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Mallinckrodt Down After Agreement with DOJ for Litigation

Zacks Equity Research

Shares of Mallinckrodt plc MNK were down 7.9% after the company announced that it reached an agreement in principle with the U.S. Department of Justice (DOJ) in relation with the Questcor litigation.

The company has reached an agreement to resolve the previously disclosed government investigation of Questcor's legacy sales and marketing activities, but it is still subject to the finalization of certain terms.

Mallinckrodt expects to pay $15.4 million relating to legacy Questcor activities, per the civil False Claims Act settlement.

We remind investors that the company was in the news last month, as there were allegations against Acthar’s previous owner, Questcor, for conducting illegal sales and marketing activities related to the drug. Per the company, the original action was filed in 2012, prior to Mallinckrodt's ownership of Acthar Gel, and consisted of two complaints filed by former Questcor employees. Mallinckrodt acquired Questcor in August 2014.

The U.S.  Department of Justice (DOJ) elected to join an existing civil False Claims Act case against the company. the government is seeking to recover unspecified monetary damages for alleged violations of the False Claims Act and the Anti-Kickback Statute.

Nevertheless, the company denies any wrongdoing on the part of Questcor during the relevant period and plans to defend itself in this matter.

Mallinckrodt’s stock has plunged 43.4% in the year so far, compared with the industry’s decline of 13.8%.

 

Shares also crashed significantly last week after the company filed suit in federal district court against the U.S. Department of Health and Human Services (HHS) and Centers for Medicare and Medicaid Services (CMS) to protect Medicaid patient access to Acthar.

The lawsuit was filed against the agency’s decision, which required Mallinckrodt to change the base date average manufacturer price (AMP) used to calculate Medicaid drug rebates for Acthar. The drug generated sales of $223.9 million in the first quarter.

Meanwhile, the company has decided that it will spin off a new company consisting of the Specialty Generics/Active Pharmaceutical Ingredients (Specialty Generics) business. The company had announced in December 2018 that the new Specialty Generics company would include constipation medicine Amitiza (lubiprostone).

However, given the strong return-to-growth performance of the Specialty Generics business, it was decided that the Amitiza product will remain with the Specialty Brands company. Per the company, retaining the Amitiza product will better serve the needs of the Specialty Brands company, providing revenue diversification and stronger cash flows to enable debt reduction.

Zacks Rank and Stocks to Consider

Mallinckrodt currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks are Bristol-Myers Squibb Co. BMY, Roche RHHBY and Celgene Corp. CELG. While Bristol-Myers sports a Zacks Rank #1 (Strong Buy), the other two 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 $4.78 to $5.03 for 2020 in the past 60 days.

Roche’s earnings per share estimates have increased from $2.35 to $2.40 for 2019 in the past 60 days.

Celgene’s earnings estimates have moved up by a cent to $10.74 over the past 30 days.

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