Mallinckrodt PLC (MNK): Don’t Try to Catch a Falling Knife

Canaccord deems crashing MNK shares an overreaction, but cuts price target down over a third.


Mallinckrodt PLC (NYSE:MNK) shares plunged almost 36% yesterday and continue to fall today in pre-market trading, with infuriated analysts pointing fingers at the drug that brings this biotech player 40% of its revenue dollars: the infamous blockbuster asset Achtar, a gel designed to treat infantile spasms and multiple sclerosis. This is the company’s lead asset, and a gel that yielded $308.7 million in sales, coming up quite short of consensus expectations towering above at $326.6 million.

Canaccord analyst Dewey Steadman warns, “Don’t try to catch a falling knife,” finding that “unclear answers on Acthar strategy” certainly are “not inspiring [near-term] confidence.” In fact, “if this is the reaction for some fulfillment hiccups,” asks the analyst, “what’s going to happen when real ACTH competition arrives?”

It does not look good for this biotech firm as the analyst reiterates a Hold rating on MNK stock while lowering the price target from $38 to $24, which represents a close to 21% increase from current levels. (To watch Steadman’s track record, click here)

Steadman is quite critical here, asserting, “Despite a bottom-line beat, we’re highly disappointed with Mallinckrodt’s 3Q/17 print, both because of issues facing fulfillment of the company’s key product Acthar and because of the company’s evasive answers to questions about the company’s work to address the fulfillment issue. That said, we think today’s stock move (-35%) is overdone and many frustrated long investors we spoke with generally feel the same way. However, some shorts feel the stock can move down further as Acthar issues may lead to leverage issues over time.”

True, Acthar’s downward trend of unfilled prescriptions already would have spooked investors, but the analyst believes MNK’s management team did not help itself when it failed to tackle analyst’s blatant questions wondering what are “the root causes and potential solutions for the issue.” To an extent, Steadman grasps Mallinckrodt’s “need for vague answers,” yet, investors are not satisfied without ability to see a “coherent strategy” that may have caught the drug maker’s team “flat-footed by the trend.” Especially with at minimum three rivals brewing in the adrenocorticotropic hormone (ACTH) arena in the coming years, Steadman lingers on the sidelines with rising apprehension. How can MNK shares have “potential […] to appreciate with a continued Acthar overhang?”

According to TipRanks, MNK analyst consensus ranges between the bulls and the torn analysts who have yet to decide either way, leaving the drug maker’s confident base quite upset following its dismal third quarter showcase. Based on 15 analysts polled by TipRanks in the last 3 months, 8 rate a Buy on Mallinckrodt stock while 7 maintain a Hold. The 12-month average price target stands at $43.29, marking a 115% upside from where the stock is currently trading.