This is the story of a company and its fortunate chief executive.
Questcor Pharmaceuticals is a biotechnology company with a $4
billion market capitalization. Good things keep happening to Questcor in the
middle of the month. Here’s what’s notable: The middle of the month just
happens to be the time that the company’s chief executive, Don M. Bailey, sells
stock through his regular selling plan.
To understand what seems to be going on here, a little context is in
order. Many company executives adopt trading plans through which they arrange
to sell stock on specific dates or at specific prices. The underlying idea of
these plans is that because the selling is automatic, executives avoid any
appearance that they are trading on inside information.
I contacted the company to ask about Mr. Bailey’s sales and the
timing of its announcements. A company spokeswoman confirmed by email that he
had a regular selling plan. She wrote that the chief executive’s plan was
adopted in 2011 “as part of a normal financial diversification strategy.” His
plan calls for sales at monthly intervals and has been renewed each year since.
“There have been no changes to any plans since their adoption, and
there have been no sales by Don outside of the plan since its adoption,” she
wrote. The company did not respond further to an email and a call, did not
respond to my request to interview Mr. Bailey or any other executive, and did
not comment on the timing of its public disclosures.
Questcor’s rise has been remarkable. The company sells an
anti-inflammatory drug called Acthar, developed in the early 1950s and
extracted from pig pituitary glands. Questcor bought the drug for a mere
$100,000 in 2001 and then increases the selling price by orders of magnitude.
The price of a five-milliliter vial jumped to $28,000 from $50.
Today, a full course of the drug can cost more than $100,000. The
company has acknowledged its business and marketing practices have fallen under
federal scrutiny. The drug was being used to treat a rare condition that
afflicts hundreds of infants a year, but Questcor vastly increased sales by
marketing it to multiple sclerosis patients and for adults suffering from
nephrotic syndrome and rheumatologic conditions.
The company’s explosive growth is “a story for these troubled times
in American health care — a tale of aggressive marketing, questionable
medicine and, not least, out-of-control costs,” as Andrew Pollack of The New
York Times wrote in a December 2012 article.
The controversies have drawn short-sellers and skeptical media attention. But so far, the
critics have been wrong at least on the company’s stock, which, while slightly
off its 52-week high, still trades at $69.28 a share.
By my count, positive news has struck Questcor mid-month at
least six times over the last ten months. Clearly, the timing of the news
announcements might be coincidental and these weren’t the only pieces of
good news for the company in that time. Securities law requires companies to
put out news, good or bad, as soon as they know it. But the timing on some
of the announcements raises questions.
Here are the news items, in order of how fortunate their timing was
for Mr. Bailey’s stock sales:
OCT. 10, 2013 Questcor disclosed its cash balances in a
securities filing. Doing a bit of math, as they tend to do, Wall Street
analysts and investors figured out that this meant the third quarter was
stronger than expected and would top analyst estimates. “We now expect a
sizable 3Q beat and would be buying the stock ahead of earnings,” analysts at
Oppenheimer wrote. On Oct. 9, the stock closed at $54.60 a share. The next day,
it shot up to $59.62 a share and kept rising.
Four days later, Mr. Bailey sold 40,000 shares, most at $62 and more than
$63 a share, highs for that month to that point.
At the end of the month, the company revealed in a post-earnings conference call
that the United States attorney in Manhattan and the Securities and Exchange
Commission had joined an investigation by the United States attorney in
Philadelphia into the company’s marketing and business practices. The stock
tumbled 14 percent, to $60.01 from $69.73.
DEC. 11, 2013 Questcor formed some new board committees, and
issued a filing with the S.E.C. that disclosed this development. The company
said one of panels was a “strategic advisory committee” that would address a
“persistent and significant discount in the company’s valuation relative to its
peer companies.” The words “strategic advisory” are a dog whistle for Wall
Street, signaling that the company is exploring doing a transaction, such as
selling itself, to increase the stock. No dummies, investors reacted positively
and the stock moved higher.
Two days later, Mr. Bailey sold 40,000 shares, mostly at $53.30 a share.
The stock had been falling that month, and was at $51.69 on Dec 9.
MAY 14, 2013 Questcor filed an 8K that included a
presentation the company delivered at a Bank of America conference that same
day. The stock moved up to the highs for the month, to close at $42.40 from
$37.50 the day before. Mr. Bailey sold 20,000 shares at $36.70 on May 13. The
next day, he sold 160,000, all at prices at least $40.40 a share. Just a week
earlier, the stock had closed at $33.58. The total 180,000 shares
sold was far more than his usual sale of 40,000 shares a month.
JAN. 13, 2014 The company filed its
presentation to be made at the JPMorgan Chase conference, with positive
earnings news and a reiteration of its exploration of stock-goosing
transactions. In contrast with its presentation for the Bank of America
conference, the company filed three days before the event. That very day, Mr.
Bailey sold 40,000 shares at more than $53 a share.
A few days before the company made its
filing, the stock had traded at its low for the month, closing at $50.19 on
Jan. 9.
NOV. 12, 2013 The company announced
that G. Kelly Martin, the chief executive of the Irish drugmaker Elan, would
join the board. The stock moved higher. On Nov. 13, the stock traded right around
the highs for the month. And that day, Mr. Bailey sold his regular 40,000 shares.
JUNE 11, 2013 The company announced
it was purchasing Synacthen from Novartis. This was good news, because
Synacthen is similar to Questcor’s drug. The company was taking out a
competitor. The stock rose 15 percent that day. On June 13, Mr. Bailey sold his 40,000 shares, near recent highs.
Questcor may just be an extreme example of what’s going on regularly
in corporate America. Questcor has a big stock buyback program, as insiders
regularly dump stock. In these heady days of market highs, most big companies
are racing to buy back their stock while insiders are unloading. The companies
of the Standard & Poor’s 500-stock index bought $459 billion worth of stock
last year, according to Thomson Reuters, which also calculated that those
corporations’ insiders sold $32.7 billion in the 12 months to mid-February.
As The Wall Street Journal explained in a 2012 series of articles, selling plans are
hard for investors, regulators and the public to track. Companies and
executives don’t have to disclose their arrangements to any federal agency. The
companies can alter and change them without notifying the public.
Oh, and the executives can still trade in the company’s stock at
other times not mentioned in the selling plans.
The Questcor situation adds another potential vulnerability to the
list: Put out good news and then sell as the world buys.
