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Morningstar | Mallinckrodt Outlines Better-Than-Expected 2019, but We Think Visibility Remains Poor

Despite recognizing a $3.9 billion non-cash impairment in the quarter, Mallinckrodt’s fourth-quarter results and 2019 guidance--which includes 1% to 4% revenue growth and an adjusted EPS of $8.10 to $8.40--exceeded our expectations. Regardless, we don’t plan a major change to our fair value estimate and no-moat rating as we still have reservations about the long-term competitive outlook and key patent expirations, such as for Ofirmev.  While we do expect portions of Mallinckrodt’s portfolio, such as Inomax, to remain defensible assets due to product complexity, we think it will be difficult for the company to retain pricing power long term. We’re still skeptical current Acthar clinical trials--including data releases for rheumatoid arthritis and multiple sclerosis in the back half of this year--will shift the drug’s price and efficacy debate. Additionally, we’re doubtful management’s pursuit of complex generic products will dramatically differentiate the company’s competitive position within the commoditized generics market. Management’s goal to reestablish growth in its generics business with non-opioid drug launches may prove difficult by pitting the company against larger peers like Teva and Mylan as well as nimble emerging market competitors. Management plans to separate its generics business in the back half of this year, but results for this segment have been reconsolidated on the income statement following the inability to find a buyer last year.