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Barry Cohen
Barry Cohen
Articles (18) 

Investors Hope Cleaving of Mallinckrodt Provides Meaty Returns

New specialty generics business will shed opioids liability

December 07, 2018 | About:

Mallinckrodt PLC (MNK) is splitting up. But will that make either of the divorcees more appealing to investors?

Current shareholders certainly hope so. At about $22, the company’s shares are where they were 12 months hence and just a fraction of the $130 they traded for just two-and-a-half years earlier.

Mallinckrodt hoped less would be more when it announced plans Dec. 6 to spin off its specialty generics business to shareholders in 2019. That is, if it can’t find a buyer for it. So far, two interested parties have taken a look and decided to pass. Either they didn’t like the business’ prospects or thought the price was too high.

The soon-to-be-single generics business will keep the Mallinckrodt name and inherit the proverbial “hot potato” — opioid drugs. That in itself may have given buyers second thoughts. These addictive medications are coming under increasing scrutiny and prescriptions are falling off due to the soaring death rates in the U.S. caused by the drugs.

The generics unit can expect to keep its legal team busy. It will not inherit not only the Mallinckrodt name, but the many lawsuits that claim that the company’s marketing and promotion programs helped foster the opioid epidemic. As expected, company executives framed the spin-off in the most favorable light. They appeared to kick the can down the road, saying on a conference call that the cash effect from any sort of settlement of lawsuits relating to opioids was "probably a number of years away."

The company is throwing the generics business a bone to carry it through what will undoubtedly be a number of challenging years. In a bit of irony, it’s getting the constipation drug Amitiza, which came along with Mallinckrodt acquisition of Sucampo Pharmaceuticals last year.

"The lion's share of the revenue stream that we see coming out of our pipeline is 4-5 years out ... Amitiza will help us as we transition to the portfolio," Chief Financial Officer Matthew Harbaugh, who will head the generics spinoff, said on a conference call with analysts.

CEO Mark Trudeau will take the helm of the specialty branded products business, which will get its new moniker at a later date.

The specialty branded business will be able to focus its R&D to improve existing products and pump out new, unique ones, the company said. The need for new products is critical because sales of the unit’s best-selling drug, Acthar, are on a downward slope.

Of course one of the big positive points is that the company will also be "less encumbered by opioid liability," according to Mizuho Securities analyst Irina Koffler.

The planned separation is expected through a pro-rata distribution of common stock to shareholders and will be tax-free, Mallinckrodt said.

Investors who lack confidence in the ability of Mallinckrodt and the yet-to-be-named specialty products company to execute their plans may want to take a look at two companies in the same space, Steris (STE) AND Perrigo (PRGO). As seen in the chart below, they have substantially outperformed Mallinckrodt during the past three years.

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Dislosure: The author holds no positions in any of the stocks mentioned.

About the author:

Barry Cohen
Barry Cohen has nearly 40 years experience in communications and marketing, the majority in senior positions at large international health care companies, including Abbott Laboratories and Bayer Inc.

He has contributed to a number of financial websites, writing primarily about the stocks of health care companies.

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