Mallinckrodt: Acthar, Deteriorating Credit Metrics Are Concerning

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Mallinckrodt's Acthar - World's Most Expensive Drug?

Mallinckrodt (MNK) reported FQ4 revenue of $792 million and eps of $2.01. It beat on revenue by $18 million and beat on earnings by $0.32. Despite the revenue beat, declining sales from its main product remain a cause for concern. The stock rose over 15% on the news.

Acthar Remains A Cause For Concern

Mallinckrodt’s Q4 revenue fell 5% Y/Y. I was expecting another double-digit decline similar to last quarter’s but it didn’t happen. The company’s double-digit revenue growth from previous years and its reputation as a growth stock appear to be things of the past. Mallinckrodt has been selling assets to pare debt accumulated from its pharma roll-up strategy. It had been relying revenue growth from Acthar (infantile spasms, multiple sclerosis) to serve as an anchor.

The company saw upticks in revenue for Ofirmev (up 8%) and Inomax (up 6%). Though revenue from Specialty Generics/Other was down 8% Y/Y, it paled in comparison to the 20% decline it experienced last quarter. However, Mallinckrodt’s former anchor continues to crack. Revenue from Acthar was off 9% Y/Y. That followed a 6% decline last quarter.

Last quarter Acthar prescriptions were going unfilled, which hurt sales. The decline may have been driven by certain insurers who were reticent to cover prescriptions for indications other than infantile spasms or multiple sclerosis. Now several of its patients have to requalify every time their Acthar prescription is extended:

So, we continued to see very good demand at the prescriber level for Acthar. That hasn’t really changed much. Where we’ve seen a change is in the proportion of those prescriptions that are written being actually reimbursed or filled through the payer environment. And a lot of what we saw going on in the third quarter, and particularly towards the end and at the start of the fourth quarter, was a specific focus that appeared on getting patients to have to requalify every time their prescription needed to be extended.

Not only has this caused an administrative burden, it has also caused the rate of reimbursement to decline. Acthar’s revenue was also off 4% Q/Q; on a dollar basis it fell $14 million sequentially. Over the past 12 months Acthar generated revenue about $1.3 billion. Management estimates its full year revenue for 2018 will be no less than $1 billion – that’s at least a 20% decline Y/Y. Acthar represents 38% of Mallinckrodt’s total revenue. A potential 20% revenue decline is concerning.

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