Wednesday, February 28, 2018

An Integrated BioSci Alpha Intelligence On Mallinckrodt Pharmaceuticals: What The Fiscal 2017 Earnings Foretell?

Summary

Q4 2017 earnings show promising results that signaled robust upcoming growth.
The Succampo acquisition for Amitiza and other phase 3 molecules will close in Q1 2018. And, the aforesaid catalyst is most likely to deliver substantial growth.
Amitiza can generate roughly $1B in the foreseeable future while other acquired late-stage therapeutics to add further value.
Highly favorable valuations and a strong balance sheet.
Significant insider purchases and share buybacks signify tremendous unlocked value.
This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success. - The Father of Growth Investing (Philip Fisher)
On Feb. 27, 2018, the shares of Mallinckrodt Pharmaceuticals (NYSE:MNK) - the specialty pharma that spun off from Covidien (NYSE:COV) in 2013 - traded $2.47 (+15%) higher at $18.86. The aforesaid rally is due to the robust earnings reported for Fiscal 2017. In this report, we’ll go over key earning highlight as well as what investors can expect going forward.
Figure 1: Mallinckrodt stock chart. (Source: StockCharts).

Fundamentals Analysis

In 2013, Covidien (NYSE:COV) spun off Mallinckrodt to maintain its emphasis on medical devices. As follows, the United Kingdom-based firm, Mallinckrodt then focuses on the innovation and commercialization of branded and generic medicines. Accordingly, the company is servicing various markets such as autoimmune, neurology, rheumatology, nephrology, ophthalmology, pulmonology, respiratory, and anesthesiology (as shown in figure 2). Of note, the generic subsidiaries include active pharmaceutical ingredients, biologics, medicinal opioids, controlled substances, and acetaminophen. On the other hand, the branded franchises feature corticotropin injection (Acthar Gel), nitric oxide gas (Innomax), acetaminophen injection (Ofirmev), Therakos photopheresis, fibrin sealant (Raplixa), surgical sealant (Preveleak), and topical thrombin (Recothrom).
Figure 2: Branded products portfolio. (Source: Mallinckrodt).

Earnings Highlight

For Fiscal 2017, Mallinckrodt procured $3.22B net sales, which is 4.7% lower than $3.38B last year. One of the reasons is that 2016 has an extra selling week. In addition, the ongoing pressure in the generics segment contributed to the slight decline. That aside, the diluted earnings per share (“EPS”) from operations were $18.09 compared to $4.39 for the year prior, thus reflecting the benefits from tax reform and other corporate reorganization). Additionally, the adjusted diluted EPS were $7.49 compared to $7.85 for the same period of comparison.
As for Q4 2017, the branded therapeutics segment delivered $582M net sales compared to the $603M a year ago, thus representing -3.7% decline (as depicted in table 1). The generics segment brought in $196M and $213M for Q4 2017 and Q4 2016, respectively (thereby, signifying the -8.5% decreased). Despite not falling off the cliff as what the market seemingly believed, both the generic and branded segments continue to experience significant growth decline (as illustrated table 1 below). The cooling off re Acthar Gels’ growth is due to the previously disclosed patient withdrawal issue. In response, the company implemented various approaches to address the issue mentioned (i.e. the engagement with payers, prescribers, and patients). Be that as it may, it is not far from the truth that Acthar Gel will continue to experience modest sales decline (if the stated efforts cannot pay off).
Branded Therapeutics
Generics Segment
$582M net sales for Q4 2017 vs $603M for Q4 2016 (-3.7%)
$195.8M in Q4 2017 vs. $212.9M in Q4 2016 (-8.5%)
Acthar Gel: $295.2M vs $325.4M (-9.3%) net sales

Inomax: $125.6M vs $118.2 (+6.1%)

Ofirmev: $78.0M vs $72.5 (+7.6%)

Therakos: $57.2M vs $47.4M (+20%)

Table 1: Quarterly figures for branded and generics segments (source: Dr. Tran BioSci)
In assessing the balance sheet, Mallinckrodt has $1.26B at the end of Q4, which include the total cash and equivalents as well as the revolving credits. This capital will be used to close the Succampo transaction sometimes in Q1 this year. The cash provided by operating activities for the said quarter was $278.8M. In addition, the free cash flow was $244.0M. For the whole year, the corresponding figures are $727.3M and $541.2M, correspondingly. Moreover, the company repurchased approximately 10% of shares outstanding (i.e. 9.4M common shares for $214.0M).
Despite that sales growth has been cooling off (due to the pressure from the generic pricing as well as the slowing down of growth for Acthar Gel), the earnings figures reflect a strong underlying business. Furthermore, the combinations of substantial insider purchases (as elucidated below) and the company’s shares buybacks can only mean that they insiders strongly believe in the company prospects (and that shares are on sales significantly below their true worth).

Insiders Transactions

Per figure 3, Mallinckrodt insiders acquired shares en masse for an extended period of time. As alluded, the most likely reason a company buys its shares is that they believe those shares are trading significantly below their intrinsic value. Interestingly, this view resonates with the wisdom of Peter Lynch: “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
Figure 3: Mallinckrodt insider purchasing. (Source: OpenInsider).

Fiscal 2018 Estimates

Pertaining to the Fiscal 2018 guidance, Mallinckrodt expects the net sales to increase from 3% to 6% (and the diluted EPS to come in at $6.00 to $6.50) as demonstrated in table 2. 
Table 2: 2018 financial guidance (source: Mallinckrodt)

Final Remarks

Of note, this is the preview of the Integrated BioSci Alpha Intelligence research, published in advance to subscribers of Integrated BioSci Investing (a community of expert physicians, scientists, executives, market leaders, and everyday investors). In the aforesaid article, we took the deep-dive into the data analysis (and elucidate the potential upsides) that you can expect from this firm. If you're an investor (or thinking about investing in Mallinckrodt), it's a good idea to check out the pending catalysts of this firm.
Author’s Notes: We’re honored that you took the time out of your busy day to read our market intelligence. Founded by Dr. Hung Tran, MD, MS, CNPR, (in collaborations with Dr. Tran BioSci analyst, Ngoc Vu, and other PhDs), Integrated BioSci Investing (“IBI”) marketplace research is delivering stellar returns since inceptions. To name a few, Nektar Therapeutics (NASDAQ:NKTR) procured more than 381% profits; Spectrum Pharmaceuticals (NASDAQ:SPPI) delivered over 194% gains; Kite Pharma netted 83%; Atara Biotherapeutics (NASDAQ:ATRA) appreciated +207%. Crispr Therapeutics (NASDAQ:CRSP) garned plus 147%. Exelixis Inc (NASDAQ:EXEL) earned greater than 54% capital appreciation. Our secret sauce is extreme due diligence coupled with expert data analysis. The service features a once-weekly exclusive in-depth Integrated BioSci Alpha-Intelligence article (in the form of research, reports, or interviews), daily individual stocks consulting, and model portfolios.
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