Mallinckrodt’s (MNK) Specialty Generics segment deals with the production of niche generic pharmaceuticals and API. It consists of “biologics, medicinal opioids, synthetic controlled substances, acetaminophen and other active ingredients.”
The total contribution from the segment in fiscal 2Q16 stood at $264.4 million, which represents a 27% YoY (year-over-year) decline. Rising competition, pricing pressure, and headwinds from buyer consolidation are among the major reasons for the decline in this segment. And the segment’s sales are expected to keep dropping in 2017.
The operating income for this segment was $101.6 million in 2Q16, which represents a 38.4% decline, as compared to the 56.1% decline in 2Q15. This margin contraction was driven by a fall in the net sales for the segment. Increased competition and pricing pressure also dragged down the segment’s operating margin.
Light gross margins
The growing Specialty Brand segment, however, is expected to offset the margin decline in Specialty Generics, and so overall gross margins are expected to remain light going forward. Other companies that operate in specialty generics include Mylan (MYL), Teva Pharmaceutical Industries (TEVA), and Valeant Pharmaceuticals (VRX).
Industry-specific factors such as pricing pressure and volume uptake are major contributors to any company’s performance, and stock prices are generally susceptible to such events. To avoid such risks, ETFs are often good investment options. For exposure to Mallinckrodt, you might consider the iShares US Pharmaceuticals ETF (IHE), which has ~2.5% its total holdings in MNK.
Continue to the next part for a look inside Mallinckrodt’s operating expenses.