Mallinckrodt CEO Mark Trudeau

Mallinckrodt (MNK) is one of several drug companies that built its business via a debt-fueled roll-up strategy. Things have changed since 2015 when Valeant (VRX) and certain other drug makers were called out by lawmakers for price gouging. The FDA is now approving generic drugs faster, which has hurt prices for certain branded drugs. Mallinckrodt has been outed by The Journal of American Medical Association (“JAMA”) and short sellers for price gouging in Acthar, particularly for indications other than infantile spasms and multiple sclerosis.

Now the company’s debt costs exceed 11%. At February 13, 2018 the company’s $600 million bonds due April 2023 with a 4.75 coupon traded at 11.1%. The bonds yields were as low as 6.04% in March 2017. They spiked to 10% in November 2017 and now exceed 11%. Mallinkrodt’s recently announced $1.2 billion acquisition of Sucampo Pharmaceuticals may have been the catalyst for the spike in yields above 11%. Shocking The Street, an investment service the Shock Exchange runs in conjunction with Seeking Alpha, believes this could be the death knell for the company.  Would you bet against Shocking The Street? We sure would not.


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