Paulson Bets Again On Mallinckrodt

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Omar Venerio
Aug 07, 2014
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In this article, lets see the last bet of

John Paulson (Trades, Portfolio), the hedge fund manager who made a fortune using credit default swaps to bet against the housing market in the 2008 financial crisis. This time he bought more shares of Mallinckrodt PLC (MNK, Financial), a $4.09 billion market cap company, which is a global specialty pharmaceuticals company.

Total position

Based on its latest regulatory filing with the Securities SEC, the hedge fund Paulson & Co. purchased 200,000 shares for $69.65 per share on July 31. The day after, it bought an additional 75,000 shares for $69.45 per share. So now, the fund owns a total of 6,999,800 shares, worth $486 million.

Previous position

Paulson & Co. previously owned 6,724,800 or 11.5% of the outstanding shares of the company as of June 10, 2014. In addition, the firm gave Paulson & Co. an option to increase its stake to 20%.

Key drivers of the company

The business model is well established, especially when we talk about the pain therapeutic area. Regulations in the pain market provide a slight barrier for new competitors to enter. On the other hand, selling generic drugs in developed markets is a bit unattractive because of its limited product differentiation, price competition and volatile sales.

The company focuses on R&D in order to build a branded pharmaceutical business which is more promising. As well as building, creating is not an easy thing. New innovative products will need to be more effective or safer so as to justify higher prices, where there are cheaper options.

The nuclear imaging segment, which sells nuclear imaging agents and generators, remains to be the strongest business for the company, having a unique position in the market.

Moreover, Mallinckrodt has recently agreed to acquire Questcor Pharmaceuticals, Inc. (

QCOR, Financial) for approximately $5.6 billion. Under the terms of the agreement, the shareholders of Questcor Pharmaceuticals will receive $86.10 per share including a $30 per share in cash and 0.897 Mallinckrodt shares for each share of Questcor common stock they own. It is expected that the deal will be completed in the third quarter this year. We do not knowprecisely the potential outcome of the acquisition, and we fear about managements lack of experience with M&A.

Finally, lets compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

MNK

Mallinckrodt

4.68

ANAC

Anacor Pharmaceuticals Inc.

69.8

PBH

Prestige Brands Holdings Inc.

12.89

PTLA

Portola Pharmaceuticals Inc.

-28.13

Industry Median

-20.6

The company has a current ROE of 4.68% which is lower than the one exhibited by Prestige Brands Holdings (

PBH, Financial), but higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher levels of ROE, Anacor Pharmaceuticals (ANAC, Financial) is an attractive option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Final comment

The firm has a PE ratio of 64x which makes some people think that it is best to leave this stock on the watch list and come back when it is definitely cheap. Other people (like Paulson and me) feel bullish on this stock, so I would recommend fundamental investors to consider this attractive option for their long-term portfolios.

Further, as we can see in the next chart, the stock price has an interesting upward trend in the period.

1407381604569.png

Other hedge fund gurus have been active in the stock. Gurus like

Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

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Omar Venerio is a capital markets, derivatives, corporate finance and financial management professor and Area Head of Finance. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.