Mallinckrodt (MNK) is in dire straits. Management built the company on a string of pharmaceutical acquisitions. Post-deal management would raise prices of the acquired drugs. The ensuing revenue and earnings momentum made Mallinckrodt a Wall Street darling. The strategy worked well as long as the Federal Reserve was creating a wealth effect by buying stocks. Then 2015 happened; politicians began to look askance on price-gouging in the drug industry and so-called hedge fund hotels like Mallinckrodt faced intense scrutiny.
In November 2015 I highlighted that if Mallinckrodt could not continue to raise drug prices or if pharmacy benefit managers (“PBMs”) dropped the company from their networks it could sink the stock:
Of the company’s FQ4 2015 products sales of $869 million, Acthar and Inomax represented a combined 31%. Specialty drugs were about 53% of total revenue and over 60% of segment operating income. If Mallinckrodt is unable to raise prices for these drugs due to reputational risk or is required to cut prices, it could stymie its top line growth.
Secondly, pharmacy benefit managers (“PBMs”) are beginning to look askance on sales practices employed by of certain pharmacies for high-priced drugs that have come off patent. Express Scripts (NASDAQ:ESRX) recently dropped Valeant and Horizon (NASDAQ:HZNP) from their networks due to angst over their sales practices. Citron Research also suggested that Mallinckrodt was having trouble receiving insurance reimbursements for Acthar. The threat that PBMs could potentially drop Mallinckrodt due to price gouging or sales practices akin to those of Valeant or Horizon, could weight on stock.
In November 2017 MNK cratered 30% after reporting Q3 earnings. The company’s worst nightmare came true. Total revenue was off 11% Y/Y while revenue from its blockbuster drug Acthar was off 6%. In addition, The Journal of the American Medical Association (“JAMA”) questioned the effectiveness of Acthar for certain indications, and suggested there might be cheaper alternatives. That assessment might have hurt Acthar’s sales. Even more alarming is that prescriptions were going unfilled and sales were expected to fall again in the following quarter.
Acthar’s demise could be just the beginning. According to Shocking The Street, an exclusive service the Shock Exchange runs in conjunction with Seeking Alpha, the outcome of a patent battle between Teva (Teva) and Allergan (AGN) could sound the death knell for Mallinckrodt. It could negatively impact 4% of Allergan’s sales, yet destroy over $1 billion in value for Mallinckrodt and trigger a Moody’s downgrade. Would you bet against Shocking The Street? We would not.