EUR 850.00 For Business Accounts Only

Morningstar | Mallinckrodt's transformation to a branded drug manufacturer still faces an uncertain growth outlook

To offset poor growth prospects in its legacy generics and medical imaging segments, Mallinckrodt has used acquisitions to enter the branded pharmaceutical market. We are skeptical of the potential results of this strategy, given Mallinckrodt's lack of existing branded pharmaceutical infrastructure to build on, little strategic overlap among acquired assets, and the seemingly high prices that the firm has paid for its targets. We prefer acquisitions that combine complementary assets that create strategic improvements in research and development and marketing functions in specific therapeutic areas. So far, Mallinckrodt's major deals have had few strategic parallels and failed to benefit from synergies, and we believe the firm was historically overly reliant on tax rate arbitrage to justify valuations. Additionally, the company’s pipeline remains dependent on external acquisitions, which have so far not provided many future growth drivers to replace maturing products. Mallinckrodt’s generics business--which management plans to divest and is reported in discontinued operations--faces limited product differentiation and significant pricing pressure even though its focus on pain medications offers some advantages from controlled substance regulation and vertical integration. The Questcor acquisition in 2014 creates the most skepticism about management’s capital-allocation strategy. While management continues to express confidence in the prospects for Acthar Gel, we believe the unique aspects of the product's approval and limited efficacy data create immense reimbursement uncertainty. We have already seen some private payers push back on the product, and Questcor has received constant negative publicity in the media, including reports on the burden that Questcor's more than hundredfold price increases have put on Medicare and other payers. Acthar Gel recently faced weakness from patients opting not to fill prescriptions, a potential side effect of the drug's high price tag, increased patient cost-sharing for healthcare, and the drug's limited efficacy data in therapeutic areas like rheumatology, pulmonology, and nephrology that have offered more recent growth.