Questcor Pharmaceuticals Inc. (Nasdaq: QCOR) Climbs 30% on Mallinckrodt Deal

Questcor Pharmaceuticals Inc. (Nasdaq: QCOR) shares surged some 30% in premarket trading Monday after announcing it has agreed to be acquired by Mallinckrodt PLC (NYSE: MNK) in a $5.6 billion cash and stock deal.

Shortly after the opening bell, shares of Anaheim-based Questcor climbed 25%, or $17, to $85.07, a 52-week high. Shares of Dublin-headquartered Mallinckrodt, which had been up 7.5% in early trading, slipped 2.29%, or $1.54, to $61.30 on extremely heavy volume. Less than 30 minutes into the session, 5.6 million MNK shares changed hands, five times the stock's average daily volume.

Mallinckrodt, which just completed a $1.3 billion acquisition of Cadence Pharmaceuticals last month, said the combined company will reap increased scale, revenue, profitability, and cash flow. The deal nicely plumps up Mallinckrodt's pipeline, which it has been building with specialty drugs focused on the profitable complex and chronic disease segment.

The Irish pharmaceutical giant expects the deal to be "immediately accretive" to FY2014 adjusted earnings and "significantly accretive" to FY2015 adjusted earnings.

"With Questcor, combined with our recently completed acquisition of Cadence Pharmaceuticals, the new Mallinckrodt will have a significant, established presence with prescribers, payers and hospitals," Mallinckrodt Chief Executive Officer Mark Trudeau said in a statement. "We will also have an increasingly diversified specialty pharmaceuticals portfolio, which will include novel therapeutics for pain management, as well as central nervous system, renal, rheumatologic and other autoimmune and inflammatory disorders."

Under terms of the deal, Questcor shareholders will receive $87.10 per share, which includes $30 cash and 0.897 Mallinckrodt shares for each Questcor share owned. Based on QCOR's April 4 closing price, the deal represents a healthy $27 per share premium.

"This transaction will create substantial value for our shareholders, employees, customers and patients," Questcor's Chief Executive Officer Don M. Bailey said in a statement

While there are many reasons for Mallinckrodt to buy Questcor, there is one drug in particular that drove this deal...

Buying Questcor gives Mallinckrodt rights to Acthar, an injectable drug that has U.S. Food and Drug Administration approval for 19 indications.

And it's a major money maker for Questcor.

Indeed, Acthar sales rose 50% to $761.3 million in 2013, up from 49.6% in 2012. It accounts for the bulk of Questcor's revenue. The company bought the drug in 2001 from Aventis (NYSE: SNY).

Used to treat a plethora of conditions, most related to autoimmune and inflammatory conditions, Acthar gained acclaim for treating infantile spasms. The drug is also approved in the U.S. for the treatment of acute multiple sclerosis (MS) in adults, a lucrative market.

MS affects some 2.5 million people worldwide, with around 5,000 new cases developing each year, reports the National Multiple Sclerosis Society.

The MS drug market is expected to increase from $8.9 billion in 2010 to $11.5 billion in 2105 in the United States, Germany, Italy, Spain, UK, and Japan, according to Decision Resources, one of the world's leading advisory firms for pharmaceuticals and healthcare issues.

In addition to Acthar, Questcor owns Synacthen, used to treat inflamed bowels and colons. It purchased the drug rights from Novartis AG (NYSE: NVS) in June 2013.

While the deal looks like a good fit for Mallinckrodt, it looks like an even better move for Questcor - and QCOR shareholders.

Shares of Questcor sank to under $20 a share in September 2012, after the company disclosed it was being investigated by the U.S. Attorney's Offices in Pennsylvania and New York for its promotional practices. Additionally, the U.S. Securities and Exchange Commission launched its own investigation into Questcor's marketing. Plus, Aetna decided to limit reimbursements of Acthar because they believed it was priced exorbitantly high.

The investigation, according to Questcor's 10-K, is ongoing. Nonetheless, QCOR shares are up 158% over the last 12 months.

Critics maintain Questcor became an overnight success by raising the price of Acthar from $50 per vial to $28,000 per vial at that time. The consensus feeling was Questcor was tremendously profiting from a drug (originally approved in the 1950s) that was unproven.

But Mallinckrodt sees potential. Started in St. Louis as a chemical company, Mallinckrodt has been tossed around several times. First sold to Avon Products Inc. (NYSE: AVP) in 1982, Tyco International Ltd. (NYSE: TYC) bought the company in 2000. Tyco Healthcare was eventually spun off into Covidien PLC (NYSE: COV) in 2007, and Covidien then spun off Mallinckrodt in 2011.

For full fiscal 2013, Questcor posted adjusted profit of $337 million, up 61% year over year.

Meanwhile, Mallinckrodt, with some 5,500 employees peppered in 70 countries, posted revenue of $2.2 billion in 2013.

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Related Articles:

• New York Times:
  Mallinckrodt to Buy Questcor for $5.6 Billion
• The Wall Street Journal:
  Mallinckrodt to Buy Questcor Pharmaceuticals for $5.6 Billion
• Reuters:
  Mallinckrodt to Buy Questcor for Its Lucrative MS Drug