Mallinckrodt (MNK) recently signed an agreement to sell hemostasis products RECOTHROM Thrombin topical (Recombinant) and PREVELEAK Surgical Sealant to Baxter (BAX) for about $185 million:
Mallinckrodt plc (MNK) (NYSE: MNK), a leading specialty pharmaceutical company, announced today it has entered into an agreement under which it will sell certain hemostasis products to Baxter International Inc. (NYSE: BAX) for approximately $185 million, with upfront payment of $153 million, inclusive of existing inventory, and the remainder in potential future milestones. Baxter will assume other expenses, including contingent liabilities associated with PREVELEAK®. Baxter is a global medical products company that is committed to advancing surgical innovation with a variety of products and delivery devices used in the surgical suite.
According to Mallinckrodt management the company is transforming itself into a top-performing specialty pharmaceutical company. The recent sale should allow it to hive off assets that do not fit with its current strategy. Below I will parse through the implications of the sale.
The Situation
Mallinckrodt acquired commercial stage hemostasis drugs Preveleak and Recothrom and Raplixatm in February 2016 for an upfront consideration of $173.5 million, including existing inventory, and contingent sales-based milestone payments that could have resulted in up to $395 million in additional consideration. The sale of those certain hemostasis assets comes as the company is looking to pare debt. In January 2017 Mallinckrodt sold its nuclear imaging business for $690 million. I felt this was the right thing to do. Mallinckrodt built its operations via a pharma roll up strategy. It also ran up over $6 billion in debt.
After Valeant’s (VRX) roll up strategy imploded in the second half of 2015 and lawmakers began to question rising healthcare costs, Mallinckrodt might have been vulnerable to a cut in drug prices. At Q3 2017 the company’s debt was $5.8 billion or 4.4x run-rate EBITDA. The current transaction would increase Mallinckrodt’s liquidity at a time when the company could be strapped for cash. Mallinckrodt recently acquired Sucampo Pharmaceuticals (SCMP) for an enterprise value of around $1.2 billion.
I estimate Mallinckrodt will have to raise about $800 million in new debt and use some of its $371 million cash on hand to fund the Sucampo deal. The cash infusion from selling certain hemostasis assets will help shore of the company’s liquidity.
Outlook For Mallinckrodt
The problem with selling assets is that Mallincrodt will lose cash flow and operating income from the divested assets. The company receives over 39% of its revenue for Acthar, which experienced a Y/Y revenue decline of 6%. Acthar revenue will likely fall further as insurance companies appear to be balking at (1) Acthar’s high price and (2) the fact it has been prescribed for indications other than infantile spasms. If the company’s operating income free falls in lockstep with Acthar then its credit metrics will deteriorate and it risks having its debt downgraded. Moody’s put Mallinckrodt’s debt under review for a downgrade after the Sucampo deal was announced. In my opinion, a ratings downgrade could be disastrous for the stock. It would potentially signal that the demise in the company’s core operations could be intractable.
I believe it prudent for Mallinckrodt to raise equity to pare debt and prepare for a potential diminution is its Acthar franchise. In selling assets management might signal that there may not be a true market for Mallinckrodt’s equity. The point of capital markets is to help companies raise capital for future growth. Investors simply may not be willing to pony up new equity for Mallinckrodt; trading and speculating in MNK shares may be more preferable. That said, the company acquired Sucampo at 4.9x run-rate revenue and about 10.0x run-rate EBITDA. The $153 million upfront cash for hemostasis assets equates to about 2.7x revenue and 6.5x run-rate EBITDA (assumes a blended margin of 42%). The disparity in the two transactions could be indicative of Mallinckrodt’s desperate straits.
Conclusion
Mallinckrodt has a market capitalization of $2.2 billion. Do investors really believe that? Why isn’t management willing to explore the idea of raising new equity instead of hiving off assets? The most recent asset sale suggests the company could be desperate. If Acthar continues to decline I believe the share price will eventually reflect that desperation. MNK remains a sell.
On Trump And The Global Economy
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?
