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Mallinckrodt (MNK) to Separate Generics & Branded Businesses

Zacks

Mallinckrodt plc MNK announced that it intends to spin-off its Specialty Generics/Active Pharmaceutical Ingredients business and Amitiza into a new company.

The company expects to create two independent, appropriately-capitalized, and publicly-traded companies — one focused on innovative specialty pharmaceutical brands, and the other primarily on niche specialty generic products and API manufacturing. The spin-off is expected to be completed by the second half of 2019.

Generic Business as New Company

The new generic business company is expected to be listed on the New York Stock Exchange (NYSE), and will assume the Mallinckrodt name and ticker symbol, while the independent Specialty Pharmaceutical Brands company will be renamed later.


The separation is planned to be executed through a pro-rata distribution of common stock to the shareholders that is generally tax-free for U.S. federal income tax purposes.

Given the decline in sales, Mallinckrodt has been exploring a range of strategic alternatives for its Specialty Generics business from 2016. The company believes that operating independently will allow this new company to more rapidly capitalize on its growth opportunities. Sales from the new Specialty Generics company exceeded $850 million on a reported basis, inclusive of the Amitiza product since Feb 14, 2018.

Headquartered in St. Louis, MO, the company will have roughly 1,600 employees. The portfolio includes a leading acetaminophen business, a portfolio of both API and generic finished dose forms of controlled substances and other drugs, a niche specialty generics development portfolio, and a strong U.S. manufacturing footprint along with Amitiza. The company expects to launch as many as five new products in 2019.

Profile of The Specialty Pharmaceutical Brands Company

Following the spin-off, ordinary shares of the renamed Specialty Pharmaceutical Brands company will continue to trade on the NYSE. The company will maintain its global headquarters in Staines-upon-Thames, United Kingdom, and its principal U.S. office.

This company includes H.P. Acthar Gel, Inomax, Ofirmev and the Therakos immunotherapy platform along with a robust pipeline.

Top-line results from both the completed rheumatoid arthritis clinical trial and multiple sclerosis registry for H.P. Acthar Gel are expected by the first half of 2019. The company expects to complete enrollment in phase IV trials for uveitis and lupus on the drug, and in the phase II trial on Acthar in amyotrophic lateral sclerosis in the second half of 2019.

Top-line results from the company's development program for CPP-1X/sulindac are anticipated in the first quarter of 2019, and trial results for both StrataGraft viable engineered skin tissue and terlipressin are expected to be available in the second half 2019.

Our Take

The spin-off of the generic business appears to be a step in the right direction as this will enable Mallinckrodt to focus better on the branded business, which promises potential.

Mallinckrodt has streamlined its business of late to focus better on its innovative medicines and therapies. The company has been involved in quite a few lawsuits for its alleged role in the current opioid epidemic in the United States through its marketing and promotion practices.

Mallinckrodt’s stock has lost 4.6% in the year so far, against the industry’s decline of 10.8%. Shares were down 6.9% following the announcement.

Zacks Rank & Key Picks

Mallinckrodt carries a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering are Bristol-Myers Squibb Co. BMY, Eli Lilly and Co. LLY and Merck & Co. Inc. MRK. While Bristol-Myers sports a Zacks Rank #1 (Strong Buy), Lilly and Merck carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bristol-Myers’ earnings per share estimates have increased from $3.63 to $3.87 for 2018 and from $3.92 to $4.08 for 2019 over the past 60 days.

Lilly’s earnings per share estimates have increased from $5.47 to $5.58 for 2018 and from $5.77 to $5.79 for 2019 over the past 60 days.

Merck’s earnings per share estimates have increased from $4.28 to $4.34 for 2018 and from $4.67 to $4.71 for 2019 over the past 60 days.

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