It appears that the local operations of Questcor Pharmaceuticals Inc. would remain intact in the wake of Mallinckrodt PLC’s $5.6 billion proposed buyout of the Anaheim-based drug maker—the largest deal so far in what’s shaping up to be a busy year for mergers and acquisitions involving Orange County-based companies.
Mallinckrodt, which is based in Dublin, Ireland, and has operations headquarters in St. Louis, said it plans to retain Questcor’s commercial operations as a separate business unit within its specialty pharmaceutical segment, according to Mark Trudeau, Mallinckrodt’s chief executive, who will be in charge of the combined company.
Don Bailey, Questcor’s chief executive, will step away from operations and join Mallinckrodt’s board. Bailey moved Questcor to Anaheim from the Bay Area in 2010, setting up headquarters near his home in Yorba Linda.
Steve Cartt, currently Questcor’s chief operating officer, will lead Questcor’s commercial operations and report directly to Trudeau.
Additional Questcor executives would join Mallinckrodt’s team, Trudeau said last week on a conference call announcing the deal.
Mallinckrodt’s lineup of drugs includes the Exalgo and Xartemis pain drugs, controlled-substance specialty generic drugs, and active pharmaceutical ingredients, as well as medical imaging. The company, which had a market value of about $3.8 billion last week, is offering 27% more than what Questcor was worth on April 4, a few days before the deal became public.
Mallinckrodt’s offer consists of $30 a share in cash and 0.897 shares of its stock for every Questcor share, or roughly $86.10 a share.
Current Questcor shareholders will own 49.5% of the combined company after the deal closes, which is expected in the third quarter.
Boston-based FMR LLC, a unit of Fidelity Investments, is Questcor’s largest institutional shareholder, with about 9% of the company. FMR stands to gross $460.2 million from the sale based on its 5,345,411 shares owned as of Dec. 31.
Various insiders hold another 2% of Questcor’s shares.
Questcor had annual sales of just less than $800 million and $292.6 million in profits last year, and its recent market value was about $4.8 billion. It relies on one primary drug: H.P. Acthar Gel. Acthar is used for a diverse group of conditions, including rheumatoid arthritis, multiple sclerosis flare-ups, and nephrotic syndrome, a kidney disorder. It added a second drug, Synacthen, last year in a deal with Switzerland-based Novartis AG.
Acthar also has what’s known as “orphan drug” status for one of its uses—infantile spasms, a rare form of epilepsy. Orphan drug status is given to treatments that may offer significant benefits for patients with serious or life-threatening disease that occur in 200,000 or fewer individuals.
Orphan drugs receive seven years of U.S. marketing exclusivity if the Food and Drug Administration approves them for sale.
Mallinckrodt sought Questcor for Acthar and its growth, according to Trudeau.
“By addressing unmet patient needs in a range of therapeutic areas, [Acthar] has demonstrated impressive revenue growth in the past few years,” Trudeau said. “Longer-term, there’s also the possibility of adding new Acthar indications.”
“Mallinckrodt has significant experience and expertise in managing medicines in highly regulated, complex markets,” Bailey said, adding that he believes Mallinckrodt is “the right partner to support the continued growth of Acthar in the highly specialized markets that we serve.”
The increased cash flow and scale of a combined Questcor-Mallinckrodt operation will provide a stronger platform to support the expansion of Acthar into new therapeutic areas, Bailey said.
Mallinckrodt was spun out of diversified healthcare company Covidien PLC roughly a year ago.
Trudeau said BioVectra, the Canada-based contract manufacturer that Questcor bought last year, was another attraction for Mallinckrodt.
“BioVectra fits well with our significant expertise in manufacturing difficult-to-make therapeutics, and Synacthen offers potential opportunities to provide specialty therapeutics worldwide,” Trudeau said.
Wall Street generally liked the deal.
“We believe that the acquisition will be a strategic fit for Mallinckrodt. Sales of Acthar have been robust and will boost Mallinckrodt’s top line besides providing an opportunity to diversify in other markets,” Chicago-based Zacks Equity Research said in a note on the deal.
Buying Questcor is “a growth avenue for Mallinckrodt. There are not a lot of synergies,” Ken Crawford, an analyst who follows Mallinckrodt for Argent Capital Management in Clayton, Mo., told the St. Louis Post-Dispatch.
Short sellers of Questcor were addressed in some online analysis of the deal, particularly longtime Questcor critic Citron Research.
Citron has taken aim at the drug maker in recent months, including in a report in
February claiming that Acthar faced “severe risk” of being taken off the market by the FDA.
“With this week’s development, though, investors holding a bullish viewpoint appear to have a last laugh,” author Keith Speights wrote on the Motley Fool investor website. “Anyone who bought [Questcor] shares before Citron’s first allegation would now have gains in the neighborhood of 60%.”
Speights did mention that Citron’s critical reports may have affected the price:
“Thanks in no small part to Citron Research, there’s a cloud hanging over Acthar that makes its future appear less solid and bright. As a result, Questcor fetched a lot less than it could have if there wasn’t any uncertainty,” he said, adding that “shorts were never going to leave this company alone.”
Questcor is also dealing with other issues, including a federal investigation over marketing and promotional practices for Acthar.
Analyst David Amsellem of Minneapolis-based Piper Jaffray LLC asked Trudeau on the conference call about Mallinckrodt’s due diligence.
“Obviously, with a transaction of this magnitude, as you can imagine, the degree of due diligence, the depth, the breadth, the thoroughness and the comprehensiveness of this has really been perhaps bigger and broader than anything we’ve ever done before,” Trudeau said.
Mallinckrodt “looked across the spectrum of the Questcor business, from manufacturing to R&D, to commercial, to legal and literally everything in between, and clearly we made the determination to go forward with this transaction,” he said.
The deal for Questcor came two weeks after Menlo Park-based Facebook’s $2 billion acquisition of Irvine-based Oculus VR, a maker of virtual reality headsets. Word of the Questcor deal was followed by a report that Advantage Sales & Marketing is looking into a sale of itself in a deal that could approach $4 billion (see story, page 6).
Meanwhile, Irvine-based TRI Pointe Homes Inc. has a $2.7 billion acquisition of the various homebuilding brands of Weyerhaeuser Co. in Federal Way, Wash., that is pending.
