Mallinckrodt (MNK) reported FQ3 revenue of $794 million and eps of $1.97. The company missed on revenue, but its stagnant growth in its main product might have been a cause for concern. The stock is down 30% post-earnings.
Is Acthar In Trouble?
Mallinckrodt’s Q3 revenue fell 11% Y/Y. The company had been growing revenue by double-digits on the strength of acquisitions. The market rewarded MNK with a high earnings multiple despite the fact all of its growth was not organic. Rising drug prices and price-gouging has been in the public consciousness since Valeant’s (VRX) debacle in Q4 2015. Mallinkrodt began hiving off assets to pare debt while it was still in a strong negotiating position. I thought this was smart. However, now the market is focusing on the organic growth of the remaining segments and it is not pretty.
Mallinckrodt experienced a revenue decline in each segment except for Ofirmev (pain reliever), whose revenue growth was flat. Revenue from Acthar was off 6% Y/Y and 3% sequentially. Acthar represents 39% of total revenue and it had been growing by double-digits. Acthar’s resilience helped mask the under-performance of Mallinckrodt’s Specialty Generics segment. Acthar appears to have cracked, and so has the stock.
The drug has been criticized for its high price and for the fact that it is prescribed for ailments other than infantile spasms – its original indication. The Journal of the American Medical Association also questioned the effectiveness of Acthar for certain indications, and suggested there might be cheaper alternatives. Whether that assessment hurt Acthar’s sales this quarter is unclear. What we do know is that prescriptions are going unfilled and sales are expected to fall again next quarter:
The payer environment has become increasingly complex for specialty drugs. Acthar has never been immune to these pressures, but as the third quarter progressed, we saw an increasing number of prescriptions going unfilled beyond the level we had seen previously … we anticipate it will take time to work through the situation, and we expect fourth quarter 2017 Acthar net sales to be down sequentially.
Management believes that through more engagement with customers and distributors it could get Acthar’s growth back up to the mid-single digits. However, until the company can pinpoint why prescriptions are going unfilled, whether due to competition or less demand, Acthar’s revenue could be in a long-term downtrend. If Medicare/Medicaid demand price cuts or if doctors issue fewer prescriptions outside of infantile spasms the rate of decline could accelerate.
Specialty Generics Is Under Siege
Another headwind for Mallinckrodt is its Specialty Generics segment which saw revenue fall off over 20%. This segment includes opioids like hydrochodone and oxycodone, which represent a combined 12% of total revenue. Revenue from oxycodone and hydrochodone fell a combined 61% Y/Y. The rise in accidental deaths from drug overdoses has coincided with the rise of opioid prescriptions. The government is attempting to tamp down such prescriptions; its efforts appear to have hurt the sale of opioids across the board, including Mallinckrodt’s.
CVS also agreed to limit opioid prescriptions to seven days and limit the daily dose of pain pills based on their strength. This should also serve to reduce oipioid sales. If the demand for opioids fall then it could impact both price and volume of opioids. I expect the fall diminution of Specialty Generics to continue for the near term. The segment also represents 11% of Mallinckrodt’s segment operating income, down from 16% in the year earlier period. This is important as Mallinckrodt needs all the income it can muster amid its $5.8 billion debt load.
Debt Is Now A Burden
Low interest rate debt for acquisitions was formerly a good thing. Now it could be a burden. Mallinkrodt’s remaining properties are experiencing sales declines. Inomax (16% of revenue) recently had its patents invalidated by a Delaware judge. In effect, over 90% of Mallinckrodt’s revenue is in decline and/or in jeopardy of losing exclusivity. This all comes amid a debt load at 4.3x run-rate EBITDA.
Mallinckrodt cut SG&A to 26% of revenue, down from 30% in the year earlier period. It also reduced R&D to 7% of revenue from 8% in Q3 2016. EBITDA of $336 million off 8% Y/Y which was less than the revenue decline. However, at some point cost cuts might not be able to keep pace with declines in revenue. A high debt load, cracks in Acthar and a potential moral hazard in opioids could equal a recipe for disaster.
Conclusion
Acthar has been the one catalyst keeping MNK afloat. With that gone the stock is a sell.
Trump And The Global Economy
The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
