Mallinckrodt: Tax Benefits Will Not Offset Acthar’s Demise

Mallinckrodt (MNK) was halted pre-market on Friday on a breaking news story. The Tax Cut and Jobs Act (“TCJA”) recently passed by Congress and President Trump is expected to result in a deferred tax benefit of $450 – $500 million:

Mallinckrodt (NYSE:MNK) says the GOP’s Tax Cut and Jobs Act will be neutral to modestly positive on its non-GAAP tax expense. If enacted, as expected, it will have a deferred tax benefit of $450M – 500M mainly associated with a reduction in its interest-bearing U.S. deferred tax liabilities ($1.6B as of the end of September) to reflect the reduction in its federal income tax to 21% from 35% effective January 1, 2018.

The beneficial impact of the lower tax rate will be mostly offset by tighter limitations on interest rate expense deductions.

MNK actually fell 1% Friday on the news. Below I will parse through the implications of the deferred tax impact.

The deferred tax benefit is a positive for Mallinckrodt. The company has engaged in several acquisitions and divestitures in recent years, leading to an inefficient legal structure. Mallinckrodt has maneuvered to simplify its legal structure, resulting in a one-time tax expense of $36 million. Management also announced an expected one-time tax benefit in excess of $800 million:

As these changes have now been completed in the fourth quarter, we expect to see a one-time tax benefit in excess of $800 million to be recorded in our annual financial statements, with a corresponding decrease to our deferred income tax liabilities by the same amount.

Mallinckrodt announced the benefit in conjunction with Q3 earnings. My impression was that Management was attempting to change the narrative from disappointing top line growth to the positive impact the tax benefit would have on the balance sheet. However, it did not work. The company’s total revenue was off 11% Y/Y. Revenue from its blockbuster drug Acthar was down 6%. The drug represents 39% of total revenue and has been the company’s one remaining catalyst. MNK cratered 30% on the news.