Mallinckrodt: Is The Generics Sale In Trouble?

Jan. 29, 2018 5:32 PM ETMallinckrodt plc (MNK)47 Comments
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  • MNK has been in the market to sell its Specialty Generics unit since Q1 2017.
  • Specialty Generics include opioid products whose sales and earnings have been hard hit.
  • Market chatter implies MNK received disappointing bids. If the unit is not sold, it could be a drag on Q4 earnings or hurt MNK's credit metrics.
  • MNK remains a sell.

Source: Stock photo

In March 2017, Mallinckrodt (NYSE:MNK) announced it was exploring the sale of its generics business in a deal that could have fetched values as high as $2 billion:

Mallinckrodt Plc (MNK.N) is exploring a sale of its generic drug unit, in a deal that could fetch as much as $2 billion and help pivot the specialty pharmaceutical maker toward higher-margin branded drugs, according to people familiar with the matter.

In November 2017, market chatter suggested Intas Pharmaceuticals was closing in on a $1.5 billion acquisition of the generics unit. Current chatter suggests the deal could be trouble due to lower than expected bids. At the end of the day, the generics business still has not been sold despite having been on the market since Q1 2017. That could be a problem as Q4 earnings results roll around.

The Situation

Mallinckrodt's main drug Acthar showed cracks in Q3. Acthar represents about 39% of total revenue, so when its revenue declined 6% Y/Y investors soured on the stock.

I expect Acthar sales to continue to decline as insurers could question its use beyond indications for infantile spasms and multiple sclerosis. The company's other major problem is its Specialty Generics segment; the segment is about 26% of total sales and fell off 20% Y/Y. Over 80% of the Specialty Generics segment is related to controlled substances and opioids like hydrochodone and oxycodone.

Last year, Mallinckrodt paid a $35 million settlement for failure to report suspicious orders of drugs such as oxycodone. Drug overdose has surpassed car accidents as the leading cause of accidental deaths. Some have linked the rise in drug overdoses to the proliferation of opioid prescriptions. President Trump has labeled the country's opioid addiction a "national crisis" and policymakers are looking to tamp down the rising number of opioid prescriptions. This partially explains the

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Disclosure: I am/we are short MNK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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