biopharmaceutical companies with similar roller coaster rides in stock price include VIVUS, Inc. (NASDAQ:VVUS) and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). These two companies are currently battling against each other in the anti-obesity market. VIVUS saw a 10% drop in its stock recently due to rejection of its anti-obesity drug by the European Medicines Agency. Arena currently trades around $8.50 a share, but has seen its 52-week stock price range from $1.23 to $13.50. Given next year EPS estimates for Arena are negative $0.15, the forward P/E is incalculable. Vivus trades at a forward P/E of 50.

Overall, Questcor has a long road back to its previous levels of prosperity, having placed a lot of faith in one drug that was expected to have universal uses. Although the company has been cut down on a valuation level, an apparent discount is moot if it begins to have fundamental issues with sales and earnings.

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