Shocking The Street: Mallinckrodt’s Assets Are Impaired By $4 Billion

Mallinckrodt (MNK) built its business on a string of acquisitions. When the Federal Reserve was creating a “wealth effect” by pumping up stocks, the company’s rapid revenue and earnings growth via acquisition appeared to be a winning strategy. Now that quantitative easing (“QE”) has slowed, healthcare acquirers like Mallinckrodt, Valeant (VRX) and Teva (TEVA) now have to address their ballooning debt.

Each company has agreed to engage in divestitures to pare debt. It might have been their only play. While investors love trading these company’s shares in the secondary market, I find it doubtful they would be willing to help these company’s raise new equity in order to pare debt. A dilutive event is not exactly an inviting proposition for day traders. That said, Mallinckrodt’s attempt to sell its generics business could end in a hung deal:

In March 2017, Mallinckrodt (MNK) announced it was exploring the sale of its generics business in a deal that could have fetched values as high as $2 billion … In November 2017, market chatter suggested Intas Pharmaceuticals was closing in on a $1.5 billion acquisition of the generics unit. Current chatter suggests the deal could be trouble due to lower than expected bids.

At the end of the day, the generics business still has not been sold despite having been on the market since Q1 2017. That could be a problem as Q4 earnings results roll around.

The company has been reeling from revenue declines in its Specialty Generics segment and in Acthar, which represents over 39% of total revenue. In my opinion, its recent $1.2 billion acquisition of Sucampo Pharmaceuticals was an attempt to find a new narrative. The deal will help diversity Mallinckrodt’s revenue stream, yet increase its debt outstanding by about $800 million. It could also hamper Mallinckrodt’s ability to raise new debt to fund more deals. Mallinckrodt might have unknowingly bet the farm on Sucampo.