Shares of Mallinckrodt (MNK) have plunged 30% over the past three months. The drugmaker's stock started to rebound after the U.S. election, but that bounce is gone now. What happened? Another fiery attack from short-seller Andrew Left took its toll. Is Mallinckrodt just too risky to buy right now -- or does the latest drop present a buying opportunity?
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Is Left right?
Andrew Left accused Mallinckrodt CEO Mark Trudeau of committing securities fraud. This allegation stems from an Oct. 2015 conference call in which Trudeau was asked about the exposure to Medicare for Acthar gel, which is used for treatment of multiple sclerosis (MS) and several other indications. Trudeau replied that on an overall basis roughly 25% of Mallinckrodt's business came from Medicare, with Acthar's percentage being a little higher.
Left said that the Medicare Drug Spending Dashboard released by the Centers for Medicare and Medicaid Services (CMS) shows that the percentage of Acthar sales from Medicare is actually over 61%. He alleged that Trudeau has now "been caught red-handed" in a lie to investors.
Is Left right? Maybe not. For one thing, Trudeau was only asked about Medicare. Left included spending for both Medicare and Medicaid to calculate his percentage. Also, the Medicare Drug Spending Dashboard uses total product sales instead of net sales. It would make sense that Trudeau was thinking about net sales in his ballpark figures.
A more serious concern
I don't think there would be a strong case against Trudeau for securities fraud. However, Left's latest attack stirred up renewed concerns of a more serious nature: Is Acthar really worth what Mallinckrodt is charging?
This question is important, because Acthar sales make up around 30% of Mallinckrodt's total revenue. On a per-patient basis, Acthar was the most expensive drug covered by Medicare in 2015. There are many who doubt the drug's price is justified.
Ilya Kister, assistant professor of neurology at New York University, and John R. Corboy, professor of neurology at the University of Colorado, recently wrote that "there is no evidence that ACTHar gel... is in any way superior to methylprednisolone for MS relapses" and that its current price makes routine use "difficult to justify." This view isn't new. Back in 2012, The New York Times reported that "doctors, insurance companies and investors are beginning to have doubts about whether the drug is really any better than much cheaper alternatives."
Aetna (AET) was one of the first health insurers to put tight restrictions on reimbursement for Acthar. A few months before that New York Times story was published in 2012, Aetna came close to dropping Acthar from its formulary completely. The insurer allowed payment for only one indication -- West syndrome (infantile spasms). Four years later, Aetna still maintains that there isn't enough clinical evidence to justify use of the drug for other indications.
Assessing the risk
While Andrew Left successfully renewed worries about Acthar, I'm not so sure Mallinckrodt's stock is truly riskier now than it was prior to his allegations. As I mentioned earlier, there doesn't seem to be enough substance to Left's accusations against Mark Trudeau to gain any real traction. Also, despite continued concerns about the pricing and efficacy of Acthar, I don't see any new obstacles on the horizon for Mallinckrodt.
It would have been a different story had the U.S. elections turned out differently. However, President-elect Donald Trump doesn't appear to have any plans to change how Medicare pays for prescription drugs. Mallinckrodt shouldn't have to worry too much about Medicare pushback on Acthar.
Mallinckrodt's shares now trade at less than seven times forward earnings. That makes the stock one of the cheapest healthcare alternatives available for investors. This low valuation is a direct result of fears about Acthar, which I think are overblown. Mallinckrodt isn't too risky to buy right now in my opinion. Concerns about its risk make it an even better buy than it was before.
