Another Serial Spin- Mallinckrodt(MNK) To Spin Off Specialty Generics Business

Well over a century ago, brothers Gustav, Otto and Edward Mallinckrodt founded a chemical company. Today, the company that still bears their name plans a spinoff to try to recreate some of the value that has been lost in the last few years. Mallinckrodt(MNK) today is a second generation spinoff. Grandfather Tyco executed a spinoff of Covidien in 2007. (See our retrospective of Tyco spins).  Six years later, Covidien decided to spin off Mallinckrodt to its shareholders. Now, Mallinckrodt has decided to do a spinoff of its own. The company

plans to spin off a new company consisting of Mallinckrodt’s Specialty Generics/Active Pharmaceutical Ingredients (Specialty Generics) business and AMITIZA® (lubiprostone) to Mallinckrodt shareholders, subject to final Board approval. The separation is expected to create two independent, appropriately capitalized, publicly traded companies – one focused on innovative specialty pharmaceutical brands, the other concentrated primarily in niche specialty generic products and API manufacturing – each positioned to optimize future success as they pursue independent growth strategies.

The Specialty Generics business will retain the Mallinckrodt name after the spinoff while the Specialty Pharmaceutical Brands company that remains will receive a new, yet to be determined name. We are sure the name will be carefully justified by a top branding consultancy and will evoke all of the right feelings in the ears of the listener.

Shareholders will now be able to choose whether they would like to own an oxycodone manufacturer, or the promoter of Achtar, one of the most egregious cases of price gouging. Certainly, there is more to each company than that, but each company will be challenged out of the gate. When we discussed Achtar in 2015, Mallinckrodt traded at $62.58, down from $130. Now, the company trades at just $18.67.

The company expects to complete the transaction “in the second half of 2019 or sooner” as “With the pursuit of strategic alternatives for the Specialty Generics business actively underway for more than two years, important progress has already been made in key areas that the company believes will simplify and support a relatively short separation process.”  The company is only choosing to spin off its Specialty Generics business after failing to find a buyer in two years of searching. Here is the company’s description of Specialty Generics:

For the twelve months ended September 28, 2018, the collective net sales from the new Specialty Generics company exceeded $850 million on an as reported basis inclusive of the AMITIZA product since February 14, 2018.

With approximately 1,600 employees, the newly spun company will include 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. The inclusion of the AMITIZA product in the non-promoted assets to be spun off brings added manufacturing facilities and employees in Japan, and diversifies revenues further. Marketed in the U.S. and Japan by alliance partners, Mallinckrodt recognizes net sales from commercial partnership arrangements in the form of AMITIZA product sales, royalties and milestones. The new Specialty Generics company will be positioned financially to grow its ANDA1 pipeline and expects to launch as many as five new products in 2019. The company will be headquartered in the St. Louis, Missouri area.

Matthew Harbaugh, currently Mallinckrodt’s Executive Vice President and Chief Financial Officer (CFO) and President of the Specialty Generics business, is expected to become President and Chief Executive Officer of the new company upon completion of the spin off.

Harbaugh will step down as Mallinckrodt’s CFO, effective immediately, to focus exclusively on preparing for separation, but will continue to serve as President of the Specialty Generics business and report to Trudeau. A search for Harbaugh’s successor is underway. During this process, George KeglerMallinckrodt’s Vice President of Finance, will serve as interim CFO. Announcements of the Board of Directors for the Specialty Generics business are expected at a later date.

Harbaugh said, “Mallinckrodt has a more than 150-year legacy of operations in St. Louis and a proud history of supplying the highest quality products to customers. As an independent, U.S.-based company, I am confident that we will be well positioned to advance our R&D2 capabilities and continue to maintain our category leadership in controlled substances.”

“Matt has been involved in the Specialty Generics business for over a decade,” said Trudeau. “We’re very pleased to have someone with his leadership experience take the helm.”

Specialty Pharmaceutical Brands will have the bulk of the revenue

With net sales in excess of $2.3 billion3 (inclusive of a $1 billion hospital portfolio and a robust innovative pipeline), the Specialty Pharmaceutical Brands company is expected to gain additional liquidity and financial flexibility from the transaction to enable continued strategic transformation and growth.

As reported on Nov. 6Mallinckrodt’s third quarter 2018 results showed strong customer demand for its branded hospital products – including INOmax® (nitric oxide) gas, for inhalation, OFIRMEV® (acetaminophen) injection and the Therakos® immunotherapy platform – and improved performance for H.P. Acthar® Gel (repository corticotropin injection). Solid execution combined with tight expense control helped support increased R&D investments in the company’s innovative pipeline. Operational excellence and continued strong commercial execution throughout 2018 have also been the catalysts for Mallinckrodt to raise its guidance for adjusted diluted earnings per share in each of the last two quarters.

The company expects to achieve a number of key milestones for its pharmaceutical brands in coming quarters. It anticipates top-line results from both the completed rheumatoid arthritis clinical trial and multiple sclerosis registry for H.P. Acthar Gel as early as the first half of 2019. Additionally, in the second half of 2019, the company is targeting completion of enrollment in Phase 4 trials in uveitis and lupus for the drug, and anticipates completing enrollment in the H.P. Acthar Gel Phase 2 trial in amyotrophic lateral sclerosis as well. Top-line results from the company’s development program for CPP-1X/sulindac are anticipated in the first quarter of 2019, and the pivotal trial results for both StrataGraft® viable engineered skin tissue and terlipressin are expected to be available in the second half of the year.

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 in Bedminster, N.J. The company also plans to maintain other facilities throughout the United States and in AustraliaCanadaIrelandJapanLuxembourg and Switzerland.

The company’s presentation on the proposed spinoff can be found here. It may be that the transaction unlocks value for shareholders, but both companies face significant challenges that will likely lead to depressed valuations going forward.

Disclosure: The author holds no position in any stock mentioned