Mallinckrodt (MNK) Q3 Earnings: Will The Stock Surprise?

Mallinckrodt plc (NYSE:MNK) is set to report third-quarter fiscal 2016 results on Aug 2.

The company’s track record has been impressive so far. It has beaten estimates in all of the last four quarters, with a positive average earnings surprise of 12.4%. Let’s see how things are shaping up for this announcement.

Factors Influencing This Quarter

Concurrent with its second-quarter earnings call, Mallinckrodt upped its outlook for fiscal 2016. The company now expects adjusted earnings per share in the range of $8.15–$8.50, up from the previous projection of $7.85 to $8.30.

Its Specialty Brands segment is performing well and should help the company achieve its raised outlook for fiscal 2016. Acthar is expected to grow on the back of expanded access. On the reimbursement front, the company is working to increase the commercial coverage of Acthar with major payers, which, in turn, will boost its sales.

Both Inomax and Therakos continue to witness solid demand. Growth for Inomax is expected to normalize in the second half to the mid-single digit range. Meanwhile, Ofirmev is should also record growth backed by penetration into existing accounts, along with new account gains and recapture of volume and formulary status in other key accounts.

Moreover, the acquisition of hemostasis drugs – Recothrom Thrombin topical (recombinant), PreveLeak, and Raplixa (fibrin sealant) – from The Medicines Co. (NASDAQ:MDCO) will strengthen Mallinckrodt’s growing hospital portfolio. The company expects to launch PreveLeak and Raplixa later in 2016.

However, the company expects continued pressure in the specialty generics business which is going to face further challenges due to the impact of downstream consolidation of pharmacy providers and heightened competition. SG&A expenditure is also expected to increase as the company gears for the launch of the acquired drugs.

What Our Model Indicates

Our proven model does not conclusively show that Mallinckrodt is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat estimates. However, that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $2.01.

Zacks Rank: Mallinckrodt currently has a Zacks Rank #2 (Buy). The combination of Mallinckrodt’s Zacks Rank #2 and 0.00% ESP makes surprise prediction difficult.

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

Stocks That Warrants a Look

Here are a couple of health care stocks that you may want to consider, as our model shows that they both have the right combination of elements to post an earnings beat this quarter:

Exelixis, Inc. (NASDAQ:EXEL) has an Earnings ESP of 3.70% and a Zacks Rank #3. The company is scheduled to report results on Aug 3.

Ironwood Pharmaceuticals (NASDAQ:IRWD) has an Earnings ESP of 13.3% and a Zacks Rank #2. The company is expected to report earnings on Aug 4.