Mallinckrodt Is Like Steak - Very Tasty

| About: Mallinckrodt PLC (MNK)


Two significant events just occurred for Mallinckrodt this week.

A key patent challenge was settled, removing a stock overhang.

A strong quarter “beat” was reported on Thursday.

Wall Street stock targets are raised, possibly due to its forward P/E multiple which is very attractive.

Mallinckrodt (NYSE:MNK) is a global specialty pharmaceuticals company with $2.3 billion in sales and headquartered in Dublin, Ireland. Its goal is to deliver sustainable growth as a developer and distributor of both branded and specialty generic pharmaceutical products, as well as medical imaging agents.

The company operates through two segments:

· Specialty Pharmaceuticals

· Global Medical Imaging

The Steak

On Thursday, August 7, 2014 Mallinckrodt in its quarterly conference call, gave guidance in line with my expectations of "consistent and strong growth ahead." The second quarter's results (a "beat") were backed up by its financials that came in better than expected with 2Q revenue of $653M; well ahead of analysts' consensus. Gross margins came in ahead of expectations driven mostly by strength in the company's Specialty Pharmaceuticals Segment where net sales were $329.4M, compared with $253.7M last year. SG&A increased from $221.3 million, compared with $166.9 million in the same period in 2013 following the acquisition of Cadence (CADX), an acquisition that Mallinckrodt closed in March 2014. Off slightly, net sales in the company's Global Medical Imaging segment were $227.1 million, versus $247.9 million for the same period of the year.

Investors should take comfort in knowing that the leadership here is strong, lead by Mark Trudeau, MNK CEO with over 25+ years of experience in the pharmaceutical industry. Some investors may not be aware, but Trudeau was formerly president and CEO, Bayer HealthCare Pharmaceuticals Inc., Bayer HealthCare LLC USA a $3B+ business.

The business is growing through acquisitions and staying diversified in the process. MNK has made an offer for Questcor (QCOR) which both sets of shareholders are likely to approve. QCOR has as its primary drug, Acthar. Acthar has, unfairly in my mind, been the subject of many negative attacks by short sellers in an attempt to manipulate and profit from QCOR's resulting stock volatility. The short sellers have successfully planted the idea in the minds of many investors that the FDA is reviewing the efficacy and regulatory compliance of Acthar. I am confident that such accusations of this 60 year old drug are meritless and are nothing more than mere attempts to influence QCOR's stock price for profit. I believe that if MNK's core business continues to flourish and the Questcor transaction closes in a timely fashion as expected, and particularly if Acthar can be freed of the shadow placed on it by the persistent short sellers, then MNK stock price will rise sharply following the QCOR deal. This would most certainly be the case if the FDA gives any public indication of its support for Achtar or even just an indication of no intent to take any action with regard to reviewing Acthar.

Guidance Was Raised

MNK raised its F2014 guidance to account for the inclusion of the CADX business and trends in the quarter. According to the company it now expects non-GAAP EPS of $4.00-$4.30 vs. previously expected $3.30 - $3.60, with sales of $2.35 - $2.45B.

Next investors will be focused on the $5.6 B pending deal for Questcor, which was announced in early April, 2014. This deal is likely to close shortly after the shareholder votes on August 14, 2014. QCOR's earnings will be highly accretive for MNK and should cause MNK to generate a cash flow to sales ratio that will be the envy of many public companies. I estimate the combined entity will trade at a price earnings multiple of less than 10 which compares favorably to the average S&P multiple of about 17.

More Steak - Patent News and Wall Street Targets Raised

A key patent challenge settlement of Ofirmev (acetaminophen) with Fresenius Kabi USA was announced this week and removes a key near-term overhang on the stock.

Wall Street Targets Raised

Deutsche Bank raises Mallinckrodt price target to $102
Following the news this week, Deutsche Bank reported that it likes the good news that was announced, namely;

1) Improved Earnings

2) Removal of the overhang from the patent challenge of Ofirmev

Jefferies raises Mallinckrodt price target to $95

Jefferies raised its price target for Mallinckrodt shares to $95 up from $85 and also added the stock to its Franchise Picks list. Estimates were raised to reflect the higher generic pricing and pending close of the Questcor acquisition.

Bank of America Merrill Lynch raises its PT to $97 on July 29, 2014 on the thesis that:

1) MNK's Irish domicile and strength in its specialty pharma business is active and developing

2) Rolling forward discount and associated cash build-up

3) The Ofirmev effect is seen as a positive

4) Good margin expansion potential in the coming years from the deals with Cadence and Questcor

Large Insider Buys

John Paulson who currently holds over 11% of QCOR shares appears to have an appetite for MNK shares as reported here. Paulson has increased his investment by more than $19.0 million by acquiring 275,000 shares at an average cost of 200,000 shares at $69.65 and 75,000 shares at $69.4541.


Mallinckrodt's future looks very bright as a long term buy and hold for suitable investors. As reported, MNK is experiencing strong performance coming from its generics sales and pricing strategies. This activity drove its non-GAAP EPS of $1.20. The current business model with its acquisition of Cadence and pending acquisition of Questcor is expected to continue to drive strong top and bottom-line growth over the next several years. MNK is making headway on the M&A circuit as well. Following the close of Cadence and soon to be closed acquisition of QCOR, It may be looking for additional companies to acquire. That is, if it doesn't get acquired first! Mallinckrodt may very well be setting up to be a tasty tax inversion play for a much larger pharma whale. In any event top funds and hedge fund managers that I have been in contact with are taking notice. With a forward looking P/E of only 60% of that of the S&P, I can understand why.

Disclosure: The author is long MNK, QCOR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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