Mallinckrodt PLC (MNK, Financial) has just been given a UBS Bank (UBS, Financial) backed share price booster, following its $2.3 billion acquisition of Ikaria in the U.S. The bank has raised the target price of the Dublin based drug maker’s stock from $120 a share to $141 a share. This transaction gives Mallinckrodt, a much stronger footprint in the United States hospital market, and increases its existing healthcare offerings beyond life-saving drugs. UBS has even added the ‘buy’ rating tag to the drug maker, thus pushing its recent opening trade price to $122.01 a share, giving it a 0.25% jump from the previous closing. The company then put forward another announcement by mentioning that the INOMax drug, used to treat children with hypoxic respiratory failure, will not get a price hike and will be sold at its current price levels, despite this being the star-drug which bought in close to $400 million in annual sales revenue. One was expecting that Ikaria takeover would push up prices, but Mallinckrodt mentioned it did not find ‘cost synergies’ that would affect the pricing of the drug.
The other thing that is adding to the novelty value of the Mallinckrodt stock is the Terlipressin drug, currently at its Phase-3 stage of approval of the U.S Food and Drug Administration. This medicine meant to treat ‘Hepatorenal Syndrome Type 1’ (rapid kidney failure), is stated to come as a respite to those afflicted with the disease which apparently has no prescribed cure and a high fatality rate amongst patients. Regarding the entire series of development, Marc Goodman, the analyst from UBS to have followed the Mallinckrodt stock said, “Given the questions we got on the deal, it appears that investors don't appreciate the barriers-to-entry for this product. This drug-device combo would not only be difficult to get through FDA but also would require a significant investment in the systems and the customer service component, further inhibiting new entries. We believe INOmax has as an important, pre-emptive first-mover advantage and thus is a long duration asset.”
Going a step forward into the details
- With the $2.3 billion takeover of Ikaria, Mallinckrodt will have a $150 million addition to net sales, apart from gaining a minimum of $0.25 a share in adjusted earnings for the 2015 fiscal year. The potential of the news is huge enough to send the stock to gain 23% in the current year. The deal is said to be financed in a mixture of cash and debt combination.
- Mallinckrodt is on a shopping spree, and Ikaria deal happens to be the third multi-billion dollar deal in recent times. Cadence Pharmaceuticals was bought for $1.3 billion and Questcor Pharmaceuticals was bought was $5.6 billion before the Ikaria deal came through.
- This deal also pushed one of Ikaria’s earliest investors Arch Venture Partners up with a return of $45 million profit from this deal, where $175 million became the total proceeds from the sale. Even Madison Dearborn, the Chigo-based company which had been another investor, gained significantly but had to let go of the 48% stake in the company.
What some of the others are saying about the deal?
Corporate Credit rating firm Morningstar ‘BB-‘, Leerink Swann gave the ‘market outperform’ tag raising target prices from $115 to $131 a share, Bank of America (BAC, Financial) estimated prices to touch $138, Guggenhiem put a ‘buy’ tag raising expectation to $140 from the earlier $123. General consensus was a ‘buy’ rating, but a lower target price of $116.64 a share.
Final Thoughts
Mallinckrodt has made a really strong headway with the Ikaria deal, in the areas of diagnostic radiology and multimodal pain management, especially for the infants. The INOMax product is something which is popular amongst major respiratory illnesses for young children, and with this deal, there is a potential for developing a delivery system for the drug which will make it a blockbuster hit in childcare. The Terlipressin drug is something which would get an approval any day, which if happens, will push the expected price lists well over $140 a share estimate but then, how it reaches the hospital networks will determine a lot. At the current scenario, hail Mallinckrodt.
