Covidien Spinoff Mallinckrodt Drops As Citron Research Turns To It From Valeant

Mallinckrodt(MNK) began the week trading at $70 per share. Six months ago, it was above $130. Today, after some comments from Andrew Left of Citron Research, it trades at $62.58, having touched as low as $52.01.  The drug company was spun off of Covidien in 2013. Covidien, which had spun out of Tyco(TYC), was acquired in 2014 by Medtronic (MDT).

Left, whose report on Valeant(VRX) last month shaved tens of billions of dollars off of the company’s market cap, wrote on twitter:

At these prices MNK has signif more downside than VRX- far worse offender of the reimb sys – more to follow. VRX can’t live in a vacuum

Left elaborated yesterday in an appearance on CNBC

“Mallinckrodt is not Valeant, it is worse,” Citron’s Andrew Left said Tuesday on CNBC’s “Fast Money: Halftime Report.” “There’s no company like this.”

Left, who noted he has been short Mallinckrodt “on and off” in recent years, questioned whether the company misrepresented the effectiveness of H.P. Acthar Gel, its high-priced specialty drug. He contended sales of the drug, which is used for infantile spasms and some autoimmune conditions, show Mallinckrodt may have problems with reimbursement from insurance companies.

Left called Mallinckrodt the “poster child” for price gouging.

Mallinckrodt is the latest drugmaker hit by Citron after it published a scathing report about Valeant’s practices last month. Since then, Valeant shares have lost about half their value.

CNBC also spoke with Mallinckrodt CEO Mark Trudeau, who

rebutted Left’s argument Tuesday afternoon, telling CNBC that “the facts he quoted were mostly, if not completely wrong.”

“The main takeaway is that Andrew really put out a whole variety of different speculations and allegations and not very many facts,” Trudeau said in a statement.

Earlier on Tuesday, he defended the company’s business model and downplayed concerns about payment for Acthar. On CNBC’s “Squawk Box,” he contended Acthar is “very effective for a variety of autoimmune conditions” and will “drive value.”

Mallinckrodt in August reported net sales of $965 million for its fiscal 2015 third quarter, a nearly 50 percent increase driven by its inclusion of Acthar. On Tuesday, Trudeau declined to disclose the profit margin for Acthar, which The New York Times said went from $40 a vial to more than $28,000 over a decade.

As CNBC mentioned, The New York Times wrote at length about Acthar.  At the time, Acthar was owned by Questcor Pharmaceuticals, which was later purchased by Mallinckrodt.  Acthar had been initially approved by the FDA in 1952, having been developed by the Armour meat company from the adrenal glands of pigs. Before it was purchased by QuestCor in 2001, the drug cost just $40 per vial. Questcor, which paid just $100,000 for the rights to the drug, raised the price aggressively, reaching $28,000 per vial by 2012 and $32,000 in 2014 The cost to manufacture each vial is less than $300. You read that right- by 2012, the company was making more in profit off each patient(who uses multiple vials), than it paid for the rights to the drug. To be fair, the company also pays a royalty of 1% on sales above $10 million to the previous owner.

Questcor also has aggressively pushed additional indications for the drug which had very limited use previously. Because it was approved in 1952, the company is not limited in the indications it can market the drug for.  In 2008, the drug, which had been largely prescribed to infants, was prescribed 202 times for Medicare patients, leading to $7 million in reimbursements. By 2013, ProPublica estimates, Medicare reimbursements reached $220 million. With total 2013 sales of $761 million, Medicare is a major percentage of revenue.

The company is already under multiple investigations, including one regarding its 2013 purchase of a potential competitive drug. As well, 14% of 2013 prescriptions resulted in adverse event reports, and the drug may be linked to over 20 deaths.

Acthar and its owners, Questcor and now Mallinckrodt, have defied gravity longer than anyone might have expected. But at some point this business built on a sand castle will crumble, leaving shareholders grasping for the grains quickly passing through their fingers, to be scattered by the wind.

Disclosure: The author holds Valeant puts.