Lone Mallinckrodt Bull Undaunted After Share Price Tumbles 94%

(Bloomberg) -- Mallinckrodt Plc investors don’t have a lot to be hopeful about as the pharmaceutical company’s stock continues to flounder after losing almost all of its value over the past four years.

Thousands of opioid lawsuits, a pricing dispute with U.S. regulators and looming bond maturities have raised bankruptcy concerns. Once a standout worth more than $15 billion in 2015, Mallinckrodt’s market value has shrunk to $200 million. Wall Street has essentially left it for dead, but for a lone bull who’s kept her buy rating despite the beating the stock, and her call, have taken.

Cantor Fitzgerald’s Louise Chen has recommended buying Mallinckrodt since 2017. Shares have fallen 94% since she first made that call. The analyst -- whose overall track record has been mixed, with more misses than hits -- has an $18 price target, 600% above the current price.

In her view, Mallinckrodt suffers from “a perception problem” that ties it to the pains of the U.S. pharmaceutical industry, Chen wrote in a note last month. “There is a lot of value to be unlocked.”

Chen, who has declined interview requests, sees value in Mallinckrodt’s pipeline, which to be sure has had some good developments lately. Favorable results from two recent studies have boosted the shares and earned praise from other analysts.

While Chen, and management, see the new therapies possibly offsetting losses from existing medicines, others say it won’t be enough. The drugs “will not sufficiently diversify the business away from Acthar,” the blockbuster autoimmune and rare-diseases treatment, Piper Jaffray’s David Amsellem said.

Sales of Acthar, which has faced pricing scrutiny, have been sliding since 2016 as health insurers tightened reimbursements and prescriptions went unfilled. After a 9% decline last quarter, management said sales may not exceed $1 billion this year for the first time Mallinckrodt acquired it in 2014.

In August, the drugmaker lost an appeals court bid over its second-largest drug, INOmax, which could see a 15% to 10% decline in sales over the next two years, according to Wells Fargo. Its third-best seller, Ofirmev, is expected to lose market exclusivity in 2021.

“There’s pressure on the top line, there’s pressure on cash flows,” Amsellem said. “Layer in the high debt levels, the opioid-related liabilities, the Acthar-related liabilities, and that puts us in the situation we have today.”

With about $5 billion in debt, analysts have estimated that Mallinckrodt could owe as much as $600 million to the U.S. government over Acthar rebates. It’s also among the companies facing potential liability into the tens of billions of dollars for their role in the opioid crisis.

While it can probably handle the government fines and address its 2020 bond maturities, “the concern is what happens with opioid fines,” Bloomberg Intelligence credit analyst Mike Holland said.

Chief Executive Officer Mark Trudeau reminded investors recently that for now, opioid fines are “only litigation risk, no litigation liability.” He said reports of potential restructuring and bankruptcy were “wild speculation.”

Mallinckrodt representatives didn’t immediately respond to requests for comment on Wednesday.

While only eight of the 27 stocks currently under her purview are in the green since she started covering them, Chen has had one really big win: Amarin Corp Plc has surged more than 300% on a promising heart pill.

--With assistance from Katherine Doherty.

To contact the reporter on this story: Tatiana Darie in New York at tdarie1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer

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