Barclays: Mallinckrodt's Sucampo Deal Overshadowed By Competitive Threats

Mallinckrodt PLC MNK agreed to buy Sucampo Pharmaceuticals, Inc. SCMP in a deal announced in December.

The Analyst

Weighing in the planned acquisition, Barclays analyst Douglas Tsao downgraded shares of Mallinckrodt from Equal Weight to Underweight and lowered the price target from $23 to $20.

In November, the firm had downgraded Mallinckrodt shares in the wake of disappointing third-quarter results.

The Thesis

The Sucampo acquisition is unlikely to address ongoing concern over Mallinckrodt's adrenocorticotropic hormone Acthar, Tsao said in a Friday note. Barclays is projecting intensifying reimbursement pressure and competitive threats to Acthar. 

The Sucampo deal, by raising Mallinckrodt's leverage to 4.5 times, has reduced its strategic options, the analyst said. 

The deal carries opportunity cost, in the sense that it precluded Mallinckrodt from making acquisitions that are better strategic fits, Tsao said.

Even if the company decides to sell its generics business to lower the leverage, Barclays said it cannot reduce leverage to less than four times, given the valuations of the generics and API businesses.

The neonatal jaundice treatment Stannsoporfin would provide a needed pipeline win for  in 2018. But Barclays sees 510K approval for Praxair, Inc. PX hurting Inomax, Mallinckrodt's hypoxic respiratory failure treatment for at-term and near-term infants — and its second-largest branded asset.

Barclays, while being below-consensus on 2018 Acthar sales, did not rule out potential upside in the eventuality of a faster recovery. The firm does not see Acthar outperformance as a catalyst for Mallinckrodt shares, Tsao said. 

"We believe the acquisition of SCMP provides some revenue diversification near term, but MNK used most, if not all, of its remaining B/S capacity for an acquisition that leaves us underwhelmed based on the relatively short duration of Amitiza and the risk/reward on the pipeline assets." 

The Price Action

Mallinckrodt shares are down over 64 percent over the past year.

The shares were down 4.96 percent to $17.25 at the close Friday.

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