Mallinckrodt finally sees benefits of Nellcor Puritan acquisition
By KAREN PIHL-CAREY
HHBR Staff Writer
After a string of disappointing earnings and major investor sellouts, Mallinckrodt (St. Louis) may finally see the light at the end of the tunnel.
Not that the company has completely overcome all obstacles, but it has exceeded analysts’ forecasts for the last three quarters, and its stock has risen following a sharp drop last fall.
"We’ve put in place a lot of what is necessary for Mallinckrodt to succeed," Chairman/CEO C. Ray Holman told the Wall Street Journal.
What the company has put in place, aside from its $1.9 billion major acquisition of Nellcor Puritan Bennett, is this: It has chosen to focus its product lines, as well as increase its presence in higher-margin segments, while keeping a tight reign on costs. Now, Holman said, the company is poised for solid growth following a "difficult, challenging transformation."
The company is finally seeing the benefits of the Nellcor acquisition, said company spokeswoman Barbara Abbett.
"When we combined that business with the old Mallinckrodt critical care division we actually created one of the world’s largest respiratory care products companies," she told HHBR. "It is a market that is growing well so we are seeing growth along with that. We have also benefited from sound strategic cost management, which has enabled us to leverage the growth in the markets we’re in."
But critics say Mallinckrodt, in some ways, disappointed its investors by missing its earning targets during the hard times last fall. Mallinckrodt also took the brunt of a disagreement with the Securities and Exchange Commission (Washington) over accounting questions. The company agreed in January to spread a $90 million charge for the Nellcor deal over 30 years, cutting earnings by 4 cents per share during that time.
While the company has reduced its expenses and has divested its industrial chemicals businesses, and while it currently holds a solid market position in the home health industry, it is still experiencing slow growth, said one analyst.
"We’ve yet to see anything that suggests they’ve built a platform for sustainable, significant topline growth," CIBC World Group (Toronto) analyst Stephen Gerber told the Journal.
For instance, over the past four years, the price of the company’s most popular product, Optiray, which enhances X-ray images, has dropped by 60%. Shipments of the product continue to rise, but its profit is slowly declining, reported the Journal. The company’s imaging group has been hit hard by such price cuts, but sales in the company’s respiratory group are on the rise because of the Nellcor acquisition.
In March, Holman sent Mallinckrodt employees an internal memo stating that the company had imposed a hiring freeze and restricted travel. Even though the company posted earnings of 92 cents per share for the first half of FY99, it wants to ensure it hits its earnings targets for the year of between $2.25 and $2.35 per share.
Analyst Elliot Wilbur of CIBC Oppenheimer (Los Angeles) said reaching those targets is achievable for Mallinckrodt because sales of the company’s pharmaceutical products are typically concentrated in the second half of the year.
While the Nellcor acquisition may prove beneficial to the company in the long run, Mallinckrodt’s top three investors Trimark Financial Corp. (Toronto); College Retirement Equities Fund (New York); and Southeastern Asset Management (Memphis, TN) were unhappy with the decision to purchase the respiratory device maker. Consequently, each company sold most, if not all, of its stock when the reduced earnings expectations came out.
"Back in around the end of September our stock was at a low of about $19, just under $20 a share," Abbett told HHBR. "And that was in large part a reflection of those investors that were dissatisfied." Stock last week was trading at about $36 a share. "So we are seeing some improvement," she said. "And yes, we do believe there is a lot of opportunity for us to regain credibility with the investment community."
The company has an aggressive goal to grow internationally, adding to its $2.4 billion a year sales and its 13,000 employees. It recently announced that it received more than 200 regulatory clearances for its products in the United States, Canada, Europe, Mexico, South America, Central America, and Pacific Rim countries. Holman said a key to sales growth is having new and improved products.
"Global sales growth is a top priority for Mallinckrodt," Holman said. "Today, our sales outside the U.S. account for 35% of our business, and we intend to increase that substantially over the next five years."
Holman said that the company is comfortable with an FY2000 earnings projection of $2.50 to $2.60 per share.
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