Mallinckrodt plc
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2018 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 is being recorded. I would now like to introduce your host for today's conference, Dan Speciale. You may begin.

[Daniel Speciale:]

Thank you, Gigi. Good morning, everyone, and welcome to today's call. Joining me are Mark Trudeau, our CEO; Dr. Steve Romano, our Chief Scientific Officer; and George Kegler, our CFO. And for the Q&A portion we will also be joined by Hugh O'Neill, Chief Commercial 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 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 an 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. We use this channel, for example, to publish our net debt leverage ratio on a quarterly basis. And as you can see today, our net debt leverage at the end of 2018 was 4.4 times. As noted in our press release, unless otherwise specified, all quarterly comparisons are to the recast comparable 2017 period and the net sales growth ranges we will be discussing on a constant currency basis. As you likely saw in our release this morning, we recorded a non GAAP impairment for goodwill as part of our required GAAP annual analysis. This impairment was primarily driven from the fundamental disconnect between our anticipated future projections for the business and where we find our share price and market capitalization today. As we’ve consistently stated, we believe our stock price is undervalued. But given the length of time that it’s been at these levels, we determined the non-cash impairment was appropriate in the fourth quarter under GAAP. You likely also saw in an 8-K this morning, we prepared recast’s historical financial statements moving to Specialty Generics Disposal Group back to continuing operation. And the company now operates two discrete segments, Specialty Brands, the innovative branded pharmaceuticals business; and Specialty Generics and Amitiza which we intend to separate from the company in the second half of 2019. We will continue to report on a segment basis with both of these businesses and continuing operations until such time that the separation is completed. Guidance is being provided on a total company basis, unless otherwise noted, assuming a full year of operations for both segments and we will provide updates to guidance throughout the year as wanted. Our 2019 total company guidance for adjusted diluted earnings per share is a range of $8.10 to $8.40 per share and we are guiding to net sales growth in each of the Specialty Brands and Specialty Generics segments of 1% to 4%. Please be sure to review the earnings release for a comprehensive listing of all metrics we’re guiding to this morning. Finally, I want to remind everyone that we are at hard work on Form 10 for the separation and expect that this will be filed publicly within the next few months. We have included segment profitability information in the recast financial statements and earnings release this morning, which should help you as you start to update models for the respective businesses. With that, let me turn the call over to Mark. Mark?

[Mark Trudeau:]

Thanks, Dan. We’re very pleased to once again report strong overall results for the fourth quarter and the full year 2018. Today, we will cover some of the highlights from the quarter and outline our strategic priorities for 2019. We will also provide updates on key development milestones that you can look forward to in the coming months. Strong performance in 2018 accelerated our progress to becoming an innovation-driven specialty pharmaceutical growth company, focused on improving outcomes for underserved patients with severe and critical conditions. In 2019, we plan to take two additional important steps toward that vision. One, separating the Specialty Generics business; and two, beginning to deliver on key components of our R&D strategy, including data generation for key inline products like Acthar and Therakos, as well as completing key development programs for pipeline assets like Terlipressin and StrataGraft. The planned separation of our Specialty Generics business combined with Amitiza is expected to result in a well diversified portfolio of products, balanced between APIs, Amitiza and the oral dosage generics, including controlled substances for pain, ADHD and addiction disorders. Approximately half of the API business is high quality acetaminophen making Mallinckrodt the largest Western producer of this product. We anticipate the Specialty Generics segment will generate significant EBITDA in the range of $300 million and substantial cash flow. After experiencing contraction over the last several years the business is projected to return to growth in 2019, driven by share recapture in the Specialty Generics business and supplemented in the near-term by contract manufacturing opportunities. Long-term growth is expected to be driven by the introduction of complex, primarily non-opioid ANDA products. Turning to the brands business, performance in the fourth quarter was consistent with the trends seen throughout the year, strong growth in our hospital products and a continuing trend of Acthar recovery. Our $1 billion hospital portfolio is now our largest and fastest growing platform in total net sales. Both INOMAX and OFIRMEV demonstrated double-digit growth in the quarter, resulting in full year growth in the high single-digits for the total hospital portfolio. We anticipate these trends to continue in 2019. Looking further at INOMAX, we will likely have better clarity on the appeal process later this year. Regardless of the outcome, though, based on customers feedback, we don't expect significant competition in 2019 -- significant impact from competition in 2019. Longer term, we believe that any potential competition will be on a branded rather than on a generic basis. We’re very confident in the long-term durability of INOMAX, driven by our highly differentiated service model and the anticipated launch of the next generation EVOLVE system in 2020. Turning to Acthar, despite ongoing challenges in the payer environment affecting specialty products in general, and Acthar in particular, we continue to be pleased with the drug's performance. In 2019, we anticipate the completion of several multi-center company-sponsored Phase 4 studies in a number of key indications, including data readouts in RA and MS. We expect to complete more than half dozen Acthar clinical studies in the next two years, fueled by a portion of the more than $0.5 billion investment in the product to-date. We believe that data generated by these studies should provide important information to prescribers and payers regarding dose and duration for appropriate refractory patients and key indications. This data demonstrates our ongoing commitment to address the needs of refractory patients, who may benefit from this therapy. We are also continuing to develop the Acthar self-injector targeted for market introduction in 2020. While we expect peer pressures on Acthar to continue, we believe the product will again exceed $1 billion in net sales in 2019 and look forward to the data readouts as the year progresses and over the next few years. Let me now share with you our four strategic priorities for 2019, which build on the momentum established in 2018. We will focus on

[Steven Romano:]

Thanks, Mark. I’m pleased to report that we continue to build momentum across our research and development activities in the fourth quarter of 2018. Momentum that has continued into the early months of this year, substantial progress has been made with regard to the advancement of important Phase 4 and development stage clinical trials and we’ve had a number of positive FDA interactions. We anticipate many important data readouts and clinical trial milestones in the months ahead. Let’s first discuss our activities supporting inline brands, particularly company-sponsored trials. We recently provided a high-level view of the open label 100% enrollment milestone in the going Acthar Phase 4 RA study with primary open label endpoint results that were consistent with the study's midpoint interim analysis. Those results have shown that 61% of patients enrolled in the open label period with persistently active RA had achieved a low disease activity at 12 weeks. These latest results add to the evidence of a potential therapeutic utility of Acthar in this more challenging to treat subpopulation of RA patients. And we look forward to completing the blinded phase of the study. Looking at other Acthar studies each of our Phase 4, uveitis, sarcoidosis, lupus and MS clinical trials continue as planned, as does the Phase 2 ALS proof-of-concept study. The MS registry enrollment was completed in December and we expect to report on that data in coming quarters. And lastly regarding inline products, we recently announced data from our Phase 3 study in pediatric steroid refractory patients with acute Graft-versus-Host Disease. Following our plan to interim analysis after 50% of patients reached four weeks of therapy, we were pleased to see response rates which allowed us to stop enrollment in the trial. We plan to publish the data from this trial later this year. Now let me touch on development of our pipeline. Terlipressin is one of our most advanced late-phase internal programs. The Phase 3 trial for the treatment of Hepatorenal Syndrome Type 1 continues to enroll at a good pace and we believe this program will complete in the second half of this year. It's important to remember, this pivotal trial is being conducted under an FDA Special Protocol Assessment, giving us greater certainty as to the approvability of the drug. If the data are positive, submission and approval are expected in 2020. Another late-phase program is StrataGraft, our developmental regenerative skin therapy. The Phase 3 study for treatment of deep partial thickness burns is over 75% enrolled with completion expected later this year and the Phase 2 trial for full thickness burns is also progressing. We will continue to engage with the FDA to evaluate the earlier submission timing for the deep partial thickness indication, which is allowed under the RMAT designation awarded to this program. If the data are supportive we expect approval in 2020. We’re very pleased to report a recent Type A meeting with the FDA on our stannsoporfin program where we had meaningful discourse with the agency regarding the population, trial design and other associated issues outlined in the CRL. We plan to refine the pivotal registration trial design and work towards submission of a Special Protocol Assessment later this year. We are optimistic that we may advance a new therapy specifically targeting a higher risk population of infants suffering from severe hyperbilirubinemia and who are failing more intensive phototherapy intervention. Similarly, we recently completed a productive Type A meeting where we discussed issues related to the Phase 3 program for MNK-6105, the IV formulation of our ammonia scavenger drug for the treatment of patients with acute hepatic encephalopathy. Here we also plan to reach an agreed pivotal protocol design and a potential Phase 3 start as early as late this year. In relation to VTS-270 our development drug intended for the treatment of patients with Niemann-Pick Type C, we expect a submission discussion with the FDA in late spring. Patients continue to be treated with VTS-270 in the open label portion of the pivotal study and through compassionate use. And we look forward to hearing learnings from the patient-focused drug development of meaning of patients, caregivers, patient efficacy organizations and the FDA, scheduled next month. As we’ve discussed with our patient group partners, we remain deeply committed to our work in this area. Turning to CPP-1X/sulindac, the pivotal trial for treatment of patients with familial adenomatous polyposis has been completed and we expect top-line results to be made available by the end of the first quarter or early in the second. Lastly, EVOLVE, our next generation device for the administration of INOMAX is moving ahead nicely with anticipated launch in 2020. This device has been designed to provide important differentiated benefits to both patients and healthcare practitioners. Additionally, our ex-vivo human lung perfusion proof-of-concept study is expected to complete very soon, providing us with insights as to how this potential therapy may enhance the viability of marginal lungs for transplantations. The latter is just one of several options being evaluated to expand the use of nitric oxide beyond current indications. With that, let me turn it to George who will take us to the financials. George?

[George Kegler:]

Thanks, Steve. Turning to the 2018 results. In the fourth quarter, we reported GAAP diluted loss per share from continuing operations of $44.64, which is Dan noted earlier, includes a non-cash impairment as determined by our annual GAAP assessment. After adjusting for the specified items, our non-GAAP adjusted diluted earnings per share was $2.18, an increase of 8.5% over the prior year. Net sales for the quarter were $835 million. For the full year 2018, we reported GAAP diluted loss per share from continuing operations of $43.12 with non-GAAP adjusted diluted earnings per share of $8.01 on net sales of $3.2 billion. In the quarter, the Specialty Brands segment generated net sales of $587 million with Acthar net sales of $283 million. The hospital portfolio collectively grew 8% in the quarter. INOMAX generated $139 million in net sales, a 10% increase and OFIRMEV continued to see strong growth with $87 million in net sales, up 12% while Therakos generated $57 million in net sales. BioVectra generated net sales of $17 million in the quarter and we expect to see significant net sales growth in BioVectra in 2019 as we bring a new manufacturing facility online. The Specialty Generics segment generated $248 million in net sales in the quarter with Amitiza contributing net sales of $65 million due to seasonal ordering patterns in Japan and the increased royalties. The segment also saw growth in oxycodone-related products and acetaminophen as we started to see signs of stabilization in the business. Now, let me share some details on operating metrics for the quarter. Total company adjusted gross profit as a percentage of net sales decreased slightly to 72.8%, down from 74.8%, primarily due to product mix, including the movement of the Specialty Generics Disposal Group back to continuing operations. Our adjusted SG&A as a percentage of net sales was 25.4% as compared to 26.8%. We continue to make great strides at reducing SG&A expense throughout last year and remain focused on disciplined cost management in 2019. We project SG&A expense will be roughly flat this year compared to 2018, as we invest in capabilities and prepare for future product launches. R&D expense as a percentage of net sales was 12% as compared to 10.9% which reflects sustained increased investments in advancing our pipeline and generating data for the inline portfolio. You can expect to see both absolute R&D spending and R&D as a percentage of net sales to increase in coming quarters. Turning to liquidity, operating cash flow for the quarter was $184 million with free cash flow of $151 million. We finished the year with very strong free cash flow of $539 million. Finally, we made significant progress throughout the year in executing on debt reduction. Today, our total debt balance is back to 2015 levels prior to the acquisition of Therakos, including debt paid down after the fourth quarter and we will continue to make debt reduction our top priority. In addition to our debt reduction goals, we intend to get our net debt leverage in line with our historical norms between 3.5 to 4 times. Now, let me turn the call back to Dan who will take us into Q&A. Dan?

[Daniel Speciale:]

Thanks, George. 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, may we please have the first question?

[Operator:]

Thank you. Our first question is from Louise Chen from Cantor. Your line is now open.

[Louise Chen:]

My question here is with respect to Acthar. Just curious when you think the product will return to sales growth and what will drive this?

[Mark Trudeau:]

Yes. Thanks, Louise. So we’re first of all very pleased with the performance of Acthar as we’ve seen over the past several quarters. The product has nice trajectory and is stabilizing at this point. What we’re most excited about is prospects for future growth for Acthar which will be driven by the outcome of the data and as you well know we’re looking at completing a number of key trials over the next 12 to 24 months. In particular, in 2019, we’re going to be reporting out on two key studies in RA and MS, probably towards the second half of this year. And again depending on the outcome of that and data and future datasets and completion of trials, we think the long-term prospects for Acthar growth are quite promising. And we believe that the long-term growth rates or long-term growth will be driven largely by volume not price.

[Daniel Speciale:]

Thanks. Next question please.

[Operator:]

Thank you. Our next question is from David Buck from B. Riley FBR. Your line is now open.

[David Buck:]

One on just the hospital business and the guidance for this year. What have you assumed for impact at all from competitive entry for INOMAX? And can you talk a little bit about Therakos? Anything -- I missed part of Steve’s comments, but what’s the go forward plan for Graft-versus-Host in the US?

[Mark Trudeau:]

So let me take the first part of that, then I will ask Steve to comment a little bit on our plans for Therakos. But first of all our hospital business continues to be a very robust and large business for us throughout 2018 as you heard from the prepared comments. This business grew in the high single-digits and it’s consistently been performing collectively in that mid-single to high single-digit growth range. We expect those trends to continue in 2019 for the hospital business in total. With regards to INOMAX, specifically, again, we believe after extensive conversations with our customers that any impact from any competition is likely to be minimal if at all in 2019. Longer term, we believe because of the highly differentiated service model that we operate that INOMAX is a very durable product for us and we’re particularly excited about some of the additional work that we're doing on the technology platform, such as what we described in our prepared commentary around looking at the viability of organs, particularly lungs for transplantation. And of course, this is a product that is growing significantly outside the US, particularly in markets like Japan where we have an indication for the use of the product associated with cardiovascular surgery. And that may be an opportunity for us longer term. So again we see INOMAX as being a very important product for us. Now if we think about Therakos as well, this also has been a product that has good prospects for growth. We’re very pleased with the performance of the drug. Again, if you look at the full year, it performed in the, again, mid to high single-digit range in terms of growth. We’re quite excited about its prospects and how we might expand utilization for the use of the ECP therapy and the Therakos platform in particular. I think that again sets up the discussion of aGvHD in the data that we just recently presented, as well as the Transimmune relationship that we just signed for development of the ECP therapy. So let me ask Steve to comment a little bit just on what our thoughts are with regards to the data that you described and also how we think about the Transimmune partnership going forward.

[Steven Romano:]

Yes. Thanks Mark and thanks for the question. Yes, I mean first of all we are very pleased to have been able to partner with the pediatric transplant community concerning this population. So being able to generate data like we were able to do with ECP in the population, is tremendously valuable. It’s really also an example of our long-term sort of investment strategy for any of the products we acquire, Therakos included and Transimmune is a perfect example of that as well. I mean we really entered into a research collaboration with Transimmune and these are some of the folks who are really experts if not pioneers in the space of ECP. And we have the opportunity to get a better understanding scientifically of the mechanism of action of the product as well as do some preclinical work, which might lead us into doing additional clinical work in certain populations that we identify where we believe changes to the device procedure might actually enhance the value of the product. So we’re very excited about both. We’re looking at the data, specifically from acute Graft-versus-Host Disease study and we will be looking at that very carefully and deciding what our next steps will be in the near future.

[Daniel Speciale:]

Great. Thanks, Dave. Next question please.

[Operator:]

Thank you. Our next question is from Dewey Steadman from Canaccord. Your line is now open.

[Dewey Steadman:]

I guess on Acthar with the recent RA interim read and then the announcement of the full enrollment, has there been any interaction with prescribers or payers on that program? And who is the audience for the Phase 4 study, is it patients or is it just physicians or payers or it’s sort of a combination of all of them?

[Mark Trudeau:]

Thanks, Dewey. So our data generation program on Acthar is really designed to address pre-fundamental questions or opportunities in the market. One is to more clearly define appropriate refractory patients in key, mostly on-label indications, with the exception of the Phase 2 ALS proof-of-concept trial that Steve referred to. But fundamentally we’re looking at most of the data being generated for on-label indication to help prescribers and payers identify appropriate patients for Acthar which are typically highly refractory patients. That’s where we believe there is potential for incremental utility and benefit to those specific patients. The other two key areas are to address concepts of dose and duration. If you look at our label today, for most indications, the dose and duration is less specific and we believe that these studies are going to help further define appropriate dose and duration for these key on-label indications. And again, that will be meaningful to both prescribers and to payers and we think it’s important information set on top of the significant amount of data that's been generated on this product, particularly around health economics. We think it's the full package but specifically addressing appropriate patients, probably refractory patients, dosing and duration.

[Daniel Speciale:]

Great. Thanks, Dewey. Next question please.

[Operator:]

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

[Annabel Samimy:]

So you guys have some interesting datasets that are in readout this year, and you actually have the opportunity to be filing on some of those. So first, Steve, just going back, can you give us an idea, number one, of the specific endpoints we will be looking at and whether you can file right after whether there is any extension data that you are going to be booking for? And with acute Graft-versus-Host Disease, I know that, that study you are going to sort of sort out the pathway going forward but can you expand the opportunity for us at least in that population? Thanks.

[Mark Trudeau:]

Yes. So Steve maybe you could take those two questions.

[Steven Romano:]

Yes. So with CPP-1X/sulindac that really as you know is a time to event study and the outcome in that is a number of events that are associated with progression of disease. So what we’re really looking at is whether we can attenuate the course of the condition. That condition is typically treated through surgical intervention largely. So that study is complete and we’re just a few weeks away from actually having the top-line result. So I hope to share those with you and the medical field very, very soon. With acute Graft-versus-Host, as I mentioned, we are looking at that data now again, we’re really excited that the data are supportive of the use of ECP and we’re going to talk with our experts and consider next steps with regards to the utility of that data, how we might move forward. We will certainly be looking forward to presenting that at research meetings hopefully later this year.

[Mark Trudeau:]

I think the opportunity here is really in combination, it’s the data that we just generated plus the Transimmune partnership really enables us to think about the ECP platform and Therakos in particular as a long-term growth opportunity and we’re evaluating how best to progress that.

[Daniel Speciale:]

Thanks, Annabel. Next question please.

[Operator:]

Thank you. Our next question is from Elliot Wilbur from Raymond James. Your line is now open.

[Elliot Wilbur:]

Just a couple of financial questions, specifically with respect to your interest expense guidance, not knowing the specifics of what issues were actually paid down during the quarter or post quarter, doesn’t look like interest expense guidance embeds any further potential debt reduction over the course of the next 12 months, I just want to confirm that? And also, could you just walk us through sort of what led to the complete elimination of your goodwill balance and the impairment charges? Obviously I think Questcor’s probably half to two-thirds of that balance but also Therakos was a significant part. And I know we’ve seen these periodic reductions over time but one-time write-off the entire balance obviously probably deserves some additional commentary and attention in terms of what did change? Thanks.

[Mark Trudeau:]

Yes. Thanks, Elliot. Let me start in framing that a little bit and then I’m going to ask Dan to comment a little bit on some of the specifics that you described. So first of all with regards to debt repayment and capital allocation strategy, I think we’ve been very clear really since early in 2018 to describe that debt repayment is our primary use of capital -- our primary objective in use of capital. And I think we have a very strong track record including what we just reported on this morning in paying back significant amount of debt to the tune of $400 million since we last spoke to you. As we said for 2019, we anticipate that our primary use of capital is also going to be to repay debt and we’ve also described the fact that we anticipate that a total reduction of $1 billion or greater to be conveyed to the branded business after separation, which would be the result of debt pay down using operating cash flow and any proceeds that we might raise on the separation of the Specialty Generics business. So again, debt reduction is again a primary objective for us in 2019 just like it was in 2018. Dan you may want to address some of the specific questions that Elliott had on the model?

[Daniel Speciale:]

Sure. Absolutely. Thanks, Elliot. Appreciate the questions. With respect to interest expense, I think, we certainly have factored in some level of debt reduction in this but there also may be opportunities for us ultimately as we think about how aggressively and how quickly we can pay down debts over time to provide update to that. In addition to that, you get a couple things that are obviously happening in the marketplace when you think about interest rates at this point and what would happen to those interest rates considering we’ve got some variable debt throughout the year as well. So we will continue to provide updates as we make progress on our debt reduction goals and give you more color on interest expense as we go. With respect to the question on goodwill and specific to that write-off, I think obviously the key that I want to give across is that this is something that came about as part of our normal process in evaluating our goodwill balance and addition to that also our intangible balances and that's required under GAAP on an annual basis. When we look at where we are, one of the processes you have to do is you have to look at where your stock price and market valuation are in relation to where those future performance -- future cash flows look. And as you do that, for us, one of the things that we’ve consistently found is that we have a very optimistic view about where the future of our business is going to look, but there's a bit of a disconnect between where that is and where our valuation resides today. And so, the write-off today is really a realization that the stock price has been at a level for a period of time that necessitated write-off under our annual processes and it doesn't really change in our minds kind of the long-term future as to what we think the business can do over time.

[Mark Trudeau:]

I think it’s very simple, it's a non-cash write-off. It basically accounts for the difference and what we believe is the future expected performance of the business which we think is actually quite strong. And if you look at our history of operating performance it’s been very strong and the disconnect between that and our share price today. And so as we completed the annual process in 2018 it was appropriate to address the goodwill.

[Daniel J. Speciale:]

Thanks. Next question please.

[Operator:]

Thank you. Our next question is from David Maris from Wells Fargo. Your line is now open.

[David Maris:]

Mark, when you think out a few years and given your experience in Canada with INOMAX, how do you model the US say longer term say three year, five years from now or so, higher than where they are now or lower because that seems to be one of the key swing factors in consensus numbers? And what happened to price in Canada when you saw competition? And then my follow-up is just a housekeeping item. Can you describe the increase in accounts receivable? Is there anything that spiked up in the fourth quarter? Because if I take the old combined business and add in the Sucampo accounts receivable, I get a lower number than where we are now, and so it seems like it kind of spiked up but I might be miss-reading it.

[Mark Trudeau:]

Yes. Thanks, David. Let me take the first question which is around INOMAX and how we think about that particularly relative to Canada. And then may be George you can comment on the accounts receivable balance that David referred to. So specifically with regard to the Canadian experience what we've seen here now after a couple of years of loss of exclusivity in Canada is that we’ve been able to retain an overwhelming market share in the business, albeit at a somewhat reduced price. And while we're very encouraged by the fact that we’re able to keep share of the business, again based on our highly differentiated model, we think Canada is a good model for that aspect of it, probably not quite as good of a model for the pricing side of it, simply because in Canada the way pricing works as you probably well know it's an all or nothing blinded bid process which it differs significantly from the US model where if there is competition in the future and keep in mind that competition is likely to be on a branded rather than generic basis, here you are competing on the merits of your product on an account-by-account or hospital-by-hospital basis. We feel very good about our ability to defend share and pricing in the US market based on that model. And again, this is really based on the feedback that we’ve heard from our customers. Again long-term we believe that INOMAX platform, and nitric oxide as a technology is very promising for us and that’s why we’re excited about things like the lung perfusion study, and potentially the opportunity to explore broader utilization in cardiovascular surgery like we see with our indication in Japan. Again we think the INOMAX long-term is very durable asset for us, it benefits patients significantly and we’re very pleased to have the opportunity to continue to look for growth opportunities long-term. George, maybe you could address the second question.

[George Kegler:]

Sure. So, accounts receivable did jump up at the end of the year, primarily due to timing of sales within the Specialty Generics business. They also had one of their key customers switch from direct buying to going through a wholesaler which also drove about some of the accounts receivables. And then finally there was a processing issue with one of our customers late in the year that was resolved in very early 2019. So we just saw some timing impact there. So nothing out of the ordinary.

[Daniel Speciale:]

Yes. Next question please.

[Operator:]

Thank you. Our next question is from David Risinger from Morgan Stanley. Your line is now open.

[Zhu Shen Ng:]

Hi. This is Zhu Shen here for David Risinger. Could you please provide an update on your dialogue with the FDA regarding the FDA’s interest in characterizing Acthar? And also what are the key Acthar placebo-controlled trial readouts to watch over the next few years?

[Mark Trudeau:]

Yes, Steve that might be a good question for you to cover.

[Steven Romano:]

Yes, so as far as the clinical trials, we have the Rheumatoid Arthritis trial that will readout mid-year as you heard me refer to. That’s the one that is furthest along if you will. So that will complete in the second half of the year, we will report out in the second half of the year. We are completing the MS registry this year and that was the other trial that Mark referred to. So those are the two that you are going to get data on by mid-year or early in the second half of the year. Now there are another four or five studies that are ongoing, several of those will actually get very close to completing enrollment later this year. And they include the one for lupus -- excuse me for lupus, and there is another MS study in uveitis as well. Now that completion of enrollment doesn’t mean you will have results of those trials but as Mark said over the next 12 to 24 months all those trials will readout. We are actually also starting another trial in [parotitis] later this year. So it's a full set of trials, some of which will readout this year, some of which will complete enrollment this year and the majority will readout in the next 12 to 24 months. The other question was referring to?

[Zhu Shen Ng:]

The characterization.

[Steven Romano:]

The characterization, yes, so we have made a submission to the agency looking for A, update to our label and are awaiting those results. We will hear about those very soon we hope.

[Daniel Speciale:]

Great. Thank you. Next question please.

[Operator:]

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

[Patrick Trucchio:]

So the DEA has included quarter reductions on solid dose opioids in the 15% range in 2019, and your guidance seems to imply that you will more than offset this. First, is the quarter decline accurate? And if it is, are you offsetting it by gaining share, increasing price or both?

[Mark Trudeau:]

Yes, so just in general Patrick again referring back to our prepared comments, we believe that the Specialty Generics business in 2019 is likely to return to growth after experiencing an extended period of contraction. So we are really pleased by that. We actually do expect that the pricing environment to continue to be relatively negative in 2019. But we think what’s going to drive this business’ return to growth is fundamentally volume and share recapture and the basic or the base Specialty Generics business. In addition to that, we think there are some near-term opportunities in contract manufacturing. And then long-term the pipeline for this business, which we've been investing in for a number of years will start to mature, primarily as that business has the opportunity to file and potentially launch several primarily non-opioid ANDA products that they had in development for quite some time.

[Daniel Speciale:]

Thanks. Next question please.

[Operator:]

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

[Gary Nachman:]

A couple of follow-ups, first on Acthar. How has that pricing trended over the last quarter? And how do you see that trending in 2019? And then with INOMAX, what's your visibility with contracts this year and next year? And then, are you still expecting resolution of the appeal on litigation by mid this year?

[Mark Trudeau:]

So maybe I'll ask Steve to take the Acthar question and then I'll follow up on the INOMAX discussion.

[Steven Romano:]

Thanks for the question, I appreciate it. So what we have seen in the product and the future of the product really is going to be driven by volume growth. Pricing has been nominally positive and we expected that actually to continue to be the case where we might be marginally positive or potentially negative depending on how the product proceeds throughout the year. The future of this product is really going to be driven by volume growth, which is it will be a direct result of the modernization strategy that was highlighted before, specifically on the data readouts and identification of those appropriate patients and dosing and duration. And then with regards to INOMAX we’ve been documenting the visibility of our contracting and you’ve seen it in some of our public statements, and you will see that again when we file our 10-K. We’re actually very pleased with what we're seeing in long-term contracts for the business with many of our customers renewing contracts at or above historical levels. And again, that’s after discussion that they had with -- that they may have had with any potential competitor that's out there. So again, we feel very strongly that the model that we have which is highly differentiated based around our service offering is very appealing to our customers. And again, we think that that trend is likely to continue regardless of the outcome of the IP appeal process which we anticipate we will hear something on it sometime in the next several months towards the second half of the year. And importantly, again, I can't emphasize enough how much value we think there may be in the EVOLVE platform. That platform is rapidly continuing its development and we anticipate being able to introduce that to the market in 2020. This could potentially be a significant advancement in the application of nitric oxide and the significant advancement from the -- not only the existing INOMAX platform but any future competition that may come in this space.

[Daniel Speciale:]

Great, thanks. Next question please.

[Operator:]

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

[David Amsellem:]

Just a couple of quick ones. So on Acthar, maybe a tough question to answer, just on the 2019 question but you have Assertio with their filing on the synthetic ACTH product in a diagnostic indication. So do you envision any meaningful impact from that product and maybe the best way to ask that is over the long-term, where does Acthar trend if you have a non-substitutable entrant? And then secondly on Terlipressin. In terms of thinking about contribution is a good way to think about it as a contribution as replacing a significant chunk of the lost cash flows from OFIRMEV due to its loss of exclusivity, what’s a good way of thinking about of that dynamic? Thanks.

[Mark Trudeau:]

Yes. So thanks for those questions David. First of all with regards to Acthar and competition, I mean remember, Acthar is positioned as a product that’s specific and primarily directed at highly refractory patients and recognize that today Acthar has competition from a variety of sources across all of its labeled indications. Longer term, any additional competition, we expect there is additional competition that’s going to come whether that's from corticotropins or other categories of drug. We think the positioning of Acthar is in that highly refractory patient population and the fact that we're generating what we believe is going to be a significant dataset addressing dose and duration in both payers and prescribers for that highly refractory population. We believe that the long-term prospects for Acthar growth are positive if the data generation is likewise positive. And we are very pleased with some of the preliminary results we have seen, for example, from the RA data and the MS data. But again the story is really going to be played out over the next 12 to 24 months and we actually think what's really going to drive Acthar's prospects is much more related to the data that we're generating versus any other potential competition that may come and that’s really based on a lot of discussion that we have had directly with our customers both prescribers and payers. And then with regards to the LOE question around OFIRMEV and Terlipressin, when we think about it, it’s we've got two late stage development assets where we will be completing the trials for both of those in Terlipressin and StrataGraft we believe in the second half of this year. And looking towards potential launches for these products in 2020, again, assuming that the data is positive, we would clearly see the opportunity for the combination of those two products potentially to more than offset any losses of exclusivity that we might have with OFIRMEV over the long run. In the near term, it may not match up exactly in that way. But over the long run, we would see at least those two products certainly more than offsetting any loss of exclusivity due to OFIRMEV. And then keep in mind we have a number of other products in our development pipeline as Steve described like MNK-6105 and 6106 which again if they are positive over time these would be a significant growth drivers of the business long-term and again right in that hospital portfolio as well.

[Daniel Speciale:]

Great. Thanks, David. Next question please.

[Operator:]

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

[Ami Fadia:]

I have got three follow ups. Firstly on Acthar, can you talk about the volume growth potential that you see from studies and existing indications? And then layering on top of that, how could growth change if you get other indications like ALS? Secondly on INOMAX, what prevents potential competitor from mimicking your sort of contracting model? And can you also talk about some potential differentiation of your device that may help you protect your volume? And then thirdly just on CPP-1X, if you don’t hit your endpoint, is there any potential to go to the FDA and maybe talk about other sort of data points from earlier studies where different endpoints were studied and then seek an approval?

[Mark Trudeau:]

Okay. Thanks, Ami. Several questions here, I'm going to take the Acthar question and start the INOMAX, I'll ask Hugh to comment a little bit on the INOMAX and on the EVOLVE device and then ask Steve to comment on CPP. So if we can talk about Acthar, again I think Hugh was very clear to say that we expect long-term growth of Acthar to be driven by volume not price. And clearly, that's the way we think about it. And again, any volume growth is likely to be driven by the data that we are going to be generating. And again those data readouts start in 2019 and will continue for the next two years or so. What we have seen historically is when we present new data on Acthar, typically growth -- volume growth follows. And again assuming and anticipating that at least some of those studies are likely to be positive, and again the preliminary reads on the first two trials appear to be trending in that direction, we would expect the prospects for long-term volume growth to correspond with the data. Of course ALS is a proof-of-concept trial. It's a relatively high risk but relatively high reward opportunity. These are patients that have relatively few options. And we would expect that if the ALS data were positive, it’s really good news for patients and it may have an opportunity for us to also augment the growth of Acthar in long-term. With regards to INOMAX, while there's nothing specifically that prevents competitors from completely copying our model. Based on what we're hearing from customers, our customers seem to be very pleased with the model that we've developed. One thing about our service base model is it’s highly flexible to the needs of customers and customers like that. And again you see that reflected in the fact that we have many of our customers, many of our large customers continuing to sign up for long-term contracts despite full transparency that there may be competition in the future in this marketplace. Hugh, maybe you can comment a little on the differentiator on the EVOLVE device.

[Hugh O'Neill:]

Sure. Thanks, Mark. So thanks for the question. The EVOLVE device is quite interesting because as you know now the delivery of INOMAX in the hospital is really driven through our DSR2 which is the state-of-the-art but this brings it at another level and which we’re very excited about is that this was developed with feedback directly from our customers about how to expedite not only the delivery of INOMAX into the hospitals but also to improve the efficiency of the delivery of INOMAX into the hospital. So we feel very confident that it’s potentially the game changer in how nitric oxide is delivered into our target customers.

[Mark Trudeau:]

And there’s three things about it that are very attractive. One, the portability of the unit is significant -- has a significant advantage to existing not only our platform but future platforms. Secondly, it really reduces the cylinder size. So it effectively becomes almost like a bedside type of an application. And the third piece of it is that it has the potential to significantly reduce human error with regards to calibration and other elements of the system, which is fairly complex. We can make it much more user-friendly with the opportunity to reducing human error. Steve maybe you can comment a little bit on the CPP side of it.

[Steven Romano:]

Yes. And very briefly as I mentioned we’re very close to getting the results of the Phase 3 trial that Phase 3 trial is a pivotal trial for purposes of filing. So in fact it’s premature to consider alternative pathways for an approval in the case if that did not meet its endpoint. So the bottom-line is when you make agreements with the agency, implicit or otherwise about your program, you need to meet those endpoints. Now there is always flexibility, a bit more flexibility when we are talking about rare or orphan conditions and you’ve seen with for instance, our approach to VTS-270 the agency has allowed us some flexibility with regards to the analysis of other datasets but for CPP-1X/sulindac I think it’s just a bit too early to comment.

[Daniel Speciale:]

Great, thanks. Next question please.

[Operator:]

Thank you. Our next question is from Jason Gerberry from Bank of America.

[Jason Gerberry:]

Just coming to the separation anticipated with the generic Amitiza business in the second half, just was curious to get your updated thoughts in lieu of, I think we have two opioid trials, Oklahoma in May and Cleveland in October. So how that might impact the separation? Point one being your ability to remove any and all liabilities from the more cash generative brand business. And then secondly, just how to mitigate any concerns around investor churn when you execute the spin if these trials are ongoing?

[Mark Trudeau:]

Yes. So, a couple of things on this. First of all let's understand that we have been thinking about separating these two businesses for quite some time, probably, certainly within the last couple of years. And while the spun off companies going to have the Mallinckrodt name, we intend to make this a very well capitalized and diverse business with very strong EBITDA and cash flow and certainly really well-positioned to navigate any risks and opportunities that would be inherent with this business. And the other thing that we are quite excited about is that the pipeline for this business is robust and it’s primarily non-opioid in nature. So we think there is a very strong and compelling rationale to look at the separation of the business. Certainly, we are going to get more clarity on where these opioid trials are heading. One of the things that we are very encouraged about is that there have been a couple of state cases already in Connecticut and Delaware where the plaintiff's claims have been dismissed outright, going to get a little bit more information on the Oklahoma case and of course the MDL as well. But again we think that the opportunity to separate these businesses continues to be very robust. However, we will continue to monitor the marketplace and separate the businesses at the appropriate time. When the separation does happen, we would anticipate like any separation that there will be a segmentation and a turnover in investors because certain investors may want to own the combined generics and Amitiza business and other investors may want to own the branded business. So that would be consistent with what has usually been market practices when two businesses that are heading in dramatically different strategic directions separate.

[Daniel Speciale:]

Great, thanks. Next question please.

[Operator:]

Thank you. Our next question is from Chris Schott from JP Morgan. Your line is open.

[Chris Schott:]

Just two questions here. First, can you just please shed a bit more color on the margin structures for the brand and generic businesses in '19 as we are trying to get a better handle on these two segments as you prepare for separation? And then my second question was with the longer-term branded specialty business and margins there ex-Amitiza, should we still think about an opportunity for cost to come down further over time? I think specifically you were talking in the past about that a $100 million target. I guess where are we in that as we kind of balance I think some of the SG&A initiatives you have relative to the R&D investments you are making?

[Mark Trudeau:]

Thanks, Chris. Let me ask Dan to comment a little bit on margin structures, where we see that heading in 2019 and then I'll address where we are looking to go on the SG&A basis.

[Daniel Speciale:]

And I think one of the important things that I want highlight is that and Mark obviously indicated this earlier from an EBITDA perspective we are obviously expecting that the Specialty Generics plus Amitiza business would be in the range of $300 million in EBITDA as we move into next year. One of the things that we are constantly trying to do today is to provide segment profitability. We have obviously aligned our segments with each of the respective businesses, one with the RemainCo the branded business and one with the intended separation business, which is the generics and Amitiza. As you look at that segment reporting, that’s going to give you a initial kind of thought at what the operating profitability that business will ultimately be. If you go back over time and you think about how our operating margins have changed over -- when you look at SG&A as a percentage of sales, R&D as a percentage of sales, gross profit, the like, you should be able to back into a reflective number there that ultimately aligns with the overall kind of operating profitability and EBITDA number that we provided today. Happy to take you through those details offline but I think that’s certainly something that you need to take into account to maybe go through. When we provide the Form 10 that’s obviously going to give you much greater disclosure related to the spin-off business and we would obviously want to just kind of reserve providing that information specifically until that Form 10 becomes public. As far as cost reduction is concerned, we still see ample opportunity to reduce costs in our cost structure. We made tremendous strides throughout last year and I think 2019 as we indicated we expect SG&A as a percentage of sales to remain relatively flat throughout the year and that’s primarily because we’ve got a lot of things that we’re working on right now as we prepare for product launches and data readouts in the later portion of this year as we move into 2020. So there is a lot of effort right now to ready the company for those product launches. And so there is still tremendous opportunity ahead of us but I think 2019 you may not see as much progress from us as you saw in 2018.

[Mark Trudeau:]

Yes. And just to put it in the frame here, I think if you look historically we’ve been very effective at driving efficiencies in our business whether it's post acquisitions or just operating a quite efficient business. And then as Dan said we demonstrated that again in 2018. The $100 million target, just to remind everyone is versus the branded business’ SG&A level in 2017. So we already made great progress against that in 2018 but we’re also anticipating over the next couple of years, as Dan mentioned that we’re likely to have a number of product launches. So SG&A maybe a little bit bumpy and lumpy over the next couple of years that would actually be a good thing as we’re getting ready to introduce new products from our pipeline. But again that’s why we gave that $100 million as being out in the early 2020s, as we go through this period of what we expect to be a good opportunity to launch new products out of our pipeline.

[Daniel Speciale:]

We’re coming up on the top of the hour. We do want to try to get through a couple more questions. Next question please.

[Operator:]

Thank you. Our next question is from Dana Flanders from Goldman Sachs. Your line is now open.

[Dana Flanders:]

I just have two quick ones. My first is just on the outlook for gross margins and then on the generics business specifically, I mean should we expect some just compression in ‘19 given the growth in the CMO business and in API or should product launches I guess help gross margins expand as we look over the medium-term? And then my just quick follow-up on the Acthar self-injector that you talk about introducing in 2020, could you just talk about what that could mean for the franchise and what benefits that bring and is that a conversion play and what does that mean for kind of price? Thank you.

[Mark Trudeau:]

Yes, so Dan, that’s maybe just a margin question, I will talk about the Acthar self -- sorry, Dan if you could maybe take the margin question and I will take the Acthar self-injector.

[Daniel Speciale:]

Yes. When you think about gross profit as a percent of sales and I’m not going to speak on a segment basis at this point but I think when you look at what we did in 2018, I think you’re going to be probably be in a similar range as to what you saw in 2019.

[Mark Trudeau:]

And with regards to Acthar self-injector we’re pretty excited about this opportunity. This would be what we believe is a significant patient-friendly advancement in the way Acthar is delivered. Acthar today is delivered in a multi-dose style, and really the multi-dose style is one that specifically comes into play for the infantile spasms indication where many patients are rate based. This is part of our overall modernization strategy for Acthar, which concludes the data generation that we’ve spoken of. But having a more modern and patient-friendly delivery device we think is quite adventitious in the market. It also enables us to think quite creatively about any ways that we could package or price Acthar for other indications or indications in general in the future. So it gives us tremendous flexibility on just providing a much more attractive delivery device to address the needs of patients, particularly in some of the areas where we have seen a lot of growth like rheumatology for example. And again when we have additional data that gives clarity on dose and duration, having essentially a unit dose available to patients, prescribers and payers we think could be a tremendous advantage in the market.

[Daniel Speciale:]

Okay. We are going to do one more question, I apologize to those who are still in queue.

[Operator:]

Thank you. Our next question is from Irina Koffler from Mizuho. Your line is now open.

[Irina Koffler:]

I wanted to get a little more granular on the free cash flow for the combined business. So it was around 150 million in the quarter. Just wondering if this is a good run rate going forward into next year? And if you could get a little bit more detailed on the free cash flow in the Specialty Generics business, what it looks like for the generics piece versus Amitiza which we are going to lose in a couple of years?

[Mark Trudeau:]

Yes. Thanks, Irina. So I'm going to ask Geroge to comment specifically on how we think about cash flow.

[George Kegler:]

Yes, I think the 150 million is a very reasonable estimate to use on a go forward. We are looking to be slightly more than that in 2019, but it's a good estimate on a go forward basis.

[Daniel Speciale:]

Maybe one thing to keep in mind is obviously as the quarters flow throughout the year I mean typically Acthar is a seasonally wider quarter and the first quarter of the year. So I think you need to make sure you take that into account when you are thinking about decent run rates throughout the year. But I think as George indicated the intention is or the belief is that our free cash flow will be higher next year than what we find it in 2018.

[Mark Trudeau:]

And if you look historically the Mallinckrodt business in total has been a very robust generator of cash flow. We don't anticipate that to change really in any way except these gentlemen have described to probably be even more robust in 2019. And again going forward as we separate the two businesses we would see each of those businesses being able to consistently generate robust cash flow.

[Daniel Speciale:]

Great, and that’s going to wrap up our Q&A. So I want to thank everyone for joining the call this morning. As a reminder, a replay of the call will be available on our website later today and also be available throughout to answer any follow up questions you may have. So thanks everyone. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.