Where Else Have We Seen Mallinckrodt’s ‘Acquire to Invest’ Strategy?



Mallinckrodt’s “Acquire to Invest” model

To be sure, Mallinckrodt’s (MNK) share price has come down in line Valeant’s. The business strategies of both companies resemble what Mallinckrodt refers to as “Acquire to Invest.” The company had a strategy to acquire under-resourced treatments for underserved patients as well as late-stage development assets under its specialty brands and generics division. However, Mallinckrodt didn’t raise prices to such extremes as Valeant (VRX) did.

Where Else Have We Seen Mallinckrodt's 'Acquire to Invest' Strategy?

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In February 2016, Mallinckrodt closed the acquisition of three commercial stage topical hemostasis drugs, Recothrom, PreveLeak, and Raplixa from The Medicines Company. The acquisition should be completed in 1Q16. Recothrom, PreveLeak, and Raplixa have market exclusivity until 2026, 2028, and 2031, respectively.

Other companies that have seen growth through acquisitions include Sanofi (SNY), which acquired Genzyme to gain access to its rare disease portfolio. The biggest ever pharmaceutical company deal is expected to happen between Pfizer (PFE) and Allergan (AGN), which will allow Pfizer to shift its headquarters to Ireland. This step would result in significant tax savings for the company.

Potential valuation catalysts 

Although Acthar, Mallinckrodt’s lead product, is approved for 19 indications, it’s only marketed for nine diseases, thus serving only 3% of the population eligible for its use. This reflects a significant market opportunity for Acthar going forward.

Where Else Have We Seen Mallinckrodt's 'Acquire to Invest' Strategy?

The company’s recent acquisition of topical hemostasis drugs represents another valuation catalyst. The market for the hemostatic drugs is ~$1 billion globally. Recothrom, PreveLeak, and Raplixa—all topical hemostatic drugs—are approved for use in the US and certain European countries. This acquisition should enable the company to lessen its dependence on Acthar and mitigate product concentration risks, because Acthar alone contributes 31% to the company’s top-line.

With changing market dynamics the share price of pharmaceutical and biotechnology companies constantly fluctuating, it’s often risky to invest directly in a pharma or biotech company. To remain on the comparatively safer side, investors might consider the SPDR S&P Pharmaceuticals ETF (XPH), which has ~4.3% of its total holdings in Mallinckrodt stock.

Now let’s take a look at Mallinckrodt’s EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization).


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