Mallinckrodt: Valeant Junior?

| About: Mallinckrodt PLC (MNK)
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Summary

Mallinckrodt has a large patient assistance program for Acthar not specifically mentioned in its 10-K.

The Acthar Support and Assistance Program deals with independent charitable organizations and a specialty pharmacy, both with no specific disclosure in Mallinckrodt's 10-K.

The top Acthar prescriber in 2011 recently plead guilty to Medicare fraud.

According to government website openpaymentsdata, three top Acthar prescribers have received payments of over $100,000 from Mallinckrodt and Questcor.

Mallinckrodt has made numerous large acquisitions and price increases.

Three important parts of Mallinckrodt's (NYSE:MNK) story have gone unnoticed by Mr. Market. First, the company is a serial acquirer and often hikes drug prices. Second, Mallinckrodt has a large patient assistance program (Acthar Support and Access Program) not specifically disclosed in its 10-K. Third, Mallinckrodt and Questcor paid some top Acthar prescribers $100,000+ in speaking/consulting fees and two top Acthar prescribers have been associated with Medicare fraud.

Serial Acquirer and Price Hikes

Mallinckrodt has made numerous acquisitions since going public in 2013:

(Source: Crunchbase)

These acquisitions are often paired with price increases. Finding drug price changes is difficult, but a simple Google search shows that Mallinckrodt has indeed raised the prices on some of its drugs:

The medication was introduced at $12.90 a vial. Cadence had increased the price to $17.70 a vial by the time it was acquired by Mallinckrodt. After the deal, Mallinckrodt raised it to $42.48 a vial, on an average wholesale price basis. Bloomberg October 2015

2,000% price hike on Synacthen Depot, a drug that treats a potentially dangerous form of infant epilepsy. Mallinckrodt raised the price to $680 per vial from $33.05 per vial earlier this year, Alberta health officials told CBC. FiercePharma November 2015

It is unclear where the Senate may set its sights next. But fresh Medicare data points to a candidate right in Ms. McCaskill's backyard: St. Louis-based Mallinckrodt PLC. It makes H.P. Acthar Gel, a 1950s vintage, off-patent drug whose cost has rocketed from $40 a vial in 2001 to $38,000 today. New York Times December 2016

The New York Times quote references a recent report from the Senate Committee on Aging titled, "Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health System". The report does not mention Mallinckrodt specifically, but some of Mallinckrodt's actions are similar to those of Valeant (NYSE:VRX):

Bloomberg October 2015 Story on Mallinckrodt Senate Aging Committee December 2016 Report
Within months, [Mallinckrodt] more than doubled the price of the drug, called Ofirmev. Revenue from the medication shot up, too, and hospitals searched for ways to absorb the costs - large hospital systems like Johns Hopkins Medicine and New York University Langone Medical Center say their expenses surged $1 million a year or more. It's the same story that's been repeated throughout the healthcare industry, as pharmaceutical companies acquire medications and hike their prices to reflect what they say is the fair value of the drugs. That industry practice has come under fire in recent weeks from lawmakers in Washington. In this case, hospitals were able to fight back by seeking other options, cutting into Mallinckrodt's projected sales growth. Hospitals interviewed by the Committee have also been forced to make extensive changes, while simultaneously facing significant uncertainties and suffering enormous budget repercussions from the price spikes. Nitropress and Isuprel, two Valeant drugs, contributed greatly to the overall rising cost of drugs for hospitals. The Johns Hopkins Health System reported it suffered a $1 million hit in 2015 from price increases for Nitropress and Isuprel. In an effort to reduce costs, these hospitals have taken aggressive steps to reduce their usage of Nitropress and Isuprel: cutting back or eliminating the use of Isuprel on hospital emergency "crash carts"; substituting other drugs where possible; actively seeking alternative approaches; aggressively monitoring usage; and reducing inventories.

If you are still not convinced just look at the 10-Ks. The words "acquisition" and "acquire" appear 371 times in Mallinckrodt's most recent 10-K, while "volume" is used a total of 16 times. Likewise, the words "acquisition" and "acquire" appear 906 times in Valeant's most recent 10-K, while "volume" is used a total of 39 times.

How has Mallinckrodt avoided the scrutiny of lawmakers? Maybe it's because Mallinckrodt's U.S. headquarters are in the home district of Senator Claire McCaskill (ranking member of the Senate Committee on Aging). Or maybe it's because Mallinckrodt has been aggressively subsidizing co-pays for its largest and most expensive drug.

Acthar Support and Access Program (A.S.A.P.)

What is the Acthar Support and Access Program? Search Mallinckrodt's most recent 10-K and you won't find anything. I have not seen the Acthar Support and Access Program mentioned in any Mallinckrodt SEC filing, analyst call, or investor presentation. However, it seems that the Acthar Support and Access Program plays a large role in patient procurement of Acthar. Below are two screenshots from websites for the program:

(Source: Acthar Website - Highlights added by author)

(Source: Acthar Website)

It is difficult to judge the size of the Acthar Support and Access Program because the first website only says "Mallinckrodt has donated more than $774 million in Acthar at no cost to patients" and the footnote discloses that the "Dollar figure refers to commercial value of free drug based on data through June 30, 2015." The footnote does not disclose when this program began. However, a more updated website shows that $1.04 billion in Acthar has been provided based on data through March 31, 2016.

(Source: Acthar Website)

From these two differing dates and amounts, we know that Mallinckrodt provided $266 million in Acthar at no cost to patients between June 30, 2015, and March 31, 2016. The available evidence makes it difficult to determine exactly what this program does, but based on the screenshots, I believe part of the program pays Acthar co-pays for patients with private insurance.

What percent of patients with private insurance pay any co-pay for Acthar?

Mallinckrodt discloses net sales for Acthar in its SEC filings and Citron excellently reported that roughly 61% of Acthar sales are to Medicare and Medicaid. This means about 39% of Acthar sales are for private insurance (and therefore eligible for co-pay assistance). Here's the math:

Acthar Data

Period ended September 25, 2015

Period ended December 25, 2015

Period ended March 25, 2016

Total for nine-month period June 25, 2015, to March 25, 2016

Net Acthar Sales

$274.2 million

$286.7 million

$248.4 million

$809.3 million

Portion Private Insurance

0.39

0.39

0.39

0.39

Net Acthar Sales to Private Insurance

$106.938 million

$111.813 million

$96.876 million

$315.627 million

Of the $315.6 million in eligible Acthar sales, we know that Mallinckrodt provided about $266 million in Acthar at no cost to the patient. From this, we can conclude about 84% of Acthar patients, not on Medicare or Medicaid pay absolutely no co-pay for Acthar (266/315.6 = 84.3%). The practice of drug companies subsidizing the co-pays for expensive drugs is commonplace, but the lack of disclosure seems odd.

Mallinckrodt is a $5 billion company, yet it doesn't specifically mention its $1 billion+ patient assistance program (Acthar Support and Access Program) once in its 141-page 10-K. On the other hand, Questcor (the company that made Acthar until acquired by Mallinckrodt in 2014) clearly disclosed the Acthar Support and Access Program in its 10-K:

(Source: Page 6 of QCOR 10-K filed 2/26/14)

Going back to the first screenshot for the Acthar Support and Assistance Program, it is important to pay attention to the footnotes:

(Source: Acthar Website)

The second highlighted footnote mentions "independent charitable organizations." Why doesn't Mallinckrodt directly provide the services? What is Mallinckrodt's relationship with the independent charitable organizations that provide assistance for its largest drug? Is Mallinckrodt receiving any tax deductions? (According to page 47 of its 10-K, "[Mallinckrodt's] effective tax rate was negative 109.5% and negative 120.5% for fiscal 2016 and 2015, respectively.") Why is part of the program administered via a third-party organization? Again, the available evidence makes it difficult to determine what exactly this program does, so I e-mailed Mallinckrodt about the footnotes. I have not received a response.

To add more confusion to the Acthar Support and Access Program, one patient brochure says the Acthar Support and Access Program partners with a specialty pharmacy to help patients get Acthar:

(Source: Patient Brochure)

However, a search of Mallinckrodt's 10-K for "specialty pharmacy" yields no results. Right now, there are many questions and few answers.

One question that Mallinckrodt has not answered is what percentage of its net income comes from Acthar. If Acthar profits grew in line with sales, then we can figure out how much of Mallinckrodt's profits come from Acthar (by using Questcor's data and Mallinckrodt's Acthar sales disclosure).

Figures in $ millions

QCOR 2013

MNK Acthar 2016

% Growth

Net Sales

$799 million

$1.150 billion

43.9%

Net income

$293 million

$422 million E

43.9% E

Mallinckrodt's 2016 net income from continuing operations was $489 million. Assuming our estimate is correct, ~86% of Mallinckrodt's net income from continuing operations was from Acthar (422/489).

This is a crude estimate but should work because substantially all of Questcor's net sales and profits were derived from Acthar. This does not take into account any potential synergies, tax advantages, or margin increases of Acthar under Mallinckrodt. (Please note that Mallinckrodt's total net income in 2016 was $644 million. This figure is higher due to discontinued operations. Using this figure as our baseline, Acthar accounts for ~66% of net income).

Paying Doctors

ProPublica published the list of the top 9 Acthar prescribers through Medicare for the year 2014:

(Source: ProPublica)

Using the government website openpaymentsdata.cms.gov, we can track how much these doctors have received from pharmaceutical companies. Three of the top 9 prescribers have received over $100,000 from Questcor and Mallinckrodt:

Prescriber

Amount received from QCOR 2013

QCOR 2014

MNK 2015

Total

Sudhakar Tumuluri

$57,312

$84,519

$27,318

$169,149

Vijay Singh

$15,403

$98,434

$48,999

$162,836

William Wilson

$66,416

$77,597

$30,742

$174,755

(Source: OpenPaymentsData)

The compensation table above includes speaking fees, consulting fees, travel and lodging reimbursements, and food and beverage values, but does not include any payment for research. Below is one page of the compensation data for Dr. Vijay Singh in the year 2014, when he was the fourth largest prescriber of Acthar through Medicare:

(Source: OpenPaymentsData)

Some doctors also may be understating the value of Mallinckrodt's gifts… unless you can think of a 2-cent food:

(Source: OpenPaymentsData)

The open payments website only shows data going back to 2013, but some actions before 2013 are certainly troubling. For example, Dr. Sean Orr of Florida, a "top prescriber of Acthar", "had his license suspended for a year for allegedly having sex with one patient, and he agreed to pay $150,000 to the Justice Department to settle a whistle-blower fraud suit over bogus bills without admitting wrongdoing."

The government's complaint against Dr. Sean Orr doesn't mention Questcor or Mallinckrodt specifically, but does mention the potential conflict of interest arising from pharma payments:

(Source: Law360 - page 12 of complaint)

Dr. Orr is not an isolated incident. According to ProPublica,"Gavin Awerbuch [was] the most frequent prescriber of the [Acthar] in 2011." In November of 2016, Dr. Gavin Awerbuch "plead guilty to health care fraud and distribution of controlled substances."

On the opposite end of the spectrum, Doctor Mark Metersky (winner of the Alfred Soffer Research Award) was troubled to find Acthar being marketed aggressively in the medical journal CHEST. He wrote a letter to the editor questioning the lack of clinical data supporting Acthar's use for certain medical indications. Here is part of what he said:

Because there may be unpublished or difficult-to-discover data regarding corticotropin, I am hoping that Mallinckrodt can direct me and the readers of CHEST to any reliable data that show that injectable corticotropin is more efficacious than oral corticosteroids in treating symptomatic sarcoidosis. If no such efficacy data exist, I see no justification for prescribing Acthar. The United States' increasing medical costs are unsustainable, and this type of sales strategy by Mallinckrodt and other pharmaceutical companies only exacerbates the problem.

Dr. Metersky is not alone. Insurance companies have also balked at Acthar's efficacy and price. SA author Quoth the Raven pointed out that at a 2014 conference Dr. Ed Pazella, a director at Aetna, was asked about Acthar. He said,

A combination of aggressive marketing and aggressive price increases finally caused [Acthar] to become a line item that a finance guy looked at and said: 'What the hell are we paying for this? Why? What is it?' And that's when we started looking at what's our policy around this stuff … We see a gradual decline, and hopefully almost no use outside of infantile spasms within the next couple of years. This is one of those things that's taking a while.

Conclusion

Lawmakers may want to take a close look at Mallinckrodt. Mallinckrodt has made numerous acquisitions and large price hikes. Mallinckrodt has a large patient assistance program dealing with an independent charitable organization and a specialty pharmacy--none of which is specifically disclosed in its 10-K. Mallinckrodt and Questcor have paid top prescribers of Acthar $100,000+ and the top prescriber of Acthar in 2011 recently plead guilty to Medicare fraud.

In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives. Warren Buffett

Please reach out if you have information on Mallinckrodt. I can be reached on Seeking Alpha or at agloecapital@gmail.com.

Disclosure: I am/we are short MNK, VIA PUT OPTIONS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.