Mallinckrodt Slumps After Filing Acthar Lawsuit, But BMO Says It Can Take The Hit

Mallinckrodt PLC MNK announced Tuesday that it filed a lawsuit against the Department of Health and Human Services and Centers for Medicare and Medicaid Services, challenging the federal government's decision to have the company change the base date average manufacturer price used to calculate Medicaid drug rebates for Acthar gel.

The company derived roughly 30 percent of its first-quarter revenue from Acthar, an adrenocorticotropic hormone analogue indicated to treat multiple conditions.

The Analyst

BMO Capital Markets analyst Gary Nachman maintained an Outperform rating on Mallinckrodt and reduced the price target from $35 to $23.

The Thesis

The news of the lawsuit is disappointing, as it could potentially eliminate Acthar's Medicaid sales, Nachman said in a Tuesday note. (See his track record here.)

That said, Medicaid represents about 10 percent of Acthar sales, equating to roughly 3 percent of Mallinckrodt's total revenues, the analyst said. 

Mallinckrodt argued in the lawsuit that it is legally and factually entitled to the new base date AMP in calculating the rebates and that CMS' reversal of its previous decision is unjustified, Nachman said. The company said it plans to vigorously defend its position and is not altering its guidance or taking a reserve at this time, he said. 

Mallinckrodt's issue is only with Medicaid for Acthar, and there is unlikely to be any potential readthrough to Medicare or other products, the analyst said. 

"While the outcome from MNK's lawsuit is uncertain, we do believe it's prudent to risk-adjust Acthar future sales, which we lowered $73-172mm in 2019-2023E." 

BMO also reduced its EBITDA and EPS estimates.

"However, we do think MNK could absorb this potential hit," Nachman said. 

The Price Action

After declining 24.25 percent to a record low of $9.87 Tuesday in reaction to the lawsuit, Mallinckrodt shares were last seen trading down an incremental 4.46 percent to $9.43 at the time of publication Wednesday. 

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Photo courtesy of Mallinckrodt.