Mallinckrodt: Acthar, Deteriorating Credit Metrics Are Concerning
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 on 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.
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.