There's A Reason Mallinckrodt Continues To Disclose A Protracted, Multi-Agency Probe Of Recently-Acquired Questcor Pharmaceuticals

Protracted SEC Investigation of Questcor Could Haunt Mallinckrodt Investors

Facts of Interest or Concern:

In Aug-2014, Mallinckrodt PLC MNK completed its acquisition of Questcor Pharmaceuticals

In a letter dated 23-Apr-2015, the SEC confirmed Questcor's involvement in on-going enforcement proceedings that was previously disclosed by Questcor.

The latest disclosures made by Mallinckrodt in May-2015 repeat in form and substance those made by Questcor a year ago when still a stand-alone company.

From the former-Questcor 10-Q filed on 29-Apr-2014 –

On September 21, 2012, we became aware of an investigation by the United States Attorney's Office, or the USAO, for the Eastern District of Pennsylvania regarding our promotional practices. Following our September 24, 2012 announcement of this investigation, we received a subpoena from the USAO for information relating to our promotional practices. We have been informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC are also participating in the investigation to review our promotional practices and related matters. We continue to cooperate with the USAO and the SEC with regard to this investigation.

From the Mallinckrodt 10-Q filed on 5-May-2015 –

On September 24, 2012, Questcor received a subpoena from the United States Attorney's Office ("the USAO") for the Eastern District of Pennsylvania for information relating to its promotional practices. Questcor has also been informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC are also participating in the investigation to review Questcor's promotional practices and related matters.

Our Take: Mallinckrodt’s been on a tear, having meaningfully outperformed the S&P 500 since this deal was done in August-2014. That makes it pretty easy to ignore some pesky SEC probe of a company it purchased last summer.
Often when companies with SEC investigations get acquired the acquirer stops talking about the exposure. This can be reasonable; that is, what may have been material to the acquired company as a stand-alone entity may not be as big an exposure in the context of the merged entity. But that's not what happened here.

Even post-merger, Mallinckrodt management and their array of experts judged the Questcor SEC investigation and involvement by the US Attorney's Office (read: criminal exposure) remains a material exposure to the post-deal company. Trust them. You too should view SEC problems at Questcor as a material risk to Mallinckrodt too.

Now we have to ask, if they deemed it worthy of disclosure, why then did Mallinckrodt not update investors on what's going on in this multi-year, multi-agency investigation of Questcor? To us, this is a game played too often by too many companies. It's like they needed to talk about it, so they did; but they didn't really want to talk about it, so they said very little. That too tells you this is a real exposure.

To learn more on our process and what our findings mean, click here.

Notes: The SEC did not disclose the details on investigations referenced above. The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security. New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.

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