US opioid litigation has overshadowed Mallinckrodt’s performance in recent quarters, contributing to a more than 80% drop in its stock price over the course of 2019 and leading it to suspend plans to spin off its specialty generics business
Opioid products account for around one-third of the speciality generics business, suggesting a fall in sales of the painkillers could create a significant headwind for the unit. Yet, Mallinckrodt’s generics business has grown in recent quarters and management thinks it will continue to expand in the long-term.
To explain his confidence in the long-term prospects of the business, Mallinckrodt CEO Mark Trudeau pointed to the potential for it to take on more outsourced manufacturing work.
Trudeau said, “This is a manufacturing business at its core. We currently do contract manufacturing and we believe there are opportunities to expand that business over time.”
Mallinckrodt gained a dedicated contract manufacturing unit, BioVectra, through its 2014 takeover of Questcor Pharmaceuticals. However, Mallinckrodt stuck a deal to sell BioVectra in September.
The deal, which is due to close in the fourth quarter, will see private equity group H.I.G. Capital pay $135m (€122m) upfront to acquire BioVectra, which operates out of several facilities in Prince Edward Island and Nova Scotia, Canada.
Mallinckrodt agreed to sell BioVectra despite seeing long-term growth potential in the business. The incorporation of $75m in milestones into the sale will allow Mallinckrodt to benefit if BioVectra lives up to that potential but Trudeau’s comments about the specialty generics business suggest the company also wants to profit from demand for outsourced manufacturing more directly.
The top five contract development and manufacturing organisations (CDMOs) are expected to grow at up to 6.5% per annum over the coming years, further expanding a market valued at $92.3bn in 2017.
Those leading organisations account for around 15% of the market, meaning there is a long tail of smaller CDMOs that comprise most of the industry.
Mallinckrodt wants its speciality generics unit to be one of the smaller players that captures rising demand for outsourced manufacturing. However, with Mallinckrodt still wanting to spin off the unit in the belief that separating its businesses will maximise their value, the current parent organisation may not be the one to reap the hoped-for benefits of expanding the service operation.