Mallinckrodt CEO Mark Trudeau

Tuesday a Delaware judge invalidated 11 patents for Mallinkrodt’s (MNK) top-selling drug Inomax. The news sent the stock down over 12%:

Shares of pharmaceutical company Mallinckrodt fell as much as 14.55% on Tuesday after a federal court in Delaware invalidated 11 of its patents.

Specifically, the judge threw out the company’s Inomax respiratory treatment system patent as part of a suit brought by Mallinckrodt against specialty chemical company Praxair, which is trying to sell a generic version of the treatment, according to Reuters.

In particular, the judge threw out the patent for Mallinckrodt’s repiratory treatment system which was being challenged by Praxair (PX); Praxair wants to sell a generic version of the treatment. I believe Praxair might have hastened Mallinckrodt’s demise for the following reasons:

Inomax Is 15% Of Sales, And Likely A Larger Share Of EBITDA

Mallinckrodt currently lacks growth. Its Q2 revenue and EBITDA fell Y/Y by 5% and 13%, respectively. Its lack of top line grow is already a red flag. A hit to Inomax could destroy the stock.

In April 2015 Mallinckrodt expanded into neonatal critical care with its $2.3 billion acquisition of Ikaria, Inc. which owned Inomax. In February 2015 Malinckrodt subsidiaries INO Therapeutics LLC and Ikaria filed suit against Praxair in U.S. District Court in Delaware after receiving notice of a new drug application with the FDA for a generic version of Inomax. The company file subsequent suits in July 2016 September 2016 to protect against to challenges to Inomax patents from Praxair.

The recent adverse outcome in the Praxair litigation could result in Praxair launching a generic version of Inomax, driving down revenue and earnings for Inomax and Mallinckrodt. The company’s growth had stalled prior to the ruling. A generic version of Inomax could hasten Mallinckrodt’s demise.

Mallinckrodt Would Be More Dependent Upon Acthar

Acthar currently represents 39% of Mallinkrodt’s revenue, making the company a one-trick pony. A major hit to Inomax revenue could make Mallinkrodt even more vulnerable to any loss of Acthar sales. Several threats exist for Acthar. First of all, it is one of the most expensive drugs that Medicaid reimburses. In the past naysayers have questioned the drug’s effectiveness for certain indications. Management is currently providing studies to prove Acthar’s effectiveness, yet no conclusion has been reached. There is a risk that Medicaid could reduce Acthar purchases for certain indications.

That said, I believe Synacthen Depot could potentially become a threat to Acthar at some point. Acthar is a natural ACTH drug while Synacthen is synthetic. They both have similar biological and pharmacological effects. Earlier this year as part of a Federal Trade Commission (“FTC”) settlement for anti-competitive practices, Mallinckrodt agreed to license Synacthen to Marathon Pharmaceuticals. In July Marathon sub-licensed the drug to West Therapeutic Development. It could become time-consuming to gain FDA approval for Synacthen for certain indications. However, I believe the risk of Synacthen competing with Acthar is too big of a risk for MNK longs to take.

Specialty Generics Segment Is In Free Fall

Mallinckrodt’s specialty generics segment represents 29% of total revenue. The segment is currently in free fall; its Q2 revenue fell 18% Y/Y which led to the company’s total revenue falling by 5%. Opioids hydrocodone and oxydone  represent over 20% of the specialty generics segment and their revenue fell by a combined 30%. Each year the number of overdoses from prescription drugs hits record highs. The percentage of overdoses from prescription opioids has risen at an even faster pace, and the government is making a concerted effort to reduce the number of unnecessary opioid prescriptions.

In July Mallinckrodt was fined $35 million by failure to report suspicious orders of opioids. The company is also being targeted by Missouri Attorney General Josh Hawley pursuant to its marketing practices for opioids. That said, I expect Mallinckrodt’s opioid sales to continue to free fall.


The risks of generic Inomax hitting the market and the continued diminution of specialty generics make MNK a strong sell.


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