A Response To Mallinckrodt And Questcor Investor Questions
Apr. 9, 2014 11:32 AM ET | 19 comments | About: QCOR, Includes: MNK
Disclosure: I am long QCOR.
This article focuses on the M&A of Questcor Pharmaceuticals by Mallinckrodt plc.
This is in direct response to questions posed by another Seeking Alpha author, Quoth the Raven, regarding the M&A.
This article carries itself as a Q&A for existing and potential shareholders of Mallinckrodt and Questcor.
It's unfortunate that some short sellers continue to bash Questcor (QCOR), especially when a "buyout"/merger happens. For those of you that are unaware, Questcor was offered an M&A deal by Mallinckrodt plc (MNK) for $5.6 billion. That offer can be seen here.
Let me just begin by saying that Questcor isn't capped at $86/share - that was a reflection of Mallinckrodt 's closing price when the deal was made. The closing price on Friday, April 4th can be seen here. If Mallinckrodt or Questcor sees a large catalyst come to fruition [positive ALS trial data, closing of government investigations, FTC throws out Retrophin (OTC:RTRX) case, or better than expected earnings growth seen in either MNK or QCOR] then the value of the merger increases based upon the share prices of either company. Today, the value, per Questcor Shareholder, is roughly $87.00 based on Mallinckrodt's stock, yet shorts continue to try and suppress Questcor's share price.
Recently, Quoth the Raven, a Seeking Alpha peer and long-time speculator of Questcor, released an article regarding the new M&A. His article can be seen here. In it, he stated that if he were an unbiased Mallinckrodt shareholder he would have a list of questions to ask the company. Below are the questions he asked and my answers. This is in no way a shot at Quoth the Raven, but more of a Q&A for Mallinckrodt and Questcor shareholders to shed light on the situation.
Q&A Period
1. Why is there such a massive short interest in the company we just merged with? What am I missing that shorts see?
As I've said in my other article, along with comments on multiple others, I believe that short sellers have trouble doing their own DD and rely too heavily on companies, like Citron Research, that bash the stock with false claims until the price drops. Essentially, they create speculation to drive down the price of the company. The question should really be, what are shorts missing that longs see?
2. Why risk everything on Acthar - is the company that we just merged with going to make up a majority of our total revenues, once complete? Where are the recent clinical trials and when does orphan drug status run out?
Mallinckrodt had revenues of a $2.2 billion in 2013. That is without the recent purchase of Cadence Pharmaceuticals in 2014, which gives Mallinckrodt access to a new drug [Ofirmev] and existing hospital channels that could generate significant annual revenues. Add in their strong generic business along with their diversified product portfolio, and Acthar essentially makes up less than a third of the revenue [assuming $1bln in 2014]. All of my supporting evidence can be seen here.
As stated in the Q&A portion of the filed form 425 [which all investors should read], Acthar holds Orphan Status for the Infantile Spasms indication until October 15, 2017.
3. Who is right about the chemical composition and concentration of Acthar, and will the FDA step in one way or another at any point in time?
The fact that the FDA has done nothing in 4 months of having Citron's revelatory news, and Acthar continues to do well, shows that once again, Citron Research is wrong. For those of you who wish to delve deeper into this issue, a search for Questcor articles on Seeking Alpha or other publications will generate multiple links that you can use to do research.
4. If Acthar was such an amazing drug, with amazing growth potential, why sell the company at $86? The talks to sell likely started, or were continuing, when the stock had breached the $70's into the $80's? In other words, if the growth behind Acthar was what longs made it out to be, QCOR would have easily been a $100+ stock. Why $86?
To me, I believe that was extremely intelligent on Don's part. I believe Quoth didn't do a strong enough job informing his readers in his last article and inadvertently mislead them. Don essentially created a floor price for the company and stopped shorts from manipulating the price any longer. The company is being sold for $30/share in cash and the remainder in Mallinckrodt shares. The rate is 0.897 MNK share for every 1 QCOR share. Therefore the value of the M&A at the time of MNK's close on Friday, April 4th, was $86.10/share.
HOWEVER, if any catalysts come to fruition, as I said before, then the value of the merger increases and Questcor/ Mallinckrodt shareholders acquire more value for their shares. In my opinion, Questcor could trade upwards of $100 if there is positive ALS data released pre-agreement finalization, or if government investigations close within that time. This would then drive up the share price of Mallinckrodt . Once the deal is finalized, QCOR shareholders get cash and stock at a much higher price. Or, if a new development occurs that greatly under/overvalues one company, then shareholders can just vote no to the merger.
5. Why was there no interest from a company like a Pfizer - why Mallinckrodt - a new spin off medical company based in Ireland, presumably for tax reasons. Further, why is the smaller company "acquiring" the larger one and keeping its own name? Isn't this company really going to be "Acthar", with a couple of other supplemental revenue drugs. (i.e., if the eggs still sit mostly in one basket, why back into this transaction and change Questcor's name?)
To speak for Quoth, I would assume that he and I have no idea whether there are other companies looking into purchasing Questcor. Mallinckrodt has been around for 145 years and does very well for itself. They purchased Questcor because they wanted to enhance their specialty drugs portfolio. The "smaller company", which is actually a spin off from Covidien, a $32 billion healthcare products producer, is "buying" Questcor because it would be easier to implement the tax domicile while keeping operations up and running. In the reverse situation, Questcor would have to establish an international headquarters in Ireland and do the entire filing process etc. It is just a smarter use of the resources at hand.
Mallinckrodt plc has a diversified product portfolio through both brand name drugs and generics. Their product line can be seen here.
6. Who assumes the risk for the ongoing Department of Justice, SEC, and U.S. Attorney General's Office investigations into the promotional tactics used to sell Acthar? When are these cases supposed to be resolved? Which of these can potentially cancel this deal before it takes place?
I would assume that the burden falls on Mallinckrodt. However, Questcor generates enough free cash flow that even a $300 million dollar fine [which seems egregious] could easily be absorbed.
7. Why are people like Herb Greenberg from CNBC potentially calling this a case of "Smart Seller, Stupid Buyer?"
This is from Herb Greenberg's article yesterday, and I quote "I've done zero work on Questcor, but over the past few years I've talked to a few very serious short-sellers who have."
Therefore, he has literally admitted to doing no DD himself and listening to other short sellers. Isn't that what I alluded to before? Essentially, that shorts listen to other shorts, which makes them short the stock being discussed - and the vicious cycle continues.
8. Why did that first question from the Piper Jaffrey analyst on the supplemental conference call sound like he was basically beside himself that MNK could acquire QCOR at this stage in the game, even after MNK executives assured him they did their due diligence?
I will answer that question with the words of Mallinckrodt CEO Mark Trudeau from the form 425:
"Obviously with a transaction of this magnitude as you can imagine the degree of due diligence, the depth, the breadth, the thoroughness and the comprehensiveness of this has really been perhaps bigger and broader than anything we've ever done before. And of course we involved not only our own internal due diligence activities and experts but a whole variety of external third-party experts as well.
And we considered all available information both internally generated as well as all externally generated data. And we looked across the spectrum of the Questcor business, from manufacturing to R&D, to commercial, to legal and literally everything in between, and clearly we made the determination to go forward with this transaction. So obviously we feel quite good about Acthar and the Questcor business going forward."
9. Would an M&A situation like this force regulators to move quicker?
I can't answer that question on my own as it's really subjective, unless you had inside information or a list of these kinds of cases - the latter seems to be quite scarce in regards to the amount of controversy surrounding QCOR.
What I will say is that it does seem like Mallinckrodt has done their own research into the cases against Questcor and found little "damning" information. Therefore, whether or not regulators move quicker would be of little importance, as the impending threats seem to have been included in the calculations by Mallinckrodt's management.
Conclusion
I am happy to say that, as of right now, Questcor longs have successfully defeated short-sellers with the help of Mallinckrodt plc . In my opinion, I would still advise those shareholders of Questcor to hold their stock as anything can happen and an increase in Questcor or Mallinckrodt results in an increase in value to you. This may not be the last time I say this, but it is assuredly the most sweet:
Long and strong QCOR. Careful investing to all.
Additional disclosure: The questions alluded to in this article were taken from Quoth the Raven's article, Mallinckrodt Transfers Questcor's Risk Onto Its Shareholders.
Apr. 9, 2014 11:32 AM ET | 19 comments | About: QCOR, Includes: MNK
Disclosure: I am long QCOR.
This article focuses on the M&A of Questcor Pharmaceuticals by Mallinckrodt plc.
This is in direct response to questions posed by another Seeking Alpha author, Quoth the Raven, regarding the M&A.
This article carries itself as a Q&A for existing and potential shareholders of Mallinckrodt and Questcor.
It's unfortunate that some short sellers continue to bash Questcor (QCOR), especially when a "buyout"/merger happens. For those of you that are unaware, Questcor was offered an M&A deal by Mallinckrodt plc (MNK) for $5.6 billion. That offer can be seen here.
Let me just begin by saying that Questcor isn't capped at $86/share - that was a reflection of Mallinckrodt 's closing price when the deal was made. The closing price on Friday, April 4th can be seen here. If Mallinckrodt or Questcor sees a large catalyst come to fruition [positive ALS trial data, closing of government investigations, FTC throws out Retrophin (OTC:RTRX) case, or better than expected earnings growth seen in either MNK or QCOR] then the value of the merger increases based upon the share prices of either company. Today, the value, per Questcor Shareholder, is roughly $87.00 based on Mallinckrodt's stock, yet shorts continue to try and suppress Questcor's share price.
Recently, Quoth the Raven, a Seeking Alpha peer and long-time speculator of Questcor, released an article regarding the new M&A. His article can be seen here. In it, he stated that if he were an unbiased Mallinckrodt shareholder he would have a list of questions to ask the company. Below are the questions he asked and my answers. This is in no way a shot at Quoth the Raven, but more of a Q&A for Mallinckrodt and Questcor shareholders to shed light on the situation.
Q&A Period
1. Why is there such a massive short interest in the company we just merged with? What am I missing that shorts see?
As I've said in my other article, along with comments on multiple others, I believe that short sellers have trouble doing their own DD and rely too heavily on companies, like Citron Research, that bash the stock with false claims until the price drops. Essentially, they create speculation to drive down the price of the company. The question should really be, what are shorts missing that longs see?
2. Why risk everything on Acthar - is the company that we just merged with going to make up a majority of our total revenues, once complete? Where are the recent clinical trials and when does orphan drug status run out?
Mallinckrodt had revenues of a $2.2 billion in 2013. That is without the recent purchase of Cadence Pharmaceuticals in 2014, which gives Mallinckrodt access to a new drug [Ofirmev] and existing hospital channels that could generate significant annual revenues. Add in their strong generic business along with their diversified product portfolio, and Acthar essentially makes up less than a third of the revenue [assuming $1bln in 2014]. All of my supporting evidence can be seen here.
As stated in the Q&A portion of the filed form 425 [which all investors should read], Acthar holds Orphan Status for the Infantile Spasms indication until October 15, 2017.
3. Who is right about the chemical composition and concentration of Acthar, and will the FDA step in one way or another at any point in time?
The fact that the FDA has done nothing in 4 months of having Citron's revelatory news, and Acthar continues to do well, shows that once again, Citron Research is wrong. For those of you who wish to delve deeper into this issue, a search for Questcor articles on Seeking Alpha or other publications will generate multiple links that you can use to do research.
4. If Acthar was such an amazing drug, with amazing growth potential, why sell the company at $86? The talks to sell likely started, or were continuing, when the stock had breached the $70's into the $80's? In other words, if the growth behind Acthar was what longs made it out to be, QCOR would have easily been a $100+ stock. Why $86?
To me, I believe that was extremely intelligent on Don's part. I believe Quoth didn't do a strong enough job informing his readers in his last article and inadvertently mislead them. Don essentially created a floor price for the company and stopped shorts from manipulating the price any longer. The company is being sold for $30/share in cash and the remainder in Mallinckrodt shares. The rate is 0.897 MNK share for every 1 QCOR share. Therefore the value of the M&A at the time of MNK's close on Friday, April 4th, was $86.10/share.
HOWEVER, if any catalysts come to fruition, as I said before, then the value of the merger increases and Questcor/ Mallinckrodt shareholders acquire more value for their shares. In my opinion, Questcor could trade upwards of $100 if there is positive ALS data released pre-agreement finalization, or if government investigations close within that time. This would then drive up the share price of Mallinckrodt . Once the deal is finalized, QCOR shareholders get cash and stock at a much higher price. Or, if a new development occurs that greatly under/overvalues one company, then shareholders can just vote no to the merger.
5. Why was there no interest from a company like a Pfizer - why Mallinckrodt - a new spin off medical company based in Ireland, presumably for tax reasons. Further, why is the smaller company "acquiring" the larger one and keeping its own name? Isn't this company really going to be "Acthar", with a couple of other supplemental revenue drugs. (i.e., if the eggs still sit mostly in one basket, why back into this transaction and change Questcor's name?)
To speak for Quoth, I would assume that he and I have no idea whether there are other companies looking into purchasing Questcor. Mallinckrodt has been around for 145 years and does very well for itself. They purchased Questcor because they wanted to enhance their specialty drugs portfolio. The "smaller company", which is actually a spin off from Covidien, a $32 billion healthcare products producer, is "buying" Questcor because it would be easier to implement the tax domicile while keeping operations up and running. In the reverse situation, Questcor would have to establish an international headquarters in Ireland and do the entire filing process etc. It is just a smarter use of the resources at hand.
Mallinckrodt plc has a diversified product portfolio through both brand name drugs and generics. Their product line can be seen here.
6. Who assumes the risk for the ongoing Department of Justice, SEC, and U.S. Attorney General's Office investigations into the promotional tactics used to sell Acthar? When are these cases supposed to be resolved? Which of these can potentially cancel this deal before it takes place?
I would assume that the burden falls on Mallinckrodt. However, Questcor generates enough free cash flow that even a $300 million dollar fine [which seems egregious] could easily be absorbed.
7. Why are people like Herb Greenberg from CNBC potentially calling this a case of "Smart Seller, Stupid Buyer?"
This is from Herb Greenberg's article yesterday, and I quote "I've done zero work on Questcor, but over the past few years I've talked to a few very serious short-sellers who have."
Therefore, he has literally admitted to doing no DD himself and listening to other short sellers. Isn't that what I alluded to before? Essentially, that shorts listen to other shorts, which makes them short the stock being discussed - and the vicious cycle continues.
8. Why did that first question from the Piper Jaffrey analyst on the supplemental conference call sound like he was basically beside himself that MNK could acquire QCOR at this stage in the game, even after MNK executives assured him they did their due diligence?
I will answer that question with the words of Mallinckrodt CEO Mark Trudeau from the form 425:
"Obviously with a transaction of this magnitude as you can imagine the degree of due diligence, the depth, the breadth, the thoroughness and the comprehensiveness of this has really been perhaps bigger and broader than anything we've ever done before. And of course we involved not only our own internal due diligence activities and experts but a whole variety of external third-party experts as well.
And we considered all available information both internally generated as well as all externally generated data. And we looked across the spectrum of the Questcor business, from manufacturing to R&D, to commercial, to legal and literally everything in between, and clearly we made the determination to go forward with this transaction. So obviously we feel quite good about Acthar and the Questcor business going forward."
9. Would an M&A situation like this force regulators to move quicker?
I can't answer that question on my own as it's really subjective, unless you had inside information or a list of these kinds of cases - the latter seems to be quite scarce in regards to the amount of controversy surrounding QCOR.
What I will say is that it does seem like Mallinckrodt has done their own research into the cases against Questcor and found little "damning" information. Therefore, whether or not regulators move quicker would be of little importance, as the impending threats seem to have been included in the calculations by Mallinckrodt's management.
Conclusion
I am happy to say that, as of right now, Questcor longs have successfully defeated short-sellers with the help of Mallinckrodt plc . In my opinion, I would still advise those shareholders of Questcor to hold their stock as anything can happen and an increase in Questcor or Mallinckrodt results in an increase in value to you. This may not be the last time I say this, but it is assuredly the most sweet:
Long and strong QCOR. Careful investing to all.
Additional disclosure: The questions alluded to in this article were taken from Quoth the Raven's article, Mallinckrodt Transfers Questcor's Risk Onto Its Shareholders.