Mallinckrodt Q4 debt, interest costs jump to fund acquisitions; company touts strong cash levels

By Paul Deckelman

New York, Nov. 19 – Mallinckrodt plc ended the 2014 fiscal fourth quarter with elevated total debt and interest costs versus a year earlier following several big financings related to acquisitions the company has made this year.

But the Dublin-based branded and generic pharmaceuticals manufacturer’s senior executives were upbeat on their conference call Wednesday following the release of results for the quarter, which also included net losses versus year-ago profits, although not on an adjusted basis. They focused instead on sales gains and insisted that the acquisitions will prove to be accretive and will help its results in the long run.

“Mallinckrodt achieved another very strong quarter and robust full-year results and adjusted net income,” president and chief executive officer Mark C. Trudeau declared.

He added that overall, fiscal 2014 “was a notable year for Mallinckrodt,” a relatively new company that was spun off just last year from Covidien plc.

“We further diversified our business portfolio and created a number of new business drivers and platforms that enhance our potential for long-term growth and profitability.”

The CEO noted that the company’s stock price, currently around the $85 level, had “roughly doubled” since it began trading after the separation from Covidien at the end of June 2013.

‘Strong’ cash position

Looking at the most recent quarterly results, Trudeau said that “we have a strong cash position and the financial flexibility to consider a wide range of assets that will build upon our core business as well as expand our new growth platforms. We will continue to seek opportunities that are immediately or rapidly accretive, including both commercial and late-stage developmental assets.”

The company’s senior vice president and chief financial officer, Matthew K. Harbaugh, said that at the end of the fiscal fourth quarter on Sept. 26, Mallinckrodt had $707.8 million of cash and equivalents on hand, versus $275.5 million a year earlier, “reflecting the strong underlying performance of our business.”

“And also notable, our net debt leverage further decreased to 2.8 [times] as of Sept. 26, down from 3.1 in mid-August following the close of Questcor,” he added.

Mallinckrodt’s $5.8 billion cash-and-stock acquisition of Anaheim, Calif.-based Questcor Pharmaceuticals Inc., which was announced in May and closed in mid-August, was one of two huge M&A deals the company pulled off this year.

The other was its $1.4 billion all-cash acquisition of San Diego-based Cadence Pharmaceuticals, Inc., which was announced in February and closed in mid-March.

Debt funds M&A deals

Mallinckrodt turned to the capital markets to fund the cash portions of both deals, swelling its long-term debt balance less current maturities to $3.951 billion at the end of the fourth quarter from $918.3 million a year earlier. Its balance sheet also included $21.2 million of current-maturity debt in the latest quarter, up from $1.5 million a year earlier.

Mallinckrodt funded the Cadence deal by entering into a $1.55 billion credit facility that was completed in early March, consisting of a $1.3 billion seven-year covenant-lite senior secured term loan B tranche and a $250 million five-year revolving credit line.

That term loan priced at 275 basis points over Libor, with a step-down to Libor plus 250 bps at 3.75 times net total leverage. There is a 0.75% Libor floor and 101 soft call protection for six months, and the debt was issued at an original issue discount of 99¾. The revolver also bears interest at Libor plus 275 bps.

Mallinckrodt returned to the debt markets in late July during the just-completed fiscal fourth quarter to obtain the funding needed for the cash portion of the Questcor deal.

It entered into a $700 million seven-year senior secured covenant-lite term loan via its Mallinckrodt International Finance SA subsidiary. The loan priced at Libor plus 275 bps. As with the March term loan, the new funding carried a 0.75% Libor floor, an original issue discount of 99½ and 101 soft call protection for six months. It was not fungible with the earlier loan.

The loan deal was restructured before it finally hit the market, with the term loan upsized from $500 million originally and a planned $250 million cash facility eliminated.

At the same time, Mallinckrodt visited the junk bond market to get some of the cash needed for the Questcor deal, pricing $900 million of 5¾% senior notes due 2022 at par on July 30 via Mallinckrodt International Finance and Mallinckrodt CB LLC following a roadshow. The bond deal was upsized from an originally announced $500 million.

Besides the new debt incurred this year to fund the acquisitions, the company’s capital structure also includes $900 million of bonds that it sold last year in preparation for its spin-off from Covidien. That quick-to-market two-part deal priced on April 8, 2013 via Mallinckrodt International Finance and consisted of $300 million 3½% senior notes due 2018, which priced at a spread of 280 bps over comparable Treasuries, translating to a reoffer price of 99.981 to yield 3.504%, plus a $600 million tranche of 4¾%senior notes due 2023, which priced at a 305 bps spread to Treasuries for a reoffer price of 99.684 to yield 4.79%.

The increased debt levels due to those acquisition-financing transactions pushed Mallinckrodt’s interest expense spending up accordingly; it jumped to $37.7 million, or 4.8% of net sales in the latest quarter, from $9.9 million, or 1.8% of net sales, a year earlier.

CFO Harbaugh noted that the company “only had a partial quarter of Acthar-related debt on our balance sheet [i.e., the debt related in July was due to to the acquisition of Questcor, maker of the anti-inflammatory gel medication], so we expect interest expense to be higher in future quarters.”

Sales up, but swing to loss

Mallinckrodt reported that net sales for the quarter rose to $789.3 million, a 44.8% jump from $545.2 million a year earlier. The company attributed the sales surge at least in part to the inclusion in its results and solid performance of Acthar, which it acquired when it bought Questcor, and of Ofirmev, an intravenous injection version of the pain reliever acetaminophen that it acquired when it bought Cadence. It also credited the continuing strength in its base Specialty Controlled Substance Generics portfolio.

On a non-GAAP basis, adjusted net income for the 2014 fiscal fourth quarter was $145.2 million, or $1.68 per diluted share, up from $56.8 million, or 98 cents per share, a year ago. It attributed the gain to the accretive benefits of acquisitions and strong results in its Specialty Pharmaceuticals segment.

However, on a GAAP basis, the company incurred a net loss for the latest quarter of $352.4 million, or $4.14 per share, compared with net income of $33.5 million, or 58 cents per share, in the same period a year ago.

It blamed the net loss on $355.6 million of non-cash impairment charges it took during the quarter primarily related to its Global Medical Imaging segment’s goodwill and intangibles, and $75.1 million of restructuring charges. The company also incurred a $92.7 million increase in amortization and inventory fair-value adjustment expenses from its fiscal 2014 acquisitions, in addition to $30 million of transaction costs associated with the Questcor acquisition.

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