Mallinckrodt PLC (MNK, Financial) is in the middle of a major change to its business model -- pivoting from a focus on pain therapy toward a more branded drug operation. This transition began in 2016 as it sold off a nuclear imaging segment and, more recently, with the December announcement of the spinoff of its generic business.
The new company will focus on branded pharmaceuticals (to be named later), while the namesake company will continue to focus on generics with five new products set to hit the market this year. In recent years, despite an incredible amount of financial power and net worth, the market has been rocked by the ongoing opioid crisis, which has hit Mallinckrodt especially hard. Since 2015, the stock is off over $100, dropping from the $125 range to its current price level.
The biggest risk lies in its debt load because, while Mallinckrodt has the ability to generate significant cash flow and should continue to build upon its $79.33 book value, the $6.2 billion in total debt is still a concern. The company will need to get its generic business back on track as a standalone entity to handle the 3.5 times to 4 times leverage that will be attached.
With that being said, as the deal is a tax-free separation, it does have the potential to provide long-term value to shareholders as both companies will still be making products necessary and desired by the marketplace. As for the deal itself, shareholders will receive a pro-rata distribution of stock when the spinoff is completed later this year. Whether the public markets accept the new company in the current environment is still to be determined as Mallinckrodt’s attempt to sell the struggling unit did not pan out.
The stock is cheap, but risky. The generics company will generate north of $1 billion in sales, including constipation and irritable bowel drug Amitiza (14% of sales). The branded drug company is expected to have net sales in the $2.3 billion range, including Acthar Gel, Inomax and Ofirmev, as well as a strong legacy with more than 150 years of operational experience. In other words, its research and development and cost management should continue to produce winners. This will be critical as the Acthar Gel product represents about 45% of the company’s sales and an even greater portion of its profits. It was also the subject of a "60 Minutes" investigation last May.
Even taking those financial numbers out of the equation, the book value is four times the share price, the company’s gross margins are strong and the spinoff will be provide shareholders with a short-term gain, allowing them to decide where to keep their money long term.
Disclosure: I am not long-short MNK.
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