What happened
Shares of Mallinckrodt PLC (MNK) were 23% higher as of 11:21 a.m. EDT on Tuesday. The big surge came after the specialty drugmaker reported its second-quarter earnings results Tuesday morning and raised its full-year 2018 guidance.
Mallinckrodt announced that its net sales grew 5.3% year over year in the second quarter to $631.7 million. The company also reported adjusted earnings per share (EPS) of $1.78, up 30.9% from the prior-year period.
Thanks to its solid performance in the second quarter, Mallinckrodt bumped its full-year 2018 net sales growth projections by 1%. The company also increased its expected adjusted EPS to between $6.50 and $6.90 from the previous forecast of between $6 and $6.50.
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So what
One key thing to know about Mallinckrodt's second-quarter performance was that the company blew past Wall Street estimates. Analysts had expected revenue of $620 million and adjusted EPS of $1.48.
Perhaps more important, though, is to understand why Mallinckrodt beat expectations. It wasn't due to the company's top-selling product, H.P. Acthar Gel. Sales for the drug declined 8.2% year over year to $293.2 million, continuing a loss of momentum seen in the first quarter.
Instead, Mallinckrodt's year-over-year improvement stemmed in large part from $48 million in additional sales from constipation drug Amitiza. The company picked up the drug with its acquisition of Sucampo Pharmaceuticals earlier this year.
In addition, Mallinckrodt enjoyed solid sales growth for several other drugs in its lineup. Its acetaminophen injection Ofirmev generated second-quarter sales of $85.6 million, up 13.1% from the prior-year period. Sales for the Therakos immunology platform increased 10.9% to $51.2 million.
But the primary factor for Mallinckrodt's big year-over-year jump in adjusted EPS was significantly higher amortization of intangible assets in the second quarter of 2018 compared to the same quarter last year. The company's GAAP EPS fell 70% from the prior-year period to $0.19.
Now what
Investors will want to monitor Mallinckrodt's updates from clinical studies of H.P. Acthar Gel. These could be important in helping ensure that patients have access to the drug, which has been embroiled in controversy over past price hikes. Mallinckrodt should also soon announce results from a late-stage study evaluating VTS-270 in treating Niemann-Pick disease type C, a rare genetic disorder where the transportation of cholesterol in the body is disrupted.
Mallinckrodt still has a large debt load of more than $6.3 billion to service. The company has made some progress on reducing its debt, but interest expense remains higher than Mallinckrodt's research and development spending. That's not a good thing for a pharmaceutical company. Until Mallinckrodt gets a better handle on its debt leverage and can generate sustained growth, investors are probably better off watching this stock from the sidelines.
