Mallinckrodt to spend over $1.3B to acquire Therakos Inc.

The M&A deal is intended to expand Mallinckrodt’s hospital-oriented specialty products line

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CHESTERFIELD, U.K. & LOS ANGELES—Mallinckrodt plc wants to add “depth and dimension” to its Specialty Brands segment and wants to further diversify its portfolio with an “innovative high-value, high-margin drug/device system used in hospitals and major medical centers in more than 25 countries.”
The company is going to do that by laying $1.325 billion on the table (metaphorically speaking) to buy up immunotherapy company Therakos Inc. from The Gores Group LLC. On Aug. 10, the companies announced a definitive agreement under which a subsidiary of Mallinckrodt will do the actual acquiring and, subject to customary closing conditions, the parties expect the transaction to be completed in the latter part of the third quarter of this year, which also happens to be Mallinckrodt’s fourth fiscal quarter. The transaction is expected to be accretive by no less than 10 cents per share to Mallinckrodt’s adjusted diluted fiscal 2016 earnings and increasingly accretive thereafter.
Therakos considers itself a global leader in autologous immune cell therapy delivered through extracorporeal photopheresis (ECP) and is focused on providing “innovative treatment platforms that harness the power of patients’ immune systems to fight disease.” Therakos Photopheresis is approved by the U.S. Food and Drug Administration for the palliative treatment of the skin manifestations of cutaneous T-cell lymphoma (CTCL) in persons who have not been responsive to other forms of treatment. Outside the United States, Therakos Photopheresis is also broadly approved for ECP, and used by physicians in countries around the world in immune-modulating applications in a variety of conditions including CTCL, graft-versus-host disease, Crohn’s disease, solid organ transplants and other indications.
Therakos says its therapeutic platforms, including the latest generation Therakos CELLEX Photopheresis System, are the world’s only approved, fully integrated systems for administering autologous immune cell therapy through ECP.
“This transaction demonstrates our ongoing commitment to building a strong, highly profitable hospital growth business as we build and diversify Mallinckrodt’s Specialty Brands portfolio,” said Mark Trudeau, president and CEO of Mallinckrodt. “In expanding our hospital portfolio we continue to move decisively in line with our strategic roadmap. And we believe we will be able to unlock untapped value in Therakos, making ECP treatment accessible to more patients in more hospitals by applying some of the innovative contract, service and customer intimacy principles that have been so successful with our INOMAX (nitric oxide) for inhalation.”
“One of Mallinckrodt’s core strengths is our unique ability to manage complexity, delivering additional value to diverse products and environments,” he continued. “With this expansion into immunotherapy we add to our footprint of nuclear medicine, pain management and respiratory neonatal critical care, broadening our touch points in hospitals and further expanding our portfolio with innovative therapies.”
Trudeau maintained that Therakos is, “quite simply, another excellent fit for Mallinckrodt. It is an immunotherapy treatment for patients who may have exhausted other therapies, with significant potential value in a variety of complex disease states and conditions.”
Alec Gores, CEO and chairman of The Gores Group stated: “Following our acquisition of Therakos from Ortho-Clinical Diagnostics Inc., a former subsidiary of Johnson & Johnson, in December 2012, we took a number of steps to expand and grow the business, including appointing a healthcare leadership team, led by Michael Rechtiene and Sandra Thompson, with more than 20 years of experience in the space. We are proud of Therakos’ success, especially its innovation and impact on patients globally, and believe it is a classic example of Gores’ strength in acquiring corporate carve-outs and partnering with management teams to successfully transition corporate subsidiaries into thriving standalone businesses.”
The Therakos commercial team will be integrated into Mallinckrodt’s current critical care organization within its Hospital Specialty Brands business. The company expects to augment sales of Therakos products with its skilled customer experience teams, which include sales, marketing, training and clinician support.
Mallinckrodt predicts that with roughly 60 percent of Therakos’ revenue in the United States, there should be fiscal 2015 net sales of $185 million to $195 million, and the company anticipates high single-digit growth off that base going forward, driven primarily by the U.S. market.
Mallinckrodt is a global specialty biopharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents. Areas of focus include therapeutic drugs for autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology; neonatal critical care respiratory therapies; and analgesics and central nervous system drugs. Therakos is an immunotherapy company focused on providing innovative treatment platforms that harness the power of each individual patient’s immune system to fight disease.
Is it a good deal?
Well, analysts at Morningstar wrote, “Mallinckrodt continues to use acquisitions to expand its product portfolio with the announcement that it will acquire Therakos for nearly $1.3 billion ... Although Therakos’ device and drug platform should possess a long product life cycle with recurring consumables revenue and little risk of new entrants, we think a limited market opportunity, even when including possible future indications, combined with the high price tag should keep our fair value estimate relatively unchanged as we incorporate the deal into our model. Management predicts a peak sales opportunity near $500 million as sales currently remain under $200 million. Although this acquisition enhances Mallinckrodt’s hospital and clinical product portfolio and may accelerate cross-selling opportunities, we stand by our no-moat rating at this time.”
The New York Times suggested the acquisition might have a bit to do with Mallinckrodt being “under a bit of pressure because the growth of its biggest product, HP Acthar Gel, seems to be slowing, only a year after Mallinckrodt obtained the ultraexpensive, immune-modulating drug in its acquisition of Questcor.”
In coverage by The Wall Street Journal, it was noted: “Acquisitions have fueled sales for Mallinckrodt, particularly within the specialty brand segment, where revenue in Mallinkrodt’s June quarter nearly quintupled from a year earlier and offset sales declines in its other segments.”
But in the end, investors may be as neutral as the analysts so far (or at least only mildly leaning toward “buy”), with Reuters noting that the news of the acquisition did very little to move Mallinckrodt’ share price.

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