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Mallinckrodt (MNK) Down After Filing Suit Against HHS and CMS

Zacks Equity Research

Shares of Mallinckrodt plc MNK crashed 24.2% 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. 

Through the lawsuit, the company challenges CMS' unexplained and unlawful reversal of its repeated 2012 written authorizations on calculation of Medicaid rebates for Acthar.

The company has decided to seek court intervention to ensure that CMS follows Administrative Procedure Act and other legal requirements, after repeated failed attempts to solve the matter through discussions.

Acthar Gel, which became part of the company’s portfolio following the Questcor acquisition, is currently approved for 19 indications. It is the lead drug in Mallinckrodt’s portfolio.

Per Mallinckrodt, the attempted reversal, which CMS seeks unlawfully to make retroactive, would substantially eliminate Medicaid net sales of Acthar Gel.

If the court doesn’t intervene, Mallinckrodt would lose Medicaid net sales for Acthar Gel, which currently contributes 10% to total Acthar sales. This in turn also jeopardizes the company’s annual guidance of raking in more than $1 billion of Acthar sales in 2019, with the potential for retroactive non-recurring charges going up to $600 million.

We remind investors that Mallinckrodt 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 Acthar. Per the company, the original action was filed in 2012, prior to Mallinckrodt's ownership of Acthar Gel, and consist of two complaints filed by former Questcor employees.

The U.S.  Department of Justice (DOJ) elected to join an existing civil False Claims Act case against the company. However, since these allegations were made prior to Mallinckrodt's acquisition of Acthar Gel, the company does not expect any impact on its business today due to these.

Mallinckrodt’s stock has plunged 37.5% in the year so far compared with the industry’s decline of 4.6%.

 

Acthar generated sales of $223.9 million in the first quarter. We expect the lawsuit to weigh on shares until resolved.

Zacks Rank & Key Picks

Mallinckrodt currently carries 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 3 cents to $10.74 over the past 30 days.

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