SUMMARY. Risk Level * ZACKS ESTIMATES

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1 February 13, 2015 Mallinckrodt Plc Current Recommendation Prior Recommendation Neutral Date of Last Change 02/13/2015 Current Price (02/12/15) $ Target Price $ SUMMARY DATA OUTPERFORM 52-Week High $ Week Low $60.28 One-Year Return (%) Beta 0.56 Average Daily Volume (sh) 1,152,654 Shares Outstanding (mil) 116 Market Capitalization ($mil) $13,050 Short Interest Ratio (days) 8.62 Institutional Ownership (%) N/A Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) N/A N/A N/A using TTM EPS 19.8 using 2015 Estimate 15.8 using 2016 Estimate 13.8 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY Risk Level * (MNK-NYSE) Mallinckrodt reported adjusted earnings of $1.84 per share in the first quarter of fiscal 2015 (ended Dec 26, 2014), beating the Zacks Consensus Estimate of $1.57. Net sales for the quarter were $866.3 million, up 60.4% from the year-ago quarter but short of the Zacks Consensus Estimate of $888 million. Results were boosted by the recent acquisitions of erstwhile Cadence Pharmaceuticals and Questcor along with lower costs due to ongoing restructuring activities. We are encouraged by the earnings beat in the first quarter and expect a strong 2015 for the company driven by continued uptake in Acthar and Ofirmev. Consequently, we upgrade our recommendation to Outperform from Neutral. Below Avg., Type of Stock Large-Growth Industry Med-Generic Drug Zacks Industry Rank * 110 out of 267 ZACKS ESTIMATES Revenue (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 585 A 570 A 552 A 2,212 A A 558 A 653 A 789 A 2,540 A A 861 E 951 E 977 E 3,655 E E 3,849 E Note: Quarterly figs. may not add up to annual figs. due to rounding off. Earnings Per Share (EPS is operating earnings before non-recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.65 A $1.00 A $0.49 A $1.02 A $3.17 A 2014 $0.88 A $0.95 A $1.20 A $1.68 A $4.94 A 2015 $1.84 A $1.51 E $1.89 E $1.87 E $7.11 E 2015 $1.92 E $8.13 E Note: Quarterly figs. may not add up to annual figs. due to rounding off. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Ireland-based Mallinckrodt public limited company is a specialty biopharmaceutical and medical imaging business company that develops, manufactures, markets and distributes specialty both branded and specialty generic pharmaceuticals, active pharmaceutical ingredients (API) and diagnostic imaging agents in approximately 65 countries. Key areas of focus include autoimmune and rare disease specialty areas such as neurology, rheumatology, nephrology and pulmonology, along with pain and attentiondeficit hyperactivity disorder (ADHD) disease. Mallinckrodt operates its business in two segments: Specialty Pharmaceuticals: This segment produces and markets branded and specialty generic pharmaceuticals and API, comprising biologics, medicinal opioids, synthetic-controlled substances, acetaminophen and other active ingredients. The segment is further divided into the following sub-segments: o o Brands, which include branded pharmaceuticals for pain and spasticity Specialty Generics and API, which produces specialty generic pharmaceutical products (including those to treat ADHD and addiction), medicinal opioids, synthetic-controlled substances and acetaminophen. This segment accounted for 64.7% of total net sales in fiscal Global Medical Imaging: This segment develops, manufactures and markets contrast media and delivery systems (CMDS), and radiopharmaceuticals (nuclear medicine). The division is further subdivided into the following sub-segments: o Contrast Media and Delivery Systems, which develops, manufactures and markets contrast media for diagnostic imaging applications, and power injectors to allow delivery of contrast media o Nuclear Imaging, which manufactures and markets radioactive isotopes and associated pharmaceuticals used for the diagnosis and treatment of diseases. This segment accounted for 35.3% of total net sales in fiscal Mallinckrodt reported net sales of $2.5 billion in fiscal 2014, up 15.2% from fiscal During the first quarter of fiscal 2015, Mallinckrodt integrated the operations of erstwhile Questcor Pharmaceuticals. Consequently, the company has changed its financial reporting and now operates under three segments Specialty Brands (branded pharmaceutical products including Acthar, Ofirmev, Xartemis XR and Gablofen as well as other brands that are not promoted), Specialty Generics (Specialty Generics portfolio, API franchise and third-party manufacturing agreements) and Global Medical Imaging (unchanged). Acquisitions In Mar 2014, Mallinckrodt acquired erstwhile Cadence Pharmaceuticals for $1.3 billion. Cadence s lead product, Ofirmev, is a proprietary intravenous formulation of acetaminophen for the management of mildto-moderate pain and moderate-to-severe pain with adjunctive opioid analgesics, and the reduction of fever. In Aug 2014, Mallinckrodt acquired erstwhile Questcor Pharmaceuticals for $6.0 billion. Questcor s primary product, H.P. Acthar Gel, is approved for as many as 19 indications. Equity Research Page 2

3 REASONS TO BUY RISKS Earnings Estimates Up: Earnings estimates have gone up significantly post the first-quarter results. We are encouraged by the earnings beat in the first quarter boosted by the recent acquisitions of erstwhile Cadence Pharmaceuticals and Questcor is expected to be a strong year for the company, especially considering the driving forces of Ofirmev and Acthar. Although seasonal timing will impact sales in the second quarter, strong growth from Acthar, Ofirmev and Specialty Generics is projected in the latter half of the year. New Products to Drive Growth The FDA s approval for new products in the past few months has expanded Mallinckrodt s product portfolio and should drive growth. In Mar 2014, the FDA had approved Mallinckrodt s New Drug Application for Xartemis XR for the management of acute pain severe enough to require opioid treatment. The initial update for Xartemis has been encouraging. In Jan 2014, Mallinckrodt had received FDA approval for Pennsaid 2% (topical non-steroidal antiinflammatory drug (NSAID)) for the treatment of pain associated with osteoarthritis of the knee. The approval of Pennsaid 2% has further expanded the company s Pennsaid franchise. Ofirmev A Growth Driver Mallinckrodt is expanding its portfolio through strategic acquisitions. The acquisition of Cadence Pharmaceuticals has added Ofirmev to the company s specialty pharmaceuticals portfolio and thus, expanded its pain management franchise. Uptake for Ofirmev continues to be strong with its growing use in hospitals surgical specialties. With Ofirmev in the kitty, Mallinckrodt can target the adjacent hospital market where Cadence has a strong presence. Ofirmev will likely be a primary growth driver in fiscal 2015 driven by increase in the number of hospitals using the product as well as the number of vials used in each procedure where additional treatment with a non-opioid pain reliever may be medically beneficial to the patient, and by expanding the use of the product across a broader range of surgical specialties and procedures, as well as its utilization in the outpatient setting. Development of Acthar Gel Acthar Gel, which became part of the company s portfolio following the Questcor acquisition, is currently approved for 19 indications but marketed for only 9. Mallinckrodt plans to step up commercialization efforts for Acthar in the approved indications including rheumatology and pulmonology as well as underserved patient populations. The company intends to invest in research and development activities for developing Acthar in the indications of lupus, proteinuria, nephrotic syndrome, ALS and diabetic nephropathy. Pipeline Development Mallinckrodt is simultaneously working on its pipeline. MNK-155, the company s candidate for controlled-release oral formulation of hydrocodone and acetaminophen, is being developed for moderate-to-severe acute pain. In May 2014, the FDA accepted the company s NDA for MNK-155. In Sep 2014, the company reported positive results from a phase III efficacy trial on MNK-155. The candidate met the study s primary endpoint of improved pain scores versus placebo over the first 48 hours following bunionectomy. Successful development and commercialization of MNK-155 will further strengthen its pain management franchise. The company expects to launch the candidate by the second half of 2015 upon approval. Lack of Organic Growth Although we are encouraged by the positive guidance for 2015, which resulted from the recent acquisitions, we remain concerned about the company s organic growth. The Imaging business continues to decline due to supply chain challenges. Moreover, the entry of generics for Exalgo will continue to impact revenues in Integration of acquisitions and Equity Research Page 3

4 RECENT NEWS achievement of potential synergies will be a challenge for the company and we might have to revisit our recommendation if the company does not achieve the targeted synergies, going forward. Setback for Generic Concerta: The company received a setback when the FDA informed the company that its methylphenidate hydrochloride extended release (ER) tablets, USP (CII), might not be therapeutically equivalent to Johnson & Johnson s ADHD drug Concerta. Consequently, the FDA reclassified Mallinckrodt s abbreviated New Drug Application (ANDA) for methylphenidate ER tablets with dosage strengths of 27 mg, 36 mg and 54 mg from AB (freely substitutable at the pharmacy level) to BX (presumed to be therapeutically non-equivalent). The FDA further stated that the reclassification was based on the application of its new draft guidance for determining the bioequivalence of methylphenidate hydrochloride products as published on Nov 6, Mallinckrodt had received FDA approval to manufacture a generic version of Concerta in three dosage strengths 27 mg, 36 mg and 54 mg tablets in Dec Mallinckrodt was also entitled to a 180-day exclusivity period for each of the 27 mg, 36 mg and 54 mg strengths, which had begun upon the commercial launch of each tablet. The company had launched the 27 mg tablet in the first quarter of fiscal 2013 and the 36 mg and 54 mg tablets during the second quarter of fiscal In Feb 2013, Mallinckrodt had submitted a supplement to its approved ANDA for the 18 mg tablet. However, the FDA issued a Complete Response Letter (CRL) to Mallinckrodt s supplement requesting for additional information. The FDA s decision will adversely impact the sales of methylphenidate HCl extended release tablets, going forward. Net sales of methylphenidate HCl extended release tablets came in at $54.7 million in the third quarter of Mallinckrodt is confident that its generic version is safe and effective when used in accordance with the approved labels. The FDA, however, appears reluctant to further discuss the issue with Mallinckrodt. Hence, it will probably not be resolved soon and the reclassification will negatively impact sales in fiscal Mallinckrodt Beats on Q1 Earnings, Sales Miss Estimates Feb 3, 2015 Mallinckrodt reported adjusted earnings of $1.84 per share in the first quarter of fiscal 2015 (ended Dec 26, 2014), beating the Zacks Consensus Estimate of $1.57. Earnings also exceeded the year-ago figure of 88 cents per share. Earnings in the reported quarter were boosted by acquisitions. Net sales for the quarter were $866.3 million, up 60.4% from the year-ago quarter but missed the Zacks Consensus Estimate of $888 million. Quarter in Details During the first quarter of fiscal 2015, Mallinckrodt integrated the operations of erstwhile Questcor Pharmaceuticals. Consequently, the company changed its financial reporting and now operates under three segments Specialty Brands, Specialty Generics and Global Medical Imaging. Sales from the Specialty Brands segment soared to $376.3 million from $59.6 million in the year-ago quarter. The increase in net sales was primarily driven by the inclusion of Acthar and Ofirmev, which generated net sales of $266.4 million and $71.4 million, respectively, and was partially offset by a decline in Exalgo sales following its loss of exclusivity in May Specialty Generics generated sales of $284.2 million, up 13.7% from the year-ago quarter primarily driven by a $35.4 million increase in sales of oxycodone-related products. However, sales in this segment were impacted by a decrease in methylphenidate ER sales due to the FDA s reclassification of these products from an AB rating to a BX rating in Nov Equity Research Page 4

5 Sales from the Global Medical Imaging segment were $199.3 million in the reported quarter, down 8.8% year over year. Research and development expenses came in at $42.4 million, up from $39.0 million in the year-ago quarter. Selling, general and administrative expenses were $262.5 million, up 79.5%. The increase was due to higher Ofirmev and Acthar selling expenses. The Cadence Pharmaceuticals acquisition added Ofirmev to the company s specialty pharmaceuticals portfolio and expanded its pain management franchise while the Questcor acquisition added Acthar Gel to its portfolio. However, revenues missed expectations due to a continued decline in Exalgo sales. The FDA s reclassification of methylphenidate ER is a setback for the company. Mallinckrodt Shares Down on Setback for Generic Concerta Nov 13, 2014 The company received a setback when the FDA informed the company that its methylphenidate hydrochloride extended release (ER) tablets, USP (CII), might not be therapeutically equivalent to Johnson & Johnson s ADHD drug Concerta. Consequently, the FDA reclassified Mallinckrodt s abbreviated New Drug Application (ANDA) for methylphenidate ER tablets with dosage strengths of 27 mg, 36 mg and 54 mg from AB (freely substitutable at the pharmacy level) to BX (presumed to be therapeutically non-equivalent). The FDA further stated that the reclassification was based on the application of its new draft guidance for determining the bioequivalence of methylphenidate hydrochloride products as published on Nov 6, However, Mallinckrodt is confident that its generic version is safe and effective when used in accordance with the approved labels. As per the company, the generic version was consistent with the quality specifications and regulatory requirements originally defined by the FDA. The company has received only 68 confirmed adverse events which are primarily related to a lack of efficacy when the patient switched from Concerta to the company s generic version. The FDA, for its part, seems to be reluctant to discuss the issue further with Mallinckrodt. Hence, the issue is not expected to be resolved soon. Mallinckrodt had received FDA approval to manufacture a generic version of Concerta in three dosage strengths 27 mg, 36 mg and 54 mg tablets in Dec Mallinckrodt was also entitled to a 180-day exclusivity period for each of the 27 mg, 36 mg and 54 mg strengths, which began upon the commercial launch of each tablet. The company had launched the 27 mg tablet in the first quarter of fiscal 2013 and the 36 mg and 54 mg tablets during the second quarter of fiscal Thereafter, in Feb 2013, Mallinckrodt had submitted a supplement to its approved ANDA for the 18 mg tablet. However, the FDA issued a Complete Response Letter (CRL) to Mallinckrodt s supplement requesting for additional information. The decision by the FDA will adversely impact the sales of methylphenidate HCl extended release tablets, going forward. Net sales of methylphenidate HCl extended release tablets came in at $54.7 million in the third quarter of Mallinckrodt is confident that its generic version is safe and effective when used in accordance with the approved labels. The FDA, for its part, seems to be reluctant to discuss the issue further with Mallinckrodt. Hence, the issue is not expected to be resolved soon. Equity Research Page 5

6 Mallinckrodt Acquires Questcor Aug 14, 2014 Mallinckrodt acquired Questcor Pharmaceuticals, Inc. in a deal valued at approximately $5.8 billion. The Mallinckrodt-Questcor transaction was completed post strong approval by shareholders of both the companies. As per the terms of the deal, shareholders of Questcor received $30.00 per share in cash and Mallinckrodt shares for each share of Questcor common stock. The transaction is expected to be immediately accretive to Mallinckrodt's bottom line in fiscal 2014 and significantly accretive in fiscal Questcor's lead product, H.P. Acthar Gel (approved for 19 indications including acute exacerbations of multiple sclerosis and infantile spasms), is expected to be a strong complement to Mallinckrodt s portfolio of specialty brands, which include Ofirmev, Exalgo and Xartemis XR. H.P. Acthar Gel generated revenues of $761.3 million in 2013, up 49.6%. VALUATION Mallinckrodt reported adjusted earnings of $1.84 per share in the first quarter of fiscal 2015 (ended Dec 26, 2014), beating the Zacks Consensus Estimate of $1.57. Net sales for the quarter were $866.3 million, up 60.4% from the year-ago quarter but short of the Zacks Consensus Estimate of $888 million. Results were boosted by the recent acquisitions of erstwhile Cadence Pharmaceuticals and Questcor along with lower costs due to ongoing restructuring activities. We are encouraged by the earnings beat in the first quarter. The Cadence Pharmaceuticals acquisition added Ofirmev to the company s specialty pharmaceuticals portfolio and expanded its pain management franchise, while the Questcor acquisition added Acthar Gel to its portfolio. We expect both the acquisitions to boost the top line in the coming quarters. However, The FDA s reclassification of the company s ANDA for methylphenidate ER tablets will impact sales. Consequently, we upgrade our recommendation to Outperform from Neutral. Mallinckrodt s current trailing 12-month earnings multiple is 19.8, compared to the industry average of 37.8 and 19.2 for the S&P 500. Over the last five years, Mallinckrodt s shares have traded in a range of 13.3x to 23.3x trailing 12-month earnings. We set a target price of $ based on a 2015 earnings multiple of Equity Research Page 6

7 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF (TTM) (TTM) 5-Yr High (TTM) 5-Yr Low (TTM) Mallinckrodt Plc (MNK) Industry Average S&P Doctor Reddy s (RDY) Mylan, Inc. (MYL) Impax Laboratories (IPXL) Actavis plc (ACT) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Equity Research Page 7

8 Earnings Surprise and Estimate Revision History Equity Research Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of JNJ. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1123 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst QCA & Lead Analyst Reason for Update Editor Ekta Bagri Ekta Bagri 1Q15 Earnings Sayantani Equity Research Page 9