Here's Why Barclays Downgraded Mallinckrodt

Specialty pharma company Mallinckrodt PLC MNK reported disappointing  results before the open Tuesday,with the weakness stemming from soft sales of its key drug Acthar, which fetched roughly 52 percent of the total sales.

Acthar gel is an injectable formulation used to treat infantile spasms and acute exacerbation of multiple sclerosis. Sales of this key product fell 5.6 percent year-over-year in the quarter, trailing most analyst estimates. 

The Analyst

Barclays analyst Douglas Tsao reviewed the results of Mallinckrodt.

The Rating

The firm downgraded the shares of Mallinckrodt from Overweight to Equal-weight and lowered the price target to $23. The downgrade is based on disappointing Q3 results and a lack of visibility for Acthar, according to Barclays. 

The Thesis

The weakness wasn't isolated to Acthar, with specialty generics sales for Mallinckrodt declining 21.1 percent, Tsao said. (See Tsao's track record here.)

Though noting that the drop was in line with previous guidance, the analyst said he was surprised by the magnitude of the sequential drop.

Mallinckrodt expects the Active Pharmaceutical Ingredient — or API — business to offer some semblance of stability despite the ongoing challenges, Tsao said.

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On other products, Barclays said INOmax sales trailed expectations. INOmax' existing customers are projected to remain durable, but Tsao said customer retention might be tough if a low-cost competitor emerges. Barclays termed Therakos as a bright spot in the quarter.

Following the Q3 report, Barclays said Mallinckrodt's stock price is less likely to appreciate. Despite the strong cash flow generation in the quarter, Barclays does not see sufficient capacity for the drugmaker to pursue diversifying M&A near term.

The Price Action

At the time of writing, shares of Mallinckrodt were slipping 2.69 percent to $19.57, extending the nearly 36-percent slide on Tuesday in reaction to the quarterly results.