Jim Cramer: In the Abstract, the Shorts May Be Right

NEW YORK (Real Money) -- A couple of years ago, I did a piece on Questcor Pharma (QCOR) for Mad Money, saying that it had been one of the greatest stocks since the show had started, and that it was the only real penny stock that had taken off to levels I had never thought possible. It was a 50 cent stock that had gone to the $50s. Not only that, but I said that the company's main drug, Acthar -- some would say its only drug -- seemed to be capable of aiding people with many different illnesses. I said Acthar could treat 19 indications in all, including some difficult rheumatology indications.

No sooner did I write this up than I was bombarded by Questcor shorts who told me I didn't know what I was talking about. Really powerful short-sellers told me the whole company was a fraud. A research outfit, Citron, had said Questcor wouldn't be reimbursed for more than minimal use for Acthar. The world caved in, and I was mortified that I thought as much of Acthar as I did.

Then, when Questcor announced that it was being investigated by the feds for improper marketing and the stock dropped to $18, I just was blown away about how I could be so wrong about one drug.

Now, to listen to those same shorts, you'd hear someone else has been fooled by Questcor. This time it's Mallinckrodt (MNK), the terrific spinoff of Covidien (COV) that has a growing generic franchise and is a maker of pretty much every major controlled substance out there, from morphine to methadone to oxycodone.

There's one difference. It is a terminal fooling if it is a fooling at all. Mark Trudeau, the CEO of Mallinckrodt, whose shares are up 16% for the year, came on Mad Money last night and said he had looked into every issue that the bears had pulled up and had found them all wanting. He said he had done due diligence of the lawsuit brought by the U.S. Attorney for the Southern District of New York, and that he was confident it wouldn't derail the deal. He was not only confident about the efficacy of Acthar for a host of indications for which people have little hope, but he harbors no doubts about the reimbursements.

He said that, even though the deal is wildly accretive because of Mallinckrodt's low-tax domicile in Ireland, he would go through with the merger even if Mallinckrodt were a regular taxpayer. In other words, the tax advantages of being able to shelter Questcor's earnings within a low-tax regime, which create more profit, were a motivating factor. Yet, for Trudeau, the deal would be worth it regardless because Acthar is such an important gel compound and has so many uses that have yet to be discovered.

Now, maybe he is just whistling past the graveyard and has no idea what he just stepped into. Maybe, because his company has a presence in anti-inflammatory treatments, he simply wanted to expand the repertoire. But here's what you need to know about this deal: It's done, and Trudeau said he wasn't worried about it breaking up over any of these issues.

In other words, the shorts may be right in the abstract, but in the real world they are wrong. To listen to some of the shorts today is to hear a belief that both worlds are in play here. I think that only the real one is. You've shorted it? You can stay short. But you'd better start learning the Mallinckrodt. It's what you will ultimately be short in the end.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.

Editor's Note: This article was originally published at 6:46 a.m. EST on Real Money on April 8.

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