Fears of a Mallinckrodt Bankruptcy May Be Premature By Josh Nathan-Kazis Sept. 6, 2019 9:38 am ET Order Reprints Print Article Text size
Photograph by Haley Lawrence Shares of the battered drugmaker Mallinckrodt fell 38.6% Thursday on bankruptcy fears, but those worries could be premature, two analysts suggest.
The drop came after a Bloomberg report Wednesday afternoon that the company had hired restructuring advisors, and that it was exploring options, including a possible bankruptcy, in light of its large debt load and the possibility that the company may need to pay a significant amount of money in connection with the opioid litigation.
Mallinckrodt (MNK) did not comment for the Bloomberg story, and did not immediately respond to a request for comment from Barron’s.
But in a note on Friday morning, SVB Leerink analyst Ami Fadia wrote that Mallinckrodt management said in conversations on Thursday that it often hires advisors for various reasons, and it’s hoping for the best but planning for the worst.
“There is no debating the fact that MNK has too much debt and is ill-equipped to handle a large opioid related settlement or liability resulting in a immediate call on cash,” wrote Raymond James analyst Elliot Wilbur on Thursday. “That said, unless there is a large scale settlement emerging involving MNK we have somehow missed, we just don’t think the company is anywhere close to the brink of bankruptcy.”
The back story. Mallinckrodt is heavily leveraged, with a net debt to EBITDA ratio of 4.6, compared to 1.6 for the broader S&P 500 Health Care sector. The stock is down 89.9% so far this year, as the company faces challenges on multiple fronts, including opioid lawsuits and a legal struggle with the federal government over rebates for its Acthar gel product.
What’s new. The Bloomberg report on Thursday tanked Mallinckrodt’s stock. It comes amid a flurry of developments in the opioid litigation, none of which look good for the drug makers defending against opioid lawsuits.
Johnson & Johnson (JNJ) lost a state court decision last week in Oklahoma in the first major opioid case to go to trial; Purdue Pharma was reported to be nearing bankruptcy; and, early this week, the judge in the federal opioid multi-district litigation issued a series of rulings that didn’t go the way the defendants wanted.
Clearly, all is not well for Mallinckrodt. In her note on Friday, Fadia acknowledged that the company was in a tricky situation. “The outcome of the opioid litigation is the key wild card which puts the company in a precarious position,” she wrote. “[In] the worst case scenario it is conceivable that the company may be required to make a large payment which it is unable to make. We believe that it makes sense for the company to explore all options as it prepares for the worst.”
Fadia, who rates the company Market Perform, cut her price target to $2 from $7 on Friday, citing the increased risk profile for the company.
In his note on Thursday, Wilbur noted that the company has $550 million in cash, and expects to generate $600 million in free cash flow in 2019. He wrote that the company has enough cash to cover a $700 million debt maturity next April. If the company loses its lawsuit with the federal government, it could owe $600 million in retroactive discounts for Acthar gel.
Looking forward. Shares were up 5% at 9:35 a.m. on Friday. Still, the stock closed at $1.59 on Thursday, and that day set a new 52-week low of $1.43.
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