An investor website that has been critical of Anaheim-based Questcor Pharmaceuticals Inc. short-sold shares of the drug maker before publishing a report that appears to have played a key role in driving its stock price down.
Questcor saw its shares fall 15% earlier this month after TheStreetSweeper.org announced plans to make public an investigative report it billed as being critical of the company’s marketing practices for its only drug.
The publicity and subsequent report called Questcor’s “explosive prescription growth” for its sole drug—H.P. Acthar Gel—“potentially unsustainable.”
Acthar is used to treat multiple sclerosis flare-ups, a kidney disorder nephrotic syndrome and a rare form of epilepsy called infantile spasms.
Streetsweeper.org recently responded to queries from the Business Journal with an acknowledgment that it engaged in short selling, the tactic of selling borrowed stock with the hopes of making a profit if the share price later declines.
Streetsweeper.org Editor Melissa Davis said the website sold 80,599 shares of Questcor at an average price of $41.46 a share prior to publicizing its report on the company. The website disclosed that it had sold the shares “in anticipation of a future decline in the stock price.”
Davis, in an e-mail response to questions from the Business Journal, said StreetSweeper decided to “capitalize on its own research by shorting the risky stocks that it exposed.”
The website’s first publicity push for its reports on Questcor went to members in a Jan. 11 e-mail announcing that “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,” according to a story publicizing the coverage on StreetInsider.com, another investor website.
Questcor’s shares tumbled from $41.72 to a low of $34.80 on the same day. The drop trimmed about $430 million from Questcor’s market value.
Chief Executive Don Bailey and other Questcor executives met with StreetSweeper on Jan. 16, when the stock market was closed for the Martin Luther King Jr. holiday. The company issued a press release the same day, making public its answers to 22 questions posed by StreetSweeper, including Acthar’s cost ($27,000 a vial) and whether the company provides financial incentives to doctors to prescribe Acthar (it doesn’t, according to the company).
Bailey explained why Questcor chose to respond to StreetSweeper in an email interview.
“Concerned about the website’s tactics, we decided that responding to its questions and publicly disclosing the contents of the questions and answers was in the best interest of the company’s shareholders,” Bailey said.
Questcor’s goal “was to be as clear and transparent as possible in a manner that would make it difficult for anyone to distort our position through partial or non-disclosure of our responses,” he said.
Streetsweeper.org came out with the actual story about Questcor on Jan. 24. The company’s shares had risen slightly in the prior week or so, and fell back a bit after the report appeared.
The publicity battle isn’t over. Streetsweeper published a follow-up on Jan. 27, as this issue of the Business Journal went to press.
• Headquarters: Anaheim
• Founded: 1990
• Business: drug maker
• Ticker symbol: QCOR (Nasdaq)
• Market value: about $2.25 billion
• Notable: stock hit by critical reports by website with short position
The second article was expected to focus on Questcor’s business practices and take a “hard look” at Questcor executives “who have struck it rich as a result of the company’s controversial growth strategy,” according to Streetsweeper.org.
Questcor’s earlier response appears to have helped blunt the effects of the second story. It’s shares rose about 5% in the hours after the article appeared online.
An aggressive approach to dealing with a report such as StreetSweeper’s must be well-thought out, said Joan Gladstone, president of Laguna Beach-based crisis communication firm Gladstone International, who is not working on behalf of Questcor.
“I think a mistake that some companies can make (is) ‘oh my gosh, I’m under attack by someone—I’m going to attack them back through social media,” Gladstone said. “That’s a lose-lose proposition.”
There’s still room to engage criticism.
“Companies, I believe, do have an obligation and a responsibility to engage more actively because this is something that impacts their very life blood, their future (and) not just stay on the sidelines and watch,” Gladstone said.
Exception
Questcor said it made an exception in meeting with StreetSweeper and “does not intend to make a regular practice of engaging with short sellers.”
“In light of StreetSweeper’s unclear background, motives and tactics, Questcor does not intend to engage in an ongoing dialog with StreetSweeper and makes no commitment to respond to any further questions,” said Michael Mulroy, Questcor’s chief compliance officer.
After Questcor met with StreetSweeper, analyst Biren Amin of Stamford, Conn.-based Jefferies & Co. Inc. said in a research note that the site’s report “may possess very little nuggets for (Questcor) bears and this latest controversy will wane soon.”
“It seems StreetSweeper preliminary attacks against (Questcor) last Wednesday may have very little substance given the line of questioning that occurred” between the drug maker and the website, Amin said.
StreetSweeper’s questions “appear generated from an entity that has not conducted an extensive investigation nor is familiar with Questcor’s business model or regulations that guide the pharmaceutical industry,” Amin said.
StreetSweeper has been critical of other Orange County companies in the past, including Local.com Corp., an Irvine operator of search engines that direct users to local businesses. Local.com’s stock fell in August 2010 after StreetSweeper published a story raising questions about the company’s current and past executives and its way of doing business.
Local.com rebutted the article, saying the assertions were “loose implications” designed to benefit short sellers.
