Mallinckrodt Pharmaceuticals (NYSE:MNK) shares have come under fire recently because of payer pushback on high-priced specialty medicine, but it hopes that paying down its debt and boosting its share buybacks will resurrect investor enthusiasm.
Rallying against sky-high prices
Revelations that companies have been acquiring other drugmakers in order to get their hands on previously approved drugs so that they can jack up the price have led to an industrywide sell-off in specialty drugmakers, including Mallinckrodt.
The payer pushback hit a high when hedge-fund pharma boy Martin Shkreli's Turing Pharmaceuticals aquired a 60-year old treatment for parasitic infection earlier this year in order to hike the price by 5,000%.
The news of Turing Pharmaceuticals' action caused a media firestorm, prompting presidential hopeful HIllary Clinton to outline measures aimed at reining in specialty drug prices -- and that put Mallinkcrodt, the maker of Acthar Gel, in the cross-hairs.
Rare condition = sky-high price
Mallinckrodt, which came public via a spin-off by Covidien in 2013, spent $5.6 billion to buy Acthar Gel's manufacturer, Questcor, in 2014.
Questcor acquired Acthar Gel from the toss-away pile at Aventis in 2001, paying just $100,000 to buy rights to the treatment for a rare condition known as infantile spasms.
The drug, which was originally created in the 1950s from pig pituary glands, helps boost the body's production of corticosteroids. When Questor bought it, sales totaled only a few million dollars per year.
Over the years, however, Questcor began to successfully market Acthar Gel as a treatment for multiple sclerosis, kidney disease, and rheumatism. Thanks to significant price increases along the way, Acthar Gel has become a top-selling medicine that brings in hundreds of millions of dollars per year, including $268.7 million in sales in the quarter ending June.
The price per vial for Acthar Gel has climbed from $1,500 to around $34,000 today, according to GoodRx.
That dramatic increase in price far outstrips inflation over the same period and that could put Mallinckrodt in the hot seat given that congressional investigators are already requesting information from other specialty drug makers, including Valeant Pharmaceuticals (NYSE:BHC), on their pricing strategies.
In April, an article in the Wall Street Journal reported that after buying the drugs Nitropress and Isuprel in February, Valeant Pharmaceuticals boosted their prices by 525% and 212%, respectively, and more recently the company has come under fire for using specialty pharmacies in which it has a financial interest to fill patient scripts, a move that could have unfairly helped Valeant Pharmaceuticals boost its prescription volume.
Mallinckrodt may not be under the congressional microscope (yet), but it is dealing with an investigation relating to Questcor's acquisition of a potential Acthar Gel rival.
In 2013, Questcor paid $135 million to Novartis to gain the rights to Synacthen Depot, a therapy that could have competed against Acthar Gel. The FTC is investigating that purchase to see if it violated antitrust laws.
Couple that investigation with the increased worry over specialty-drug pricing, and it's easy to see why Mallinckrodt's shares have tumbled by 55% since May.
In a bid to stop that slide, Mallinckrodt is initiating a set of measures that are designed to restore investor confidence. Those measures include boosting its share buyback program by $500 million, which brings the money available to repurchase shares to $700 million, and deleveraging its balance sheet by using some of its $1 billion cash flow to pay down its debt.
Mallinckrodt's commitment to debt repayment is particularly welcome given that the company's interest expense last quarter hit $72.5 million, up from $22.7 million a year ago.
There's an important need for therapies that address rare conditions, but a balance needs to be struck between addressing that need and compensating companies fairly for those efforts.
Personally, I don't think it's likely that prices will drop for Acthar Gel, but media attention may hamper further price increases and that would put more pressure on Mallinckrodt's other drugs to generate revenue and earnings growth.
Nevertheless, Mallinckrodt's commitment to reducing its share count and right-sizing its debt burden could mean that there's some value to be had by picking up shares. After all, despite the pushback on pricing, Mallinckrodt could still deliver EPS of $7.90 next year and if it does, then picking up shares when they're trading at just 7 times that amount could be a profit-friendly move.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.