Mallinckrodt: Acthar, Deteriorating Credit Metrics Are Concerning

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Specialty Generics Named Discontinued Operations

Mallinckrodt’s Specialty Generics business was moved to discontinued operations. Mallinckrodt has been exploring a sale of Specialty Generics since Q1 2017. Market chatter originally suggested it could have fetch up to $2 billion. Nearly a year later the segment still has not been sold and the company may ultimately have to keep it. The segment’s free fall in revenue likely made it difficult for a buyer to value it or estimate when it would bottom out.

Per Reuters the company faces 281 lawsuits related to the sale of opioid products. Legal risks related to Specialty Generics (which includes opioids) may have scared buyers away. For now, these legal exposures remain with Mallinckrodt and could create headwinds for the stock.

Credit Metrics Have Deteriorated

Moody’s previously voiced concerns that Mallinckrodt’s Sucampo acquisition could push debt/EBITDA to 4.8x-4.9x The Q4 balance showed debt of $6.7 billion. Debt/trailing 12 months EBITDA is already at 4.8x, and the debt needed to fund the Sucampo deal could push the metric even higher. If deteriorating credit metrics trigger a ratings downgrade it could further pressure on MNK.

Conclusion

Mallinckrodt cut costs to help offset its decline in revenue. Q4 EBITDA margin was an eye-popping 49%. However, Acthar’s demise, opioid legal exposures and deteriorating credit metrics are concerning. MNK remains a sell.

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