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Inside the Double-Digit Fall for Mallinckrodt’s Specialty Generics Business in 2016

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Nov. 20 2020, Updated 12:19 p.m. ET

Specialty Generics’ performance in 2016

Specialty Generics’ contribution to Mallinckrodt’s (MNK) net sales fell by 18% to $1 billion in 2016. The business had a 31% share in Mallinckrodt’s total net sales during 2016. But during the fourth quarter, this share dropped to 27% of MNK’s total revenue.

Rising market competition for Oxycodone-related products, other controlled substances, and hydrocodone-related products drove the fall in the segment. The revenue fall for Methylphenidate ER followed its reclassification by the FDA (US Food and Drug Administration) to “therapeutically inequivalent” status. MNK disagreed with this decision and is pursuing the FDA’s hearing process on it. Although it’s a cash-generating business, Mallinckrodt expects a continued fall for the segment in 2017.

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For Specialty Generics, the US is the largest market for the company. Mallinckrodt fetched 85% of the segment’s revenues from the country. In 2016, the segment’s revenue from the US fell 16% to $870.5 million. Along with Mallinckrodt, Valeant Pharmaceuticals (VRX), Endo International (ENDP), and Teva pharmaceutical (TEVA) are also exposed to generic competition and expect a decline in this business.

Operating income for Specialty Generics

The operating income for the Specialty Generics segment fell to $376.1 million in 2016 from $594.4 million in 2015. Along with the revenue fall, its operating margin for the segment dropped to 36.7% in 2016 from 47.5% in 2015. Lower net sales, rising competition, and higher R&D (research and development) led to margin contraction.

Remember, as Mallinckrodt’s has a high dependence on Acthar, it’s exposed to product concentration risk. Acthar also holds higher exposure to government-oriented franchises. (For more information on Acthar, please refer to “Acthar’s Higher Exposure to Government-Oriented Franchise.”)

Notably, if you invest in the First Trust Health Care AlphaDEX ETF (FXH), you’ll gain indirect exposure to Mallinckrodt. FXH invests ~1.8% of its total assets in MNK.

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