Mallinckrodt to Buy Sucampo for $1.2B to Diversify Portfolio

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In a bid to revive its declining business beleaguered Mallinckrodt plcMNK announced plans to acquire Sucampo PharmaceuticalsSCMP .

Details of the Deal

Mallinckrodt, will commence a cash tender offer to purchase the outstanding shares of Sucampo's common stock for $18.00 per share. The total transaction value, including Sucampo's debt is approximately $1.2 billion.

Mallinckrodt expects to fund the acquisition through borrowings under its existing revolving credit facility, a new secured term loan facility and/or cash on hand.

Rationale of The Deal

The Sucampo acquisition will add two approved drugs - Amitiza and Rescula to Mallinckrodt's portfolio. Amitiza is approved for treatment of chronic idiopathic constipation (CIC) in adults, irritable bowel syndrome with constipation (IBS-C) in women 18 years of age and older, and opioid-induced constipation (OIC) in adult patients with chronic, non-cancer pain, including patients with chronic pain related to prior cancer or its treatment who do not require frequent opioid dosage escalation.

Sucampo is looking to expand the drug's label as well. A supplemental New Drug Application (sNDA) for Amitiza in children 6 to 17 years of age with pediatric functional constipation has been accepted by the FDA on a priority review basis. A decision is expected by Jan 28, 2018.

The acquisition also adds Rescula to Mallinckrodt's portfolio along with experimental candidates VTS-270 and CPP-1X/sulindac. VTS-270 is in phase III development for Niemann-Pick Type C and enjoys an orphan drug designation in the United States. A NDA filing is expected in 2018. CPP-1X/sulindac is also in phase III development for Familial Adenomatous Polyposis under a collaborative agreement between Cancer Prevention Pharmaceuticals (CPP) and Sucampo. The candidate enjoys both orphan drug designation and fast track designation in the United States.

The transaction will be accretive to the bottom line by 30 cents in 2018 and at least double that amount in 2019, assuming a first quarter 2018 close.

Our Take

Mallinckrodt is looking to diversify its portfolio with the Sucampo acquisition and counter the decline in sales of existing drugs.

Mallinckrodt, like Valeant Pharmaceuticals International Inc. VRX has always been on the look-out for acquisitions to expand/diversify its portfolio. However, the company has been under tremendous pressure in 2017.

Mallinckrodt's stock has tumbled 52.9% year to date, compared with the industry's decline of 26.1%

The company's largest product, Acthar's, sales declined in the third quarter as the payer environment has become increasingly complex for specialty drugs. A large number of prescriptions were unfilled beyond the level management expected. The weakness in the sales is expected to persist in the fourth quarter. The pricing of the drug has also been under scanner.

Moreover, the generic segment continues to face weakness as various product categories are witnessing stiff competition, which is hurting both volumes and prices. The company expects double-digit decline in revenues from this segment. The company has also received much censure for the misuse of opioid drugs.

Moreover, the company suffered a setback after a U.S. District Court invalidated 11 patents covering its second-largest product Inomax. We remind investors that in February 2015, Mallinckrodt along with its subsidiaries filed suit in the U.S. District Court for the District of Delaware against Praxair, Inc. PX following receipt of a January 2015 notice from the latter. The notice was regarding Praxair's submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Inomax.

Subsequently, in July 2016, Mallinckrodt filed a second suit against Praxair following receipt of a Paragraph IV notice concerning three additional patents recently added to the FDA Orange Book regarding its ANDA for a generic version of Inomax. Thereafter, a third suit was filed in September 2016. Mallinckrodt plans to appeal against the decision and stated that Inomax has patent protection till 2018.

On the other hand, Sucampo's shares surged 5.9% on the acquisition deal.

Though the addition of Amitiza will add to Mallinckrodt's sales, it might not be enough to counter the decline in Acthar sales.

Zacks Rank

Mallinckrodt currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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Praxair, Inc. (PX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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