Mallinckrodt plc
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2019 Mallinckrodt Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Dan Speciale, Vice President of Investor Relations. Sir, you may begin.

[Dan Speciale:]

Thank you, operator. Good morning, everyone, and welcome to today’s call. Joining me this morning are Mark Trudeau, our CEO; Bryan Reasons, our CFO; and Dr. Steve Romano, our Chief Scientific Officer Before we begin, let me remind you of a few important details. On the call, you’ll hear us make some forward-looking statements and it’s possible that actual results could be materially different from our stated expectations. Please note, we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. We encourage you to refer to the cautionary statements contained in our SEC filings for a more in-depth explanation of the inherent limitations of such forward-looking statements. We will also provide selected non-GAAP adjusted measures related to our financial performance. A reconciliation of these adjusted measures to GAAP is available in our earnings release, which can be found on our website, mallinckrodt.com. We use our website as a channel to distribute important and time-critical company information, and you should look to the Investor Relations page of our website for this information. As noted in our press release, unless otherwise specified, all quarterly comparisons are to the recast comparable 2018 period and the net sales growth ranges we will be discussing are on a constant currency basis. This morning we're very pleased to raise 2019 total company guidance for adjusted diluted earnings per share now in the range of $8.30 to $8.60 per share. Please refer to the earnings release for a comprehensive changes to guidance. With that, let me turn the call over to Mark. Mark?

[Mark Trudeau:]

Thanks, Dan. We're pleased to have started 2019 with continued strong operational execution, achieving robust, top and bottom line growth, and resulting in significant cash generation as we continue to transform our company. The hospital portfolio continued its positive momentum. And as anticipated, we saw the return to growth reported for the Specialty Generics products. We're also very pleased with the overall progression of our pipeline and data generation efforts, as highlighted in a number of recent announcements. We're particularly excited to share results from the Acthar Phase 4 rheumatoid arthritis clinical trial next month and look forward to the Phase 3 pivotal trial results for our StrataGraft and terlipressin investigational products later this year. As previously announced, our company's 2019 strategic priorities include; one, maximizing the value of the diversified in-line portfolio; two, advancing further data generation in the pipeline; three, completing the separation of the Specialty Generics business; and four, executing disciplined capital allocation with net debt reduction as a primary focus. Strong progress has already been made in each of these priorities in the quarter. As a result, we're excited to be raising guidance today and these results are reinforcing our confidence that 2019 is shaping up to be a strong year for the company. Before we discuss operational results for the quarter, it's important to take a moment to address allegations pertaining to a legacy legal matter that surfaced in the news last week. When acquiring a business any ongoing legal matters that may be associated with it are typically inherited and our 2014 acquisition of Questcor was no different. This and other legacy matters have been previously disclosed by both Questcor and Mallinckrodt and we've continued to work diligently to resolve them. The Department of Justice intervention action relates to complaints initially filed in 2012 and 2013 against Questcor and the DOJ has been investigating since that time with full cooperation from the company as noted in our SEC filings. These complaints alleged improprieties relating to Questcor's sales and marketing activities as well as its interactions with charitable foundations. While we disagree strongly with the substance of the complaints, we've been in discussion to resolve the sales and marketing claims for several months. As previously noted, we believe ongoing negotiation should yield a resolution that is reasonable and manageable for both parties. We previously reserved for the anticipated settlement of the sales and marketing claims which we hope to finalize in the near-term. And because the complaints and subsequent investigation relate to legacy practices, we do not believe there will be any material impact to future results. Returning to quarterly operational results, let's start with our billion-dollar hospital portfolio. This continues to be our largest and fastest-growing platform in total net sales and is clearly our major long-term growth engine as we prepare for a number of anticipated product launches over the next several years. OFIRMEV demonstrated double-digit growth in the quarter on strong volume, capturing ongoing benefit for market demand for non-opioid-based pain regimens. Both INOMAX and Therakos contributed high single-digit growth and Therakos results were driven by volume growth both in the U.S. in cutaneous T-cell lymphoma and internationally, including acute graft-versus-host disease. Going more deeply into INOMAX, growth continued to be driven by sustained, consistent demand and contract renewals fueled by the product's differentiated total service model. Regardless of the potential for competition, we expect INOMAX growth to continue going forward, particularly as we progress development of the next-generation EVOLVE device, which we estimate should launch in the second half of 2020 if approved. Overall, we expect the combined hospital portfolio in the high single-digit range for the full year. Moreover, we believe that nitric oxide and extracorporeal photopheresis or ECP are broader technology platforms that may offer further long-term growth potential. We're exploring additional uses for these technologies which Steve will discuss in a bit more detail later. Turning to Acthar, we continue to expect the product will be greater than $1 billion in net sales in 2019. Performance in the first quarter, typically our lowest, was driven primarily by the annual benefit reset process impacting returning patients and we saw ongoing payer scrutiny on overall specialty pharmaceuticals spending. The impact of these challenges is likely to persist at least through the first half of the year. We continue to believe 2019 will be a transitional period for the product with new clinical data sets emerging throughout the year, especially those for MS and RA. Historically, indication specific volume growth has typically been correlated to positive data. In particular, we're excitedly looking forward to presenting the full Acthar RA data, including the randomized placebo-controlled portion of the study at upcoming medical meetings beginning in June. Steve will provide more on the study in just a moment. Our additional data-generation activities include ongoing clinical trials in lupus, sarcoidosis, uveitis and others that will play out over the next couple of years. These data sets, as well as recent label enhancements and the expected market introduction of a new self-injector in late 2020, all represent potential longer-term growth opportunities for this key product. In short, while we anticipate environmental pressures are likely to remain, we believe the robustness of the data being produced and the preponderance of evidence we're building should provide important information to prescribers and payers regarding dose and duration for appropriate refractory patients in key indications. Looking at capital allocation and our separation plan, we're very happy with the progress we've made on these fronts over the past few quarters and they both remain top priorities for us. Bryan will update on these topics shortly. In summary, we've had a strong start to the year. We're especially pleased with the operational performance of hospital products and Specialty Generics and with the data generation and product enhancement progress for Acthar. We're particularly excited by the pipeline advancements we're making, including near-term assets StrataGraft and terlipressin. With that, I'll now ask Steve to provide more detailed update on some of the key activities we're pursuing across our portfolio. Steve?

[Steve Romano:]

Thanks Mark. I'm excited to report that we maintained our strong research and development momentum in the first quarter of 2019. As evident from the many data and pipeline announcements you've seen in recent months, our investments across the portfolio are bearing fruit. Turning to Acthar. We're pleased by the FDA's recent approval of a new product description detailing Acthar Gel's unique composition, noting the agency's important recognition that the drug is more than simply ACTH. We announced just last week that the blinded placebo-controlled part of the Phase 4 RA clinical study is complete. We're very excited about that substantial RA data set. As a reminder, we designed this trial to produce information that answers some of the most clinically relevant treatment questions. These include

[Bryan Reasons:]

Thank you, Steve. Good morning, everyone. In the first quarter of 2019, we reported diluted earnings per share of $1.83. After adjusting for specific items, our non-GAAP adjusted diluted earnings per share was $1.94, an increase of 20% over the prior year, driven predominantly by the performance of our hospital products and Specialty Generics segment. Net sales for the quarter were $791 million, representing growth of 5%. The Specialty Brands segment net sales were $547 million with the hospital products collectively generating $309 million in net sales, growing 10% over the prior period and Acthar contributed net sales of $224 million. INOMAX delivered $151 million in net sales, an 8% increase and OFIRMEV continued to see strong growth and benefited from order timing with $96 million in net sales, up 17%, while Therakos provided $62 million in net sales, a 10% increase. Specialty Generics segment reported $243 million in net sales in the quarter, an 18% increase with AMITIZA contributing net sales of $53 million. AMITIZA is expected to generate approximately $200 million in net sales in 2019. Segment-returned growth is projected in the quarter, largely driven by Specialty Generics product volume-based share recapture. The Specialty Generics pipeline is progressing toward long-term advances with nearly 20 products in development and strategically planned approximately 70% of those are non-controlled substance molecules. Also of note, total branded market side, in which developmental drugs will compete, is approximately $10 billion. Activities for the planned separation are proceeding on schedule, including the Board and senior management recruiting, capital structure strategy, and Form-10 filed in March. The business' strong results in the quarter drove an increase in full year segment net sales guidance and we continue to target separation in the second half of the year. Now, let me share some details on operating measures for the quarter. Total company adjusted gross profit as a percentage of net sales was flat at 71.6%. Our adjusted SG&A as a percentage of net sales was 26.7% as compared to 27.5%, reflecting the SG&A benefits of acquisition synergies and restructuring offset by increased legal expenses. Overall, company R&D expense as a percentage of net sales was 10.8% as compared to 10.9%, which on a percentage basis is weighted more heavily towards the Specialty Brands --absolute R&D spending and R&D spending as a percent of net sales to increase as we progress our pipeline and data generation throughout 2019. Turning to liquidity, we experienced strong operating cash flows in the quarter of $155 million with free cash flows of $125 million. We've previously stated our expectations of free cash flow being higher in 2019 than prior year, and we're actually ahead of schedule with our results to-date. Finally, we've continued to execute on our debt reduction goals having reduced debt by $264 million in the quarter and we've continued to buyback -- net of discount. These activities have yielded a reduction in anticipated interest expense as you'll see in our adjusted guidance. Our debt reduction is ahead of plan and remained focused on achieving our reduction targets for net debt leverage and total debt reduction. Importantly, I'm happy to report that our net debt leverage decreased to 4.2 times in the quarter. Now let me turn the call back to Dan who'll take us into Q&A.

[Dan Speciale:]

Thank you, Bryan. I’d like to remind each of you to please limit yourself to a single question with a brief follow-up, if needed. Feel free to put yourself back in queue afterwards and we’ll work to get through as many questions as possible. With that, operator, will you please have the first question.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Chris Schott with JPMorgan. Your line is now open.

[Ekaterina Knyazkova:]

Hi. This is Ekaterina on for Chris. Thank you for taking my question. Can you please elaborate a bit more on what's driving the recovery for the generics business? Any thoughts on the sustainability of this going forward? And any upcoming launches that you would highlight? Thank you.

[Bryan Reasons:]

It's Bryan. I'll take that. When we look at the growth, it's predominantly share recapture and we do project that to continue. Also, longer term, like I said in my prepared statements, the business is working on almost 20 different projects and the -- with branded sales of close to $10 billion. So we do see share recapture and a little bit of price stabilization and longer term some pipeline growth.

[Mark Trudeau:]

And if we go back to what we said last quarter, we were projecting that this business was likely to enter a growth phase after an extended period of both market contraction as well as the business itself contracting over the last couple of years. This business has historically been quite cyclical and we believe we're now entering a growth phase for the business and we had projected and guided at the beginning of the year, we expect that this business would grow – going to grow primarily based on the volume capture – recapture that Bryan articulated in the 1% to 4% range. As you see today, we actually upped that guidance to 2% to 5% based on the strong performance in the first quarter and the trends that we're seeing in this business going forward. So we feel quite good about the prospects for growth for this business as we look ahead.

[Dan Speciale:]

Thank you, Ekaterina. Next question, please?

[Operator:]

Thank you. Our next question comes from Greg Fraser with SunTrust. Your line is now open.

[Greg Fraser:]

Good morning. Thanks for taking the questions. This is Greg Fraser on for Gregg Gilbert. On the spin process, when do you expect to test the debt markets? And how important did another quarter of results for that business for the separation timeline?

[Bryan Reasons:]

It's Bryan, again. We are currently monitoring the debt markets and continue to do that, so that we're fully aware and ready to act on it when it's most opportunistic. I do think another quarter showing stabilization and growth in that business is very helpful.

[Mark Trudeau:]

And as we've said, our plans are to separate this business in the second half of the year. And I think as you've heard from our prepared comments, we're on track to achieve that, including, as Bryan discussed, going out to debt markets at the appropriate time. Again, we're very encouraged that this business is actually performing a bit better than we expected and we're expecting it to return to growth so it's good to be able to demonstrate that. And we look forward to communicating the results of the upcoming quarters at the appropriate time.

[Dan Speciale:]

Thank you, Greg. Next question, please? Operator

[Chi Fong:]

Hey. Hi. Good morning, everyone. This is Chi on for Jason. Thanks for taking our question. On the opioid litigation, can you talk about the current legal expenses associated with the litigation? And maybe it will be helpful if you can provide a framework for thinking about the costs associated with litigating this matter, whether it's going to be reaching a settlement in near term or maybe -- or you think about it may drag on for years? And maybe a quick follow-up on Acthar. Can you give us a little bit of color on the magnitude of incremental Medicare Part D donut holes that you would expect for Acthar for the remainder of the year? Or has most of the expense already incurred in 1Q? Thank you.

[Mark Trudeau:]

Yes. So maybe what I'll do is I'll frame a little bit around how we think about the opioid litigation and then I'll take that Acthar question and in between. I'll ask Bryan could comment a little bit on how we can think about the cost going forward. So if we just look at the time frame here we really got a couple of things going on. We got a number of state cases that appear to be progressing. As you're probably aware the claims were thrown out in a couple of cases in Butler and Connecticut specifically. We're seeing some other settlements or at least partial settlements progressing. There's an Oklahoma case that's coming up, and clearly, which we're not part of. And clearly the state cases are progressing along their own timeline with different claims. And then you have the MDL, which is likely coming in at the fourth quarter at some point. And again the information and the estimates as to how this will play out will be largely shaped based on what we see happening from the state cases and the MDL. And at this point, we're quite pleased actually to be able to present the appropriate cases from our side. We think that we've got a very strong case to defend certainly our actions. So we'll be able to see a lot more information coming up over the next couple of quarters. Unfortunately the state cases aren't necessarily good predictors of what may happen in the MDL, but we'll have a lot more information going forward. Meanwhile we continue to defend these cases to support our position quite vigorously and maybe I'll ask Bryan on to comment a little bit about how we think about the cost of that and then I'll talk about Acthar in a minute.

[Bryan Reasons:]

Yes, thanks Mark. On the opioid litigation expense, we don't give specific guidance to that amount. But just a little color, it is included in our SG&A guidance, so that's part of our SG&A guidance. If you look at the year-over-year like I said in my prepared comments, overall SG&A would have been down quite a bit if it wasn't for the offsetting opioid legal expenses.

[Mark Trudeau:]

So coming back to the Acthar question, which was specifically around Medicare Part D doughnut hole. The way I think about this is typically in the first quarter for Acthar you see -- it's typically our lowest quarter, which we believe has typically been associated with patients resetting their benefits whether that's Medicare or private pay. Usually there's some type of a benefit reset. And we've seen that virtually every quarter since we've owned Acthar, and I think that's been a historical pattern. What we believe from an Acthar perspective going forward is that that impact in the first quarter this year, which was a bit deeper than we've seen historically the impact of that we believe is likely to persist at least through the first half of the year, possibly longer. But the bottom-line is we still believe that Acthar is going to be greater than $1 billion in net sales in 2019. And importantly, rather than looking at it on a quarter-to-quarter basis, we believe that Acthar growth is going to be driven by the emergence of clinical data. That's why we're so excited about the RA data that we'll be presenting starting in June as well as a number of other clinical data sets. And our belief is that rather than one single piece of data making a step change in prescribing, what we believe is that it's likely to be a preponderance of data or a weight of evidence story which over the long-term assuming that we do have positive clinical data like we're seeing initially with some of our studies in MS and RA, that preponderance that data is likely to drive growth opportunities over the long-term, particularly as we start to introduce things like the new self-injector which we anticipate will be in the market in 2020. So, for us, Acthar is a longer term story. Next couple of quarters, we expect we're going to be performing kind of in the same range that we saw in the first quarter with regards to year-over-year growth numbers. Keep in mind last year the second quarter was our strongest quarter. And over time, again, we think it's the data that's going to drive growth, but importantly, the way to think about 2019 is just like in 2018, we believe this product again is going to be in excess of $1 billion. So, 2019 is really a transitional year for Acthar. We're going to see some quarter-to-quarter variability, great confidence in the greater than $1 billion, and excited about the long-term growth prospects based on the data that we've been communicating.

[Chi Fong:]

Thank you.

[Dan Speciale:]

Great. Thanks. Next question, please.

[Operator:]

Thank you. Our next question comes from Patrick Trucchio with Berenberg Capital. Your line is now open.

[Patrick Trucchio:]

Thanks. Good morning. Can you tell us how much of the Acthar business is reimbursed through Medicare and why this proportion appears to have increased over the prior five years? And then just as a follow-up to that would you anticipate any impact from Acthar from the proposed change us by HHS to the Medicare Part D rebates whereby these rebates would at least in theory be passed on directly to patients and reflected in what they pay at the pharmacy counter either in 2020 this would begin or 2021?

[Mark Trudeau:]

Yes. So, maybe I'll take the second half of your question first then I'll come back to the first one Patrick. We are certainly supportive of any changes to the U.S. healthcare system which would provide better access to drugs for patients. And particularly, the challenges that patients experience with their out-of-pocket expense. And I think that's one of the things clearly that has impacted the current price debate. If the HHS does make changes to Medicare Part D or, for example, if things happen in the private pay market whereby patients have an opportunity to get greater access, we believe that's likely to have a positive net impact on Acthar and probably for the industry in general. So, again, we support access to drugs that patients need based on what their payers and prescribers believe is appropriate for that particular patient. With regards to Acthar business reimbursed by Medicare, as we've said consistently, our Medicare -- the proportion of our business through Medicare is a bit higher than 50%. It is typically increased over the last five years, simply based on the mix of indications. So if you think about where Acthar used to be prescribed a number of years ago, it was primarily prescribed for neurologic indications, particular infantile spasms and exacerbations of multiple sclerosis, which typically trend towards younger patients. What we've seen more recently is a number of the other indications that Acthar has, which tend to skew more towards older patients like rheumatoid arthritis or sarcoidosis or other critical diseases that afflict patients -- that afflict particularly highly refractory patients. We've seen Acthar growth in those particular indications, so our mix of business has changed quite a bit. So now rheumatologic indications comprise a larger proportion of Acthar, which then tends to be skewed towards older patients, which tend to be reimbursed through Medicare. And again, we believe very strongly that the long-term volume-based growth for Acthar will be highly dependent on our ability to demonstrate clinical data that supports those highly refractory patients. That's again, why we're so excited about the Acthar RA trial, which Steve just described a bit. This gives payers and prescribers a lot of information on appropriate patients, appropriate dose and appropriate duration, so that those payers and prescribers, if they believe that Acthar can benefit those patients, have an understanding of where the best effect is going to be, how long and how to dose it. We think that's important clinical information that's relevant for the business long term.

[Dan Speciale:]

Great. Thanks, Patrick. Next question, please.

[Operator:]

Thank you. Our next question comes from Gary Nachman with BMO Capital Markets. Your line is now open.

[Gary Nachman:]

Hi. Good morning. On the hospital franchise, it was strong in 1Q across the board. So is there anything unusual in there worth calling out? Like you mentioned, the OFIRMEV orders or all those pretty good run rates going forward to think about? And then, one other follow-up, just specifically on the INOMAX contracts. How many of those do you have locked in for the next couple of years? And do you think that could potentially increase further in front of a potential Praxair launch? And are you giving up more economics in order to lock those contracts in? Thank you.

[Mark Trudeau:]

Yes. Thanks a lot Gary for those questions. So, yes, we're very excited about the continued strong growth of our combined hospital portfolio. As we've said, we believe this is really the heart of the company and likely the longer-term growth engine for the business based on the products that we have coming from our pipeline, which again largely go into this hospital sector, including both StrataGraft and terlipressin. But if we look at the business, every one of the major products OFIRMEV, INOMAX and Therakos continued to perform very well. We anticipate that this business will continue to grow in the high single-digit range throughout 2019. And while OFIRMEV is particularly strong in the quarter, we continue to see that as primarily volume-based. And sometimes from quarter-to-quarter, we do see some timing of orders that might pump up or reduce overall growth in a given quarter, so we wouldn't necessarily look at the 16% or 17% that we post for OFIRMEV throughout the course of 2019, but we again continue to see this hospital business performing quite well. With regards to INOMAX and contracts, again, we've been very transparent about the proportion of business that we have in multiyear contracts. I think last quarter we reported north of $130 million or so. And typically in any given year as much as two-thirds or more of our business will be in some type of a contract, maybe not necessarily a multiyear contract some type of a contract. And whether or not we have competition, our contracting strategy certainly at this point is not changing really at all. If and when we do see competition for INOMAX, we'll address our contracting strategy at that point as necessary. But again we believe that we're actually going to be transforming this market significantly starting in 2020 with the anticipated approval of the EVOLVE device, which really enables us to change the way nitric oxide is delivered in the hospital, getting away from large cylinders with a much more user-friendly system. And again we think that's likely to drive longer term growth for INOMAX. Then as we said earlier, we think there are plenty of opportunities to potentially expand the label for INOMAX and look at expanding the nitric oxide platform as a technology play longer term.

[Dan Speciale:]

Thanks, Gary. Next question, please.

[Operator:]

Thank you. Our next question comes from David Amsellem of Piper Jaffray. Your line is now open.

[David Amsellem:]

Thanks. So, I just have a couple of questions on the generics business. So first this is a long-term pressure on the opioid business, but you've struck a note of confidence regarding the sustainability if you will of the opioid business. So the question here is what gives you confidence that this is a sustainable business. And then just talk about some of the different moving parts that gives you confidence that that's a sustainable stream of cash flows over the long term? That's number one. And then secondly, I think you've alluded to complex generics in the past as an area of focus and I'm wondering if you can elaborate on your thinking there. Is that a function of having the BioVectra piece and your ability to potentially develop hormone and peptide products? And how are you thinking about leveraging that expertise? Thanks.

[Mark Trudeau:]

Thanks, David. So maybe I'll just give you some perspective on the Specialty Generics and Amitiza segment, because I think there's a misperception that that's as you characterized it an opioid business. Let's recognize that the majority of that business is actually not opioid. Certainly only a small subsection of it, relatively small section of it is actually oral dose opioid related pain products. There are a number of controlled substances in that oral dose business, which include addiction treatment, which include treatments for ADHD, for example. There is a very big API business as you know. Half of that API business is actually acetaminophen. So the oral dose pain, opioid related portion of this is just a portion of it. What we are seeing is that near-term growth for the business as Bryan described is driven by share recapture of some of our existing businesses including oral dose opioids, but it also includes other parts of the portfolio. And longer term -- again as Brian described, we believe that 70% or greater on the pipeline ANDAs that that business has are in non-opioid pain products. And so that's where the long-term growth prospects of this business are likely to reside. The bio vector piece really doesn't come into play for that business in particular. But we have consistently invested in research and development of ANDA products in anticipation of the separation of this business. And again our emphasis has been more on the complex generics that are consistent with the capabilities that that business has to deal with complex products whether they're in controlled substances or any other type of complex marketplace.

[Dan Speciale:]

Thank you very much. Next question, please.

[Operator:]

Thank you. Our next question comes from Anthony Petrone with Jefferies. Your line is now open.

[Anthony Petrone:]

Thanks. I guess I'll do two quick ones out there. One would just be on litigation reserves on opioids. Just how does that play out into the spin? What portion will be on SpinCo? What portion stays at the parent? And maybe timing on the build-out of those reserves? And just on Acthar trends, just maybe an update on written prescriptions the trends on the funnel upfront versus the fill rate and dropout rate. Is the impact still more on the latter? Thanks.

[Mark Trudeau:]

Yes. Thank you. So, with regards to litigation and reserves, I mean we don't have specific reserves for litigation at this point and we may never have. We or the SpinCo business may never have reserves. It's really dependent on how these trials play out over time. And with regards to the risks and liabilities, again, I think, we've been very clear since we announced our intent to spin is that risks and liabilities will follow the assets. So, the risks and liabilities for the branded business will follow the brand and the risks and liabilities for the generics business will also then go with the SpinCo. And recognize that we have a risk an opioid litigation. We don't have a liability. So, again, our view continues to be that as we separate those businesses, the assets and the risk and liabilities as well as the opportunity should match each business. Moving to Acthar, what we're seeing is that a pretty good stabilization actually of the reimbursement and that's very encouraging. So, our reimbursement rates for both new and returning patients continues to be quite stable and we're pleased about that. Prescription volume typically, again, is going to be driven as I've described before by the emergence of new clinical data sets. Historically, virtually every time new data has been introduced to the market, we've seen a corresponding indication-specific impact on volume prescribing and we would expect that to be the case going forward. And the reason why we keep coming back to the RA data is this will be the largest piece of data that we've yet communicated to the market. It will be the first large scale placebo-controlled trial. And importantly, the RA opportunity for highly refractory patients, meaning those patients that still have active disease while still on a variety of different mark [ph] and corticotropins -- corticosteroids, sorry, is a pretty large opportunity. And we have single-digit patient penetration in that relatively large opportunity. So that combination of what we believe is going to be very important clinical data that speaks to dose and duration, relatively low patient penetration and a relatively large market opportunity, we think based on history that's likely to result in increased volume prescribing in that category, as well as any of the other indications that we're – that we'll be communicating clinical data over the next several quarters.

[Anthony Petrone:]

Thank you, guys.

[Dan Speciale:]

Great. Thanks. Yes. No problem. Next question, please.

[Operator:]

Thank you. Our next question comes from Ami Fadia with SVB Leerink. Your line is now open.

[Ami Fadia:]

Hi. Good morning. I have follow-ups on two topics. Just as we think about, kind of, the next 12 months, do you anticipate growth in Acthar irrespective of the RA data? Or how should we think about some of the puts and takes as we think about heading into the next year? And with regards to OFIRMEV, we know that there's a generic entry expected next year. How are you thinking about offsetting that headwind into next year? Thank you.

[Mark Trudeau:]

Right. So taking the Acthar question first. Again, I think, we continue to believe that 2019 is a transitional year for the product. And, again, looking at it for a full year I can't emphasize enough that our confidence in greater than $1 billion is consistent. We do anticipate the next couple of quarters are likely to be in the same range of performance that we saw in the first quarter, because the Acthar data sets really start playing out here starting in June. Longer term, we believe that it's not only the RA data, but it's the MS data, the sarcoidosis data, the lupus data, the uveitis data, the eight clinical trials that we're running. Again, if that data is positive, based on historical precedent, we would anticipate that volume-based growth is likely to follow. Again, we're at a transition point where we're just starting to introduce that data into the market. I think, we've also been pretty consistent to say, if we don't have positive clinical data, in other words we go 0 for eight on clinical trials, that driving Acthar growth over time will be more challenged. But, again, based on what we already see as positive data from the RA trial and the MS trial, we think that – like, we know that we're not going to go 0 for 8. So, again, long-term view of Acthar is going to be based on the robustness of data. Growth will be based on robustness of the data and that data starts coming here in the middle of 2019. With regards to OFIRMEV, we will have exclusivity on this product throughout 2020, loss of exclusivities is at December of 2020. At this point, we've essentially exhausted any opportunities that we understand to extend the life of OFIRMEV. We're likely to lose -- when we lose exclusivity, the revenue is likely to decline in 2021. However, that's why the timing of products like StrataGraft and terlipressin are so important, because we're anticipating those products to be approved assuming that our Phase 3 programs are positive in 2020, essentially at the same time that OFIRMEV would be losing exclusivity. And again, longer term, we believe that the combination of those two products collectively is likely to exceed OFIRMEV's peak year sales. So peak year sales for terlipressin plus StrataGraft over time are likely to exceed the peak year sales for OFIRMEV. Of course, we have other things in our pipeline that follow those two products. Those are just the first two. But things like stannsoporfin if we introduce that program and that's successful will be in the hospital channel. MNK-6105 that Steve just referred to we're planning to start that Phase 3 program this year would also come through the hospital channel. So long-term, we believe that the hospital channel not only will be a long-term growth engine for us, but we have a very robust pipeline that supports a very effective infrastructure that already exists. And keep in mind both the INOMAX and Therakos platforms, the technology that underlies those, the nitric oxide and ECP, we're making significant investments to look to enhance the labels for those products and to look at those as technology platforms that we can build around over time. So again the entire hospital portfolio we think has a very robust set of prospects over the long-term.

[Dan Speciale:]

Thanks, Ami. Next question, please.

[Operator:]

Thank you. Our next question comes from Annabel Samimy with Stifel. Your line is now open.

[Unidentified Analyst:]

Good morning, everyone. This is Nick Rubino [ph] on for Annabel. Thanks for taking our questions. You've had a number of Phase 4 readouts for Acthar in several quarters. You circle with payers to share the information. To what extent has data driven conversations with payers? And does it even resonate given the dominance of Acthar's costs in the broader discussions? So what could be a reasonable reaction from payers after say the RA data? And then just a quick question on potentially an update on VTS-270, and if the FDA will consider long-term extension data? Thanks.

[Mark Trudeau:]

Yes. So maybe I'll talk the first question and ask Steve to comment on VTS-270. With regards to the Phase 4 readouts as you might have imagine, we have been communicating that information to payers as the data has emerged. Of course at this point we only have partial data sets to communicate with the payers. While they are intrigued by the information, of course, they want to see the full data set as well as the placebo controlled portion of the data, which again we're quite excited that both pieces are now completed and we'll have that information to share with the payers. And the information is quite positive. What is I think most intriguing to payers at this point is that this data set particularly for RA really speaks to three things that are important to them. What's the appropriate refractory patient? What is the appropriate dose and the appropriate duration for these highly refractory RA patients? While we've had challenges with payers just because our label is currently vague on those three topics, payers have a lot more flexibility if you will to shorten Acthar prescriptions. And I think what we're particularly intrigued by is that it's -- what we've been able to demonstrate with this Acthar data is like most RA therapies typically the effect takes about three months or so to really play itself out. And the reason why this study is also intriguing is that we -- the second half of the data really shows whatever incremental benefit you may get by extending the drug for an additional three months. And so that information for the first time will have a very robust placebo-controlled data set to share with payers to address those important clinical questions about appropriate patient, appropriate dose, and appropriate duration. I do want to also emphasize that any single piece of data is unlikely to make significant changes immediately with either payers or prescribers, but we believe it's the preponderance of data and the preponderance of evidence that's relevant to prescribers and payers that's likely to drive long-term growth prospects for Acthar. With that, maybe, Steve you can talk about VTS.

[Steve Romano:]

Yes. No, I'm happy to. So, as you recall we had a meeting with the FDA last August and it was prior to unblinding of the registration trial for VTS-270. And in that meeting, they made it very clear that, in fact, the review of the product if we reached that point would be based on the totality of the data all the data available. And that meant not just the registration trial, but a proof-of-concept trial that was done or sponsored through the NIH as well as a fairly large EAP program largely out of Rush or coordinated out of Rush. So, bottom-line is we are looking at all of that data. We have completed a substantial amount of post-hoc analyses to look at the data across all three data sets and actually are going to meet with the FDA in the very near-term to talk about options moving forward. So, I'll have more information for you certainly in the coming months.

[Dan Speciale:]

Great. It looks like we've got a couple more people in queue. I recognize there's a lot of earnings call this morning. So, we'll go ahead and take the next question please. Thank you very much.

[Operator:]

Thank you. Our next question comes from Louise Chen with Cantor Fitzgerald. Your line is now open.

[Louise Chen:]

Hi, thanks for taking my questions. So, my first question is on the remainco after the spinout of the Specialty Generics and AMITIZA business, how should we think about the capital structure, your R&D SG&A spend? And is that EBITDA metric that you gave before still relevant? And then the second question I had was on your EVOLVE system. How would the economics change for that product once you launch it? Will the contract still be relevant? Will they be renegotiated? Is it an accretive switch-out or just an extension to rent competition from other players in the market? Thank you.

[Mark Trudeau:]

Let me start with the EVOLVE question Louise and then I'll ask Bryan and Dan to comment a little bit about capital structure and some of our expense ratios as well as EBITDA for remainco after the spin. So, with regards to EVOLVE, we think this is really a transformational opportunity to really make a significant advance in the way nitric oxide therapy is delivered in the NICU. In particular, the systems today, whether it's ours or any other potential system, typically require a fairly large-scale cylinder that has to be rolled around the hospital. Our offering includes the drug which is in the cylinder -- the device as well as a comprehensive total service model which we offer as one package. The advantage of EVOLVE is to replace really the drug and device which is the primary point of service, but our total service model would still be included with the EVOLVE device. What EVOLVE enables users to do is have something that's much more convenient, much more portable with a lot less likelihood of human error because typically the existing systems require a fair amount of calibration and other things which can introduce human error. Our current DSIR system is designed to minimize that. There's significant amount of safety enhancements that have been put on to that device, but EVOLVE really helps reduce those things by increasing automation, ease of use and reducing the potential for human error. But the biggest advantage, frankly, is its portability. It can be easily moved around the hospital, almost like carrying a briefcase. So we think that's a significant advantage over our current system and any other technology that's likely out there. So maybe I can pause there and ask Bryan to comment a little bit about some of the expense and EBITDA questions that Louise had.

[Bryan Reasons:]

Sure. Thanks, Mark. Thanks, Louise. Looking at the capital structure I think the -- we said in prior calls, the goal post spin for remainco is to be between 3.5 and 4 times levered with -- since the announcement of total debt reduction of greater than $1 billion. And we're, like I said in my prepared statements, we are trending ahead of that – ahead of schedule on that goal. Post spin, yes, we're looking at the capital markets. And I would just say, right now, the strategy is to be opportunistic on paying down the more heavily discounted debt, but being mindful that we do have a tranche of debt due next April. So kind of just inside a year. So we -- and right now with the strong cash flows and anticipated spin proceeds and current capacity we're comfortable with the flexibility we have around capital structure. And as far as some of – what some of the measures would look like post spin, I think, if you go back to some of the prior period reporting when the generics business was in discontinued operations, I think that's probably a good proxy on how to split the EBITDA and come up with some of your ratios. Certainly, I said in my prepared statements, R&D as a percent of sales on remainco will trend, both on absolute dollar value and the percentage of sales value will go up as we drive some of the pipeline projects and other data generation. And then, SG&A, we're -- we've done a lot of initiatives to reduce SG&A and that's been largely offset by some of the litigation expense, like I said. But we'll look to continue to reduce that as a percentage of sales post spin.

[Mark Trudeau:]

And just a couple of comments on that. The thing I think about remainco is, we're essentially going to be a drug development and commercialization business that's focused specifically around hospital critical care and autoimmune diseases. And as such, we would look to have a set of spend ratios that's commensurate with that type of business. So as Bryan described, it's a pretty good proxy from what you saw when the Specialty Generics business was in discontinued operations. R&D as a percent of sales will largely be driven by the R&D opportunities that we have, but as you see we have a number of really robust programs that we believe need to be funded that are going to drive long-term growth. So we can anticipate that low double-digit kind of mid-teens range for R&D spend, again, which would be commensurate with other types of drug development and commercialization companies at our stage. I do think if you look historically, we've been very good stewards of cost management around SG&A. We've typically been able to extract significant efficiencies out of our SG&A spend and we will anticipate that going forward. So it gives you at least I think a framework for how we're thinking about it longer term.

[Dan Speciale:]

Thanks, Louise. Looks like we've got one more person in queue. Next question, please.

[Operator:]

Thank you. And our next question comes from Rishi Parekh with Barclays. Your line is now open.

[Rishi Parekh:]

Hi, Dan. Thanks for taking my question. I guess, the first question is specifically on Acthar. You mentioned the payers' scrutiny on Acthar, which is not new and we've been aware of this for some time. But is there anything different in this go-around versus the prior periods that you may want to highlight? And then on the second part, I think you had said that you have previously reserved for the whistleblower lawsuit. I was hoping that you could quantify what that reserve is and what stage are you in with the settlement negotiations?

[Mark Trudeau:]

Yes. So with regards to Acthar payer scrutiny, it's really nothing new and nothing really different this quarter other than just increased scrutiny I think on overall specialty pharmaceutical spending, which is not necessarily specific to Acthar. I think, obviously, the public debate around drug pricing, particularly specialty drug pricing has continued to accelerate. And certainly Acthar has been part of that discussion. So haven't been really any major changes for formularies or anything like that. Again first quarter is really just a typical quarter in that you see these what we believe are resets of patient benefits, which typically leads to a weaker quarter. But I do want to emphasize this quarter was weaker than we've seen historically a little bit weaker. We do anticipate that weakness is likely to persist at least through the first half of the year as we rebuild new patients and returning patients. And again the -- for us the story is really 2019, $1 billion and the longer term view of being driven by data. And I can't emphasize that enough, which is why the timing of the Acthar RA data is quite important. With regards to reserves, obviously, we're not quantifying this at the moment other than to say any number that we would have here would be manageable and reasonable for both parties. You can look at our quarter-over-quarter reserves and you'll see there hasn't been much of a change. So that's about as much as we can say about that just recognizing that we're still in active negotiation and our anticipation is that we’re likely to be resolving this sooner than later. We'd like to put this behind us. And the good news here is because this is a legacy matter we don't believe that it extends on a go-forward basis.

[Dan Speciale:]

Thanks, Rishi. I'd like to thank everyone for joining us again this morning. As a reminder, a replay of the call is going to be available on our website later today. And I’ll obviously be available throughout the day, answering call or questions you guys may have. So, I really appreciate everybody joining us. Thanks again.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program and you may all disconnect. Everyone have a great day.