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Mallinckrodt (MNK) Q2 Earnings Beat, Generics Spin-off on Hold

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Shares of Mallinckrodt Public Limited Company (MNK - Free Report) were down 12% after the company reported mixed results for the second quarter of 2019 and provided an update on its business separation plan.

The company reported adjusted earnings of $2.53 per share in the quarter, up from the year-ago quarter’s $2.16. Also, the bottom line beat the Zacks Consensus Estimate of $2.10.

Net sales in the quarter came in at $823.3 million, down 0.2% year over year. The figure missed the Zacks Consensus Estimate of $824 million.

Mallinckrodt’s stock has gained 2% in the year so far compared with the industry’s growth of 8.8%.

Quarter in Detail

The company now operates two reportable segments aligned to the previously-announced separation — the Specialty Brands and the Specialty Generics.

Specialty Brands sales came in at $627.8 million, down 0.6% year over year.

Acthar, Mallinckrodt’s largest product, generated sales of $266.4 million, down 9.1% year over year primarily due to continued reimbursement challenges impacting new and returning patients, and continued payer scrutiny on overall specialty pharmaceutical spending.

Inomax, the company’s second-largest product, generated sales of $139.7 million, up 6.6%, driven by continued demand and contract renewals. Ofirmev sales increased 5.7% year over year to $90.5 million, owing to strong demand and order timing.

Sales of the Therakos immunology platform were $60.9 million, up 7.2% owing to growth in the United States.

Specialty Generics sales amounted to $195.5 million, up 0.9%, driven by the recapture of market share.

Adjusted selling, general and administrative expenses in the quarter were $208.6 million, down from $215.8 million in the year-ago quarter. Research and development expenses decreased from $92.6 million to $79.6 million, owing to timing of certain developmental milestone payments in the prior year.

Update on Specialty Generics Separation

In December 2018, the company announced that it intends to spin-off the Specialty Generics business into a new company. However, based on current market conditions and developments, including increasing uncertainties regarding the opioid litigation, the company has shelved this plan for now. Mallinckrodt continues to evaluate a range of options for the separation of the Specialty Generics business.

Guidance Update

Specialty Brands sales are expected to be down 5% to up 1%. The company continues to expect the hospital products to collectively achieve high-single-digit net sales growth for the year. Given the current market uncertainties, the company now believes Acthar Gel net sales for 2019 are unlikely to exceed $1 billion. Total sales for Specialty Generics are expected to increase 2-5%. Earnings per share are now projected to be $8.40-$8.70, up from the previous projection of $8.30-$8.60.

Our Take

The news of the company’s plan to suspend the separation of the specialty generics business overshadowed its second-quarter results.

Shares of the company have decreased 65.7% year to date compared with the industry’s decline of 7.6%.

 

Mallinckrodt is currently facing multiple challenges. The company was under the scanner for the sale and marketing of opioid drugs, which contributed to the ongoing opioid epidemic in the United States. The company has been in the news since the last couple of months, as there were allegations against Acthar’s previous owner, Questcor, for conducting illegal sales and marketing activities related to the drug. Thereafter, it reached an agreement in principle with the U.S. Department of Justice (DOJ) in relation to the Questcor litigation to resolve the previously-disclosed government investigation of the drug's legacy sales and marketing activities. Mallinckrodt expects to pay $15.4 million related to legacy Questcor activities, per the civil False Claims Act settlement.

We expect investors to focus on how the company grapples with these ongoing lawsuits and revives its business.

Zacks Rank & Key Picks

Mallinckrodt carries a Zacks Rank #3 (Hold).

Some better-ranked stocks are Roche (RHHBY - Free Report) , Bristol-Myers Squibb Co. (BMY - Free Report) and Novartis (NVS - Free Report) . While Roche sports a Zacks Rank #1 (Strong Buy), the other two carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Roche’s earnings per share estimates have increased from $2.41 to $2.50 for 2019 in the past 60 days.

Bristol-Myers’ earnings per share estimates have increased from $4.20 to $4.24 for 2019 in the past 30 days.

Novartis’ earnings estimates have increased from $5.01 to $5.06 for 2019 in the past 30 days.

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