Mallinckrodt plc
Q4 2017 Earnings Call Transcript

Published: 27 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2017 Mallinckrodt Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Cole Lannum, Senior Vice President of Investor Relations. You may begin.

[Coleman N. Lannum:]

Thank you, Glenda. Good morning, everyone, and welcome to today's call. Joining me are our CEO, Mark Trudeau; our CFO, Matt Harbaugh; and Dr. Steve Romano, our Chief Scientific Office. We'll have Matt quickly cover the financial results before turning to Mark to provide a business update including our view on the value of the recent Sucampo acquisition and go into detail regarding our strategic priorities for 2018. Steve will then provide some important updates to our pipeline. Before we begin, let me remind you of a few details. On the call you will 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. Please 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'll also provide certain 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 comparable 2017 calendar period. And the net sales growth ranges we'll be discussing are on a constant-currency basis. With that, let me turn it over to Matt. Matt?

[Matthew K. Harbaugh:]

Thank you, Cole, and thanks to all of you for joining us today. This morning, we look back on fourth quarter and full year 2017. We're also looking ahead to 2018. And earlier, we provided an adjusted diluted earnings per share guidance range for the year of $6 to $6.50 with quarterly earnings performance expected to improve as the year progresses. This guidance excludes a portion of our business that is being moved to discontinued operations, and I'll speak to that strategic decision a bit more in a moment. Turning to the 2017 results, in the quarter, we reported GAAP diluted earnings per share from continuing operations of $17.40 compared to prior year loss of a $1.67. Our non-GAAP adjusted diluted earnings per share was $2.01 versus $1.91 in the prior year. Net sales for the quarter were $792 million. For the full year 2017, we reported GAAP diluted earnings per share from continuing operations of $18.09. After adjusting for specified items, our non-GAAP adjusted diluted earnings per share was $7.49 on net sales of $3.2 billion. Net sales in the quarter for the Specialty Brands segment were $582 million, a decline of about 4%. Solid performance by our hospital products was offset by Acthar's 9% decline in the quarter to $295 million, which Mark will discuss in more detail. Looking further at our $1 billion hospital franchise, INOMAX generated $126 million in net sales, a 6% increase. OFIRMEV continues to see a return to stronger growth with $78 million in net sales, up 8%. Therakos also performed well in the quarter and benefited from a favorable comparison, with net sales of $57 million, up 18%. Specialty Generics net sales were $195 million, a 9% decline. As I mentioned, we are moving a part of our business, including the majority of products in this historical Specialty Generic segment into discontinued operations as we look to dispose of these assets. We believe the time is right for this, more given the Sucampo acquisition and other transactions of last year. We are fulfilling our strategy and the move, then ultimate disposal of non-core assets, will allow us to fully shift our focus to our innovative portfolio of marketed and development brands. As you'll see in the press release, we have published historical net sales for the new continuing operations of the company as we anticipate presenting them in the first quarter of 2018. We expect to provide fully recast financial statements before our next earnings call in early May. Now, let me share some details on operating metrics. Total company adjusted gross profit as a percentage of net sales decreased slightly in the period to 74.8% from 75.2% in the prior year, primarily due to Acthar. Our adjusted SG&A as a percentage of net sales was 26.8%, as compared to 26.2%. However, with the movement of certain lower SG&A products to discontinued operations, we expect this metric will rise to above 30% in the first quarter of 2018. This will obviously be an area of focus for us, and Mark will speak more about this in a bit. R&D expense as a percentage of net sales was 10.9% in the quarter. This includes the $10 million up-front Xenon licensing payment, but even excluding that, our investment into our branded portfolio and development pipeline has never been this significant and you can expect to see absolute R&D spending to continue to increase over time. Turning to tax for the quarter, our adjusted effective tax rate was 13% compared to 15.7% in the prior year. As you saw in our press release this morning, we recorded a $1.5 billion benefit in the quarter from income taxes related to tax reform and the finalization of our internal reorganization. As previously communicated, much of this benefit resulted from non-cash reductions of our interest-bearing deferred tax liabilities which have now dropped to $553 million. Notably, the combined impact of our legal entity reorganization and U.S. tax reform will significantly reduce our non-GAAP effective tax rate. In 2018, as I'm sure you saw this morning, we expect our rate to be between 9% and 11%. Turning to liquidity; our operating cash flow in the quarter was an extremely robust $279 million. For the year, we generated $727 million in operating cash flow to support strategic capital allocation. As we move forward, capital expenditures will increasingly be focused on supporting our Specialty Brands pipeline and manufacturing scale build-out. In the period, we also took further advantage of the significant disconnect in our market value and repurchased 9.4 million shares, roughly 10% of the company in the fourth quarter alone. Finally, our net debt leverage ratio increased slightly to 4.0 from the prior quarter. We expect net debt leverage will increase in the first quarter due to the closure of the Sucampo transaction, but are committed to reducing debt and net debt leverage throughout 2018. We expect to use a significant amount of our ongoing strong cash generation towards debt reduction. Now let me turn it over to Mark to discuss our strategy and provide more color. Mark?

[Mark Trudeau:]

Thanks, Matt. I'd like to start by discussing the continued strategic transformation of Mallinckrodt. In the last five years, we've divested declining non-core assets and invested in not only a cadre of strong marketed brands that have established platforms in the hospital and rare diseases space, but have also brought in mid- and late-stage development programs that, if approved, will serve patient populations with complex, often devastating conditions. After several years of investment, we now have a number of milestones and catalysts in 2018 which have the potential to strengthen our growth and performance. In the midterm, we believe our branded portfolio is capable of producing sustainable growth of at least mid-single digits with the potential for higher growth longer term. In the last six months, we announced five transactions, culminating with the acquisition of Sucampo, a deal that in one stroke delivers significant net sales, gives us a foundation of established global partners, and provides us with two additional near-term development programs for our pipeline. Having now completed this transaction, in 2018, we'll focus on execution, aggressively pursuing five overarching priorities to support and accelerate our transformation. Let me summarize each. As always, our first goal will be to maximize the productivity and contribution of both inline brands and the near-term development portfolio. We expect to achieve this through effectively integrating Sucampo, delivering against Acthar, INOMAX, OFIRMEV and Therakos targets and launching as many as seven new products over the next three years. If successful, at their peak, these new products combined could generate more than $1 billion in net sales but most importantly, they will provide patients with new life improving and, in some cases, lifesaving therapeutic options. Our second priority is to further refine our portfolio and our organization. As announced today, we'll move part of our business to discontinued operations as we continue to explore strategic options for non-core assets. With this move, we'll streamline our operating model to increase efficiency and productivity making room for continued and even greater investments to generate future growth in the Specialty Brands business. We expect to apply significant focus to reducing SG&A. As Matt noted, following the discontinued operations move, we expect SG&A as a percentage of net sales will rise. And our goal is to reduce our overall annual spend on SG&A by at least $100 million no later than the early 2020s in addition to synergies recognized from the Sucampo transaction. And we plan to increase our R&D spending in absolute dollars by at least 50% by 2021 and double R&D spending in absolute dollars over the next decade. Third, in 2018, our primary capital allocation focus will be to reduce debt and lower net debt leverage while pursuing business development and share repurchases where and when they make strategic sense. Fourth, we'll continue to refine and strengthen our management team to increase focus on performance and drive sustainable growth. A prime example is the recent recruitment of Mark Casey as General Counsel, adding 20 years of focused life sciences experience and deep knowledge of intellectual property and litigation management to Mallinckrodt's leadership team. And finally, we'll continue to focus on bringing additional deep specialty pharmaceutical expertise to our Board of Directors, such as we did recently with the third quarter appointment of David Norton, who has more than 30 years of direct industry experience. Now let me provide some commentary specific to Acthar and touch on other operational highlights from the fourth quarter. Acthar performed in line with our revised expectations coming out of the third quarter, and we continue to make progress in addressing patient withdrawal challenges. While underlying demand remains strong, these challenges are primarily a result of ever tighter payer controls, which is not unique to Acthar. An example is when payers require existing patients to reauthorize their prescriptions more frequently than in the past. We've already made adjustments to both our payer engagement strategy and our internal administrative approach and expect the impact of these changes to build positive momentum over time. We also continue to focus on reviewing and enhancing the clinical data for the product to identify the most appropriate patients across our promoted indications, which, outside of infantile spasms, are typically later stage patients with complex, difficult to treat conditions. We believe that identifying the patients for whom Acthar is most appropriate, combined with a proactive contracting strategy, are the keys to achieving strengthening reimbursement for the product. Data generation has been at the foundation of our investment in Acthar over the last three years and 2018 is an especially important year in this regard. We expect multiple new data sets will be published this year, including patient experience output from investigated initiated research as well as initial results from our company-sponsored trials and registries. These data sets cross a multitude of our promoted indications, particularly in the areas of pulmonology, myositis, rheumatoid arthritis, and multiple sclerosis. By staying committed to this strategy, we believe we can help healthcare practitioners and payers understand how Acthar can benefit at-risk patient populations. Given all these efforts and having now invested nearly $400 million in the drug since acquisition, we remain confident in the long-term growth prospects for the product. Turning to the hospital portfolio, we continued to see strong performance in the quarter with steady, consistent growth from INOMAX, OFIRMEV and Therakos. We were pleased to generate greater than $1 billion in net sales from hospital products last year, highlighting the importance of this business to our diversification strategy. In addition, our pipeline has a number of hospital products that we anticipate could generate significant growth, and we remain excited about the prospects for this portfolio, both to patients and Mallinckrodt's future. I'd now like to discuss the strategic rationale for the recent acquisition of Sucampo. The acquisition is comprised of four products in total, two products currently on the market in AMITIZA and RESCULA, and two development programs, VTS-270 and CPP-1X/sulindac. The commercial drugs, primarily AMITIZA, provide us immediate accretion and portfolio diversification with net sales in excess of $200 million and growth forecast across the global market over the next several years. In particular, exclusivity in Japan, which provides roughly a third of today's AMITIZA net sales, is expected to extend well beyond 2022. We will continue to market AMITIZA through the existing global network of commercial partners. There are also several potential opportunities for additional near-term value creation for AMITIZA, the most immediate coming in mid-2018 with the outcome of the FDA's review of the sNDA for AMITIZA in patients ages 6 to 17. If approved, AMITIZA will be the first branded treatment for constipation in a pediatric population in the U.S. The two pipeline opportunities are a clear strategic fit with our existing innovative branded model and could launch into the market in the 2019 to 2020 timeline. If approved, these two drugs collectively could represent in excess of $450 million in peak year net sales. Steve will now discuss the details of these development programs along with other pipeline updates. Steve?

[Steven Romano:]

Thanks, Mark. We made a great deal of progress in recent months advancing our expanding pipeline. With the addition of VTS-270 and CPP-1X, we now have approximately a dozen late-phase programs ongoing and some of those are approaching important milestones. Let me briefly touch on AMITIZA and the two development products we gained from the recent transaction. The potential AMITIZA indication for pediatric functional constipation has a PDUFA date of April 28 and, if approved, it would provide relevant information to clinicians managing younger patients. Regarding the pipeline programs, the first is VTS-270, a therapy under development for the treatment of Niemann-Pick Disease Type C, a rare neurodegenerative and ultimately fatal disease that can present at any age. We expect to file the NDA for VTS-270 later this year and we anticipate approval and launch sometime in 2019. We also gained access to CPP-1X/sulindac in the transaction, a product for the treatment of familial adenomatous polyposis or FAP, a genetic mutation leading to uncontrolled growth of hundreds to thousands of polyps in the lower digestive tract. Left untreated, FAP patients currently have a nearly 100% lifetime risk of developing colorectal cancer. If approved, we expect both of these therapies to provide important treatment options for patients suffering from these serious and critical conditions. Highlighting progress in other projects, I'm pleased to report the FDA has recently accepted the NDA for stannsoporfin, setting a PDUFA date of August 22. This important therapy is under development for treatment of infants at risk of severe hyperbilirubinemia, or severe jaundice, and we expect the FDA to hold an advisory committee meeting to review the product sometime this spring. We are confident in stannsoporfin's clinical profile and look forward to supporting the approval process. Our ongoing terlipressin trial for the treatment of hepatorenal syndrome type 1 is nearing its midpoint for patient recruitment. Regarding StrataGraft, our regenerative skin therapy in Phase 3 development for deep partial-thickness burns and Phase 2 for full-thickness burns, we will be meeting with the FDA in the coming weeks to discuss an accelerated approval pathway based on its RMAT designation. If approved, StrataGraft has the possibility to significantly improve the standard of burn care in the United States. We were also excited to recently report the first patient enrolled in ExpressGraft Phase 1 trial in patients with diabetic foot ulcers. As you may recall, ExpressGraft is the keratinocyte cell line utilized in the production of StrataGraft, but genetically modified in this case to increase production of a naturally occurring antimicrobial. The unique clinical profile of this biologic product may benefit patients with chronic non-healing wounds. We were very pleased to also announce the first patient enrolled in our Phase 2 trial of MNK-1411, a melanocortin receptor agonist in patients with the Duchenne muscular dystrophy. Turning to activities supporting inline brands, our Acthar studies also continue to progress well. We recently announced the first patient enrolled in our Phase 4 sarcoidosis study and continue to advance our Phase 2 ALS trial. We will also have the opportunity to present data from both the MS relapse registry and the ongoing Phase 4 trial in rheumatoid arthritis later this year at scientific conferences. Lastly, we're progressing the development of the next-generation INOMAX nitric oxide delivery system which we believe, if approved, will substantially enhance both patient and healthcare provider experience. With that, let me turn the call back to you, Mark.

[Mark Trudeau:]

Thanks, Steve. So you can see in only a few years, we've established a valuable mid- and late-stage pipeline and we've built a skilled and productive science and technology function with Steve at the helm to help us realize its full potential. We'll pursue multiple product launches within the next three years and anticipate our first approval sometime later in 2018; an incredibly exciting turn of events for a company that had virtually no innovative pipeline just four and a half years ago. Our strategy of transforming Mallinckrodt into an innovation-driven company positions 2018 to be a promising year, the first of many actually, with a number of exciting catalysts on our calendar. Supported by the five overarching priorities I highlighted, we expect our transformation to accelerate and generate substantial value. At this point I'll turn it back over to Cole, who'll take us into Q&A. Cole?

[Coleman N. Lannum:]

Thanks, Mark. Obviously, a lot of information that we've disclosed this morning. I want to remind everyone to please limit yourself to a single question with a brief follow-up if and only if needed. Feel free to put yourself back in queue afterwards. And by doing it this way, I promise we'll get through as many of your questions as possible in our timeframe. With that, Glenda, may we please have the first question?

[Operator:]

Thank you. And our first question comes from the line of Louise Chen from Cantor. Your line is now open.

[Louise Chen:]

Hi. Thanks for taking my question. So, my question is regards to Acthar and what type of sales are assumed in your 2018 guidance? Thank you.

[Mark Trudeau:]

It's great. So, obviously we gave some guidance for the overall business, the branded business growing at 3% to 6%. You can determine, based on the composition of that sales, that Acthar sales are likely to be down versus 2017. But we certainly expect that the net sales for that product will be in excess of $1 billion for the year.

[Louise Chen:]

Okay. Thanks.

[Operator:]

Thank you. And our next question comes from the line of David Maris from Wells Fargo. Your line is now open.

[David Maris:]

Morning. I had a couple questions. And first and foremost, since this is Cole's last call, I do have to say probably on behalf of everyone that thanks for everything. You've been great and you will be missed. So, maybe on the product side, to get to the less exciting things, or maybe more exciting, if we could talk a little bit about stannsoporfin and the advisory committee, what do you think they're going to be focused on? And tell us about the current use in the compassionate use basis. How many patients are being treated per year, more or less? Or how many physicians have experience with it. Maybe you could just tell us what the experience has been so far for this product.

[Mark Trudeau:]

Yeah, David, thanks for that question. Obviously, we're very excited about the prospects for stannsoporfin. This will be the first pharmaceutical option for patients that have severe jaundice and we think it's a very exciting opportunity that meshes very well with our presence in the hospital particularly in the NICU with INOMAX. Let me turn the questions over to Dr. Romano to explain.

[Steven Romano:]

Yeah. So, first maybe a comment about the advisory committee. It's hard to know exactly what they will focus on. We haven't heard yet the feedback from the agency with regards to the specific concerns and questions. But you can imagine with any product that's going into infants, that there would be a likely focus on the safety profile of the product. And we're very confident in the safety profile and the tolerability profile of the product acutely. And it is a single, remember, it's a single injection, so it's given once in these patients. But naturally, they'll want to know the follow-up of those patients and the general safety profile beyond a single injection. So, I don't think that's any surprise and that's likely. The other things we'll focus on is just the evidence for the efficacy because remember, they've allowed for a submission based essentially on a relatively smaller pivotal trial, essentially a Phase 2 trial. So, they've allowed the previous owners, and now us, to actually essentially skip Phase 3. So again, there will be a focus on the efficacy and the benefit risk as they would on any product, but I think particularly on the safety side and tolerability side given it is being given to infants. There's a small number of patients, I don't have the exact number, that have been provided the product, but the general experience has been, as reflected in the pivotal trial, which is a substantial and statistically significant reduction in total serum bilirubin, and that is, of course, what we're basing the approval on.

[David Maris:]

Just as a follow-up, if the product were available for compassionate use basis, why would there be such limited use so far? Is there anything about your ability to let doctors know about it? Or should we not read into that just because it is (26

[Steven Romano:]

Yes. Yes, I got your question. No, I wouldn't read anything into that. In fact generally speaking, you typically don't want to allow access to your product until you're fairly advanced in your development. And because again, this is based on Phase 2 data and had not yet gone into Phase 3 and will not, I think there was some concern about being conservative. I wouldn't read anything more into that than the fact that the agency has allowed an accelerated review of the product.

[David Maris:]

Great. Thank you very much.

[Coleman N. Lannum:]

Thank you, David. Next question please.

[Operator:]

Thank you. And our next question comes from the line of Dana Flanders from Goldman Sachs. Your line is now open.

[Dana Flanders:]

Hi. Thank you very much for the questions this morning. My first, just on Acthar. Can you just characterize the discussions that you're having with payers at this point? And I realize it's early, and I guess, do those discussions involve potential price concessions or rebates on Acthar at all? And then, my quick follow-up, just on Sucampo, can you, from a high level, talk about the due diligence you were able to do there, and specifically on their two pipeline assets? I know there's some controversy on the data from the Phase 2; I believe on CPP-1X proof of concept failed. And so, just what level of confidence do you have heading into the Phase 3 readouts this year? Thank you.

[Mark Trudeau:]

Yeah. Let me take the payer discussion question first, and then I'll ask Steve to discuss a bit around the pipeline assets coming out of the Sucampo acquisition. So, our payer discussions are actually going along quite well. We've been proactively re-engaging with payers and looking for opportunities to ensure that Acthar continues to have access to appropriate patients. And we're contracting for what we call appropriate reimbursement pathways; in other words, ensuring that Acthar is appropriately positioned as an option for patients that are at risk that have relatively few options. These are particularly highly refractory patients that may have tried and failed on other therapies. We have historically, in any of our contracts, applied some discounts and rebates. And certainly, that has a net negative impact on gross to net. However, we expect that through our enhanced payer activities, while we may be providing some additional discounts or rebates, net price on Acthar are still likely to be positive going forward. We think it's a very good opportunity for the long term to ensure that Acthar has access again to these appropriate patients where the product can really make a difference in those patients that have relatively few options. So, let me pass the discussion then on the next question around the pipeline opportunities coming out the most recent acquisition to you, Steve.

[Steven Romano:]

Yeah. And I think you asked about the confidence in those studies and of course these are interesting studies because they're both in relatively rare conditions. When you think about VTS-270, it's in a Phase 3 trial right now which will – or has enrolled over just over 50 patients. The last patient visit is coming up over the next month or two. So, we'll soon have that trial completed and we'll be looking forward to the results of that trial. Now, that trial was based on the results from a previous trial that included a small number of patients in the low-teens 11, 12 patients. The results of that were compared to a historical control group. So, there was a fair amount of confidence in the results of that earlier study and obviously that led to the commitment to the Phase 3 trial. So, we're feeling relatively good about that. And of course, you never know until you complete a study what the outcome will be. But I will tell you we're feeling hopeful that, for those patients in need of an intervention, we will replicate the data as was seen in Phase 1 in the earlier trial. With regard to CPP-1X/sulindac, again this is an interesting product as well and is being studied in a population of patients, as I mentioned, with FAP. So, I think you suggested that the previous study was negative. Well, the previous study really looked at polyp burden and did show a reduction in polyp burden. Now, the Phase 3 trial is a factorial trial in that you'll look at the combination of eflornithine and sulindac as well as the two components separately. And instead of looking at polyp burden, you're actually going to be looking at a time to event, and the event is progression of FAP. So, there's always a bit of risk when you change, or when you advance to a Phase 3 with a different outcome. But typically, it is driven based on confidence in a mechanism and assumptions around the likely outcome. So again, two rare conditions; very important that these trials be done. We're feeling fairly confident that the VTS-270 trial will replicate the results seen in the Phase 1 trial that was done by the National Institute of Health and we're hoping that the data seen in polyp burden previously will translate into improvement in time to – or delay in time to progression in the case of CPP-1.

[Matthew K. Harbaugh:]

I would just add, for this particular product, keep in mind it is a licensing agreement with some modest investment to realize it. So, this is not going to be a huge investment until we know more.

[Dana Flanders:]

Thank you.

[Coleman N. Lannum:]

Thanks, Dana. Next question please.

[Operator:]

And our next question comes from the line of David Amsellem from Piper Jaffray. Your line is now open.

[David A. Amsellem:]

So, thanks. So, on Acthar, can you drill down a bit on the portion of prescriptions getting filled, how that trended in 4Q, how you expect that to trend in 2018? And then just secondly on AMITIZA, can you talk about the extent to which the market will be relatively limited in terms of competition once Endo and Dr. Reddy's enters in the 2021, 2022 timeframe? I guess what I'm trying to get at is, how long do you think it could be just a two- or three-way market where you're generating significant cash flow on the product even though it's multi-source? Thanks.

[Mark Trudeau:]

Yeah. Thanks, David. So let me take the Acthar kind of prescription fill rate, if you will. So, couple things to keep in mind, remember in 2016, Acthar grew double digit in volume, effectively no price at all in 2016. And we grew volume in some of the indications like pulmonology and rheumatology where the prescriptions are typically longer, certainly longer than 30 days. So, we continued to see very good demand at the prescriber level for Acthar. That hasn't really changed much. Where we've seen a change is in the proportion of those prescriptions that are written being actually reimbursed or filled through the payer environment. And a lot of what we saw going on in the third quarter, and particularly towards the end and at the start of the fourth quarter, was a specific focus that appeared on getting patients to have to requalify every time their prescription needed to be extended. As you might imagine, that caused a significant administrative burden. It's not great for the patients. It probably actually causes some cost shifting going on at the payers because, again, these are refractory patients with relatively few options. But we did see a decline in the rate of reimbursement in the third quarter. We saw some stabilization in the fourth quarter, and we would expect over time that that stabilization, and perhaps growth, will change. We believe that the answer to that is twofold. One, it's the enhanced payer engagement strategy that I referred to in the prepared comments. But secondly, it's really highly dependent on the new sets of data, clinical data in particular, coming from both investigator initiated research as well as company trials that we believe are the long-term value creators that are likely to have a positive impact on that prescription fill rate going forward. Let me move to the second question regarding AMITIZA competition. What we anticipate is that in the U.S. – now keep in mind, the split of business for AMITIZA is about two-thirds U.S., about one-third Japan. In the U.S., we will see loss of exclusivity in the kind of 2021 timeframe for AMITIZA. But there are – which would impact the net sales growth opportunity in the U.S. But between 2021 and 2023, so the years of 2021 and 2022, there are some value share agreements in place with a couple of the generic entrants that are likely to come into that timeframe and you described those. So, we would anticipate continuing to see growth in the income delivered from AMITIZA in the U.S. through 2022 as a result of those value-sharing agreements. In Japan, keep in mind that the exclusivity continues to extend well beyond the 2022 timeframe. And so, we would expect that that's going to continue to deliver value for this product over the longer term.

[Coleman N. Lannum:]

Thanks, David. Next question, please.

[Operator:]

Thank you. And our next question comes from the line of Dewey Steadman from Canaccord Genuity. Your line is now open.

[Dewey Steadman:]

Thanks and good morning. For the Generics unit and the divestiture or potential divestiture there, would any transaction include a physical plant? And if so, what would happen with any environmental liabilities associated with that facility? And then on Acthar, can you give us an update on the net percent of lives that are covered? You've previously given us some updates there. And for those commercial lives that are covered, are those the source of some of these issues, or is that outside of the normal coverage that patients have? Thanks.

[Matthew K. Harbaugh:]

Yeah, Dewey, I'll answer your question around the Generics business and then I'll turn it over to Mark to answer your question specifically around Acthar commercial lives. So, I do want to highlight for everyone on the call this morning that we did put a reconciliation. It's called the Specialty Generics Disposal Group. That reconciliation is important for you to understand because we do have revenue moving between our legacy Brands segment, between Brands and legacy Specialty Generic segment. So please make sure you look at that so that you're clear on that data. As it relates to if we were to do a divestiture, the answer is, yes. We do have a handful of plants that would go with that transaction. And I say a handful. We have four plants specifically, but we also have a facility in Webster Groves which is a R&D technical center, where we also have the opportunity to produce some product out of that plant. So, I think that answers your question and I'll turn it over to Mark.

[Mark Trudeau:]

Right. With regards to Acthar commercial covered lives under contract, we still have a significant portion of Acthar commercial covered lives under contract, and we would expect through our enhanced pair engagement process to continue to drive that proportion of covered lives under contract higher. Keep in mind, though, we've learned over the last couple of quarters that it's quite important that we have even more specific contracts with regards to commercial covered lives. And that's why I go back to my original comments around ensuring that when we sign contracts, that Acthar is appropriately positioned in these reimbursement pathways for refractory patients. And that's part of the enhanced strategy that we're now going back to payers with. Gives us a bit more certainty and a bit more clarity on both sides as to what the appropriate patients are for Acthar.

[Dewey Steadman:]

Thanks.

[Matthew K. Harbaugh:]

Yeah. Just to be clear, the disposal reconciliation I was talking about is on our website.

[Dewey Steadman:]

Thanks. And just to be clear on the environmental liabilities, I think they're associated with the North City plant. Would those be held by Mallinckrodt or would those go to an acquirer?

[Matthew K. Harbaugh:]

You know, it remains to be seen. I will tell you after having been with the company a long period of time, the environmental issues at all those plants are pretty benign and have been well managed historically. So I wouldn't expect that to be a material issue.

[Dewey Steadman:]

All right. Thank you.

[Coleman N. Lannum:]

Thanks, Dewey. Next question please.

[Operator:]

Thank you. And our next question comes from the line of Ami Fadia from Leerink. Your line is now open.

[Ami Fadia:]

Hi. Good morning. I have follow-ups on two things. Firstly on Acthar, with your payer engagement strategy, what are you looking to achieve? Would it be sort of reducing the frequency of re-authorizations that are required for some of these chronic indications? Or maybe better elucidation of the type of patients that qualify for Acthar? Or just overall increased coverage? And around what timeframe do you expect to be able to achieve that? And then separately, you mentioned that the net price for Acthar realized is likely to increase despite higher rebates. So if you could help me understand that a little bit better? And then on VTS-270, what specifically does the Phase 3 trial need to demonstrate in order to be successful? Have there been any specific discussions with the FDA regarding what would be adequate for an approval? Thanks.

[Mark Trudeau:]

Great, thanks for those questions. I'll take the first two on Acthar and then, again, I'll turn it back to Steve to talk about the VTS-270 trial opportunities. With regards to our objectives in our Acthar payer strategy, obviously what we're trying to do long term is ensure appropriate access for the product for patients that are refractory, in most cases, and have relatively few options. And so, our overall strategy is just as you describe. We're looking to ensure that patients, once they're prescribed Acthar, have ready access to the product regardless of their duration of therapy. And again, that's one of the things that we have seen some payers change in their approach. And in terms of timing, what we're looking at here is, first of all, we've already done significant engagement with a number of payers. We would expect to continue that through 2018. But again, it's going to be an ongoing process for us. It's something that we're always refreshing. And I think in particular when we get new data sets, new clinical data sets like we're likely to experience in 2018, that gives us yet another opportunity to go in and discuss the appropriate positioning of the product with payers. Keep in mind that virtually every Acthar patient goes through a pre-authorization process and to the extent that we can provide clarity as to the appropriate type of patient and the data that supports those patients, it's to the advantage of the patient and also certainly to the advantage of the growth of the product. With regards to the net price, what I'm referring to is that in the event that we do provide any additional rebates or discounts in our payer engagement strategy, and again, we do that only if we get enhanced access to the product. We anticipate that our net price impact will still be positive. Keep in mind that we have taken some modest list price increases on the product from time to time, and those will likely more than offset some of the discounts and hand discounts that we may be giving in order to ensure appropriate access to the drug So with that, let me pass it over to Steve to talk a little bit about VTS-270. Just one other comment that I will make around price on Acthar; keep in mind that we do have a pricing pledge. It's on our website. A pricing pledge is very clear to say, we not to take price in any of our innovative products in a calendar year period and no price greater than double digits. So we keep our price increases relatively modest. And again, we want to make sure that for Acthar or any of our innovative products, that our primary emphasis is on access, so that appropriate patients can be treated. Steve, let's talk about VTS-270.

[Steven Romano:]

Sure. No, no. Thank you for the questions. So regarding VTS-270 development program, I mean, naturally, as with any program, there have been interactions with the agency and there's been general agreement on what's required in order for the product to be approved. So there was certainly alignment on the design of the Phase 3 trial. Now the good news is this product has breakthrough status, which allows us to have more robust and frequent interactions with the agency. So we are planning to have discussions with the agency just to confirm the analyses and some other sort of finer points around the interpretation of this trial that will soon be completed and we'll do that over the coming weeks to months. So we will have that discussion. But let me reassure you that naturally the Phase 3 trial was discussed and agreed with the agency with regards to requirements for approval.

[Mark Trudeau:]

Let me just clarify. I want to make sure I was clear. Again, you can go to our website and look at our pricing pledge. But our pricing pledge is that, no price increase would exceed single digits. So, want to make sure that that's clear. And again, that applies to any of our portfolio of innovative products going forward.

[Coleman N. Lannum:]

Next question please.

[Ami Fadia:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of David Risinger from Morgan Stanley. Your line is now open.

[David R. Risinger:]

Yes. Thanks very much. So, my questions are pretty straightforward financial ones. So, the first is, with respect to your revenue guidance for 2018, when one adjusts the 3% to 6% guidance for Sucampo, is it right to conclude that you're guiding for total revenue to be down 5% to 8%, and that is versus consensus at about flattish? I know that you follow consensus pretty closely. And then, the next question is simply what is reflected in guidance for EPS assumed dilution in 2018 for exiting Generics? Thank you.

[Coleman N. Lannum:]

David, obviously a lot of moving parts here and certainly respect where you're coming from there. Some of this might be easier to go through offline because of the moving parts. So, let me give you a brief outline. Yes, we did talk about the accretion from Sucampo, and that remains unchanged going forward is what we said previously. But remember, when you start doing apples-to-apples comparisons, we also have sold the intrathecal business and we sold the hemostats business. Want to make it clear, those two asset sales are not going into discontinued operations. So, you have an apples and oranges comparison there on a revenue side of things because obviously we lose the revenues as soon as we sell those businesses. But we're not going back and pro forma-ing for any of that. So I think you need to be careful at just, if you're looking to do the apples-to-apples of the Sucampo, you need to be careful with taking those into account as well. In addition, I don't think that any of our guidance numbers are intended to be an exact mathematical itemization, point by point. You should think of the guidance we've given as a holistic number to give you an idea of what the revenues will look like including all the pieces, yes, including Sucampo accretion and yes, including the sale of those businesses, but also pluses and minuses including the Generics business going into discontinued operations. So, let's talk about Generics going into discontinued operations for a moment. It's hard to get the exact number again. But if you just look at 2017 numbers and you take a look at the numbers based on the operating income and our segment data, now admittedly, that's a different number because we're not moving all the businesses over to discontinued operations. You can quickly see that you're talking about dilution there probably in the $1.50 to $2 a share solely from that move to businesses to discontinued operations and then maybe even a little bit higher than that. Obviously, we can't give you the exact number now because there are still some moving pieces as Matt talked about. You'll be getting full pro forma historical data before the next earnings call to allow for a more precise assessment of what that impact is. Does that help?

[David R. Risinger:]

Yes. Thanks very much, Cole.

[Matthew K. Harbaugh:]

Yeah. David, the only other thing I want to add, I really can't emphasize enough, please go to the website and look at the reconciliation. To Cole's point, there's a lot of moving parts with, for instance the BioVectra unit going in under the Brands business for instance. So that'll help you. I would also add as it relates to Specialty Generics just to make sure everything is crystal clear, from a P&L, from an income statement perspective, the Specialty Generics business will go into discontinued operations as I mentioned on the call. But from a cash flow and from a balance sheet perspective, as long as that business is in the portfolio, we can use that cash to de-lever or make other alternative moves from a capital allocation perspective. And when we renegotiated recently around getting the cash in to be able to close on the Sucampo acquisition, we made sure to get that exclusion allowed for us to be able to use that cash freely. So the benefit is is that we will continue to enjoy that cash flow, albeit that business has been challenged a number of years. It still has generated good cash for us that we can continue to put to work.

[David R. Risinger:]

Got it. Thanks, Matt.

[Coleman N. Lannum:]

Thanks, David. Next question please.

[Operator:]

Thank you. And our next question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is now open.

[Gregg Gilbert:]

Thanks. Matt, I'd like to better understand the $100 million SG&A savings plan. Is it $100 million lower or what is it $100 million lower than specifically? Looking for a number there and I just want to make sure that remains true in light of what could be several launches in the coming years. So kind of a gross or net question. And then on AMITIZA, Mark, can you tell us, just tell us the Japan exclusivity picture beyond saying it's well beyond 2022? Isn't it a set date, and to what extent is OTC a possibility in the U.S. for that product? Thanks, guys.

[Matthew K. Harbaugh:]

So, I'll start with the SG&A question Gregg. And I think it's pretty straightforward. As you look at the balance as to where we're at now, the goal is by the early 2020s to get another $100 million taken out. As you know, we have been very successful at restructuring over a number of years. And as we've divested non-core businesses, you you've definitely seen the benefit of some of that restructuring. We saw it in the last quarter and to a more modest in the fourth quarter, but we've shown a good solid track record I'd say over the last four years, in particular with both the restructuring reserves got approved by the board to continue to refine and take cost out. I would just highlight that in Mark's section as well, we're not including the synergy potential out of Sucampo which is significant. That's in addition to. So, it will be a material drop. It'll take us some time to implement that. For the AMITIZA question, I'll turn it over to Mark.

[Mark Trudeau:]

Yeah, thanks for that, Gregg. So yes, the AMITIZA LOE date in Japan is out there. It's in the mid to late 2020s. I believe it's in the 2026 kind of timeframe. And with regards to additional potential growth opportunities for AMITIZA, clearly we would see this as a growth asset for us into the early 2020s. There may be additional opportunities, certainly with the pediatric labeling which we'll know about here relatively shortly. And then, specific to your question about an Rx to OTC switch, there are clearly opportunities for that as well. That's in the relatively early stages of formation. But we believe that this product would be an appropriate candidate for an Rx to OTC switch. And if in fact we do find that as an opportunity, we would likely be doing that with an established partner who has done this previously and can help us capture the full value for that opportunity.

[Gregg Gilbert:]

Thanks.

[Coleman N. Lannum:]

Thank you, Gregg. We got time for couple more questions. Next question please, operator.

[Operator:]

Thank you. And our next question comes from the line of Irina Koffler from Mizuho. Your line is now open.

[Irina Rivkind Koffler:]

Hi. Good morning. You'd previously said that Acthar could be weaker sequentially in the first quarter of 2018. I just wanted to verify if that's still the case. And also, should we expect the brand to return to growth in 2019 or is this process with the payers going to take a bit longer in your opinion? And then, perhaps you could also weigh in on the competitive landscape for Acthar with other competitors like ANIP and Depomed? Thanks.

[Mark Trudeau:]

Yeah. Thanks, Irina. So typically, as you know, Acthar has a relatively weaker quarter in Q1 relative to all other quarters. We have seen this pattern for many years and I think it's probably consistent with some other specialty drugs. But clearly, we would expect the same pattern in 2018. And so, again, comparisons would be to the previous year's quarter as opposed to sequential. But we would anticipate again that on a relative basis, you would see a weaker quarter in Q1 of 2018 than any other quarter. We're not necessarily giving any direction yet for 2019, obviously. We've just given guidance for 2018. And again, as I mentioned earlier, we would expect year-over-year Acthar likely to be down in 2018, but still in excess of $1 billion dollars. Again, long term, we expect this product to continue to have significant potential for growth. That would be driven by the emergence of the data and certainly that's one of the reasons why we've invested so heavily in this product. In particular in clinical data, randomized placebo controlled trials in key indications, I believe, we have six clinical trials ongoing at the moment. So that will be the long-term growth driver for this product. And we're very encouraged to start to see, at least initially, some of that data playing out as early as 2018. And we would expect that data generation readout and reporting to increase in momentum over the next couple of years. With regards to competition, again, our position on competition remains the same. We believe that Acthar has a very solid long-term durability. Again, we wouldn't be investing so heavily in this product if we thought otherwise. We do believe that long term there's likely to be competition for Acthar. Keep in mind, there's already competition for Acthar today in virtually every indication, if not every indication on the label. But we would expect additional corticotropin class competition to occur, again, more than likely through the NDA route. There are a variety of different approaches being tried. Again, we think that regardless of the approach, that it's likely to be a pretty challenging process, although far from impossible. And so again, if it does come through the NDA route, which we expect is likely, keep in mind that these would be separate branded products with their own labeling, their own promotion, their own pricing and reimbursement. In effect, what we may see in the future is additional focus on the corticotropin area as a potential alternatives for patients that are currently with few options in the refractory state for some of these indications.

[Matthew K. Harbaugh:]

Yeah, Irina , the other thing I'd like to go back to your first question around the calendarization. Again, I would encourage you to go out to the website and look at the reconciliation because you can see the manifestation of what Mark was talking about around the quarterly fluctuations you will see in Acthar. And by far you'll see on that reconciliation the first quarter of last year was the lowest. The other thing I would highlight, and I know there were a lot of words in the prepared remarks, but when I was giving the guidance range for the year of $6 to $6.50, I also said with quarterly earnings performance expected to improve as the year progresses. So I would encourage you to really think through the quarterly timing, especially in light of the Specialty Generics Disposal Group transition we announced this morning.

[Coleman N. Lannum:]

Thanks Irina. Operator, we're going to try to get through two or three more questions. I think we can mostly get through them, if that's the case. Next question, please.

[Operator:]

And our next question comes from the line of Chris Schott from JPMorgan. Your line is now open.

[Chris Schott:]

Great. Thanks very much for the questions. Just a quick follow-up on that Acthar commentary. I know you've talked a lot about the efforts you're making to reaccelerate growth. But just again, as we think more about the year-over-year growth of this product as we move through 2018, should we think about this business consistently down throughout 2018? Or should we be thinking about a bigger impact in the first half of the year and that by the second half of the year, you're hoping that some of these efforts should be leading to a business that's more stable or actually starting to grow? Just trying to understand a little bit as we think about the milestones we should be watching to see if these efforts are stabilizing Acthar . And then the second question was just on the Generic divestiture. Just a little bit more color in terms of any use of proceeds there? Should we think about that being used to further de-lever the company given some of the priorities you talked about for 2018? Or could there be a more balanced use of that, whatever cash comes in the door for that transaction? Thank you.

[Mark Trudeau:]

Yeah, let me take the first question on Acthar and I'll have Matt address the second one on Generics. Again, I would just go back to Matt's comments with regards to our expectation of performance accelerating throughout the year. Clearly, that would apply to our entire portfolio.

[Matthew K. Harbaugh:]

Yeah. With regard to your question around the use of proceeds, Chris, a couple things I would say is you'll see in our 10-K filing here in the not too distant future, that we have already started chipping away at the debt that we took on to acquire Sucampo. You'll see in there that we've paid off the revolver to the tune of about $275 million. That's netted with a $25 million draw on our AR securitization program. So, net the $250 million decrease is out there in the near term. So, we are already de-levering. Remember, we have not closed on the hemostasis transaction. We would hope to do that in the near term. We'll get cash for that transaction that will come in here. Also, remember we're getting the proceeds from the intrathecal business. And as you can see, with the strong cash generation, not only did we buy back 10% of our shares in the last quarter, but we also were building our cash reserves in anticipation of being able to close on Sucampo. So, as it relates to what we would use the proceeds for, for anything we would do with our Specialty Generics Disposal Group, I would say we'll look to de-lever because we've said that's a key priority. But if you think you can get a significant amount of cash out of that transaction, it allows the balance sheet to get back to the levels that it's been historically pretty quickly.

[Coleman N. Lannum:]

Folks, if you can really keep it to one question, we're going to try to get two more people in. Operator, next question, please.

[Operator:]

And our next question comes from the line of Chi Fong from Bank of America. Your line is now open.

[Chi M. Fong:]

Hi. This is Chi on for Jason Gerberry. Thanks for taking our questions. On tax, how durable does the management view the 2018 adjusted tax rate will be beyond 2018? Given prior comments, the tax reform is expected to have a neutral to slightly positive impact on the adjusted tax rate? And if I may, on Acthar, can you discuss whether the reimbursement pressure is greater on the commercial versus the government plan? Thanks.

[Matthew K. Harbaugh:]

Yes. I'll start with the tax question you asked. I mean, as Mark said earlier, we just gave guidance for 2018, so we're not prepared to be giving 2019 guidance at this point. What I would say is that a significant portion of the drop that we saw, if you look at the math on 2017, we came in on a guidance range of 15% to 17%. We came in within that range. And I've been hopeful that I've been clear since JPMorgan and beyond that we did see benefit on our tax rate and benefit on our interest expense as a result of both the legal reorganization we did, the entity reorganization we did as well as tax reform. So, those are very real gains for the company that we will be realizing in 2018. I think investors should find it notable that our guidance for interest expense this year is about what it was this time last year. And the reason it is is while we have reduced our 453A interest associated with the deferred tax liability, we've gone out and acquired Sucampo. And so it's pretty remarkable the benefit that you can see, both in that interest expense line as well in the tax rate. Mark, I'll turn it over to you for the other question.

[Mark Trudeau:]

Yeah. So, the question was around Acthar payer pressures in commercial versus government. Again, I'm going to speak specifically to commercial plans and primarily Medicare. Recognize that about half of our business is reimbursed through Medicare. There is a relatively small proportion in other government programs and then the balance is in commercial. Many of these pressures are coming through the commercial side of reimbursement, but recognize that also can spill over into the Medicare population because many of the commercial insurers and payers also manage Medicare patients. So, effectively we're seeing this impact across the spectrum of Acthar reimbursement regardless of the source.

[Chi M. Fong:]

Thank you.

[Coleman N. Lannum:]

Operator, one more question, then we'll have to wrap up.

[Operator:]

And our next question comes from the line of Marc Goodman from UBS. Your line is now open.

[Marc Goodman:]

Yes. Good morning. Just on an Acthar. Can you confirm what the net price was in the quarter? I think last quarter you had a benefit of like mid-single digits. What was it this quarter? And then also, Mark, you've talked about this some stabilization in your discussions. Can you give us a sense of how many discussions have you had, like what percent of the commercial lives that are not covered that you've talked to? Or just give us a sense of how far along you are on the process. Because obviously last quarter, we were all a little bit surprised that some payers took some extra liberties of beating you guys up on reimbursement. So, a patient engagement strategy is the right strategy. Proactively go out and talk to all these guys. How far along are you in that process? Are we halfway there? Do we still have many more to go? Just so we know what does stabilization actually mean this past quarter? Thanks.

[Mark Trudeau:]

Yeah. So, with regards to Acthar Q4 net price, net price was again positive in the quarter. Again, recognize that we did take a price increase in 2017 early in the year consistent with our pricing pledge. And so that continued to be positive in the fourth quarter, net of, of course, discounts and rebates that we have been discussing with a variety of payers over time. In terms of the stabilization markets, not how many talks we've had but what are the size of the accounts and the impact on the business. What I can tell you is that we've reengaged and had talks with virtually all of our payers. I don't know that it's 100% but it's pretty darn close. And since the third quarter, we've gone out and been very, very proactive to look very carefully at our existing contracts to make sure that there's a lot more focus around appropriate patients in these reimbursement pathways. So I would say we're well along in the discussions. But as you might imagine, these do take time and we would expect that they'll continue to take some time. But we're pleased with the progress that we've seen with a number of the large payers. But again, the payer contracting strategy is just one of what I would say two primary pillars for focusing on Acthar growth over time. The second piece, and I can't emphasize this enough, is the emergence of clinical data and that's why 2018 is such an important year for Acthar because we're going to see some pretty, we think, interesting data sets in some key indications. And historically, when we've presented, or additional new clinical data has been introduced to the market around Acthar, that's resulted in a positive impact, both with payers and prescribers. And we would expect to see some of that impact starting in 2018, but obviously carrying into years going forward. And recognize that in 2017, while we had a lot of health economic data that was presented, it was a relatively lighter year for actual clinical data presentations, which again is why we're so excited about the prospects for 2018. Again, the impact is likely to be later into 2019, but the emergence of these data sets is what we really think is going to be the long term driver for growth for the product over time.

[Coleman N. Lannum:]

Thanks, Mark. And with that, we've gone over our usual rule of stopping at the bottom of the hour simply to try to accommodate as many of you as we could. Obviously, a lot of questions and a lot of moving parts this morning. I want to thank all of you for joining us on the call this morning. We're going to stop it there. A replay will be available later on today on our website. Of course Dan and I will also be available throughout the day to answer any follow-up questions you may have. And I look forward to talking to all of you very soon. Have a great morning.

[Operator:]

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