Mallinckrodt plc
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 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, and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Daniel Speciale, Investor Relations and Strategy Officer. Sir, you may begin.

[Daniel J. Speciale:]

Thank you, Bruce. Good morning, everyone, and welcome to today's call. Joining me are Mark Trudeau, our CEO; Matt Harbaugh, our CFO; and Dr. Steve Romano, our Chief Scientific Officer. 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 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'd encourage you to refer to the cautionary statements contained in our SEC filings for a more in-depth explanation of inherent limitations of such forward-looking statements. We will also provide selected non-GAAP adjusted measures related to our financial performance. A reconciliation of these adjusted measures to GAAP is available in our earnings release, which can be found on our website, mallinckrodt.com. We use our website as a channel to distribute important and time-critical company information, and you should look to the Investor Relations page of our website for this information. As noted in our press release, unless otherwise specified, all quarterly comparisons are to the comparable 2017 calendar period. And the net sales growth ranges we will be discussing are on a constant-currency basis. As a reminder, the recast historical financials related to the continuing operations of the business were shared last week and reflect the moving of the Specialty Generic Disposal Group to discontinued operations. With that, let me turn the call over to Matt, who will take us through the financials. Matt?

[Matthew K. Harbaugh:]

Thank you, Dan, and thanks to all of you for joining us today. For the first quarter of 2018, we saw strong results led by a number of our key products. For the quarter, we reported GAAP diluted loss per share from continuing operations of $0.50, compared to $0.43 in the prior year. Our non-GAAP adjusted diluted earnings per share was $1.31 versus $1.04. Net sales for the quarter were $573 million from continuing operations, an increase of 2%. Strong performances from INOMAX, OFIRMEV, and Therakos in the quarter were offset by a 10% decline in Acthar to $244 million. The first quarter has historically been the lowest period for Acthar net sales in any calendar year. We successfully closed the Sucampo acquisition in mid-February and made good progress on the integration. AMITIZA generated net sales of $23 million. Looking further at our Hospital franchise, INOMAX generated $140 million in net sales, a 9% increase, and OFIRMEV continued to see strong growth with $82 million in net sales, up 12%. Therakos also performed well in the quarter with net sales of $57 million, up 8%. 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 81.8% from 84% in the prior year, negatively impacted due to product mix. Our adjusted SG&A as a percentage of net sales was 33%, as compared to 38.6%, with the reduction attributed primarily to the benefits from restructuring initiatives throughout 2017. We expect SG&A as a percentage of net sales to remain near these levels over the next quarter or two, as we work to further realize the synergies of the Sucampo transaction. As a reminder of the comments made in our last earnings call, by the early 2020s, we expect to reduce the annual SG&A run rate by $100 million from the 2017 base we presented in our recast financial statements. Our board recently approved an incremental restructuring program to assist us in our SG&A reduction initiatives and the ongoing transformation of the company. R&D expense as a percentage of net sales was 11.2% in the quarter and includes investment in our newly acquired pipeline assets. You can expect to see both absolute R&D spending and R&D as a percentage of net sales increase in coming quarters, as we continue to invest in our pipeline projects we have underway, which Steve will go through later. Interest expense was in line with our expectations. And our adjusted effective tax rate was 10% for the quarter. Operating cash flow for the quarter was $18 million, with free cash flow of negative $17 million. Both of these metrics were impacted due to the liabilities assumed and paid following the close of the Sucampo acquisition. We expect operating cash flow to be strong the remainder of the year and also expect roughly $0.5 billion in free cash flow on a full year basis. Now, let's look at our debt reduction initiatives. Taking into account the recently announced $300 million repayment of the April maturity from cash on-hand and the repurchase of $33 million in debt in the secondary markets at a discount in the quarter, as of today, we have reduced total debt by over $200 million since the beginning of the year. Also keep in mind we had drawn on our revolver prior to year-end in anticipation of the Sucampo transaction. And while our primary focus in 2018 has been and will continue to be on reducing debt, we also repurchased 2.9 million shares in the quarter. As expected, our net debt leverage ratio has increased to 4.6 [times] as defined from a covenant perspective due to the closure of the Sucampo transaction. We will continue to use a significant amount of our cash generation toward debt reduction throughout 2018. Now let me turn the call over to Mark to provide more color on the quarter and discuss progress on our strategic priorities for 2018. Mark?

[Mark Trudeau:]

Thanks, Matt. The strong performance in the first quarter has become – begun an important year for the company. We continue to drive solid growth in the three key products in our $1 billion Hospital portfolio and expect growth rates in the mid- to high-single digits in this franchise for the remainder of the year. We also continued to focus on advancing our pipeline, and importantly, made headway in stabilizing Acthar payer access. While we continue to recover from the residual Acthar patient withdrawal issues from last year, we're making significant progress across the spectrum of both commercial and public payers. We have several additional data readouts expected beginning the second quarter of 2018. And we continue to believe that Acthar net sales for 2018 will be in excess of $1 billion. Last quarter, I outlined five strategic priorities we're pursuing in 2018 to support and accelerate our transformation. I'm happy to report we're making significant progress on those priorities, and I'd like to dive a little deeper into each of them. Our top and first strategic priority is to maximize the productivity and contribution of both in-line brands and the near term development portfolio. In the quarter we took important steps toward achieving that goal. For Acthar, we've continued to focus our conversations with payers on identifying appropriate patients based on emerging product data, both with early reads from our company sponsored trials and continued investigator initiated research. Demand remains solid at the prescriber level, with these data sets driving new patient referrals. Historically, the emergence of controlled clinical data has correlated with the ability to increase patient access and volume growth. And we expect data readouts in the coming weeks for rheumatoid arthritis and MS flare-ups. On INOMAX, we continued to see strong growth in the U.S. with our contracting strategy driving renewals of multiyear contracts at or above historical rates. We're pleased to see strong uptake in Japan for the cardiovascular indication and continued to advance the design of our next generation delivery device. All of these provide the foundation for our confidence in the product's continued growth. With OFIRMEV, we saw strong volume based growth in the quarter, both as a result of contract initiatives, which use the hospital's own data to demonstrate value, as well as increased demand. Therakos saw particularly strong growth in the quarter, driven by focused commercial execution. Growth was seen in both the U.S. and EU regions, driven in part by a new UK coverage policy for acute graft versus host disease. Since the close of the Sucampo transaction in February, the integration is going smoothly. And we're on pace to capture the synergies we anticipated. Commercially, we've made strong progress in defining the long term opportunities for AMITIZA and RESCULA and believe the combined net sales will be approximately $200 million in 2018. Our development activities are also progressing. And Steve will give you details on our pipeline programs in his comments, including last week's Stannsoporfin Advisory Committee Meeting. Our second priority for this year is to further streamline our organization. We took an important step last quarter by removing the Specialty Generics Disposal Group to discontinued operations. And we continue to look at strategic options for these assets. We view the ultimate disposition of this group of products as the next major step to completing our transformation into an innovative brand focused enterprise. And as Matt noted, we're also focused on reducing SG&A. Our third priority has been and continues to be ensuring that we execute a highly disciplined capital allocation strategy with particular focus on reduction of debt in 2018. We're also progressing on our fourth priority of streamlining our management structure to further drive alignment and collaboration across the business. This initiative is particularly focused on enhancing the links between our science and technology and our commercial organizations to amplify our efforts to gain new product approvals and execute effective product launches. And finally, we've made significant progress in our fifth priority of deepening the pharmaceutical industry expertise of our board of directors. We announced that Angus Russell, a member of our board for nearly four years with long standing specialty pharmaceutical experience as a CFO, CEO, and board member, will become board chairman immediately following our Annual General Meeting. In the quarter, we also nominated two new directors to our board, both of whom bring with them decades of industry experience, particularly in the areas of drug development, product launches, and commercialization. The progress achieved in the quarter against these strategic priorities is helping us to accelerate our transformation to serve patients while also focusing on generating value for shareholders. But at the foundation of our vision is the conviction that we can improve patient lives through innovation. Today, we have more than a dozen clinical trials ongoing, as many as seven product launches in the next three years, and scores of publications and data generation activities to support our existing portfolio, all potential catalysts for continued growth. I'll now ask Steve to provide an update on some of our key development activities. Steve?

[Steven Romano, M.D.:]

Thanks, Mark. As you noted, we continue to advance our late phase pipeline, while also generating data to support our in-line drugs, including Acthar, where we expect data readouts in the coming months. First, I'll note that last week, as you know, the FDA held an Advisory Committee Meeting for Stannsoporfin. While we were disappointed with the outcome, we will continue the dialogue with the FDA. And we're also evaluating alternatives for this development program. Let me now discuss other pipeline advancements. Our ongoing terlipressin trial for the treatment of hepatorenal syndrome type 1 reached its midpoint for patient recruitment in the quarter, and as expected will continue to completion of the full 300 patients as designed. Enrollment has been robust, and we continue to expect a decision on approval in 2020. On StrataGraft, our regenerative skin therapy and development trials for treatment of deep partial- and full-thickness burns, we continue to have ongoing discussions with the FDA and have begun work with the EMA to define a potential path for approval in Europe. If approved, StrataGraft has the possibility to significantly improve the standard of burn care in the United States and Europe. For VTS-270, our development product to treat Niemann-Pick Type C, a rare neurodegenerative and ultimately fatal disease that commonly presents in childhood, the double blind portion of the Phase 3 study reached its last patient last visit in March. We also had a recent meeting with the FDA and are finalizing agreement on the analysis plan for this pivotal trial. Top-line results are expected in the coming months. We're also happy to see a high level of patient group interest in our development of this important product. We'll continue to work closely with these advocacy groups and hope to bring VTS-270 to the market as quickly as possible. Turning to activities supporting in-line brands. We continue to develop a next-generation INOMAX delivery device, which we are targeting for introduction in the next two to three years. Our Acthar studies are also progressing well. And we have two near-term data readouts that will be presented at upcoming scientific conferences. We will present preliminary interim data from approximately 60 patients enrolled in the open label treatment period of our Phase 4 rheumatoid arthritis clinical trial at the EULAR meeting in June. And the interim results following the first 80 patients enrolled in our MS relapse registry trial will be presented at the Consortium of Multiple Sclerosis Centers conference later this month. Additionally, data was recently presented at the American Academy of Neurology meeting, detailing the effect of MNK-1411, a melanocortin receptor agonist in development for Duchenne muscular dystrophy in an established mouse model of this disease. In total, we generated more than 30 scientific communications and presentations in the first quarter. And we'll continue to communicate the results of our research and clinical efforts throughout the year. These data readouts and publications help physicians understand how to appropriately utilize our in-line products and support ongoing development programs as well. With that, let me turn it back to Mark.

[Mark Trudeau:]

Thanks, Steve. As our transformation continues, we've begun to establish a mid and late stage pipeline that we believe will offer important therapies to patients, who typically have very few or even no options for treatment. And our data generation activities are designed to help physicians and payers better understand the value of our existing portfolio of products. We look forward to continuing our momentum and will report on Acthar and VTS-270 data readouts in the next several months. At this point, I'll turn it over to Dan, who will take us into Q&A. Dan?

[Daniel J. Speciale:]

Thanks, Mark. I'd like to remind each of you to please limit yourself to a single question and a brief follow up if needed. Feel free to put yourself back in queue afterwards, and I promise we'll get through as many questions as possible. With that, operator, may we please have the first question?

[Operator:]

And our first question comes from the line of Elliot Wilbur from Raymond James. Your line is now open.

[Elliot Wilbur:]

Thank you. Good morning. First question is Acthar related. Big surprise, I know. With respect to performance in the quarter, could you just maybe talk a little bit about your ability to convert patient referrals and Rx generation into actual Rxs fulfilled in the recent quarter versus the past several periods? And whether or not, at least in terms of that metric, you're back to historic norms? And then as a follow-up to that, still reasonable to assume that the same pattern of historic seasonality occurs over the course of 2018? Which would obviously suggest that this is the low watermark in terms of revenue performance for the year? Thanks.

[Mark Trudeau:]

Yeah, thanks, Elliot. So, yes. Let me take the seasonality question first, and then I'll speak a little bit more about how we see Acthar at the moment playing out and the trends and so on. Certainly from a seasonality standpoint, we would expect, much like has been the case for the last number of years, certainly in the time that we've owned Acthar, that the first quarter would be the lowest quarter in terms of volume and net sales throughout the year. So we would expect the subsequent quarters to be higher than the first quarter, again consistent with the same seasonality pattern we've seen for a number of years. With regards to patient referrals and conversions to prescriptions, we're quite pleased with the engagement that we are having with payers around establishing appropriate reimbursement pathways for appropriate patients. We're very pleased with the prescription volume we're seeing at the prescriber level. And in particular, we continue to look forward to the emergence of new data. Historically, again, emergence of new data has correlated quite strongly with volume based growth for Acthar. Again, on the reimbursement rates, if you will, clearly we've seen some stabilization there. And we're again focused primarily on a two-prong strategy to drive Acthar growth over time. One is payer engagement, which is ongoing strategy. And again, we've had very good progress with payers across the spectrum of both commercial and public payers. But also it's this emergence of clinical data, on which we're really on the cusp of what could be several years of new company sponsored clinical data emerging, which again, typically when you have established pathways with payers, has been a good correlation to future growth.

[Daniel J. Speciale:]

Thanks, Elliot. Next question?

[Operator:]

And our next question comes from the line of Gary Nachman from BMO Capital. Your line is now open.

[Gary Nachman:]

Thanks. Good morning. Also on Acthar, do find that you have to give up a lot of economics to ensure a favorable status with the payers? And then on the SG&A restructuring, where are most of those costs coming out from? Specifically on Acthar, have you made any changes to your sales force or promotional efforts behind that product? Thanks.

[Mark Trudeau:]

Yes. So with regards to our negotiations with payers, as we mentioned I think earlier in the year, we would expect the net price impact for Acthar in 2018 to be modestly net positive. So certainly there is some economics that we do negotiate when we negotiate for access to our label. But of course we're quite focused on ensuring that we have access to the important indications that we think drive Acthar growth and are of the greatest benefit to patients. So it's a combination really of economics and access to our label. With regards to our Acthar promotional activities, again, this is a very balanced effort. Certainly our medical affairs activities and our commercial activities at the sales force level are both important contributors to driving growth. But again, most importantly – and I can't emphasize this enough – it's really the combination of our payer engagement and the data generation that we think are the big drivers of future potential growth for Acthar.

[Matthew K. Harbaugh:]

Yeah, as it relates to your question, Gary, around SG&A, I would say there, the savings will come throughout SG&A. We have been in the process over the last year or two to streamline our infrastructure, particularly around IT systems, which is going to allow us to be more efficient over time. To Mark's point, we really have not made a lot of changes to our Acthar promotion. So it's going to come out over time. Obviously we also have loss of exclusivity on OFIRMEV that we'll be navigating over this time period. And I would say, if you look at our track record over the last number of years, we have significantly reduced our SG&A burn on the company. And we still see more opportunity there. And that's why we gave the guidance we gave today. I would also highlight the fact that we feel good about where we're at as it relates to taking out the costs as it relates to Sucampo.

[Gary Nachman:]

Okay. Thank you.

[Daniel J. Speciale:]

Next question, please?

[Operator:]

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

[Louise Chen:]

Hi. Thank you for taking my question. So you had a couple of pipeline setbacks recently on Stannsoporfin and AMITIZA. And just curious if this changes in any way your thinking with respect to your other late stage pipeline products? And what gives you confidence that the remaining readouts will be as expected?

[Mark Trudeau:]

Yeah, let me just open this up a little bit, Louise, and then I'll turn it over to Steve for his comments. So clearly the Advisory Committee on Stannsoporfin was a disappointment. And Steve will speak a little bit to the details around that. We do think that this is a product that can provide benefit to appropriate patients. And actually we look forward to further engaging with the FDA to determine next steps on a go-forward plan for Stannsoporfin. With regards to AMITIZA, again, that is something that we fully expected. I think we communicated that when we did the Sucampo acquisition. So I wouldn't necessarily put that in the same category here. We're very excited about our future pipeline. And we think we've got the opportunity potentially to launch as many as seven new products over the next three years. And certainly, we have a number of very intriguing strategically aligned products that we think can provide tremendous benefit for patients. So, Steve, maybe you can give some additional color on that?

[Steven Romano, M.D.:]

Yeah, absolutely. So if we talk a little bit about Stannsoporfin. First of all, we feel that we did the appropriate degree of diligence, because I think it's important to reflect on the diligence capability of the company in performing this acquisition. And we were well aware of the general risks and concerns we'd need to work through with the FDA prior to approval. So remember, the previous company had already initiated a rolling submission at the time of close. Under our ownership, so post close, the filing was completed and a priority review was granted by the FDA. So through the midcycle review meeting, things were progressing as generally anticipated. However, while we were aware of these concerns, the significance of certain issues was not communicated by the FDA up and to that point. So we were actually quite surprised at the negative tone and assessments presented in the FDA's briefing book that occurred just a week or two ago. So look, we're disappointed at the outcome of the Advisory Committee Meeting. However, we do feel we will continue to engage with the FDA in the coming days and weeks. And we'll assess the appropriate path forward to the product. Now clearly the outcome at the AdCom was disappointing, but especially given this was our most near term late stage product. But we continue to feel that given the way we structured that transaction that it was a compelling opportunity with appropriate risk/reward balance for the company. So with regards to the other products in our pipeline, we actually feel we appropriately balanced the risk and reward in each of the transactions we've done. And we're encouraged by the progress we're making in numerous products in our pipeline. Maybe it's worth highlighting a couple of those late phase programs that you probably also have your eyes on, StrataGraft, for instance, and terlipressin. So let's look at terlipressin. Terlipressin is a compound that we feel very confident about. We designed the Phase 3 program that's ongoing, and we have a SPA in place. This is a special protocol assessment with the FDA. That pretty much ensures that if you reach statistical significance in that trial, you are ensured of an approval. So we feel very confident about the progress of that program. Also with StrataGraft, remember, we thought the Phase 2 data were very compelling. Remember, this is a product for burn patients. None of the patients required auto grafting. And all of them showed – or a majority showed wound healing at the time point of the primary outcome measure on safety. The good thing is in the Phase 3 trial we're conducting now, it's an open label trial. Each individual is their own control. So we can see the results as we progress. In the first 10 or 12 patients, we're actually seeing a recapitulation of the results in the Phase 2. So again, we're seeing really nice outcomes in that Phase 3 trial. So that's just two examples of two programs that are moving forward very nicely and as anticipated. Now, we're not going to let one AdCom define our broader pipeline. And we look forward to the readout and potential approvals in a number of development programs over the next few years.

[Daniel J. Speciale:]

Great. Thanks, Louise. Good question. Operator, next question, please.

[Operator:]

And our next question comes from the line of Annabel Samimy from Stifel. Your line is now open.

[Annabel Eva Samimy:]

Hi. Thanks for taking my question. And I'm going to ask a question, I guess, sort of in the same vein as Louise. But so at this point, you've kind of – have been trying to get out from under the legacy issues with Acthar and diversify away from that through a pipeline strategy. And obviously, we saw what came out with Stannsoporfin. So what is it that you're doing specifically with, let's say, VTS-270, and you just talked about terlipressin, but what gives us confidence that the next couple pipeline catalysts will be positive and continue this diversification strategy for you? And I guess, thinking about the risk/reward of this kind of pipeline strategy for diversification, are you going to start thinking about balancing with actual on-market bolt-on acquisitions, business development, just to balance the risk? Thanks.

[Mark Trudeau:]

You want to start with that, Steve? And then I'll take next aspect.

[Steven Romano, M.D.:]

Yeah. Sure. So with VTS, now remember, the Sucampo deal, and Mark can certainly highlight that, was driven not just by the opportunity to access a couple pipeline deals, but of course the value of the AMITIZA sales and synergies and tax. But the bottom line is, we did have the opportunity – two shots on goal – with development opportunities in rare conditions which really kind of fits right in our wheelhouse. The VTS trial now was already progressed. So of course, remember, the last patient last visit was in the end of March. So that study is essentially done. In our diligence, we obviously took a very deep look at the data that had already been generated in the Phase 1b/2 study that was done in association with NIH. And we looked at the design of the Phase 3 trial and the assumptions that were carried forward there, and we feel fairly confident. Now remember, this is a very – this is an ultra-rare condition. So there's always challenges in moving to these small difficult-to-manage populations. But we feel again we've risk adjusted that opportunity, and we're looking forward to the readout of that result very, very soon. So I think that's the nearer term one. CPP-1X/sulindac combination was the second product. And we're also having discussions with the owners of that, with the folks we licensed that product from around the conduct of the final portion of that Phase 3 trial. So we're already engaged with that company in the course of that particular study. Now going back to VTS just briefly, I should have mentioned, one of the things we also assessed during our diligence was some concerns around the choice of the primary outcome measure. So one thing we were able to do under our ownership was immediately trigger a discussion with the FDA. And we had a very robust conversation about the outcome of that trial. We're agreeing on the final analysis plan. And we'll be submitting that for review with the agency. So we feel that is a portion of the trial that we have some control over, given that the Phase 3 portion is in fact already completed.

[Mark Trudeau:]

Yeah, I would just summarize to say we have great confidence in our ability to diversify our portfolio. And in fact, as we've stated on multiple occasions, our long term objective is to ensure that we have a well-diversified both in-line and development portfolio, with no single product accounting for more than a third of our income. And we have great confidence in our pipeline. And if you look at just the number of shots on goal, as Steve has articulated, we believe quite strongly that regardless of the outcome of Stannsoporfin that our opportunity to diversify out of our own pipeline is high. Certainly, we're also interested, as we've discussed, in continuing to diversify our in-line portfolio. And we believe that we took a step forward in doing that with the Sucampo transaction, with the addition of the AMITIZA income stream, as Steve articulated. We will continue to look to further diversify our in-line portfolio and build out our pipeline through business development, whether they're products that are either in the market or in mid-to-late-stage development, and/or looking at opportunities to add technology platforms to our development, in addition to what we have with the ExpressGraft platform, which could generate over time a multitude of products in the wound care arena. So again, we will continue to be opportunistic. We will continue to be focused with regards to business development, with the overall objective to continue to enhance our diversification and our overall portfolio.

[Daniel J. Speciale:]

Okay. Thanks, Annabel. Next question, please, operator?

[Operator:]

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

[Katie Kerfoot:]

Hi. This is Katie Kerfoot on for David. Thanks for taking the question. So on the potential sale of the Generics business, can you give us a sense of the interest you've seen around those assets? And what your hopes are for timing of the potential divestiture? Also what, if any, pushback you've had from potential buyers? And separately, is there a pathway to return Acthar to a growth product? And if so, during what period would you expect that on an annual basis? Thanks.

[Mark Trudeau:]

Right. So maybe I'll ask Matt to speak to your first set of questions regarding the Specialty Generics Disposition Group and our thoughts around that particular set of assets. And then, Matt, I'll come back and talk about the long term view on Acthar.

[Matthew K. Harbaugh:]

Great. Thank you for the question, Katie. So interest is very high in the Specialty Generics business. We have had a lot of inbound interest over time. But it's unlikely we're going to have anything imminent to announce on that. These things do take time. And I would say certainly one of the challenges that we have to work our way through is the opioid litigation that's going on in this country and has for a number of months now. But we remain very focused on looking at strategic alternatives for the Specialty Generics Disposal Group. And from a business perspective, you'll see when we file our 10-Q here in the near term that the numbers are going to be significantly down. I just want to highlight for investors and stakeholders that it's down because we had an all-time high quarter this time last year. And as we think about the coming quarters, we do not expect the rate of decline that we saw in the first quarter. So, Mark, I'll turn it over to you.

[Mark Trudeau:]

Yeah. With regards to Acthar, we clearly see this product as an opportunity for growth long term for just a couple of very simple facts. First of all, recognize that Acthar today on a patient penetration basis is still in the low-single digits for appropriate patients, meaning those for most indication which are highly refractory. Secondly, this is a product that we've been able to consistently grow over time since our ownership. And in particular, as we've invested significantly in this product, particularly around data generation, we have seen a corresponding volume based growth in key indications. We are on the cusp of starting to read out significant new data sets, many of which are coming now from company sponsored double blind randomized placebo controlled trials in key indications, such as rheumatoid arthritis, multiple sclerosis, lupus, sarcoidosis. We have six clinical trials ongoing for Acthar, and those data readouts are going to start coming here very, very shortly. So we feel quite good about those data generation activities. And again, I come back to where we've seen some pressure recently has been with regards to payer issues. And we believe that the payer issues and the data generation are closely linked. We've had, again, very good success engaging with payers to ensure appropriate pathways or pathways for appropriate patients for Acthar. And we believe that it's that combination with the emerging data sets, which really give us the opportunity to drive growth in the future.

[Daniel J. Speciale:]

Next question, please?

[Katie Kerfoot:]

Thank you.

[Operator:]

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

[Dewey Steadman:]

Hi. I just wanted to get an update on the xenon program. We talked about some other programs, but there hasn't been anything on xenon. And I think there was supposed be a Phase 3 trial starting soon for that. And then following up on some previous questions on Generics. How should we apply the capital received from any Generics disposals? Should we just assume it's pay down of debt or share buyback? Or would it be applied to future business development? Thanks.

[Mark Trudeau:]

Why don't you go ahead on the xenon, Steve?

[Steven Romano, M.D.:]

Yeah.

[Mark Trudeau:]

And then maybe, Matt, you can speak to the capital?

[Steven Romano, M.D.:]

Yeah, so very briefly, we're developing xenon gas for inhalation with NeuroproteXeon. As you know, this is going to be used post-cardiac arrest to have an impact on both survival and neurological outcomes. That Phase 3 study is actually about to start in a number of weeks to a month. We'll have first patient enrolled, so we're right on target for the initiation of that Phase 3 in the second quarter of this year.

[Matthew K. Harbaugh:]

Yeah, Dewey, with regard to your question around really broadly capital allocation, but specifically related to any proceeds we might get from a sale of the Specialty Generics platform, it would be focused on debt reduction. That's why we prioritized our comments this morning accordingly.

[Mark Trudeau:]

Yeah, I'd just like to come back, Dewey, to statements that we've made earlier in the year and reaffirmed today. Our priorities for capital allocation are squarely focused primarily on debt reduction. I think Matt has been very specific in that regard. We do continue to be opportunistic though in 2018 with regards to other capital allocation options, which would include share buybacks and business development. But our primary use of capital would be and continues to be in 2018 rapidly reducing our absolute debt and our net debt leverage ratio.

[Daniel J. Speciale:]

Okay. Thanks, Dewey. Next question, please.

[Operator:]

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

[Irina R. Koffler:]

Thank you. I just wanted to clarify on these Acthar readouts that are coming in RA and MS flares. Are those looks at – interim looks at the data? Or just full readouts of the trials? And then also, how do you think about what will happen if the results are disappointing or not to your expectations? Or is there some reason that you expect very positive readouts from the data? Thanks.

[Mark Trudeau:]

Yeah, Steve, maybe you can speak to some of the details on the data readouts? I think in particular, not just the current reads, but the plan for the full study reads as well.

[Steven Romano, M.D.:]

Yeah, no, exactly. So, Irina, what we're doing is we're presenting interim data from the MS registry. Now the MS registry is open label. We enroll patients when physicians decide to choose Acthar for management of a flare in MS. Then they follow those patients with flares for up to a minimum of six months, certainly can be longer. So our first 80 patients have come through there. In fact we've actually enrolled closer to 130, so we're approaching the endpoint, which is 160 patients. We'll present that data at the end of this month. So we see how these patients are doing. And in fact, we see a relevant and robust improvement that is considered clinical relevant at two months. And actually gets – becomes deeper as far as better improvement at six months. So we know that data, and it looks good. And we'll be presenting more of that very shortly. With the rheumatoid arthritis trial, that's a trial that was designed – remember, these are Phase 4 trials. It was designed as a blinded withdrawal trial. So what you're really evaluating is not just the response of patients to the product, but also the durability of that response. So this trial is designed so everyone goes through a 12-week open label period. They all come in with high levels of disease activity based on the DAS28 [Disease Activity Score-28]. And we look to see what percent of patients treated reach a certain level, which is considered – on that score, which is considered a low disease activity. And these are tough to treat patients, patients who are already on other products and [ph] demarged (39

[Irina R. Koffler:]

Okay. So it sounds like you're pretty confident, because you've seen the data.

[Steven Romano, M.D.:]

Yes.

[Irina R. Koffler:]

Okay. Thanks.

[Daniel J. Speciale:]

Okay. Next question, please.

[Operator:]

And our next question comes from the line of Anthony Petrone from Jefferies. Your line is now open.

[Anthony Petrone:]

Maybe two quick questions. One on Acthar, one on AMITIZA. Just on Acthar, maybe just a review of the competitive landscape, as the company sees that there's some additional rumblings in the past 90 days or so about potential entrants into the space. So maybe a comment there? And then just again, a brief update on the pathway that you think a follow-on product may or may not have to take. And then just on AMITIZA briefly, just any update on the pediatric indication and what the next steps are there. Thanks.

[Mark Trudeau:]

Yeah, so let me take the Acthar questions. And then, Steve, maybe you can comment specifically on the AMITIZA ped [pediatric]? With regard to competition, again, in terms of pathway, let's recognize first that Acthar has competition on every single one of its indications today. Any corticotropin competition we believe is likely to come, if and when it comes, through the NDA pathway, which means it would be a separate product, separate brand with its own label, and that's pretty important. Its own promotional requirements, pricing, reimbursement, and so on. So we think again, if and when additional corticotropin competitors come, it'll likely be through that pathway, we believe. We believe as well that Acthar has tremendous long term growth potential for the reasons that I described to you, regardless of how the competitive environment evolves over time, whether that competition comes from corticotropin products or from any other class of products, where patients could potentially benefit, particularly refractory patients. And again, our belief is that as we generate additional contemporary robust controlled data sets for Acthar, regardless of the competitive environment, because we're so focused on these refractory patients that have really tried and failed many times on a number of other therapies, that there's plenty of opportunity for Acthar to provide benefit to those patients and to drive growth long term.

[Steven Romano, M.D.:]

Yeah. I'll comment on AMITIZA. Remember, the Sucampo had submitted an sNDA for pediatric functional constipation in the pediatric population, and that was ages 6 through 17. That study was negative, so the primary outcome measure was negative. We knew that at the time of the acquisition of the company. Now, of course Sucampo had good discussions with the agency. And they actually were allowed to submit that negative trial for consideration of potential labeling. That doesn't necessarily mean you would get the indication. But in their discussions with the agency and in sub-analyses it had done and post-hoc analyses that were done on that population, there was some indication of efficacy in certain subpopulations. The hope was that some of that – regardless of a negative trial, some of those subpopulation and post-hoc analyses would support some labeling in the pediatric section of the label. So unfortunately in the end, the agency decided that the strength of the data did not support a specific indication in the pediatric population. So there is information that will come out in the pediatric use section, but it will describe the study and the lack of efficacy. Importantly, no new tolerability issues with this product. Now this is a population really in need. There are really no prescription products that are available to treat constipation or a range of constipation disorders in this population. So we're going to continue to have discussions about the agency. Remember, this was an obligation, based on approval of AMITIZA with regards to pediatric post-approval commitments.

[Anthony Petrone:]

Thank you there.

[Mark Trudeau:]

Yeah. And obviously on the commercial impact, it was recognized that we had assumed in the transaction that the outcome that occurred would be the likely outcome. So had it been different than that in a positive way, that would've been an upside to our assumptions around AMITIZA going forward. So with this outcome, there's really no change to our projections for the product.

[Daniel J. Speciale:]

Thank you.

[Anthony Petrone:]

Thank you.

[Daniel J. Speciale:]

Next question, please.

[Operator:]

And our next question comes from the line of Douglas Tsao from Barclays. Your line is open.

[Douglas D. Tsao:]

Hi. Good morning. Thanks for taking the question. Just a couple. One quickly on Acthar, just if you could you give the price – the net pricing benefit on the quarter? And then just maybe, Steve, in terms of Stannsoporfin, just given the tone from the briefing documents, just maybe what in particular seemed to be a change from the agency's perspective? I mean because it seems like they were referencing back some advisory panels going back to 2003 in terms of concerns around the product safety. So I understand InfaCare had initiated the roll-on submission process. But it seemed like some of those concerns were going back. I mean had you reviewed the correspondence with – between InfaCare and the FDA?

[Mark Trudeau:]

Matt, do you want to speak to the price on Acthar?

[Matthew K. Harbaugh:]

Sure.

[Mark Trudeau:]

And, Steve, on the Stannso piece?

[Matthew K. Harbaugh:]

Yeah, Doug. Price was modesty positive for Acthar. But obviously the volume was off. And so from a mix perspective, we were down 10% driven by lower volumes. Steve, I'll turn it over to you.

[Steven Romano, M.D.:]

Okay. Yeah, so absolutely we were very aware of these issues and actually had access to the transcripts for instance of the 2012 AdCom. So we knew exactly what the issues were. Largely on the clinical efficacy side, there was always a concern about being able to interpret the relevance of the impact on reduction in bilirubin. But the primary outcome measure was agreed. The design of the study that was completed and filed for approval was as – essentially as dictated, or largely as dictated from the 2012 Advisory Committee Meeting and agreed with the agency. So there was always going to be that concern. Now keep in mind the results of that study were very robust. The primary outcome measure was a reduction in total serum bilirubin, percent reduction. And the significance of that was at 0.0001%. And that significance was largely maintained, even in their sensitivity analyses that removed 26 patients or almost a third of the patients from the trial. So very robust response to the outcome measure agreed to with the agency. The safety issues were also known. The concern was really a theoretical one. It was a potential for neurotoxic outcomes that would be manifested in neurodevelopment delays or other issues, often which would not come out for a matter of years. So that was the concern. When we looked at the data and looked at it carefully, we thought the risk associated with this was reasonable based on the benefit that was accruing in these patients and the need for therapy here. So over the course of time between the ownership of – taking ownership of the trial and the FDA AdCom, numbers changed a little. You look at the data a little more closely with the agency, they ask questions, et cetera. These issues we thought were being managed very well, as I mentioned earlier. But at the briefing book time it was clearly more negative on their side. So that's really – I think I said it all in the beginning. We did a very fair diligence, deep diligence. We really believe that the benefit to a certain subpopulation of patients with severe – moderate to severe hyperbilirubinemia would be met with the availability of this product. And we'll continue to have discussions with the agency around that, a pathway forward.

[Mark Trudeau:]

The only other thing I would add here is that we also engaged with really world-class experts from an external perspective.

[Steven Romano, M.D.:]

Great point.

[Mark Trudeau:]

Both on the efficacy side as well as the safety side, and you saw that come out in our presentation at the AdCom. And again, this is something that was part of our diligence and part of our preparation, which is again why we found frankly the outcome of the AdCom so disappointing.

[Steven Romano, M.D.:]

Yeah, if I could just to add on that point, Mark, because I think it's a great point, often times in studies you see imbalances, small imbalances between treatment groups, whether placebo or the exploratory or experimental treatment. That doesn't necessarily mean it's a true signal of a problem. So one way we have to look at that is really analyze the data that's available to us. And we looked very clearly at the 01 trial (48

[Mark Trudeau:]

And I would just say that we look forward actually to engaging with the agency on next steps. Clearly, there were some surprising complexities that occurred at very late stages here, as Steve has articulated. And I think most importantly we continue to be very, very excited and confident about our future pipeline and believe that's a great opportunity frankly for us to drive growth through innovation as well as diversification of our portfolio over time.

[Daniel J. Speciale:]

Thanks, Doug. Operator, next question, please.

[Operator:]

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

[Dana Flanders:]

Hi. Thank you for the questions. My first just on INOMAX, I know you mentioned you have a potentially new device coming online in the next two to three years. Just maybe you can flesh out what the benefits that would bring? I mean how difficult would it be for you to convert the hospital base over? And would that make that customer base more sticky should competition come? And then my second, just a quick one on competition and the Praxair front, what are just the key milestones we should be watching over the next 12 to 24 months? Thank you.

[Mark Trudeau:]

Right. Maybe I'll take the last bit first and then the second – or your first piece around the benefits of the device. So with regards to the challenges and the appeal process that we have around the INOMAX patent estate, we would expect the appeal to probably read out somewhere in the early part of 2019. And we fully expect that it's business as usual on INOMAX. Certainly, up and to that point we're very pleased with the growth that we're seeing. And we're also very pleased with the fact that we're renewing longer term contracts at or above historical rates. So that gives us some indication that our customers see this as a very, very important therapy, and one that they're likely to stick with over time. The new INOMAX device we think really enables just a lot – much more convenience and utilization of the product in different arenas. I think we showed some early prototypes of the device. It certainly would enable use perhaps in some type of ambulatory situations more readily. But also it's just significantly easier to use for the respiratory therapists that use this very important product. So we think it provides a number of benefits to customers and makes a significant technology jump above and beyond the current offering, which is already a significant technology jump from where the original devices started here. So again, we see INOMAX as being a very sticky product for a variety of reasons, including our commercial model. We're very pleased with the response we're seeing from customers. We're pleased with the growth. And we look forward to continuing to grow this product, as well as provide new offerings to the marketplace over time.

[Daniel J. Speciale:]

Thank you very much. Next question, please.

[Operator:]

And our next question comes from the line of John Boris from SunTrust. Your line is now open.

[John T. Boris:]

Thanks for taking the questions, and congratulations on the results. We'll limit it to Acthar on the – Matt, you mentioned the 10% volume decline. Can you maybe give a little bit more granularity on which uses you're seeing that contraction coming from? On the MS and RA data, thanks for the color that you gave to on Irina's question on the data. But one would assume length of therapy is obviously important when you present those results. How is length of therapy coming out? And how are you going to communicate and/or publish those results? And then how are you going to feed that through into payers to ensure that your contracts have the right length of therapy, so patients aren't getting discontinued early? And is the sales force going to be able to use those publications to help generate additional uses with MS and RA experts? And then just on free cash...

[Mark Trudeau:]

Sure. So let me take these kind of in somewhat order, but I want to start with the length of therapy piece. And again, clearly that has been part of the payer pressure that we've experienced with Acthar wherein some of our indications, like RA for example, where most RA agents will take 12 weeks or so to actually show an effect. In many cases, we have seen payers try to restrict the length of therapy for Acthar. And in fact, that's why we're excited about the data that we're going to be presenting, because it demonstrates effect at 12 weeks, because there's a 12-week lead-in phase, as Steve mentioned. So it's this information that we believe will continue to demonstrate the appropriate length of therapy for Acthar, if you're looking to see an effect. And again, as that data set continues to become more robust, we think the opportunity to go in and reconfirm that with payers is a nice opportunity for Acthar, which potentially could drive significant growth over time. With regards to volume decline in specific PAs, again, keep in mind from a prescriber perspective, from our prescriptions generated, we continue to create solid demand across the label of indications that we promote for Acthar. And the volume declines are really more focused on some of the payer pressures that I just articulated, which can speak to duration of therapy. And again, as we've articulated previously, a lot of the pressure that we have seen on Acthar from a payer perspective we think is actually in response to the double digit volume growth that we generated in Acthar going back to 2016, which was largely driven by some of these longer duration therapies, where we've been able to demonstrate that the product can have significant effect for those patients where they've tried and failed on other therapies. So again, that's why we think this new data, particularly in RA, is so important to demonstrate that duration of affect.

[Daniel J. Speciale:]

Thank you very much. I think, looks like we've got a couple more minutes for a few questions. I think we'll try to get through three more people.

[Operator:]

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

[Jason M. Gerberry:]

Hi. Good morning. Thanks for taking my question. Just following up on INOMAX, the press release, the commentary around favorable contracting updates. Just kind of curious, is your balance of contracts skewing more towards long term contracts, as you potentially look to institute some defensive measures, if there is a low cost alternative that could enter the market? And then my follow-up is just on some legal milestones. When do you expect the INOMAX patent appeal to readout? And are there any milestones in the opioid litigation? Because I imagine that's a factor in your calculus around whether to indemnify a potential buyer of the asset? Thanks.

[Mark Trudeau:]

Yeah, so again, just go back to INOMAX and to re-emphasize the fact that from a timeline perspective on the appeal process, we believe it's likely to read out sometime in the early part of 2019. In terms of long term contracts, again, we historically have had a range of contracts on Acthar, some of which are a year in duration, some of which are multiyear. And what we're seeing is a renewal rate in particular for multi-year contracts, that's at or above historical rates. And again, that's typically driven by the desire of the accounts of the customers themselves. So again, we would see that as a very good sign going forward that our customers, with full knowledge that there may be competition over time, are likely to stick with INOMAX. With regards to milestones on the opioid litigation. What I can say there is this is a very complex issue that we believe is likely to take a number of years to fully resolve. There are a number of players, a number of participants in these suits. It's a highly complex issue. And we would expect again that this will just take significant amount of time. There is – there are some test cases if you will that are in process that may start to give some indication as to where this is heading some time in 2019. But again, we would expect the complexity of this situation to really take a number of years to play out.

[Daniel J. Speciale:]

Thanks. Operator, next question.

[Operator:]

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

[David A. Amsellem:]

Thanks. Actually wanted to ask about Therakos. And specifically just walk us through the different puts and takes and what's been driving the growth? I know you cited Europe. And also wanted to get your thoughts on expansion opportunities. I know in ClinicalTrials.gov, you have a study recruiting in pediatrics with graft versus host disease, maybe some color on that. And any other expansion opportunities for that product line? Thanks.

[Mark Trudeau:]

Yeah, thanks, David. So we're very pleased with the growth that were seeing with Therakos. And again, as I indicated in the prepared remarks, we would see Therakos having the opportunity to be in the mid to high single digit growth rate through 2018. Growth drivers here are pretty straightforward. It's commercial execution focused around label indications. In the U.S., that's primarily driving utilization in CTCL [cutaneous T-cell lymphoma]. Outside the U.S., primarily in Europe, the product has a very broad label. And in particular, we've seen good utilizations for the product in graft versus host disease. And again, as I indicated in prepared remarks, we actually got some positive news in the UK specifically, which we think is an opportunity for growth in that particular market. I'll ask Steve to speak specifically to our development program around pediatric graft versus host disease. But we do see opportunities potentially for label expansion for Therakos over the long term. Steve?

[Steven Romano, M.D.:]

Yeah. Thank you. So just briefly one of the programs we're conducting in the U.S. is in pediatric acute graft versus host, and it's a 48-patient trial. It initially was somewhat challenging to enroll, but we're seeing an uptick nicely. And we're not quite halfway done, but we're approaching the halfway mark. So we feel very confident that we'll be able to complete that study over the next year or so, so we're very excited about that. We've also – are in the process of submitting to Japan for an indication for chronic graft versus host in adults there. We completed a small trial and have had favorable discussions with the PMDA. So we're completing some work prior to a submission later this year. That will actually be the first time this particular technology is being introduced in that marketplace, so we're very excited about that. I'd just highlight one other effort in the United States, and that is a very large IR (1

[Daniel J. Speciale:]

Okay. Operator, we have time for one more question, please.

[Operator:]

And our next question comes from the line of David Buck from B. Riley. Your line is now open.

[David George Buck:]

Yes. Thanks. Just wanted to follow up on the comment on Stannsoporfin about working on alternatives with and dialogue with the FDA. Can you talk a little bit about whether you're committed to doing another clinical study if asked? Are you committed to doing a safety study? And maybe just separately, can you talk a little bit about the drivers of the gross margin contraction year over year and sequentially from the recast numbers? Was that entirely Acthar? Or is there something else going on there? And then just finally, VTS-270, the data readout looks like it was pushed out a couple of months versus what Sucampo had been saying previously. What's the timeline we should be expecting? Still around mid-year? Or is that more of a September-ish type readout? Thanks.

[Mark Trudeau:]

Matt, maybe you should take the gross margin question quickly. And then, Steve, let's talk about the pipeline issues.

[Steven Romano, M.D.:]

Yeah.

[Matthew K. Harbaugh:]

Sure, Mark. So, David, on gross margin, what we had was a mix shift. So with Acthar being down 10% and the growth that we saw in the Hospital business, that's what led to the results that you're seeing here. Acthar has a higher margin than our blended average and has for many years. So that it's very straightforward answer. And as we move into future quarters, obviously you'll need to think about that in your modeling, as we see growth continuing in the Hospital business, as Mark mentioned.

[Steven Romano, M.D.:]

Yeah, on VTS, I think we're right on schedule. So as I mentioned, we completed the last patient last visit at the end of March. It was March 29. And remember, I also mentioned we're having discussions with the agency around the SAP (sic) [SPA]. So if anything, there might be a delay of a few weeks based on those discussions. But the bottom line is we're expecting the results mid-year. On the Stannsoporfin issue, it's really too early to say. Remember, we're just a couple business days away from the AdCom. So we will engage with the agency I hope in a matter of days to weeks and discuss the opportunities. The willingness to do additional work, we'll have to kind of take all of that under advisement. Thanks.

[Daniel J. Speciale:]

Okay. Everyone, thanks for joining us on the call this morning. As a reminder, a replay of the call will be available on the website later today. I'll also be available throughout the day to answer any questions you may have. So thanks, everyone. Have a nice day.

[Operator:]

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