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This News Explains Mallinckrodt's Fall Today

What happened

News of a grand jury subpoena sent shares of Mallinckrodt (NYSE: MNK), a company focused on generic and specialty drugs, dropping as much as 13% in afternoon trading on Wednesday. The stock has since recovered a bit, but was still down 11% as of 3:25 p.m. EST.

So what

Mallinckrodt revealed in a Securities and Exchange Commission filing that it has received a grand jury subpoena from the U.S. Attorney's Office for the Southern District of Florida. The government is requesting documentation on generic drugs it produces that contain the opioid painkiller oxymorphone. Specifically, it is investigating the company's distribution, marketing, and sales practices.

Given the revelation, it isn't hard to figure out why investors are spooked.

Now what

Many state and local governments have filed lawsuits against drugmakers that produce opioids in recent years for their role in exacerbating the opioid epidemic. In this case, the U.S. attorney's office is seeking damages to recover the costs that it has borne as a result of the ongoing drug addiction crisis.

Will this lawsuit culminate in Mallinckrodt being forced to write the government a big check? That remains unclear. However, given the risk, I don't consider today's drop to be a buying opportunity, even though shares are currently dirt cheap.

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Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.