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Mallinckrodt PLC Shares Get Hammered Again -- Here's Why

By Sean Williams - Mar 16, 2016 at 3:10PM

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A double whammy of woes sends Mallinckrodt's shares reeling. Is there any hope of a rebound?


Image source: Centers for Disease Control and Prevention.

What: Shares of Mallinckrodt (MNK), a biopharmaceutical company that acquires specialty branded pharmaceuticals and generic drugs, tumbled as much as 15% during Wednesday's trading session. There appear to be two primary culprits, which are both carryover effects from yesterday.

So what: First, Andrew Left, the executive editor of noted short-seller Citron Research, went on CNBC yesterday and called out Mallinckrodt for being worse than Valeant Pharmaceuticals (BHC -3.20%), which, mind you, was down more than 50% yesterday.

Image source: Mallinckrodt.

Left was implying in his commentary on CNBC that, although Valeant is merely buying drugs and raising their prices without adding any real scientific value, at least the company has a portfolio with dozens of drugs inside. Ergo, the risk Valeant might face is at least spread out over multiple products. Left points out that Mallinckrodt is heavily reliant on Acthar Gel, a drug whose price point has skyrocketed during the years, for more than 50% of its EBITDA. In other words, Left views Mallinckrodt as an excellent short-sale candidate.

The second issue ties into the release of new recommendations from the Centers for Disease Control and Prevention when it comes to prescribing opioid-based medicines. The CDC is aiming to reduce overdose and overdose-related deaths tied to opioid misuse. Mallinckrodt earns a high-single-digit revenue percentage annually from the sale of generic opioids, so there's clear fear of a slowdown in the growth of these products.

Now what: This has not been a good week at all for pharmaceutical companies that look to acquire products and grow through price hikes. Mallinckrodt remains under heavy scrutiny for Acthar Gel, which runs about $35,000 per vial today, but cost only $1,235 per vial back in 2005. Although the drug treats around 20 inflammatory diseases, justifying a price hike of this magnitude may prove impossible for Mallinckrodt. Also, to be fair, Questcor Pharmaceuticals, which Mallinckrodt purchased to get its hands on Acthar Gel, enacted the bulk of those price hikes well before Mallinckrodt agreed to buy Questcor.

It's unclear at this point what Mallinckrodt's path forward is. The company is incredibly inexpensive at just six times forward earnings, but there's uncertainty about whether or not Congress might try to throw the book, so to speak, at Mallinckrodt for its pricing practices. It's also possible that, with alleged price-gouging pharma companies being thrown into the spotlight, pharmacy-benefit managers and insurers may begin to push back.

I'd suggest investors keep their distance from this potentially messy situation.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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.

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