Mallinckrodt Creating Two Companies: Generics And Innovative Specialty Drugs

The company, which makes generic opioid products and the controversial Acthar Gel, is looking to chart a new course for the future – or make that two new courses.

Mallinckrodt PLC will soon begin operating as two independent publicly traded companies – an innovative specialty drug marketer, and a generic and active pharmaceutical ingredient developer. That's after the company announced plans to spin out its specialty generics and API business Dec. 6, pending final board approval. The spin-out is expected to be completed in the second half of 2019.

The decision is part of a strategy to position some of the business into a new pure-play specialty pharmaceutical company, even as the company has sought to reduce its dependence on H.P. Acthar Gel (corticotropin injection). Acthar has been a controversial product, because it is an older medicine that underwent an enormous price hike.

"Specialty generics and specialty pharmaceutical brands have distinct business models and each has been impacted by the divergent set of market dynamics," CEO Mark Trudeau said in a same-day conference call. "The planned separation will allow the respective management teams to focus on and commit to the long-term strategic priorities aligned with each company's stakeholders."

Trudeau is expected to remain CEO of the new innovative company, which will be named at a later date and trade on the New York Stock Exchange.

Chief Financial Officer and President of the Specialty Generics business Matthew Harbaugh will become CEO of the new generics and API company upon completion of the spin-out, which will be executed through a pro-rata distribution of common stock to Mallinckrodt's shareholders.

The generics company will assume the Mallinckrodt name and ticker symbol. Although Mallinckrodt is based in the UK, the generics business is based in the US and will be headquartered in the St. Louis area.

The generics business has been a de-prioritized business at Mallinckrodt for some time, and it has been reported under discontinued operations in the company's financial updates as it has explored strategic alternatives.

The decision to break out the business will be refreshing and provide an opportunity to direct its own cash flow into reinvestments, Harbaugh said.

"In the last few years, the specialty generics business has assumed a supporting player role within Mallinckrodt," he said.

Innovative Pharma: A $2.3bn Business

The better known innovative pharma business will have net sales in excess of $2.3bn, with a portfolio of hospital products including INOmax (nitric oxide) gas, Ofirmev (acetaminophen) injection and Acthar for a range of autoimmune conditions.

Acthar attracted negative attention because it is an old drug that saw a steep jump in price, mostly under its prior owner Questcor, from $1,640 to $34,034 a vial since 2001.

Mallinckrodt acquired the product in 2014, but sales have come under pressure more recently. Acthar sales declined 6% year-over-year to $290.1m in the third quarter. The drug accounted for about 45% of the company's continuing operations – excluding the discontinued generics business – in the third quarter.

Mallinckrodt acquired Sucampo Pharmaceuticals Inc. for $1.2bn, including debt, earlier this year in an effort to diversify its portfolio. (Also see "Mallinckrodt Reduces Acthar Reliance With $1.2bn Sucampo Buy" - Scrip, 27 Dec, 2017.) The company gained Amitiza (lubiprostone), a marketed drug for various constipation indications, and Rescula (unoprostone) for lowering ocular pressure, which is sold in Japan. Amitiza is poised to face generic competition in the near-term, so the longer-term benefits of the deal were focused on the late-stage pipeline, which includes two Phase III drugs for rare conditions.

Generics Gets Amitiza

Amitiza will go to the specialty generics business, which Harbaugh said was appropriate because it is managed through established commercial partnerships that resemble some of the company's other non-promoted brands for pain, addiction treatment and attention-deficit hyperactivity disorder (ADHD). An authorized generic version of the drug also is expected to launch in the US in 2021 under a settlement with Par Pharmaceutical . It is marketed by Takeda Pharmaceutical Co. Ltd. in the US.

The generic business generated $850m for the 12 months ended Sept. 28, including seven months of sales of Amitiza.

The specialty generic business also will have a leading acetaminophen business, a portfolio of API and generic finished-dose forms of controlled substances and a strong US manufacturing footprint, the company said. The business will employ 1,600.

 "We anticipate roughly 40% of the business will come from APIs, approximately 35% will come from specialty generic dosage products and the remaining 25% will come from Amitiza and other non-promoted brands," Harbaugh said. "Specialty generics also has an ANDA pipeline of complex generics that we believe positions the business for growth longer term." The business is on track to launch as many as five new products in 2019, he said.

One of the challenges, however, will be around potential opioid litigation liability.

Leerink analyst Ami Fadia, in a same-day note, said the news could be incrementally positive for the innovative specialty company, because it could be a source of liquidity to further bolster the pipeline, but the headwinds facing the generic business could be problematic.

"We believe the addition of Amitiza to this business is a positive as it provides a source of cash flows at least in the near term," Fadia said. "However, we believe investors will struggle with the lack of visibility into the pipeline on which very little has been disclosed so far, continued macro headwinds in generics, and the outstanding opioid litigation overhang."