Leerink Boosts PT on Mallinckrodt (MNK) to $92; Lifts INOMax Expectations

Leerink is lifting its price target on Outperform-rated Mallinckrodt (Nasdaq: MNK) from $91 up to $92 following recent estimate adjustments.

The firm commented Friday: We're publishing our updated model to reflect MNK's nuclear imaging divestiture, which is dilutive to EPS but accretive to the growth profile of the company. We are also increasing our INOMax (respiratory) forecasts based on our analysis following encouraging feedback from two MEDACorp neonatology specialists ... we assessed the commercial prospects for MNK’s INOMax franchise, which has beaten consensus expectations in the last 4 qtrs by 8-11%. Based on our checks, INOMax outperformance appears to be driven by two factors: (1) more open attitudes about prescribing in off-label settings where duration of therapy is higher; & (2) a greater shift to unlimited use contracts – which is the highest revenue generating contract type offered by MNK, adopted by ~40% of total institutions. Based on our analysis following the positive feedback, we are increasing our INOMax forecasts by 4-10% between 2017-21E, and our forecasts are now 2% above the Street. Post-nuclear imaging divestiture, our 2-yr and 5-yr EPS CAGR is 9% and 7%, compared to prior forecasts of 6% and 5%, respectively. Key events for MNK include another strong quarter (3Q16 reporting in October), Ph. 4 Acthar lupus data (late '16-early '17 based on clin-trial.gov primary completion date), and potential M&A which can occur anytime.

INOMax uptick keyed to expanded use, possibly due to contract structure that takes price out of the prescribing decision. In the last 4 qtrs, INOMax has meaningfully outperformed consensus sales forecasts, which mgmt. has attributed to a "favorable contracting cycle" and possibly due to more permissive statements about INOMax off-label usage in the medical guidelines. Based on specialist feedback, we continue to hear that INOMax (approved in 1999) is fully penetrated into the more moderate/severe segment of on-label patients suffering from hypoxic respiratory failure (HRF), but that usage has risen in off-label indications including congenital diaphragmatic hernia (CDH) and bronchopulmonary dysplasia (BPD), particularly in patients whose condition is deteriorating and "running out of treatment options." Both specialists we spoke with did not view recent guideline changes as a catalyst for increased use, and both worked at institutions with unlimited INOMax use contracts.

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