Why Mallinckrodt Stock Is Plunging Today

What happened

Shares of Mallinckrodt (NYSE: MNK) are plunging today, down 16.7% as of 11:43 a.m. EDT. The beleaguered drugmaker didn't announce any new developments, but it didn't have to do so for a major sell-off of the stock to continue.

Mallinckrodt shares sank earlier this week after a federal appeals court ruled against the company in a patent infringement lawsuit. Investors also remain worried about Mallinckrodt's prospects in multiple opioid litigation cases. On Monday, Johnson & Johnson was ordered to pay $572 million in an Oklahoma lawsuit related to its opioid drugs.

Perhaps the most disturbing news for Mallinckrodt is that Purdue Pharma is rumored to be considering settling all pending opioid litigation for between $10 billion and $12 billion. As part of this deal, Purdue would also file for bankruptcy.

Businessman looking at chart going down

Image source: Getty Images.

So what

There are simply not enough reasons for even speculative investors to want to stick with Mallinckrodt right now. Should Purdue Pharma declare bankruptcy as part of a deal to settle its opioid lawsuits, there could be increased pressure on Mallinckrodt to reach a similar settlement.

Keep in mind, however, that there's no certainty that any of these scenarios will occur. The rumors about Purdue Pharma haven't been confirmed by the company at this point. Purdue did release a public statement, though, stating, "Purdue believes a constructive global resolution is the best path forward, and the company is actively working with the state attorneys general and other plaintiffs to achieve this outcome."

Even if Purdue did reach a settlement and file for bankruptcy, Mallinckrodt could choose a different path. The circumstances for the two companies are quite different. Purdue is privately held. Its owners, the Sackler family, would still be very wealthy even if Purdue Pharma went bankrupt. Mallinckrodt, on the other hand, is a public company with a board of directors responsible for looking out for the interests of its shareholders. The company's opioid-related operations don't generate the majority of its total revenue.

Now what

Mallinckrodt has more dark clouds lingering over it than Dracula's castle. The company wants to spin off its specialty generics segment but put plans for a spin-off on hold due to uncertainty created by the ongoing opioid litigation. Mallinckrodt said that it "will consider all its available legal options" with respect to the recent unfavorable patent ruling for its INOMax product, but there's no word yet on what steps the company will take.

Investing in pharmaceutical stocks always comes with risks. But the risks for Mallinckrodt appear to be way too high right now to do anything but sit on the sidelines. 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends JNJ. The Motley Fool has a disclosure policy.

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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