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Morningstar | Mallinckrodt Reports Better-Than-Expected 2Q, but Our Longer-Term Concerns Remain

Mallinckrodt reported second-quarter results and raised year-end top- and bottom-line guidance above our expectations thanks to better-than-expected Achter sales and nearly 300 basis points of adjusted operating margin improvement from last year. A beneficial product mix and management’s efficiency efforts and integration of Sucampo drove the margin improvement above our expectations partially offset by a material increase in R&D expense. While we appreciate management’s focus to build the pipeline through internal and external development efforts, we remain wary of management’s capital allocation track record. We therefore plan to keep our no-moat rating in place even though we’ll likely raise the fair value estimate as we increase our near-term projections.

This quarter’s 8.2% decline in Acthar sales was slightly better than we expected following patient withdrawal issues over the past few quarters. Management remains confident that efforts to address prior authorization issues for patients can bolster this critical product’s sales. However, the company’s current efforts to improve clinical data for Acthar to help support marketing efforts doesn’t shift our thinking that this product faces a difficult future given its price point and potential new competition within the next few years.

Beyond Acthar, acetaminophen injection Ofirmev and the Therakos photopheresis system showed strong performance for the quarter with 13.1% and 8.7% constant-currency growth, respectively. While Ofirmev has sustained a strong growth trajectory this year, the product doesn’t dramatically move the needle in our model given the product's limited life span and generic competition expected by very late 2020.