Analyst: Why The Sucampo Deal Is A Smart Move For Mallinckrodt

Mallinckrodt PLC (NYSE: MNK) announced an agreement Tuesday to buy Sucampo Pharmaceuticals, Inc. (NASDAQ: SCMP) for $1.2 billion.

The Analyst

Cantor Fitzgerald analyst Louise Chen has an Overweight on Mallinckrodt with a $42 price target.

The Thesis

The Sucampo transaction is a smart strategic deal, signalling a good end to the year and start to the new one, Chen said. (See the analyst's track record here.) 

"We like this deal because it brings a commercial product (Amitiza) and two Phase 3 pipeline assets (CPP-1X/sulindac, VTS-270) in rare diseases with combined peak sales of $450 million-plus," Chen said.

Mallinckrodt expects the deal to be accretive to 2018 earnings per share by at least 30 cents, and double that in 2019 if it closes in the first quarter of 2018, Chen said. 

The Sucampo deal and others announced by Mallinckrodt earlier this year "expand its portfolio and pipeline assets to diversify the growth and dialogue for the story beyond Acthar," an injectable hormone therapy, Chen said. 

"Concerns about competition and reimbursement challenges for Acthar have been an overhang on MNK's stock, in our opinion," the analyst said. 

Mallinckrodt expects to fund the Sucampo deal through borrowings under its revolving credit facility, a new secured term loan facility and/or cash on hand, according to Cantor Fitzgerald. 

Mallinckrodt suffered from a perception problem that ties it to headline risks in the pharma industry, Chen said, such as scrutiny of high-priced drugs and government investigations. This, the analyst said, masks the growth potential of the company's specialty brands business and its consistent ability to meet or beat expectations.

The Price Action

At the time of publication: 

• Mallinckrodt shares were up 0.56 percent to $23.45.
• Sucampo Pharma was rallying 5.74 percent to $17.98.

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