Mallinckrodt's (MNK) Q2 Earnings & Sales Surpass Estimates

Shares of Mallinckrodt MNK were down 28.3% after it reported second-quarter 2020 results and indicated the possibility of filing for bankruptcy.

The stock has lost 53.6% in the year so far compared with the industry’s decline of 3.4%.

The company reported adjusted earnings of $1.89 per share in the first quarter, beating the Zacks Consensus Estimate of $1.25 but decreasing from the year-ago quarter’s $2.53.

Net sales were $166.5 million in the second quarter. Adjusted net sales, following the adjustment for the retrospective one-time Acthar   Gel (repository corticotropin injection) Medicaid rebate liability, were $700.9 million, beating the Zacks Consensus Estimate of $623 million.  Sales were down 14.9% year over year, primarily due to demand impacts related to COVID-19 and competitive and payer pressures on certain products.

Quarter in Detail

The company now operates in two reportable segments aligned with the previously-announced separation — the Specialty Brands and the Specialty Generics.

Specialty Brands’ sales came in at $522.8 million. Acthar, Mallinckrodt’s largest product, generated sales of $213.7 million, down 19.8% year on year due to continued reimbursement challenges impacting new and returning patients; continued reduction in new patients as a result of COVID-19 pandemic, which is anticipated to affect results in the second half of the year; continued payer scrutiny on overall specialty pharmaceutical spending; and, to a partial extent, the change in the Medicaid rebate calculation.

Inomax, the company’s second-largest product, generated sales of $154.9 million, up 10.9% year over year, driven by an overall increased consumption of nitric oxide, including strong utilization among COVID-19 patients.

Ofirmev sales decreased 42.1% year over year to $52.4 million due to a reduction in elective surgeries stemming from public health orders and institutions focusing on responding to the COVID-19 pandemic.

Sales of the Therakos immunology platform came in at $47.8 million, down 21.5% due to COVID-19 stay-at-home directives impacting patients' abilities to receive treatment in hospitals or apheresis centers.

Amitza net sales were $49.4 million, down 5% due to increased competition in the United States and the biennial price reduction in Japan.

Specialty Generics’ sales amounted to $178.1 million in the quarter.

Adjusted selling, general and administrative expenses were $197.5 million, down from the year-ago quarter’s $208.6 million. Research and development expenses decreased to $82.9 million from $79.6 million.

The cash balance at the end of the second quarter was $818.3 million and the revolving credit facility was fully drawn. Total debt outstanding at the end of the second quarter was $5.293 billion, with net debt of $4.475 billion.

Litigation Update

Due to pressures from the Acthar Gel Medicaid matter, the ongoing opioid litigation and existing debts and the related risk of non-compliance with its financial debt covenant over the next twelve months, Mallinckrodt has been working with external advisors to explore a range of options, including the possibility of filing for reorganization in bankruptcy under Chapter 11 by the company and most of its subsidiaries in the near-term.

Our Take

Mallinckrodt’s better-than-expected second-quarter results were overshadowed by its indication of a possible bankruptcy. A retrospective one-time Acthar Gel Medicaid liability of $534.4 million adversely impacted sales in the quarter. The company had earlier warned that the next few quarters will be challenging due to the impact of COVID-19, as some of its products are sensitive to reduced numbers of surgical procedures and doctor visits.

Meanwhile, the company is embroiled in litigations with the U.S. Department of Health and Human Services and CMS related to the calculation of Medicaid drug rebates for Acthar.

The woes do not seem to end for Mallinckrodt. While the huge levels of debt have always been a burden, the opioid litigations adversely impacted its share price along with other companies like Teva TEVA. Moreover, the coronavirus pandemic has adversely impacted the business, forcing it to explore options.

Zacks Rank & Stocks to Consider

Mallinckrodt is a Zacks Rank #3 (Hold) stock, currently. A couple of better-ranked stocks in this space are Dr. Reddys Laboratories Ltd RDY and Supernus Pharmaceuticals, Inc. SUPN. Both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dr. Reddy’s earnings per share estimates have risen from $1.84 to $1.93 for 2020 and from $2.11 to $2.17 for 2021 over the past 60 days.

Supernus’ earnings per share estimates have risen from $1.44 to $1.49 for 2020 and from $1.66 to $1.82 for 2021 over the past 30 days.

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