Mallinckrodt bets $5.6 billion on Questcor

DUBLIN and ANAHEIM, Calif.—Mallinckrodt plc, a global specialty pharmaceuticals company, and Questcor Pharmaceuticals Inc., a high-growth biopharmaceutical company, have entered into a definitive merger agreement under which Mallinckrodt will acquire Questcor in a transaction valued at approximately $5.6 billion. The transaction was unanimously approved by the boards of directors of both companies. Subject to customary closing conditions, the transaction is currently expected to be completed in the third calendar quarter of 2014.

Under the terms of the transaction, Questcor shareholders will receive $30 per share in cash and 0.897 Mallinckrodt shares for each share of Questcor common stock they own, for a total approximate consideration of $86.10 per Questcor share. Following completion of the merger, Mallinckrodt shareholders will own approximately 50.5 percent and former Questcor shareholders will own approximately 49.5 percent of the combined company’s stock. Based on the closing price of Mallinckrodt and Questcor on April 4, 2014, the total per-share consideration represents a premium of approximately 27 percent per share over Questcor’s stock price, and a premium of approximately 33 percent over Questcor’s trailing 20-trading-day volume-weighted average price.

Questcor’s high-growth H.P. Acthar Gel is expected by some—but not all— to be a strong complement to Mallinckrodt’s broadening growth portfolio of leading specialty pharmaceutical brands, including Ofirmev, Exalgo and Xartemis XR. Acthar generated net sales for Questcor of $761.3 million in calendar 2013, up a tidy 49.6 percent from calendar 2012. It comprises virtually all of Questcor’s sales and is approved by the U.S. Food and Drug Administration (FDA) for 19 indications, many of which are associated with the treatment of autoimmune and inflammatory conditions.

Questcor commercial operations will function as a separate business unit within Mallinckrodt’s Specialty Pharmaceuticals segment.

“We believe this transaction will provide a strong and sustainable platform for future revenue and earnings growth, and provide exceptional value for shareholders of both Mallinckrodt and Questcor,” said Mark Trudeau, president and CEO of Mallinckrodt. “It will substantially increase the scale, diversification, cash flow and profitability of our business, while expanding and enhancing the breadth and depth of our specialty pharmaceutical platform. With Questcor, combined with our recently completed acquisition of Cadence Pharmaceuticals, the new Mallinckrodt will have a significant, established presence with prescribers, payers and hospitals. We will also have an increasingly diversified specialty pharmaceuticals portfolio, which will include novel therapeutics for pain management, as well as central nervous system, renal, rheumatologic and other autoimmune and inflammatory disorders.” Trudeau will continue to lead the combined companies.

“After significant due diligence,” we have concluded that Questcor is another ideal strategic fit with Mallinckrodt,” Trudeau added. “Acthar is increasingly being employed by specialty physicians in the treatment of a range of serious, difficult-to-treat autoimmune and inflammatory conditions, where patients often have exhausted other good therapeutic options.”

“This transaction will create substantial value for our shareholders, employees, customers and patients” said Don M. Bailey, president and CEO of Questcor.

H.P. Acthar Gel (repository corticotropin injection) is an injectable drug approved by the FDA for 19 indications. Increasingly used in the management of difficult-to-treat autoimmune and inflammatory conditions, Acthar is primarily prescribed for the treatment of multiple sclerosis relapses in adults, proteinuria associated with nephrotic syndrome, certain rheumatology-related conditions and infantile spasms. Acthar has already demonstrated impressive revenue growth over the past few years, and future growth is expected to continue to be driven by current on-label indications and possibly future indications as well, the release announcing the merger states.

Without doubt, a great deal of the cited revenue growth has come from steady price increases for Acthar with the price for a single dose now hovering around $30,000. This for a drug approved in 1952 and granted orphan status in 2010 for the treatment of infantile spasms. In a blog posted on the Petrie-Flom Center for Health Law Policy, Biotechnology and Bioethics of Harvard Law School, Dr. Jonathan J. Darrow, a research fellow at Harvard Medical School, notes that the clinical trial data presented in Acthar Gel’s FDA-approved label is not consistent with later clinical experience which places the efficacy of Acthar much closer to that of generic (and dirt-cheap) prednisone.

Despite such disquieting notes, Zacks Equity Research gave the combined companies a Zacks Rank #1 (Strong Buy). A second research firm, The Motley Fool, was not as kind, stating that “If Mallinckrodt can steer Questcor past the rocks that short sellers have been loudly claiming are in the company’s path, this deal could double Mallinckrodt’s earnings in relatively short order. If the short sellers are proven right about the many and varied problems of Questcor and Acthar, Mallinckrodt’s shareholders will pay the price."