Shares of Mallinckrodt (MNK) are sliding following the FDA approval of an abbreviated new drug application for Praxair's (PX) Noxivent. Commenting on the news, Stifel analyst Annabel Samimy argued that the stock selloff is an overreaction as its competitor will face high commercial hurdles to displace the INOmax System and noted that consensus estimates have reflected potential commercial competition for well over a year. Voicing a similar opinion, her peer at BMO added that there are several important factors to consider that would appear to mitigate the generic risks and make the situation manageable for Mallinckrodt.

SELLOFF AN OVERREACTION: Noxivent's filing as a generic has given investors pause that the gas will be used as a substitute to Mallinckrodt's nitrous oxide in the INOmax System, the leading nitric oxide vasodilator for respiratory failure in term/near-term infants, Stifel's Samimy said in a research note. The analyst pointed out, however, that Noxivent cannot be interchanged with the nitric oxide gas used in the INOmax System, and thus far, she has not seen a 510(k) approval from the FDA for Praxair's device. Furthermore, Samimy highlighted that the pending Praxair system will be another branded competitor and not a generic substitute as the Street reaction implies. The pending approval of this ANDA was well known, she contended, adding that she believes estimates have reflected potential competition for well over a year. Overall, the analyst sees the stock move as an "overreaction to a known event" and believes Mallinckrodt is well-positioned to defend its share. Samimy reiterated a Hold rating and $30 price target on the latter's shares. Also commenting on Praixar's Noxivent news, BMO Capital analyst Gary Nachman said in a research note of his own that the generic was expected to be approved at some point, although the timing was uncertain. Moreover, the analyst highlighted that there are several important factors to consider that would appear to mitigate the generic risk and make this situation manageable for Mallinckrodt. Praxair will need its device to be approved in order to have a generic version of INOmax, he noted, adding that he fully expects the device to be approved sometime soon. Additionally, the analyst pointed out that litigation is still ongoing with Mallinckrodt's appeal of the decision that favored Praxair regarding the INOmax patents, with the former indicating that the appeal is expected to be resolved sometime in the first half of 2019. A Praxair generic launch before then would be "at risk," Nachman argued. The analyst believes "this is a very challenging market" with many natural barriers including all the support that Mallinckrodt provides the neonatal intensive care units at hospitals. Nachman reiterated an Outperform rating and $37 price target on Mallinckrodt.

PRAXAIR APPROVAL REINFORCES OVERHANG: Noting that INOmax is Mallinckrodt's second largest product, representing approximately $131M of sales in the second quarter, Wells Fargo analyst David Maris told investors that the approval of a generic version of its gas was something that was expected, although the exact timing was unexpected. The analyst pointed out that he was already modeling a slowdown in growth in 2019 for Mallinckrodt but is not modeling "a major loss" of market share. Overall, Maris believes that the Praxair approval "certainly reinforces an overhang issue" and brings market share risk closer to reality, and as such will likely have a negative impact on the shares. He reiterated a Market Perform rating and $30 price target on Mallinckrodt's shares.

PRICE ACTION: In afternoon trading, shares of Mallinckrodt have plunged over 18% to $25.43.