In March 2017 Mallinckrodt (MNK) announced it was exploring the sale of its generics business in a deal that could have fetched values as high as $2 billion:

Mallinckrodt Plc (MNK.N) is exploring a sale of its generic drug unit, in a deal that could fetch as much as $2 billion and help pivot the specialty pharmaceutical maker toward higher-margin branded drugs, according to people familiar with the matter.

In November 2017 market chatter suggested Intas Pharmaceuticals was closing in on a $1.5 billion acquisition of the generics unit. Current chatter suggests the deal could be trouble due to lower than expected bids. At the end of the day, the generics business still has not been sold despite having been on the market since Q1 2017. That could be a problem as Q4 earnings results roll around.

The Situation

Mallinckrodt’s main drug Acthar showed cracks in Q3. Athar represents about 39% of total revenue, so when its revenue declined 6% Y/Y investors soured on the stock. I expect Acthar sales to continue to decline as insurers could question its use beyond indications for infantile spasms and multiple sclerosis. The company’s other major problem is its Specialty Generics segment; the segment is about 26% of total sales and fell off 20% Y/Y. Over 80% of the Specialty Generics segment is related to controlled substances and opioids like hydrochodone and oxycodone.

Last year Mallinckrodt paid a $35 million settlement for failure to report suspicious orders of drugs such as oxycodone. Drug overdose has surpassed car accidents as the leading cause of accidental deaths. Some have linked the rise in drug overdoses to the proliferation of opioid prescriptions. President Trump has labeled the country’s opioid addiction a “national crisis” and policymakers are looking to tamp down the rising number of opioid prescriptions. This partially explains the free fall in sales for Specialty Generics.

There could be more headwinds ahead as CVS (CVS) agreed to limit opioid prescriptions to seven days and limit the daily dose of pain pills based on their strength. Headwinds for opioid sales likely hurt the sales process for Specialty Generics. First of all, the decline in revenue and earnings sense Q1 2017 likely justifies a price cut. Secondly, determining when the free all will end is anybody’s guess. Buyers may have to price in the worst-case scenario to justify acquiring a shrinking asset.