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Mallinckrodt Acquired San Diego Pharma and Much More

March 21, 2014 | About:
victorselva

Victor Selva

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According to GuruFocus Real Time Picks, on March 3, Mario Gabelli (Trades, Portfolio), the chairman and CEO of GAMCO Investors Inc. added Cadence Pharmaceuticals Inc. (CDX) at an average price of $13.98. On March 13, Gabelli reported 5.76% stake in Cadence, but the day after that, health care products maker Mallinckrodt Public Ltd. Co. (MNK) completed a $1.4 billion acquisition of Cadence. On March 20, as a result of the completion of the acquisition, Gabelli no longer has beneficial ownership of any of its shares. Another hedge fund with a long position was Israel Englander, who increased its holding by 844% during the last quarter.

So let's take a look at this company and try to explain to investors the reasons for this trading activity.

Tender Offer

Cadence is a biopharmaceutical company focused on in-licensing, developing and commercializing product candidates mainly for use in the hospital setting. Mallinckrodt, is a leading global specialty pharmaceuticals company. Last month the two companies announced the signing of a definitive agreement pursuant to which a subsidiary of the latter will commence a tender offer to acquire all outstanding shares of Cadence stock for $14.00 per share in cash. A few days ago, it was announced the successful completion of the acquisition of Cadence for approximately $1.4 billion.

The transaction may be undervalued as it is below the premium paid in comparable transactions and analysts at Guggenheim Securities LLC and Wedbush Inc. have set a $15.00 per share price target on the stock. So far this year, the stock has advanced 54% to a current price of $13.99. The transaction adds OFIRMEV® (acetaminophen) injection, a high-growth, differentiated pain product. "The sale of our Incline option provides Cadence with non-dilutive capital and a solid return on our original investment," said Ted Schroeder, President and CEO of Cadence. "We're excited about the continued growth in sales of OFIRMEV, and believe that today's announcement provides us with further flexibility to focus on other drivers of near term revenue growth." As a result of the acquisition, Cadence shares will cease to be traded on Nasdaq.

Earnings, Stock Price Movement and ROE

Mallinckrodt´s earnings per share (EPS) increased in a huge amount in the most recent quarter compared to the same quarter a year ago (137.5% year over year). Let´s see in the next graph the stock price evolution because it has increased considerably and might attract investors.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With a trailing twelve months ROE of 4.93% is less than the ones presented by Bayer AG (BAYRY) and Johnson Matthey Plc (JMPLY).

Final Comment

The acquisition will expand Mallinckrodt’s hospital presence and increase company profits. Mallinckrodt is currently Zacks Rank # 1–Strong Buy, and it also has a longer-term recommendation of “OutPerform.”

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Jean-Marie Eveillard (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) have already taken a stake in the stock.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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