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In ANI, rival emerging for Mallinckrodt’s Acthar?

May 8, 2017

ANI Pharmaceuticals is working on a generic corticotropin product.

At the same time, MNK has been unable to effectively diversify away from Acthar through M&A.

This leaves the company and its shareholders in a vulnerable position.

With Mallinckrodt (NYSE:MNK) reporting on Monday, we thought it would be a good time to look at what generates a majority of the company’s cash flow and what we believe to be a new emerging threat that may interrupt that cash flow stream. With every day that goes by, ANI Pharmaceuticals (NASDAQ:ANIP) gets one step closer to developing their generic competitor to MNK’s cash cow, Acthar.

At this point it is accepted relatively widely and agreed-upon between bears and bulls that Acthar gel drives not only the majority of MNK’s earnings, but also majority of the company’s cash flow. Because it plays such a key role in the company success, the company has tried to make a point of diversifying away from Acthar, which would create some redundancy and secure a business that won’t be in dire straits if it loses just one drug. In other words, Acthar is the company’s pressure point, and it needs to remove itself from the possibility of a one hit K.O. by someone interrupting Acthar sales.

MNK management has been saying on conference calls for the last year or two that they are actively looking for ways to decrease Acthar’s total overall contribution to operating income. They have stated they wanted to get the drug down to about 33% of operating income or less. In previous articles, we have basically argued that this is impossible without the company making some type of major acquisition. We don’t believe now is a great time for the company to make an acquisition not only due to their debt obligation and current leverage, but also because the value of their stock is low. In other words, this isn’t a great time for the company to use its cash, nor is it a great time for the company to issue stock.

MNK has found success with Acthar because it has taken the alternatives out of commission. It entered into a settlement agreement with the FTC a few months ago because it had been hoarding Synacthen Depot, a widely available synthetic that is not approved here in the US but is approved and used in Europe. Nobody had been advancing the development of the synthetic because MNK bought and secured the rights to it years ago. Even now, after the FTC has found that the company had essentially had a monopoly and had needed to divest of Synacthen, MNK is still in pretty good shape. They had to license Synacthen to Marathon Pharmaceuticals, which has done little with it thus far and will likely do little with it in the future.

But then there is the case ANIP, which is working to develop a generic version of corticotropin gel, the same supposed active ingredient that works in Acthar. The company has had this drug in development for a while and continues to make progress. From the company’s last press release,

In the first quarter 2017, ANI’s active pharmaceutical ingredient (“API”) manufacturer successfully manufactured a development lot of Corticotropin API, replicating the yield and process from when the API was last manufactured. In the second quarter, ANI has initiated the scale-up of the API manufacturing process and process characterization, which is the next step prior to commercial scale API manufacturing. ANI has identified potential finished dosage form contract manufacturers and plans to select one and initiate Corticotropin finished dosage form manufacturing in the second half of 2017. ANI has continued to make progress developing analytical methods to analyze the components of the purified Corticotropin API powder. These analytical methods are being used to generate results that are, in turn, compared to results from historical batches of API. ANI has developed a comprehensive regulatory filing plan for the Corticotropin Gel product and intends to meet and present the plan to the FDA in the second half of 2017.

It seems that the wheels to getting an approval could start turning in just months. This could have a profoundly negative effect on MNK if ANIP is able to product and commercialize this product in short order.

And so when reviewing MNK’s results on Monday, we think it is important to remember that the clock is working against the company. In addition to not being able to diversify their product portfolio in any shareholder friendly fashion, the company now has a potential competitor down the road to deal with. For MNK, time is not on their side. They need to act swiftly and either acquire a new cash flow stream or get some drugs in their pipeline. If a generic corticotropin gel can be introduced and is found to be effective at the same time that MNK’s equity is priced so low and Acthar is still making up a majority of the company’s cash flow, it could be devastating to the company.

We hope that the company has a chance to address this on its conference call Monday morning after they report earnings. We will be looking for an update in regulatory language in the company’s quarterly filing and will try to be on the conference call in order to ask several pointed questions that we have regarding what could be devastatingly low priced upcoming competition for their main drug.

If you are invested in MNK or are considering investing in MNK, you should familiarize yourself with ANIP and how it could possibly affect MNK’s future in a profound way.

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