EQUITY RESEARCH QUARTERLY UPDATE March 23, 2016 Stock Rating: PERFORM 12-18 mo. Price Target NA MDCO - NASDAQ $31.48 3-5 Yr. EPS Gr. Rate NA 52-Wk Range $43.79-$25.27 Shares Outstanding 68.9M Float 67.1M Market Capitalization $2,191.5M Avg. Daily Trading Volume 1,052,730 Dividend/Div Yield NA/NM Book Value $14.14 Fiscal Year Ends Dec 2016E ROE NA LT Debt $579.0M Preferred NA Common Equity $911M Convertible Available Yes EPS Diluted Q1 Q2 Q3 Q4 Year Mult. 2014A 0.33 0.31 0.18 0.21 1.02 30.9x 2015E 0.08 (0.65) (0.82) (0.88) (2.42) NM Prior (E) -- -- -- (0.26) (2.61) NM 2016E (0.46) (0.41) (0.46) (0.50) (1.83) NM Prior (E) -- -- -- -- (0.17) NM 2017E -- -- -- -- (2.13) NM Prior (E) -- -- -- -- 0.37 NM HEALTHCARE/BIOPHARMACEUTICALS Model Update; Busy Catalyst Calendar Ahead SUMMARY We are updating our model following 4Q15. 4Q15 revenues/adj. EPS were $67.2M/ ($0.88) compared to our estimates of $67.6M/($0.26). MDCO sold its hemostasis franchise in February to Mallinckrodt for an initial upfront payment of $174M, which brought the company's cash holding to ~$547M. A busy catalyst calendar lies ahead in 2016, including top-line data for the phase 2 ABP-700, Phase 2 MILANO-PILOT, Phase 3 Carbavance, and Phase 2 ALN-PCSsc trials. We view MDCO's pipeline assets as promising and innovative, but believe the shares are fairly priced. We note that progress on the development (in particular with the PCSK9si trial) or restructuring fronts this year would represent significant upside, including from strategic M&A interest. KEY POINTS The majority of 4Q15 revenues were derived from branded Angiomax sales and generic Angiomax royalties (Sandoz), totaling $18.7M and $29.4M, respectively. The timing of impact on these revenues from new generic bivalirudin entrants is unclear. Excluded from 4Q15 revenues were $18M of Recothrom sales. Total FY15 revenues/adj. EPS were $356M/($2.42) compared to our estimates $357M/($2.61) and consensus $353M/($2.71). Management provided FY2016 revenue guidance of $190-210M, and $263-273M for adj. SG&A, and $127-137M for adj. R&D. We are updating our model accordingly. Sales of "other" products, including launch products Orbactiv and Kengreal, totaled $14.6M in 4Q15, up 54% from $9.5M in 3Q15. Formulary access and the number of ordering accounts has increased for Orbactiv and Kengreal. MDCO will perform an interim analysis of the ORION-1 (90-day, ALN-PCSsc) trial in 3Q16 to help identify the proper dose to be used in ORION-2, which is planned to commence in 2016. Additionally, an interim analysis of MILANO PILOT (MDCO-216) will be performed mid-year. It is unclear how much the company will disclose to the Street from these analyses. Upcoming catalysts include: 1) top-line phase 3 TANGO1/2 data for Carbavance in 2H16; 2) top-line data for ORION-1 (PCSK9) in 4Q16; and 3) top-line Phase 2 ABP-700 data in 2016. Stock Price Performance Company Description is a pharmaceutical company focused on the identification, development and commercialization of pharmaceutical products to treat critical care patients. Carlos Solorzano, Ph.D. 415-399-5722 Carlos.Solorzano@opco.com For analyst certification and important disclosures, see the Disclosure Appendix. Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229
MDCO (PERFORM) - NA 5-YEAR PRICE PERFORMANCE INVESTMENT THESIS 50 45 40 35 30 25 20 15 10 2012 Source: Bloomberg 2013 2014 BASE CASE ASSUMPTION 2015 MDCO MDCO revenues slowly recover from Angiomax hit through newly launched hospital products There is success in one or two of the key pipeline assets (ALN- PCSsc, MDCO-216, Carbavance, ABP-700) 2016 We believe MDCO shares are fairly valued at current levels. While the loss of Angiomax exclusivity significantly affected earnings, the company's broad hospital platform of commercial and development-stage drugs could spur M&A interest and provides revenue that can be leveraged for the development of key pipeline assets. MDCO s decision to explore various restructuring options in order to focus on pipeline assets increases both upside potential and uncertainty. CATALYSTS Mid-2016: Interim analysis of MILANO PILOT study (first 40 patients) 2H16: Top-line TANGO1/2 Phase 3 trial data of Carbavance 4Q16: Top-line data from ORION-1 (ALN-PCSsc) 2016: Start of Phase 2 program of ABP-700 for general anesthesia and sedation UPSIDE SCENARIO Clinical trial success of pipeline assets allows MDCO to raise money to develop and commercialize these products Success in clinical trials of pipeline assets increases value of the pipeline, triggering interest from potential acquirers Differentiated profile of pipeline assets (ALN-PCSsc: longer duration of action; ABP-700: faster kinetics and safety profile) lead to blockbuster sales and gain of market share from standard of care DOWNSIDE SCENARIO Revenues grow slowly, and the company continues to burn cash, affecting its ability to continue development of its key pipeline assets MDCO is not able to restructure or raise the available funds (via divestment of hemostatic assets) needed to increase capital 2 Carlos Solorzano, Ph.D.: 415-399-5722
MDCO (PERFORM) - NA (MDCO) ($000's) [FY - DEC] 2013 2014 2015 2016E 2017E Income Statement FY:13A Q1A Q2A Q3A Q4A FY:14A Q1A Q2A Q3A Q4A FY:15A Q1E Q2E Q3E Q4E FY:16E FY:17E U.S. Angiomax 550,164 146,224 152,224 143,620 157,532 599,599 95,100 60,500 18,800 18,700 193,100 5,361 4,691 4,021 2,680 16,753 1,576 International Angiomax 58,420 9,514 10,918 6,386 8,379 35,198 5,600 5,100 3,700 4,500 18,900 0 0 0 0 0 0 Royalty revenues (Gen Angiomax-Sandoz) - - 24,503 29,356 53,859 16,362 16,362 14,726 14,726 62,177 40,105 Total Angiomax 608,584 155,738 163,142 150,006 165,911 634,797 100,700 65,600 47,003 52,556 265,859 21,723 21,053 18,747 17,407 78,930 41,681 Cleviprex 6,238 3,223 1,881 2,040 2,068 9,212 2,200 3,300 2,700 1,650 9,850 2,386 2,228 1,774 1,837 8,224 9,073 Argatroban 9,755 4,228 1,951 2,042 1,988 10,209 5,300 1,750 3,600 2,019 12,669 4,218 4,060 4,038 3,931 16,247 17,230 Kengreal - - - - - - - - 600.0 1,100 1,700 4,725 6,300 9,450 11,025 31,500 83,516 Orbactiv - - - - 1,500 1,500 1,200 1,900 2,300 4,699 10,099 4,371 5,280 4,527 5,280 19,457 30,231 Recothrom 63,200 13,500 16,300 16,800 17,900 64,500 16,280 15,900 15,400 15,708 63,288 4,712 0 0 0 4,712 0 Minocin - 545 500 514 519 2,077 800 800 1,000.0 1,010 3,610 993 993 993 993 3,971 4,170 PreveLeak 1,000 1,112 2,112 100 100 100.0 105 405 32 0 0 0 32 0 Ionsys - - - - - - - - - 2,955 2,955 4,941 6,588 9,882 11,529 32,941 42,336 Raplixa (Fibrocaps) - - - - - - - - - - - - - - - 0 0 Carbavance - - - - - - - - - - - - 19,121 Total revenues 687,864 177,235 183,774 172,401 190,998 724,408 126,516 90,472 72,678 67,167 356,833 48,100 46,503 49,410 52,002 196,015 247,356 COGS 262,785 66,867 85,687 69,076 66,000 287,630 33,737 36,999 86,970 25,449 183,155 24,050 23,251 24,705 26,001 98,007 128,625 Gross profit 425,079 110,368 98,087 103,325 124,998 436,778 92,779 53,473 (14,292) 41,718 173,678 24,050 23,251 24,705 26,001 98,007 118,731 Operating expenses Selling, general and administrative 264,958 64,521 88,745 82,662 106,236 342,164 80,534 96,246 82,477 76,959 336,216 79,365 74,404 79,056 83,203 316,028 346,298 Research and development 146,930 31,096 41,228 33,314 53,543 159,181 23,949 36,221 30,120 40,186 130,476 33,670 32,552 34,587 36,401 137,210 148,414 Total expenses 411,888 95,617 129,973 115,976 159,779 501,345 104,483 132,467 112,597 117,145 466,692 113,035 106,956 113,643 119,604 453,239 494,712 Operating income 13,191 14,751 (31,886) (12,651) (34,781) (64,567) (11,704) (78,994) (126,889) (75,427) (293,014) (88,985) (83,705) (88,938) (93,603) (355,231) (375,981) Interest & other 3,429 2,339 3,284 (9,831) 29,589 25,381 22,487 11,157 (3,699) (9,673) 20,272 7,638 7,638 7,638 7,638 30,550 36,176 Pre-tax income 16,620 17,090 (28,602) (22,482) (5,192) (39,186) 10,783 (67,837) (130,588) (85,100) (272,742) (81,347) (76,067) (81,301) (85,966) (324,681) (339,805) Taxes 1,360 22,095 (23,428) (5,693) 190 (6,836) 5,777 (21,298) (25,447) (16,853) (57,821) (28,472) (26,624) (28,455) (30,088) (113,638) (122,330) Minority Interest (252) (9) (17) (53) (59) (138) (28) 53 (9) (6) 10 - - Net (loss) income from cont. ops 15,512 (4,996) (5,157) (16,736) (5,323) (32,212) 5,034 (46,592) (105,132) (68,247) (221,936) (52,876) (49,444) (52,846) (55,878) (211,043) (217,475) Loss from discont ops, net of tax - - - - 6,999 (137,825) (130,826) (10,000) (10,000) (10,000) (10,000) (40,000) - Net Loss 15,512 (4,996) (5,157) (16,736) (5,323) (32,212) 5,034 (46,592) (112,131) (206,066) (352,772) (62,876) (59,444) (62,846) (65,878) (251,043) (217,475) Basic shares outstanding 58,096 64,152 64,400 64,534 64,799 64,471 65,174 65,903 67,137 68,976 66,809 68,976 69,045 69,183 69,875 69,270 70,172 Diluted shares outstanding 62,652 66,654 66,061 66,067 66,347 66,282 66,929 65,903 67,137 68,976 66,809 68,976 69,045 69,183 69,875 69,270 70,172 GAAP EPS (basic) from cont. ops $0.27 ($0.08) ($0.08) ($0.26) ($0.08) ($0.50) $0.08 ($0.71) ($1.57) ($0.99) ($3.32) ($0.77) ($0.72) ($0.76) ($0.80) ($3.05) ($3.10) GAAP EPS (diluted) from cont. ops $0.25 ($0.08) ($0.08) ($0.26) ($0.08) ($0.49) $0.08 ($0.71) ($1.57) ($0.99) ($3.32) ($0.77) ($0.72) ($0.76) ($0.80) ($3.05) ($3.10) GAAP EPS (diluted) from cont. and disc. ops $0.25 ($0.07) ($0.08) ($0.25) ($0.08) ($0.49) $0.08 ($0.71) ($1.67) ($2.99) ($5.28) ($0.91) ($0.86) ($0.91) ($0.94) ($3.62) ($3.10) GAAP adjustments 76,438 27,105 25,744 28,312 18,870 100,031 642 3,840 50,031 7,458 61,971 21,000 21,000 21,000 21,000 84,000 68,000 Adjusted Net Income 91,950 22,109 20,587 11,576 13,547 67,819 5,676 (42,752) (55,101) (60,789) (161,613) (31,876) (28,444) (31,846) (34,878) (127,043) (149,475) Adjusted Diluted EPS (incl. options expense) $1.50 $0.33 $0.31 $0.18 $0.21 $1.02 $0.08 ($0.65) ($0.82) ($0.88) ($2.42) ($0.46) ($0.41) ($0.46) ($0.50) ($1.83) ($2.13) Cash and cash equivalents $376,727 $378,376 $368,270 $356,239 $370,741 $370,741 $607,073 $462,743 $508,808 $373,173 $373,173 $491,072 $357,471 $322,287 $283,968 $283,968 ($301,856) Margin analysis Gross profit 61.8% 62.3% 53.4% 59.9% 65.4% 60.3% 73.3% 59.1% -19.7% 62.1% 48.7% 50.0% 50.0% 50.0% 50.0% 50.0% 48.0% Selling, general and administrative 38.5% 36.4% 48.3% 47.9% 55.6% 47.2% 63.7% 106.4% 113.5% 114.6% 94.2% 165.0% 160.0% 160.0% 160.0% 161.2% 140.0% Research and development 21.4% 17.5% 22.4% 19.3% 28.0% 22.0% 18.9% 40.0% 41.4% 59.8% 36.6% 70.0% 70.0% 70.0% 70.0% 70.0% 60.0% Operating Income 1.9% 8.3% -17.4% -7.3% -18.2% -8.9% -9.3% -87.3% -174.6% -112.3% -82.1% -185.0% -180.0% -180.0% -180.0% -181.2% -152.0% Pre-tax income 2.4% 9.6% -15.6% -13.0% -2.7% -5.4% 8.5% -75.0% -179.7% -126.7% -76.4% -169.1% -163.6% -164.5% -165.3% -165.6% -137.4% Net Income 2.3% -2.8% -2.8% -9.7% -2.8% -4.4% 4.0% -51.5% -144.7% -101.6% -62.2% -109.9% -106.3% -107.0% -107.5% -107.7% -87.9% Source: Oppenheimer & Co. Inc., Company Reports 3
MDCO (PERFORM) - NA Stock prices of other companies mentioned in this report (as of 3/23/16): Novartis AG Sponsored ADR (NVS-NYSE, $74.39, Not Covered) Disclosure Appendix Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Analyst Certification - The author certifies that this research report accurately states his/her personal views about the subject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Potential Conflicts of Interest: Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firm including the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by Oppenheimer & Co. Inc: Stock Prices as of March 23, 2016 Mallinckrodt (MNK - NYSE, $60.44, OUTPERFORM) 4
MDCO (PERFORM) - NA All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories, please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department, Business Manager. Oppenheimer & Co. Inc. Rating System as of January 14th, 2008: Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months. Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months. Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months. Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflict of interest. Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008: Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector. Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere. Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group. 5
MDCO (PERFORM) - NA Distribution of Ratings/IB Services Firmwide IB Serv/Past 12 Mos. Rating Count Percent Count Percent OUTPERFORM [O] 308 57.46 137 44.48 PERFORM [P] 227 42.35 68 29.96 UNDERPERFORM [U] 1 0.19 0 0.00 Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform. Company Specific Disclosures Oppenheimer & Co. Inc. makes a market in the securities of MDCO. Additional Information Available Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department, Business Manager. Other Disclosures This report is issued and approved for distribution by Oppenheimer & Co. Inc. Oppenheimer & Co. Inc. transacts business on all principal exchanges and is a member of SIPC. This report is provided, for informational purposes only, to institutional and retail investor clients of Oppenheimer & Co. Inc. and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security recommended in this report, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal. Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable to Oppenheimer & Co. Inc. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete (with the exception of information contained in the Important Disclosures section of this report provided by Oppenheimer & Co. Inc. or individual research analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser. This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. 6
MDCO (PERFORM) - NA This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This research is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA s protection rules nor compensation scheme may be applied. Distribution in Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by Oppenheimer Investments Asia Limited (OIAL) to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. OIAL, an affiliate of Oppenheimer & Co. Inc., is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, and advising on Corporate Finance. For professional investors in Hong Kong, please contact researchasia@opco.com for all matters and queries relating to this report. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright Oppenheimer & Co. Inc. 2016. 7