Mallinckrodt: Can The Upside Trump This Pertinent Risk?
- We recently featured Mallinckrodt in Alpha Intelligence with a buy recommendation.
- Multiple catalysts suggested that the stock is a stellar buy.
- Nevertheless, a key signal in the balance sheet (as keenly spotted by President of Business Development Abelardo Fraga) prompted us to stay neutral on Mallinckrodt.
"Never promote someone who hasn't made some bad mistakes, because if you do, you are promoting someone who has never done anything." - The Father of Growth Investing (Philip Fisher)
Subsequent to the post-earnings appreciation, shares of Mallinckrodt Pharmaceuticals (NYSE:NYSE:MNK) tumbled over 10% to trade $1.98 lower at $16.68. In our recent Alpha Intelligence, we elucidated a bull thesis on the company by detailing various promising fundamental developments. In this article, we'll take the next step to reevaluate this thesis against a recent finding that our president of Business Development, Abelardo Fraga, has alerted us to.
Figure 1: Mallinckrodt stock chart. (Source: StockCharts).
As the 2013 spin-off from the giant medical device maker, Covidien (NYSE:COV), Mallinckrodt acquired Questor Pharmaceuticals (NASDAQ:QCOR) in 2014 to take ownership of its flagship product, Acthar Gel. As a repository corticotropin injection, Acthar Gel is approved to treat infantile spasm. What enabled the company to deliver increasing earnings in subsequent years is the premium pricing for its drug. Nevertheless, growth in sales is cooling down. Despite the company's efforts, it is not far from the truth that the ongoing downtrend for Acthar Gel is highly difficult to reverse.
In addition, the company is marketing a robust products portfolio as depicted in Figure 2. This includes nitric oxide gas (Innomax), acetaminophen injection (Ofirmev), Therakos photopheresis, fibrin sealant (Raplixa), surgical sealant (Preveleak), and topical thrombin (Recothrom).
Figure 2: Branded products portfolio. (Source: Mallinckrodt).
Per Table 1 below, the sales of the aforementioned medicines are overall increasing robustly. We anticipated that the company will continue to procure significantly more profits for shareholders.
$582M net sales for Q4 2017 vs $603M for Q4 2016 (-3.7%)
$195.8M in Q4 2017 vs. $212.9M in Q4 2016 (-8.5%)
Acthar Gel: $295.2M vs $325.4M (-9.3%) net sales
Inomax: $125.6M vs $118.2 (+6.1%)
Ofirmev: $78.0M vs $72.5 (+7.6%)
Therakos: $57.2M vs $47.4M (+20%)
Table 1: Quarterly figures for branded and generics segments (Source: Dr. Tran BioSci)
That aside, insiders have been purchasing shares aggressively and unanimously since 2016. We note Peter Lynch's wisdom that "insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." Interestingly, the company also recently bought back over 10% of shares outstanding, which added up to 9.4M shares for $214M. Of note, Mallinckrodt announced on Dec. 26, 2017, that the firm will acquire Sucampo Pharmaceuticals (NASDAQ:SCMP) for $1.2B. With the deal set to be consummated in Q1 of this year, the buyout would enable the company to have ownership of a stellar approved-molecule to treat constipation, lubiprostone (Amitiza).
In the midst of what are seemingly favorable developments, we were notified to reassess the balance sheet by CEO Abelardo Fraga of AFDatalink, who recently transitioned to lead Integrated BioSci Investing as the president of business development. President Fraga keenly elucidated that the latest net intangible assets and goodwill are $8.54B and $3.45B, respectively. We conducted this calculation a step further and realized that the percentage of the intangible assets made up 58% of the total assets. This percentage is too excessive to absorb the $9.5B aggregate liability, thereby making this investment extremely risky.
Figure 3: Key points in the balance sheet (Source: Google Finance)
The company seemingly has strong overall fundamentals, and is heading in the right direction for becoming a successful turnaround story of 2018. Multiple powerful catalysts are brewing in the background and the corporate guidance for 2018 is also optimistic. Although the aforesaid developments were quite promising, we'll take CEO Abelardo's stance on Mallinckrodt in that the balance sheet indicates a key weakness that we overlooked in our prior analysis. While the firm can successfully turnaround to deliver multibagger profits, the reasons noted above are pertinent enough for us to be neutral on this company.
Finally, we come back to Fisher's quotes in that during our due diligence we'll make mistakes here and there. Be that as it may, we hope to maintain our accuracy and our success in order to outweigh the mistakes. Last but not least, we'll be transparent about our shortcomings with you, our partners.
Author's Notes: We're honored that you took the time to read our market intelligence. Founded by Dr. Hung Tran, MD, MS, CNPR, (in collaborations with Analyst Vu, and other PhDs), Integrated BioSci Investing ("IBI") is delivering stellar returns. To name a few, Nektar, Spectrum, Atara, and Kite procured over 359%, 180%, 785%, and 83% profits, respectively. Our secret sauce is extreme due diligence with expert data analysis. The service features a once-weekly exclusive Alpha-Intelligence article, daily analysis/consulting, and model portfolios. Subscribe to our marketplace now to lock in the legacy price and save money, as we're increasing our price soon.
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