Mallinckrodt (NYSE:MNK) shares gained 3.65% on Friday after the company announced that its pain drug, Pennsaid 2%, has been cleared by the U.S. Food and Drug Administration (:FDA). The FDA approved Pennsaid 2% for the treatment of pain associated with osteoarthritis of the knee. The company plans to launch the topical non-steroidal anti-inflammatory drug (:NSAID) shortly.

We remind investors that the company already markets Pennsaid 1.5% for the treatment of signs and symptoms of osteoarthritis of the knee. Pennsaid 2% is touted as an extension of the Pennsaid franchise.

The company has another late stage pain candidate, Xartemis XR, under review for the management of moderate-to-severe acute pain where the use of an opioid analgesic is appropriate. On its fourth quarter fiscal 2013 (ended Sep 27, 2013) earnings conference call, Mallinckrodt discussed that it expected an FDA decision on the candidate by the end of 2013 and had started preparing for the launch. However, in Nov 2013, the FDA extended the review period for the candidate by three months.

Our Take

2014 is a critical year for the company with its key pain product Exalgo losing exclusivity. The company expects Exalgo sales to decrease in fiscal 2014. The drug generated $126.1 million in the prior fiscal. We believe that both Pennsaid 2% and Xartemis XR (if approved) will contribute modestly to fiscal 2014 revenues. However, the contribution should improve in the long run.

Mallinckrodt carries a Zacks Rank #2 (Buy). Other players which look attractive at current levels include Impax Laboratories Inc. (NASD:IPXL), Actelion Ltd. (OTC:ALIOF) and Actavis (NYSE:ACT). All the three stocks carry a Zacks Rank #1 (Strong Buy).

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