Analyst: Mallinckrodt Stock Is Undervalued

Following the investor meeting with the Mallinckrodt PLC MNK management, BMO Capital Markets analyst Gary Nachman said the shares of the company are undervalued.

BMO Capital Markets reiterated its Outperform rating on the shares of Mallinckrodt and its $65 price target, given its strong earnings power and free cash flow yield.

Nachman said the tone of the meetings was very constructive, as management expressed confidence in the durability of the portfolio and that the company's emerging pipeline will help support growth a few years out. The analyst also said management is always considering ways to try and unlock shareholder value.

The detailed Stannsoporfin review led BMO Capital Markets to include estimates for it. The firm noted that the management was excited about the company's recent InfaCare deal providing Stannsoporfin for severe jaundice.

Although Stannsoporfin will likely be a niche product, the firm thinks it could still be meaningful, fetching $100 million to $300 million over time. Consequently, the firm included Stannsoporfin sales of $10 million in 2018, which is expected to ramp up to $90 million in 2021.

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Assuming some of the upside will be offset by higher expenses, the firm raised its 2018 to 2021 earnings estimate by $0 to 12 cents.

"[The] rest of the pipeline (StrataGraft, Terlipressin, MNK-1411) also offers some nice niche opportunities, but in aggregate could help support growth in outer years when Ofirmev goes generic (2021), and represent optionality in the stock," the firm said.

BMO Capital Markets noted that the management is confident in Acthar durability, while also looking for ways to diversify the company and minimize concentration risk with Acthar. The firm is of the view that the company continues a balanced approach with the use of cash, including share buybacks, debt paydown and bolt-on M&A.

The firm also thinks the company would consider being more aggressive with any one of the options, if it can potentially unlock shareholder value.

Despite the generics remaining under pressure, the firm believes the longer-term picture may be a bit better due to the relatively stable API business and the company being a very reliable supplier of ethical opioid market.

"MNK has evolved its approach to identify new generic pipeline opportunities (target of 5-6/year) filtering through a new lens based on MNK's broader capabilities in complex generics (more outside opioid space)," the firm added.