NEW DIRECTIONAL PUT PLAYS

Mallinckrodt Public Ltd - MNK - close: 95.49 change: -2.30

Stop Loss: 100.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.3 million
Entry on August -- at $---.--
Listed on August 19, 2015
Time Frame: Exit PRIOR to earnings
New Positions: Yes, see below

Company Description

Trade Description:
Normally you might think of mergers and acquisitions in the healthcare sector is a bullish recipe. It has been a winning combination for Irish drugmaker MNK who has been actively buying smaller rivals. Unfortunately, after the company's most recent earnings report, Wall Street is worried they may have paid too much for a recent purchase.

MNK is in the healthcare sector. According to the company, "Mallinckrodt is a global specialty biopharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents. Areas of focus include therapeutic drugs for autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology; neonatal critical care respiratory therapies; and analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities. The company's Specialty Brands segment includes branded medicines; its Specialty Generics segment includes specialty generic drugs, active pharmaceutical ingredients and external manufacturing; and the Global Medical Imaging segment includes contrast media and nuclear imaging agents."

Their most recent earnings report was August 4th. MNK announced its Q3 results of $2.05 per share. That beat estimates of $1.83. Revenues surged +47.8% to $965 million. A big chunk of that revenue improvement was due to recent acquisitions. Furthermore, analysts were expecting MNK to report revenues of $984 million. That's a $19 million miss.

The fly in the ointment seems to be sales of Acthar gel. MNK recently paid $5.6 billion to buy Questcor Pharmaceuticals who makes HP Acthar Gel, which is derived from the pituitary glands of pigs. The drug can be used to treat a variety of autoimmune and inflammatory conditions, plus rare skin diseases. MNK reported that sales of Acthar were only up +4% from a year ago, which was a disappointment. Management lowered their long-term forecast for Acthar sales to mid-single digit to low-double digit percentage growth.

MNK's CEO said they're facing pressure from health insurance companies over the price of Acthar. Some insurance companies have gone so far as to restrict coverage or refusing to cover the drug due to costs (source: AP).

The combination of the revenue miss and this disappointing outlook for Acthar sales sparked a serious sell-off in shares of MNK. The stock plunged from $124 down to $102 the next day. Shares have spent the last couple of weeks trying to produce an oversold bounce but traders keep selling the rallies. The point & figure chart has reversed sharply and is now forecasting at $63.00 target.

The $95.00 level was support in early August but MNK is about to break it. Today's intraday low was $94.44. Tonight I am suggesting a trigger to buy puts at $94.35.

MNK can obviously be a volatile stock. I would consider this a more aggressive, higher-risk trade.

Trigger @ $94.35 *small positions to limit risk*

- Suggested Positions -

Buy the OCT $90 PUT (MNK151016P90) current ask $3.50
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart: