Why Is Mallinckrodt (MNK) Down 3.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Mallinckrodt (MNK). Shares have lost about 3.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mallinckrodt due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Mallinckrodt's Q2 Earnings & Sales Surpass Estimates

The company reported adjusted earnings of $1.89 per share in the first quarter, beating the Zacks Consensus Estimate of $1.25 but decreasing from the year-ago quarter’s $2.53.

Net sales were $166.5 million in the second quarter. Adjusted net sales, following the adjustment for the retrospective one-time Acthar   Gel (repository corticotropin injection) Medicaid rebate liability, were $700.9 million, beating the Zacks Consensus Estimate of $623 million.  Sales were down 14.9% year over year, primarily due to demand impacts related to COVID-19 and competitive and payer pressures on certain products.

Quarter in Detail

The company now operates in two reportable segments aligned with the previously-announced separation — the Specialty Brands and the Specialty Generics.

Specialty Brands’ sales came in at $522.8 million. Acthar, Mallinckrodt’s largest product, generated sales of $213.7 million, down 19.8% year on year due to continued reimbursement challenges impacting new and returning patients; continued reduction in new patients as a result of COVID-19 pandemic, which is anticipated to affect results in the second half of the year; continued payer scrutiny on overall specialty pharmaceutical spending; and, to a partial extent, the change in the Medicaid rebate calculation.

Inomax, the company’s second-largest product, generated sales of $154.9 million, up 10.9% year over year, driven by an overall increased consumption of nitric oxide, including strong utilization among COVID-19 patients.

Ofirmev sales decreased 42.1% year over year to $52.4 million due to a reduction in elective surgeries stemming from public health orders and institutions focusing on responding to the COVID-19 pandemic.

Sales of the Therakos immunology platform came in at $47.8 million, down 21.5% due to COVID-19 stay-at-home directives impacting patients' abilities to receive treatment in hospitals or apheresis centers.

Amitza net sales were $49.4 million, down 5% due to increased competition in the United States and the biennial price reduction in Japan.

Specialty Generics’ sales amounted to $178.1 million in the quarter.

Adjusted selling, general and administrative expenses were $197.5 million, down from the year-ago quarter’s $208.6 million. Research and development expenses decreased to $82.9 million from $79.6 million.

The cash balance at the end of the second quarter was $818.3 million and the revolving credit facility was fully drawn. Total debt outstanding at the end of the second quarter was $5.293 billion, with net debt of $4.475 billion.

Litigation Update

Due to pressures from the Acthar Gel Medicaid matter, the ongoing opioid litigation and existing debts and the related risk of non-compliance with its financial debt covenant over the next twelve months, Mallinckrodt has been working with external advisors to explore a range of options, including the possibility of filing for reorganization in bankruptcy under Chapter 11 by the company and most of its subsidiaries in the near-term.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Mallinckrodt has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Mallinckrodt has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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