Morgan Stanley on Mallinckrodt: Controversy Around Acthar Unsettling

Analyst Christopher Caponetti at Morgan Stanley on Thursday, April 17, 2014, released a report on Mallinckrodt Plc MNK. Shares of the company are down $1.72 or 2.77 percent to $60.44 per share. CFA Christopher Caponetti led the research at the firm and has rated the stock Equal-weight. Additionally, this rating includes its model update and the model now includes MNK's acquisitions of Cadence and Questcor QCOR. The model also includes the controversy surrounding its flagship drug Acthar. Morgan Stanley has cited the Acthar controversy as a multiple overhang. Questcor acquired Acthar in 2011, and repositioned it as an orphan drug. Acthar was originally approved in 1952 before the Food and Drug Administration required clinical trials. According to Morgan Stanley, “Acthar has not been shown to be any better than generic steroids which cost pennies on the dollar.” The firm stated that the proposed 5.6 billion cash and stock acquisition of Questcor in financially compelling, but Morgan Stanley lacks conviction on the long-term durability of QCOR's flagship drug, Acthar. The firm has cited the following as potential upside risks:

• Better than expected Questcor/ Cadence accretion
• Faster than expected recovery in Global Medical Imaging
• Continued delays in additional competition to Exalgo and Concerta

In addition, the firm has cited the following as potential downside risks:

• Accretion disappoints
• Margins in Global Medical Imaging turn negative
• Generics pricing upside fails to materialize driving greater than expected margin contraction

Some key events to watch:

• MNK-155 NDA submission (mid-14)
• Close of the proposed Questcor acquisition (August 2014)
• Additional competition on generic Concerta (2H:F14)
• 18 mg Gx Concerta approval and launch (late F14)
• Resolution of supply disruptions in Global Medical Imaging Resolution of DOJ/ SEC investigation into QCOR sales and marketing