Does Mallinckrodt Stock Present a Buying Opportunity, or Is It Another Valeant?
Influential stock commentary Web site Citron Research criticizedMallinckrodt (MNK) - Get Report this week, sending the specialty drugmaker's stock sharply lower. Some analysts are calling this a great opportunity to buy a Big Pharma stock on the cheap, but should you bite?
The company's stock plummeted 17% on Monday; it managed to recover some ground the next day, but the downswing couldn't be controlled and it lost nearly 9% on Wednesday. Shares are down $1.71. or 3%, at $55.42 early Thursday.
What's going on with the Ireland-headquartered Mallinckrodt?
On Monday, Citron Research issued a tweet saying that Mallinckrodt is "a far worse offender" of the drug reimbursement system than Valeant Pharmaceuticals, which has seen its stock slump on concerns about its use of a specialty pharmacy to boost revenue. Citron Research's owner, Andrew Left, has been a prominent Valeant critic and has said that he has sold short the stocks of both companies, betting that their prices will decline.
On Wednesday, law firm Levi & Korsinsky announced that it is investigating possible securities fraud at Mallinckrodt on behalf of the drug firm's shareholders. All of these woes come on top of concerns about Mallinckrodt's sales growth.
Mallinckrodt plans to report its fiscal fourth-quarter earnings on Nov. 23 and is holding an additional investor briefing on Dec. 7.
Citron targeted H.P. Acthar Gel, a biological product used for patients with lupus, multiple sclerosis and other conditions. Mallinckrodt is the current owner of the drug, which now costs $35,000 per vial, after it bought Questcor Pharmaceuticals last year for about $5.8 billion. Acthar accounts for about 28% of Mallinckrodt's most recent quarterly revenue of $965.1 million.
Investor angst is exacerbated by the recent dip in the company's sales, which fell short of expectations. The company's fiscal third-quarter earnings per share beat analysts' estimates, but revenue fell short of expectations. In an interview on CNBC this week, Citron's Left said the sales disappointment shows Mallinckrodt may be facing resistance from insurers against reimbursement for Acthar. Left also said that the company may have misrepresented the effectiveness of Acthar. Mallinckrodt CEO Mark Trudeau responded by telling CNBC that "the facts he quoted were mostly, if not completely wrong."
Hedge funds Paulson & Co Inc and Janus Capital Management LLC are two of Mallinckrodt's biggest shareholders. It's important for Mallinckrodt to keep these two major players satisfied with its performance and stability. But clearly, the stock has witnessed a dark patch lately.
After the Questcor deal was finalized in August last year, Mallinckrodt's shares surged 85% to hit a peak in March of this year. (The S&P 500 index gained less than 8% in the same period.)
Since then, however, the stock has lost 50%. The allegations that the company is abusing the pharmaceutical reimbursement system is a massive blow to the company's reputation, perhaps even worse than the inflated revenue allegations raised against Valeant. Small wonder that Mallinckrodt's stock is now down nearly 44% year to date.
Fourth-quarter earnings estimates suggest at least a short-term resurgence for Mallinckrodt. On average, analysts expect the company to deliver earnings per share of $1.77, which would mark 11% growth from the same quarter last year. Analysts also expect 10% year-over-year sales growth, with revenue coming in at $871.45 million. It remains to be seen whether Mallinckrodt can meet or exceed those expectations.
Given the selloff in the stock, it now has a forward price-to-earnings ratio of only 7.2, which makes it look cheap. Meanwhile, analysts on average are forecasting 20% growth per year for the next five years.
That might make the stock look tempting for some investors who might think this is a chance to buy the next Merck or Pfizer on the cheap. But right now, the risks appear to be too great, at until we get more information that either substantiates or refutes the allegations from Citron. We advise you to watch how the plot pans out before grabbing a piece of Mallinckrodt.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.