Is Mallinckrodt (MNK) Poised For A Beat In Q4 Earnings?

Mallinckrodt plc (NYSE:MNK) is set to report fourth-quarter fiscal 2016 results on Nov 29.

The company’s track has been impressive so far. It has beaten estimates in each of the last four quarters, with a positive average earnings surprise of 11.9%. Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Mallinckrodt is likely to beat on earnings because it has the right combination of the two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.01%. This is a meaningful indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Mallinckrodt currently has a Zacks Rank #2 (Buy). The combination of Mallinckrodt’s favorable Zacks Rank and a positive ESP makes us reasonably confident of a positive earnings beat.

Note we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Influencing This Quarter

Concurrent with its fiscal third-quarter earnings call, Mallinckrodt upped its outlook for fiscal 2016. The company expects adjusted earnings per share in the range of $8.50–$8.80, up from the previous projection of $8.15 to $8.50.

The company’s Specialty Brands segment is performing well. We expect the trend to continue in the fourth quarter.

Performance of Acthar Gel, which became part of the company’s portfolio following the Questcor acquisition, has been impressive so far. Acthar Gel has seen solid demand and expanded access in more recently promoted indications such as lupus and sarcoidosis, as well as in mature indications such as infantile spasms and nephrotic syndrome. On the reimbursement front, the company is working toward increasing the commercial coverage of Acthar with major payors, which should boost sales.

The company has already bought more than 50% of covered commercial lives under contract earlier than expected.

The company’s acquire-to-invest policy is apparently paying off as both Inomax and Therakos continue to see solid demand. Meanwhile, With Ofirmev in its portfolio, Mallinckrodt can target the adjacent acute-care hospital market. Penetration rates on available surgical procedures are relatively low and hospitals systems continue to develop recovery standards after surgery protocols, which should benefit products like Ofirmev and enable patients to recover faster post surgery. Growth of the drug is expected to be driven by expanded patient reach.

However, the company expects continued pressure in the specialty generics business which may face further challenges due to the impact of the downstream consolidation of pharmacy providers and heightened competition. The decline in the fiscal third quarter was weaker than expected and the trend is expected to continue in the quarters ahead. Meanwhile, the Nuclear Imaging business has been facing challenges for quite some time now, which made the company decide on divesting it.

Stocks That Warrants a Look

Here are a few other health care stocks that also have the right combination of elements to post an earnings beat in their next release:

Adamas Pharmaceuticals, Inc. (NASDAQ:ADMS) has an Earnings ESP of +1.16% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) has an Earnings ESP of +30.77% and a Zacks Rank #3 (Hold).

Akorn, Inc. (NASDAQ:AKRX) has an Earnings ESP of +1.85% and a Zacks Rank #3.

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