What happened

Shares of Mallinckrodt (MNK) sank 7.2% as of 3:44 p.m. EST on Monday after dropping as much as 12.8% earlier in the day. The pharmaceutical stock fell on negative tweets from short-seller Citron Research stating that Mallinckrodt had failed in a clinical study of Acthar.

Citron tweeted that the U.S. Department of Health's Office of Inspector General (OIG) and the Medicare Payment Advisory Commission (MEDPAC) "are finally about to put an end to this charade" -- an apparent reference to a controversy about the effectiveness of Acthar. Citron went on to state that Mallinckrodt's "failed clinical studies comes weeks after OIG publishes [sic] that Acthar is a drug based on a history of fraud and abuse." 

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Image source: Getty Images.

So what

Citron Research and its founder Andrew Left have a mixed history at best in its claims about the impending demise of healthcare stocks. But that doesn't mean Citron and Left don't sometimes make correct calls about a given stock. In the case of Mallinckrodt, the question comes down to whether or not Acthar is truly effective.

The clinical study failure that Citron Research referenced was published on Nov. 15, 2018, in the Clinical Journal of the American Society of Nephrology (CJASN). This study was stopped early "because of a lack of discernible treatment efficacy" for Acthar in treating children with nephrotic syndrome.

One negative clinical study doesn't mean OIG will investigate Mallinckrodt, or that MEDPAC will quit paying for Acthar for Medicare patients. That's especially the case considering that Acthar has been approved for 19 different indications.  

Mallinckrodt Chief Scientific Officer Steven Romano noted in the company's third-quarter conference call that positive data was presented at the American College of Rheumatology conference in October for a phase 4 study of Acthar in treating rheumatoid arthritis. The company is also conducting clinical studies of the drug in treating other indications, including amyotrophic lateral sclerosis (ALS), lupus, multiple sclerosis, and sarcoidosis.

Now what

While Citron Research's tweets likely exaggerated the impact of one clinical study failure, investors should watch closely as Mallinckrodt announces the results for additional clinical studies over the next year. Acthar contributes roughly 45% of the company's total revenue, so any clinical updates will be important.