Engaged in the pharmaceutical business and based in Dublin, Ireland, Mallinckrodt PLC (MNK) is a developer, manufacturer, marketer and distributor of specialty pharmaceutical products and diagnostic imaging agents. Its business segments include branded and generic drugs, sold to wholesalers and retail drugstore chains, as well as contrast media and nuclear imaging agents. Mallinckrodt's primary focus on pharmaceuticals is on products in the pain therapeutic class, especially after being spun-off by Covidien (COV) last summer.

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Mallinckrodt used to be Covidien's drug unit. Now that it's on its own the firm has been able to regain focus and advance on new pain killing compounds to market. The split-up has also unlocked value at both companies and Mallinckrodt has been having a stellar growth since then. The stock has risen and it has beaten earnings estimates in its two last reports by at least 15 percent. But how long can this history of crushing expectations - for good - go on? Let's see.

Contrast Media Segment

Currently, the contrast media and nuclear imaging segment is the firm's strongest business. Although sales have been somewhat declining as a result of increased competition and significant pricing pressure, Mallinckrodt owns a well-stablished reputation in highly sensitive nuclear products. This is a great advantage for the company against new competitors and thus makes it unlikely for them to steal business from it.

Nuclear products' sentive nature led customers to stick with established and trustworthy suppliers that can guarantee they have the nuclear logistics experience and good relations needed with reactors. Revenues in this sector come largely from selling generators that are used to convert a substance called molybdenum-99 into technetium-99 to be used in nuclear imaging tests.

On top of that, Mallinckrodt is one of the only two manufacturers in the U.S., one of Europe's three. As one can appreciate, there isn't much room for competition in this established market but along with that, there isn't much space to grow either. That's why the firm's been pursuing the development of its branded pharmaceuticals business segment.

Branded Pharmaceutical Business

After its new-found independence, Mallinckrodt's been changing its focus and investment to its higher gross margin pharmaceutical business. It has done so especially aiming at the branded sector which, although it's more attractive than the generics business, it still faces some challenges of its own. That is limited pricing power, higher utilization of generics and hurdles at the creation of innovative new products.

What seems to be making things worse is that Mallinckrodt's branded business is currently made up almost entirely of a drug that faces generic competition in July 2014, Exalgo - an opioid pain medication. However, if this company is trying to build a branded pain business from scratch, it owns another great advantage: Mallinckrodt is consistently awarded a sizable share of the DEA's quota for controlled substances. Therefore, it plans to invest heavily in its specialty branded pharmaceutical business in order to compete against better-positioned companies in the pain sector.

According to the Institute of Medicine, as many as 100 million Americans suffer from some sort of chronic pain each year. This represents between $560 to $635 billion in treatment and economic loss anually. A larger, living population suggests the patient pool for pain treatment may prove to be larger than diabetes, coronary heart disease and cancer combined. However, as opioids are widely perceived to be overprescribed and abused there is a need for safer and better drugs. Because of overdoses and also because 50% of those suffering in pain still claim not to have control over it and because another 77% reports feelings of depression.

Currently, Mallinckrodt has submitted for FDA approval its extended release oral combination of oxycodone and acetaminophen, Xartemis XR, specially formulated to reduce user ability to abuse the drug. Earlier this week, the United States Patent Trademark Office granted a patent to Xartemis XR containing claims with regard to its design, formulatioin, pharmacokinetc and release characteristics. Provided the candidate is approved by the FDA, Malllinckrodt said it will launch its new drug in the second quater of fiscal 2014. This will make Xartemis the only extended release drug combining oxycodone with acectaminophen on the market.

Also, the company has recently launched another pain drug, Pennsaid, and expects to file approval for another pain candidate, MNK-155, in the second half of fiscal 2014. All of the above is timely given as Mallinckrodt's best selling drugs, Exalgo and generic Concerta, face stiffer competition due to the loss of patent protection and 180-day marketing exclusivity respectively.

Mallinckrodt's Momentum

Not everything is certain, though. Even this is a rather new company, it already runs on a high debt level. It does so only because it has recently bought Cadence Pharmaceuticals (CADX) for $1.3 billion. It has overpaid, but it's done so for a good reason: to gain control of an injectable form of acetaminophenn, the main ingredient in Tylenol. This will allow the firm to further diversify its portfolio and it will give it a new growth platform on which to build - hospital-based pharmaceuticals.

Rising earning estimates for the past few weeks is certainly encouraging for those thinking of investing in this stock. Besides the short-term momentum, the stock currently holds a Zacks Rank #1 (Strong Buy) and gurus Mario Gabelli (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Vanguard Health Care Fund (Trades, Portfolio), Eric Mindich (Trades, Portfolio), John Paulson (Trades, Portfolio), Jean-Eveillard and Jim Simons have already taken a stake in it. The momentum, so far, seems likely to carry on.

Disclosure: Damian Illia holds no position in any stocks mentioned.

This article first appeared on GuruFocus.