Why Questcor Buyout Will Not Deter Short Sellers

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The $5.6 billion acquisition of Questcor Pharmaceuticals Inc. (NASDAQ: QCOR) by specialty drugmaker Mallinckrodt PLC (NYSE: MNK) started the week off with a big bang. Shares of Questcor originally leaped over the 27% premium Mallinckrodt is paying, but the stock has pulled back some.

Questcor is something of a one-trick pony. But it is a big trick. The company’s H.P. Acthar injectable gel has been approved as a treatment for 19 different conditions, many of which are associated with autoimmune and inflammatory conditions. The drug generated sales of around $760 million in 2013, up nearly 50% from the prior year. Questcor’s total revenues for 2013 came to $799 million. Perhaps a one-trick pony, but the trick continues to get bigger.

Before the acquisition was announced, Questor’s market value was around $4.4 billion, so Questcor shareholders got a good deal. But what did Mallinckrodt get?

Of nearly 58 million Questcor shares floated, some 38% were held short as of March 14. In April last year, more than 27 million shares were short. A year ago the stock traded at around $28 a share, and over the 12 months the share price more than doubled to close Friday at $67.87. Doesn’t look particularly like a good short play, but the price has bounced around and at least some of the stock price gains have got to be attributable to short covering.

Questcor is also the target of a U.S. Department of Justice inquiry into its promotional practices, which poses a threat of fines and other sanctions. Mallinckrodt has now inherited that.

Nearly 14% of Mallinckrodt’s own float was held short prior to the announcement, and its days to cover are just over seven compared with Questcor’s days to cover of just under seven. Mallinckrodt’s float is about 55 million shares, and it trades about half as many shares a day as does Questcor. It is nearly a given that the shorts will be taking a run at Mallinckrodt.

Shares of Questcor traded up about 18% in the late morning Monday to $79.95, after posting a new 52-week high of $89.30 earlier in the morning. The stock’s 52-week low is $$26.80.

Mallinckrodt shares traded  down about 2.7%, at $60.94 in a 52-week range of $41.00 to $72.93.