Mallinckrodt plc
Q4 2015 Earnings Call Transcript

Published: 23 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Mallinckrodt Pharmaceuticals Fourth Quarter 2015 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 will now turn the call over to your host, Cole Lannum, Senior Vice President Investor Relations. Please go ahead.

[Coleman N. Lannum:]

Thank you, Stephanie. And welcome to today's call on a day that I know is going to be very busy for everyone who is listening. Joining me are Mark Trudeau, President and Chief Executive Officer; Matt Harbaugh, our Chief Financial Officer; and Dr. Steve Romano, our Chief Scientific Officer. Mark will start us off with some brief introductory comments and then we'll hear from Steve who will preview our December 7 investor briefing in New York City. Matt will follow Steve with details on our financials and then we'll go into our customary Q&A session. Before we begin let me remind you of some important details. On the call you'll hear us make some forward-looking statements and it’s possible that actual results could be materially different from our current expectations. Please note that we assume no obligation to update the information contained in these forward-looking statements even if actual results or future expectations change materially. We ask you to please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements. We'll also provide some adjusted non-GAAP financial measures with respect to our performance. A reconciliation of these adjusted measures to GAAP is detailed in our earnings release and its financial related financial tables which should be found on our website, mallinckrodt.com. As noted in our press release today, 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 that website for such information. Now I'll turn the call over to Mark for his comments. We'll then hear from Steve and Matt and then go into Q&A. Mark?

[Mark C. Trudeau:]

Thanks, Cole, and thanks all of you for joining us on today's call. I am very pleased to report that Mallinckrodt delivered another strong quarter completing an important and pivotal year in building strong momentum for 2016. Net sales were up 33% and 63% for the quarter and the year respectively on an operational basis, driven predominantly by volume. Adjusted EPS growth was very strong as well, up nearly 16% for the quarter and 66% for the full year. This strong performance and solid momentum clearly demonstrate the effectiveness of our strategy to create both immediate and long-term value for patients and shareholders. We believe Mallinckrodt's acquire to invest business model differs meaningfully from that of other companies in this sector in important ways. We became independent through the spin-off of non-core assets from a medical device company. As such, our pharmaceutical assets at the time were limited to controlled substances and medical imaging. But from the outset our vision has been to make Mallinckrodt a true specialty pharmaceutical business that grows and delivers value equal to top quartile peers. To do that we've had to transform the portfolio, so we leveraged our core strengths and favorable market conditions to create a new Mallinckrodt in roughly 2.5 years building new platforms around unique durable therapies. In building through acquisition, we followed a path that on the surface may look like that followed by others in the industry, but in many ways the likeness ends here. At the core, Mallinckrodt is patient centered. Our mission is managing complexity and improving lives and to achieve that vision, we're using time proven business methods that have been used to build patient and shareholder value across the pharmaceutical industry for decades. We look for unique products that typically provide highly effective treatments for small underserved patient populations, patients who are often challenged by devastating conditions for which there are few alternatives. We identify highly durable assets that may have been under resourced and acquire those we believe will enhance our growth platforms and benefit from Mallinckrodt ownership. We then apply classical methods to expand and grow our new brands. We make significant investments to develop compelling clinical and health economic data to further define patient outcomes and demonstrate value for the healthcare system and engage with payers to maximize access for patients. We also invest to expand indications and develop line extensions, gain regulatory approvals in key markets and assure manufacturing continuity and compliance with current GMP standards. These investments increase the value of our new brands for patients and providers and are essential to the continued growth and transformation of our portfolio. But even as we focus on increasing value for patients in the healthcare system, we are equally and relentlessly focused on driving value for shareholders. We will continue to increase efficiency, achieve category competitive spending levels and meet the targets we've set. So we'll concentrate on execution, reducing our overhead, refining our portfolio and redeploying resources from legacy areas to build our future. The opportunities before us are substantial and Mallinckrodt's strong and durable growth engines are well positioned to enable us to take full advantage. We have exceptional cash generation capabilities and expect to generate approximately $1 billion annually. This capacity and our strong expected earnings outlook give us the ability to continue to acquire and invest in assets where we can add value, leverage our platforms and further diversify our portfolio, while simultaneously enabling us to buy back shares and delever quickly. Last week our board expressed their confidence in the company by adding $500 million to our existing share repurchase program and authorizing us to repurchase debt at our discretion, giving us the flexibility to allocate capital to maximize benefit for all of our stakeholders. Let me now highlight the strong performance of a few of our key products. We had a strong finish to our first full year with Acthar with net sales up 10% in the quarter delivering full year net sales of over $1 billion in fiscal 2015. Quarterly performance was driven principally by volume, growth in rheumatology and pulmonology. Looking to fiscal 2016, we're confident we will continue to grow Acthar sales volume. INOMAX, our second largest product, was up 9% in the quarter on a pro forma basis. We're also well along in the process of integrating Therakos into our hospital franchise and we see significant opportunities for commercial and development synergy between Therakos and INOMAX. We will begin recording Therakos sales in the first quarter of fiscal 2016. We also continued to see volume recovery for OFIRMEV and in 2016, we will drive utilization in existing accounts beyond the roughly 10% procedure penetration we have today and further expand our formulary position in new accounts. Put simply, in the last 12 months we've built strong momentum for key products that puts us in a great position to deliver outstanding value to patients and shareholders. As we look ahead to 2016, our focus will continue to be on execution using the time proven industry methods we know will build value. We will drive volume growth in key products, generate clinical and pharmacoeconomic evidence for core brands, enhance and expand payer relationships, maximize the value of our acquisitions, continue organic and inorganic portfolio development and drive strong cash flow, while navigating the challenging market dynamics in our Specialty Generics segment. Based on the traction we see in key areas, we're confident we'll reach our goals. Now I'll turn the call over to Steve who will review recently presented lupus data and preview what we'll present at the December 7 investor briefing in New York. Steve?

[Steve Romano:]

Thanks, Mark. In two weeks we will have a chance to discuss our clinical and medical programs in more detail and give you the opportunity to become familiar with some of our more recently acquired assets. Today though, I want to give a brief update on a few of our key clinical programs for Acthar. I'll start with the lupus study results we recently presented at the American College of Rheumatology's annual meeting in San Francisco. Lupus is one of Acthar's 19 FDA approved indications already used in patients as a treatment during exacerbation or as a maintenance therapy and it has the potential to benefit many more. At ACR, we presented the results of a Phase 4 company sponsored randomized placebo-controlled multi-site pilot study, reporting data from the important eight-week double blinded acute phase of the trial. This study also includes a second 44 week open label extension that is currently nearing completion. Importantly, the population included in this trial was a more challenging to manage subset of lupus patients, those with high levels of persistent disease at baseline who were already on substantial doses of steroids in addition to other therapies to help manage their illness when they entered the trial. It was against the backdrop of this baseline that either Acthar or placebo was added. What we saw was that though study missed significance on the pre-chosen primary endpoint, a particularly high hurdle of complete response at four weeks, at eight weeks, there were statistically significant and clinically meaningful improvements on a number of secondary standard lupus disease assessment outcome measures. And as with any pilot study, it’s very important to note that learning’s are derived from a review of the data in totality, both primary and secondary measures. Based on my own experience and our discussions with physicians attending conference, I believe the results from this study have clinical relevance for patients with this challenging disease. Given the need for additional therapeutic options and these results, we believe physicians will continue to consider Acthar to be a valuable treatment alternative for lupus patients who have few remaining options. We'll present the actual poster and discuss the results in greater detail at the upcoming investor briefing. And I am pleased that Dr. Richard Furie, the lead investigator for the trial, will join us at this event. The lupus trial will be only one of our key topics for that day. We'll also discuss several other company-sponsored clinical trials we're conducting with Acthar in approved indications in which we can produce contemporary controlled data to help guide physician selection of patients in their approach to clinical use of the product. These include two randomized placebo-controlled trials in conditions that contribute to the development of nephrotic syndrome in adults. In complementing our investments in perspective clinical trials, we have substantial efforts underway in the area of health economics and outcomes research for Acthar and also continue to fund additional independent investigator research. Lastly, touching on a different area of the portfolio, we also look forward to sharing more with you about Terlipressin, a vasopressin analog and an important asset in late stage development in the US for the treatment of hepatorenal syndrome type I. I hope this gives you a taste of what we will be sharing with you in the December meeting and some sense of our focus on expanding the evidence for key products like Acthar, so that the right patients can benefit from appropriate intervention and the value of our products can be clearly articulated to payers. Matt?

[Matthew K. Harbaugh:]

Thanks, Steve. I want to take a few moments to go a little deeper into our financials and also briefly update you on recent events related to our nuclear business. Before I do that following Steve's lead-in, let me first touch on our R&D spending. I know there has been a lot of recent interest in how much pharmaceutical companies are investing in R&D and in Mallinckrodt's case, I think we have to consider this through the lens of our recent history. As Mark said, when we became independent we had a limited pharmaceutical pipeline focused on controlled substances and imaging. Today we have a substantially transformed portfolio and as Steve highlighted are investing in developing a specialty pharmaceutical pipeline where we have a number of opportunities to further build for the long-term. Not surprisingly, now that we have assets with substantial growth potential, we're embarking on projects that will increase the value of these products for more patients and physicians. We'll focus our investments on these opportunities and believe our R&D spending will gradually increase longer-term. So when distinctions are drawn between pharma companies related to their spending on R&D, please keep in mind that we're still very much in the ramp up phase of our pipeline development, but we're committed to doing so to drive long-term organic growth. Now onto the financials. As Mark said, fiscal 2015 was a strong year for Mallinckrodt, both strategically and financially. We ended the fiscal year with solid Specialty Brands momentum going into 2016 and believe that our acquire to invest volume driven strategy is paying off. Net sales from continuing operations for the fourth quarter of fiscal 2015 were $882 million versus $674 million in the previous fiscal year, representing operational growth of 33%. All of this was driven by volume with price negative. Fourth quarter net sales in the Specialty Brands segment were $469 million, representing operational growth of 120%, achieved largely through increased Acthar revenues and the inclusion of INOMAX. As Mark mentioned, Acthar posted strong results in the quarter with $274 million in net sales over the pro forma prior year quarterly revenue of $250 million, a 10% increase. INOMAX generated $104 million in net sales during the first full quarter in which we owned the product, as compared to $95 million in the equivalent quarter last year, a 9% increase year-over-year on a pro forma basis. Turning to OFIRMEV. We've seen a steady sequential increase in volume growth since we hit the trough in the second quarter of fiscal 2015. With this we are even more confident that we will achieve year-over-year volume growth later in fiscal 2016. Now let's look at our Specialty Generics business which continues to be challenged by the reclassification of methylphenidate ER. Given the overall volume losses and the relative size of that product in this segment, the impact was notable in the fourth quarter of fiscal 2015 and equated to greater than half of our sales decline in Specialty Generics. We also felt impact from increasing competition across a number of categories. Both factors were reflected in the fourth quarter with net sales of $297 million versus $351 million representing a 14% increase year-over-year operational decline. However, strong growth in our Specialty Brands segment helped more than offset the challenging market environment in Specialty Generics leading to the strong overall results we have announced today. Please keep in mind that our CMDS business is no longer included in continuing operations pending the expected close on that sale. So our Global Medical Imaging segment has been renamed Nuclear Imaging. Segment net sales for the quarter were $104 million compared with $105 million in the prior year. Let me pause here to share with you some additional recent information regarding our Nuclear Imaging business. Since mid-September, the High-Flux Reactor in the Netherlands, a primary supplier of moly-99 for our nuclear imaging products, has been experiencing an unplanned shutdown due to a mechanical issue. To meet customers needs we have been accessing moly-99 at higher spot market prices and expect this situation to impact operating income by approximately $10 million to $15 million in our first quarter of fiscal 2016 and somewhat less in the second quarter depending on when the reactor returns to full production. Regardless, we expect underlying strength in our Specialty Brands business to largely offset the lowered operating income in the first quarter, and at this point we have no plans whatsoever to change the 2016 guidance we provided in October. Returning to the financials. Total company adjusted gross profit was $639 million, up $191 million with adjusted gross profit as a percentage of net sales at 72% compared to 67% in the prior year quarter. SG&A for the quarter was $303 million compared to $252 million in the prior year quarter. Adjusted SG&A as a percentage of net sales declined 110 basis points to 27.5% for the quarter. We continue to focus on reducing SG&A as we become more efficient and gain synergies from our acquisitions. Now let me briefly talk about how we're thinking about debt. After completing four acquisitions since our spin-off, we remain in a solid financial position as evidenced by the balance sheet we provided today. Cash flow was strong in the fourth quarter placing us in an enviable position to not only pursue incremental business development, but also to simultaneously repurchase shares and buy back debt. As you've heard us say before, we're generating approximately $1 billion a year in cash. We continued on that trajectory at the end of the fiscal year with $366 million in cash on hand not counting what we expect to receive from the sale of our CMDS business. Interest expense in the quarter was $77 million compared to $38 million and while this number will be rising significantly starting in our first fiscal quarter consistent with our 2016 guidance, we remain comfortable that our strong cash flow will easily accommodate multiple facets of our growth strategy. Our adjusted effective tax rate in the fourth quarter was 18% compared to 22% in the prior year quarter. Fourth quarter adjusted diluted earnings per share were $1.84, up 16% compared to the prior year quarter. At this point, I'll turn it over to Cole who will take us into Q&A.

[Coleman N. Lannum:]

Thanks, Matt. As we go into questions and answers I want to remind 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 I promise we'll get through as many questions as possible. With that, operator, may we please have the first question?

[Operator:]

Our first question comes from Douglas Tsao with Barclays. Your line is open.

[Douglas Tsao:]

Hi, good morning. Thanks for taking the question. Just maybe as a starting point, Matt and Mark, you obviously have spoken about the cash position of the company. There is obviously been a lot of dislocation in the industry, both in terms of your stock, as well as others. Just curious in terms of how that affects your thinking in terms of capital deployment? And obviously we saw the share buyback and is there sort of any - does that affect the sort of attractiveness of one option versus the other over in the near-term? Thank you very much.

[Mark C. Trudeau:]

Yes, let me start with that, Doug, and thanks for the question. Yes, I think we were very clear that given the fact that we have such a strong balance sheet position and the fact that we're generating a significant amount of cash. We are in an enviable position to simultaneously be able to look at a capital allocation strategy that includes share buybacks, debt repurchase and also continue to drive business development. We think all three of those things are quite important to consider. We are quite pleased that the board gave us additional flexibility to be able to deploy our resources in an effective way to maximize value for all of our stakeholders.

[Matthew K. Harbaugh:]

Yes, Doug, the only thing I would add is we talked earlier about how much cash we had at fiscal year end. The cash pile continues to grow because obviously that was a couple of months back. So we're in a very strong cash position. And so we're really not limited to do one or the other. We can do all of the three things that Mark mentioned. We can buy back shares, we can buy back our debt or take our debt down and we can also do business development. With what's gone on in the market over the last three to four months, a lot of the assets that we're looking at, the price points have dropped as well. So there is a lot of interesting things that we can do as we move forward into the future.

[Douglas Tsao:]

And Matt, if I can follow up quickly on that point, I mean have you seen sort of a change in terms of the dialogue with some of those potential sort of M&A partners?

[Matthew K. Harbaugh:]

Yes, Doug, if you think about where the debt markets are right now, to access capital is very expensive. We really were blessed in that we closed on Therakos before the interest rates really started to rise. If we were to go out and get debt at this point it would be significantly more expensive. So we see a lot of these smaller companies, particularly one product focused companies or pipeline companies, their equity is low and to access debt is expensive. And so there is a willingness there to entertain dialogues.

[Mark C. Trudeau:]

Yes, I'd just add, Doug, that I think the opportunity set is again as attractive as we've ever seen and our priorities are both to continue to build out the commercial portfolio, but also to continue to enhance our development portfolio because our objective long-term of course is to have sustainable organic growth for the business. We're very pleased with the platforms that we have created. We want to build around those. We want to further diversify our platforms, but we also want to invest for the future and there are a number of assets out there that fill both of those objectives.

[Coleman N. Lannum:]

Thanks, Doug. Next question please.

[Operator:]

Our next question comes from the line of Gregg Gilbert with Deutsche Bank. Your line is open.

[Coleman N. Lannum:]

Gregg, are you there? Operator, skip over him, go to the next question please.

[Operator:]

Our next question comes from Marc Goodman with UBS. Your line is open.

[Ami Fadia:]

Good morning. This is Ami Fadia on behalf of Marc. The question I had was on Acthar. What was the contribution of each of the different indications to the growth in the quarter? And also could you update us on the progress towards building out the ophthalmology end pulmonology sales forces and also the new patient hub? Thanks.

[Mark C. Trudeau:]

Sure. Thank you and yes, on Acthar we were quite pleased with the performance of Acthar in the quarter. And as we said, the 10% increase that we saw in Acthar for the quarter versus the prior year quarter was driven predominantly by volume, which again I think is a real important distinction on how we're driving growth for the business. Remember that we look across the spectrum of Acthar indications and we believe we have about a 3% patient penetration rate. And so there is clearly lots of upside opportunity we believe over the long-term to drive Acthar volume growth. And again, we were quite pleased with the performance in the quarter. Our performance was driven primarily by volume growth that we see in both rheumatology and pulmonology and in particular that volume growth in rheumatology is driven by lupus and RA. And of course with the new lupus data that you heard Steve describe, we believe that has the potential to give us an opportunity to discuss with physicians using Acthar in an even greater group of lupus patients than ever before. And I think that is a benefit for both the company and the patients. With regards to our ophthalmology business, again this is an on-label indication. We just have initiated a pilot in this area. We are looking to create additional more modern and contemporary datasets around ophthalmology over time. And at the moment we expect that we'll be able to evaluate this ophthalmology pilot within the next couple of months and determine whether or not we want to go full scale with it from a promotional standpoint. Keep in mind we took the same approach with pulmonology just about a year ago. That pilot proved to be quite successful and we now have a full promotional effort around pulmonology. With regards to our hub, we continue to work on efficiency with our third party vendor with the hub. We continue to make efficiency gains there. We're probably a reasonable way along in the efficiency of that. There is still more work to do and we would anticipate over the next six months or so we'll be able to maximize the efficiency in the hub.

[Coleman N. Lannum:]

Next question please?

[Operator:]

Our next question comes from the line of Greg Fraser with Deutsche Bank. Your line is open.

[Coleman N. Lannum:]

Hey, Greg.

[Greg Fraser:]

Thanks. This is Fraser on for Gilbert. A question on INOMAX, the quarter looked particular strong. I was wondering if you could remind us if there is any seasonality to that business? And maybe just comment on overall trends for INOMAX, because it is difficult for folks on the outside to track how that business is doing intra quarter?

[Mark C. Trudeau:]

Yes, certainly. Yes, INOMAX was strong in the quarter. If you recall when we acquired this business, we acknowledged that it was roughly a $400 million global business growing in the mid single digits and of course we posted 9% growth in the quarter. And INOMAX is a business that we believe certainly has significant long-term legs to it. It’s a very durable asset. One of the ways that we drive INOMAX business is through multiyear contracts with key accounts and we see that strategy bearing significant fruit. You asked about INOMAX seasonality. It’s a business that really doesn't have much seasonality to it. The exception might be in a strong flu season. Historically we have seen some seasonality if there is a strong flu season. But the main indication for INOMAX is to treat babies in the NICU and of course babies are born all year round and so the seasonality is fairly limited. We recognize that INOMAX is a business that many investors may not be particularly familiar with. So one of the things that we are going to do at our December 7 investor briefing is to give you a lot more information on INOMAX, including a show and tell of the technology, so you can see it and feel it firsthand.

[Matthew K. Harbaugh:]

Yes, and the only other thing I would add is considering the fact that this was a full quarter with INOMAX and our results, the execution was phenomenal by the team there throughout the quarter. So we are done with integration and the fact that we're posting such strong results leads us to be bullish on this franchise as we move forward into the future.

[Coleman N. Lannum:]

Next question please?

[Operator:]

Our next question comes from Gary Nachman with Goldman Sachs. Your line is open.

[Divya Harikesh:]

This is Divya Harikesh on behalf of Gary Nachman. Just on Acthar just curious how your reimbursement discussions are going with payers, how do you see that, how have you seen that evolving, has there been any major changes to plans? And also that Acthar is – is that distributed primarily through Specialty Pharmacies and can you give some details around those given the concerns in the market?

[Mark C. Trudeau:]

Yes, certainly. So, yes, as you recall in our third quarter, we had announced that we had begun signing contracts with key payers around Acthar to provide long-term favorable formulary positions with key payers. Those activities have continued and we've announced over time that we continue to add additional payers to those contracts. Our objective long-term is to have the majority of our payers with Acthar in a favorable formulary position. That will take considerable time, but we remain quite active in that activity. Recognize that we just started signing those contracts in the third fiscal quarter. So it’s going to take some time for us to see the benefit and these contracts are typically performance based. And so we are pleased with the fact that we're getting good traction with payers. We're pleased that we are able to put Acthar in strong formulary positions because we believe that is a very solid strategy for assuring long-term Acthar growth. With regard to Specialty Pharmacies, keep in mind that we do distribute Acthar through a network of Specialty Pharmacies. We announced again that we've used – we now have about 6 Specialty Pharmacies under contract for Acthar. These are all third-party contracts. They are at an arm's length. Mallinckrodt has no ownership, no control over these pharmacies and these are typically well known, well established Specialty Pharmacies that are often parts of larger organizations. So this is a distribution channel that we're taking advantage of that has been a standard in the marketplace for products, injectable products like Acthar for decades and we'll continue to use this very effective channel going forward.

[Divya Harikesh:]

Very helpful. Thank you.

[Coleman N. Lannum:]

Thank you, Divya. Next question please?

[Operator:]

Our next question comes from the line of David Risinger with Morgan Stanley. Your line is open.

[Noel Cheung:]

Hi. This is Noel Cheung on for Dave. Thanks for taking our questions. One quick one. Can you just discuss the near-term growth outlook for Acthar in more detail, specifically if you can give any color on the December quarter sequentially relative to September's $274 million? And then also any - just delving more into the formulary changes, are there any of note that you can highlight on January 1st that will impact growth in the March quarter? Thank you.

[Mark C. Trudeau:]

Yes. So we're very pleased again that we posted a 10% growth rate for Acthar in the fourth quarter and again we were actually - Acthar was a bit stronger than we expected. And so the historical guidance that we've given around Acthar for the future in the range of mid single digits to low double-digits with being on the lower end of that range in the near quarters at this point is the best assumption going forward. But we're quite pleased with what we see with Acthar in the fourth quarter. With regards to formulary specific contracts where we've put Acthar in a favorable formulary position, we don't for contractual reasons disclose those individual accounts. But again we will continue to work diligently across our payer network to put Acthar in a favorable formulary position over the long-term.

[Noel Cheung:]

Great. Thank you.

[Coleman N. Lannum:]

Thank you, Noel. Next question please?

[Operator:]

Our next question comes from Dana Flanders with JPMorgan. Your line is open.

[Dana Flanders:]

Thanks. This is Dana on for Chris.

[Coleman N. Lannum:]

Go ahead, Dana. We can hear you.

[Dana Flanders:]

Cole, can you hear me?

[Coleman N. Lannum:]

Yes, we can hear you loud and clear. Go ahead.

[Dana Flanders:]

Okay. Sorry, about that. Can you just talk about the dynamics in the generics business for the quarter and just as you look at that business sequentially, are you starting to see price volume stabilize or should we expect maybe that could continue to - the competitive dynamics could continue to worsen going forward? Thank you.

[Matthew K. Harbaugh:]

Yes. So let me start and try and answer your question. This is Matt. So I want to go back to the fact that we gave guidance roughly a month ago and our guidance was very clear to say that we expected the generics business to have some tough comps as we move forward into the future. That guidance just so everyone is on the same page was minus 15% to minus 20%. What you saw in the fourth quarter was we delivered minus 14%. So the numbers are all kind of coming together if you will. But you really have to break it down between methylphenidate ER and the broader portfolio and that’s why I went out of my way in the prepared remarks to characterize the fact that in the fourth quarter greater than 50% of the decrease was driven by methylphenidate ER. What we saw this time last year when the agency took action was it took a while for the channel if you will to readjust to the change in rating. And so our first and second quarter last year were particularly strong. In fact during those quarters, we tended to beat what external expectations were and it’s just that these things don't flip overnight. So we're going to have some tough comps in the first half of this year and then hopefully in the back half of the year particularly the fourth quarter hopefully it will smooth out. And I would encourage you to actually calendarize methylphenidate ER by quarter in your models, because I think that will help you. What you did also see in the quarter was we are seeing some competition in oxycodone in particular and that really factored into the guidance that we provided. So we feel good that the guidance range that we provided is in line with what we're seeing right now and are expecting to see as we move forward. Typically these competitors come in and they get share, but keep in mind there is also the whole element of DEA quota and just our ability to produce mass quantities of these products to serve the needs of the market.

[Dana Flanders:]

Thanks.

[Coleman N. Lannum:]

Next question please?

[Operator:]

Our next question comes from Louise Chen with Guggenheim. Your line is open.

[Louise Chen:]

Hi. Thanks for taking my question. So I am curious if your nuclear imaging and controlled substances businesses are strategic to you longer term? And if you do keep the nuclear business, should we expect any supplier disruptions in the future again? Why or why not? Thanks.

[Matthew K. Harbaugh:]

Yes. So to break that down for you, what I said on our last call I would say still rings true as it relates to nuclear. We have said for years now that longer term the global medical imaging business was unlikely to be in Mallinckrodt. But what I said in the third quarter as it relates to nuclear is that it would not be anytime soon that we would likely affect a transaction there. I would encourage you to also look at the disclosures that we put out a month ago as it relates to the dynamics between the nuclear business and the contrast media business. What you'll find is that the nuclear business does generate strong cash and has higher profit margins than what we have in the CMDS business. So yes, we have had these disruptions. I've been with the company a long time as you know. So every couple of years we do have these disruptions. But if you kind of step back from it or if I step back from it and I look over say the last 8 years that I've been associated with this business, the cash that it generates is appealing and these disruptions kind of come and go and they create some quarterly volatility, but in aggregate, the business does generate cash which we use to build out the Specialty Pharmaceutical side of the company. As it relates to generics, the generics business certainly generates a lot of cash and we are using that cash and redeploying it and have been with the acquisitions that we've done over the last few years. With that business actually we would be interested in adding to that portfolio over time if we could find some business development that hit both our strategic and our financial screen.

[Mark C. Trudeau:]

Louise, I might just add, this is Mark. Clearly we've done a remarkable job in 2.5 years of transforming the portfolio. We have now positioned ourselves with a number of unique and highly durable assets that drive growth and profitability for the future. And as I said in my prepared remarks, we clearly want to continue to do portfolio optimization with regards to these legacy businesses. As Matt described, they are a great source of cash flow for us. But as we look at our overall portfolio going forward, we want to continue to build around these growth platforms and use that cash to continue to diversify those platforms. So we're always very aggressively looking at how can we improve the overall mix of our portfolio and we look at every business that we have very critically to understand our cash flow capabilities, as well as our growth potential and we take action accordingly.

[Coleman N. Lannum:]

Thanks, Louise. Next question please?

[Operator:]

Our next question comes from Sumant Kulkarni with Bank of America Merrill Lynch. Your line is open.

[Sumant Kulkarni:]

Good morning. Thanks for taking my question. I will ask my one question and follow-up up front. So the first one is on OFIRMEV, do you still expect $500 million in peak OFIRMEV sales prior to that product going generic? It’s annualizing at less than half that right now, so what specifically needs to happen? And second, on Acthar, you've owned that asset now for a little more than a year. Are you in a position to provide any kind of peak penetration rates for patients or peak sales of that product? Thanks.

[Mark C. Trudeau:]

Yes, thanks, Sumant. So yes, with regards to OFIRMEV, $500 million in annual sales would still be our long-term strategic objective, recognize that at this point while the loss of exclusivity currently is defined as the end of 2020, clearly we will be looking at opportunities to further extend that runway if we can. All that being said, we're quite pleased with the growth now. The re-growth that we're seeing in volume with OFIRMEV and recognize that OFIRMEV today is only used in about 10% of the surgical procedures for which it would be a candidate. Furthermore, we see the marketplace protocols moving towards protocols that would favor a product like OFIRMEV, because clearly OFIRMEV has the potential to get patients ambulatory quicker after surgery and consequently move those patients out of the hospital faster, and we're clearly generating data to do that. We're quite pleased actually with the results that we saw in fiscal 2015 around OFIRMEV at $263 million and given now the volume re-growth that we're starting to see, we're quite pleased with the performance of that product, both short term, as well as the potential for long-term. With regards to Acthar, if you could please repeat your question, that would be very helpful Sumant.

[Sumant Kulkarni:]

Sure. I was just asking if you have any kinds of peak penetration rates or peak sales of that product?

[Mark C. Trudeau:]

Yes, great. Thank you. So I would just go back to what we've said historically around Acthar. This is a product that currently across the promoted set of indications has a 3% patient penetration rate and we've said historically that over the long-term we believe that we could double that patient penetration rate. And keep in mind this is a product with an exceptionally long runway of exclusivity. And so we believe that through data generation and payer engagement primarily, as well as expanding around the on-label indication sets, that long-term we should be able to achieve those objectives.

[Sumant Kulkarni:]

Thank you.

[Coleman N. Lannum:]

Thanks, Sumant. Next question please?

[Operator:]

Our next question comes from Akiva Felt with Oppenheimer. Your line is open.

[Akiva Felt:]

Thanks for taking the question. So you discussed the Phase 4 lupus results and that was a company-sponsored study. But there seems to be a number of investigator sponsored studies out there saw positive data from 2 also at ACR. I was just wondering what the kind of company approach or view is on the investigator sponsored studies? Are these things that you'll be talking about or you can use in defense or promotion of the drug at a later time or should we think of those as operating at arm's length? Thank you.

[Steve Romano:]

This is Steve. So we do a fair amount of funding of IIRs to complement the efforts with controlled trial data and the HOR data that we are generating ourselves. Of course, we are very interested in the results of those IIRs. So know you are referring to perhaps a couple that were presented at ACR one in rheumatoid arthritis and one in dermatomyositis. And in fact we'll look and study that data and we'll look at the quality of that data and the quality of the trial and there is a possibility we can utilize that data promotionally. But we need to rigorously review it. We looked for peer reviewed presentations of the data in journals first, but we definitely will take a look. Sometimes that data will really provide pilot study for us, pilot data excuse me, for us to consider whether or not we want to progress for instance with a controlled trial in that particular area. So we're very interested in the data that is generated through the funding that we have with IIRs.

[Mark C. Trudeau:]

Yes, if we think about the strategy for Acthar and data generation, it’s really on three kind of primary axes. One is company-controlled, company-sponsored controlled trials like the lupus study, but also a couple of the studies that Steve referred to previously that we have for example in nephrotic syndrome. The second access is the pharmacoeconomic data and we're very aggressively generating pharmacoeconomic data. In fact we have over 20 studies currently in process around health economics for Acthar. And then the third access is just what Steve described, which is investigator initiated trials. And again, we think that this is very helpful in providing additional contemporary datasets to further define appropriate use for Acthar in certain patient areas, particularly those that are on label. But Steve is exactly right, these investigator initiated studies while funded by Mallinckrodt are purely at an arm's length. But we think provide valuable additional data to both physicians and payers over time.

[Coleman N. Lannum:]

Thanks, Akiva. Next question please?

[Operator:]

Our next question comes from Shibani Malhotra with Nomura Securities. Your line is open.

[Austin Nelson:]

This is Austin Nelson on for Shibani. I had one question around Acthar and then just a follow up around the comments you made around capital allocation. On Acthar, congratulations on the quarter, the growth is impressive. The question we had was, if you are seeing an improvement in the paid vials versus prescriptions or if you really what you saw was driving the growth in the quarter was just an increase in prescriptions and the reimbursement rate has kind of been the same or if you are already starting to benefit from that some of the discussions that you have had with payers? And then just on the financing, Matt, you made a comment about how the market has gotten pretty expensive. So how do you think about the comments around prepaying debt versus just keeping the now kind of advantageous rate on the books and letting the cash build to use elsewhere?

[Mark C. Trudeau:]

So let me first take the Acthar question, then I will turn it to Matt for the question around debt. With regards to Acthar, as we have said previously, Acthar prescription generation has consistently been strong and we're very pleased that we are continuing to see that for this product. As we said, some of the challenges that we had around Acthar have historically been around the reimbursement rate and that’s one of the reasons why we have been so diligent from the very beginning on engaging with payers at the policy level to position Acthar into favorable formulary positions. And in fact, we're getting traction there now and we're quite pleased with the initial results of that. But let me just say it is very early days because we just recently over the last couple of months signed these contracts. So while the initial indications are quite positive, we clearly want to see additional traction on a go forward basis. But we're quite pleased with the overall performance of Acthar as we described both on the reimbursement side, as well as the prescription generation side.

[Matthew K. Harbaugh:]

Yes. With regard to your question around capital allocation and repaying debt. First, let me start by saying we do not have any material restrictions regarding our ability to repurchase debt in the open market using the cash that we have on hand. That’s part of the reason why I went out of my way to share with you the cash balance. I would also encourage you to actually look at the spreads on our debt. They are significantly wider than what you would normally see, which does create an opportunity to deploy our capital for return for shareholders. But keep in mind we also have share repurchases that we can pursue. That program was significantly expanded last week after the approval from our board and we're also out there looking at business development. So we'll be very judicious as to how we allocate capital. But I would just tell you that the market conditions to drive return are significant and meaningful to us right now.

[Austin Nelson:]

Okay. Thank you.

[Coleman N. Lannum:]

Next question please?

[Operator:]

Our next question comes from Jason Gerberry with Leerink Partners. Your line is open.

[Unidentified Analyst:]

This is Ed Cerra [ph] filling in for Jason. Just a couple of quick questions. The first, can you discuss how the capital placements of the UVADEX systems are going, and what your expectations are for the first Q and I guess for 2016 for that business? And just quickly, just wanted to get a sense from you on how you think the data from the lupus study will impact sales of Acthar moving forward and what conversations are you having with physicians about further Acthar use in lupus patients?

[Mark C. Trudeau:]

Right. So let me take the UVADEX question and initially initial comments around the lupus question I'll ask Steve to comment specifically on some of the feedback that we have heard from physicians around the lupus data. With regards to UVADEX, and again we really describe the ECP system as Therakos, which includes UVADEX plus the actual capital equipment. We just closed this transaction. And so therefore we're not yet reporting any sales obviously in the fourth quarter for the Therakos platform. And again, it’s very early days here. Our strategy is to use our established presence in hospitals, in critical care through our INOMAX platform to further drive opportunities for Therakos and we're just now determining how that will be done. And so that remains to be seen as to exactly how we will be driving opportunities. But we see the opportunities as significant because the number of accounts in which the Therakos platform exists today for treating CTCL patients is only about 200 and we only have about a 10% to 15% penetration rate in CTCL patients that we believe could benefit from the Therakos platform. So clearly there is an opportunity we believe to drive more usage of Therakos in CTCL patients and we'll be reporting on that further after the first quarter. But we're very pleased with this acquisition. This is a business that historically on a global basis has been on the order of about $185 million to $195 million, growing at high single digit growth rates and we believe long-term there is an opportunity for us to drive both near term value through more placements and more synergy between the INOMAX platform and the Therakos platform. Longer-term we think there is a greater opportunity to drive utilization in other indications through label expansion. With regards to the lupus study, again we're quite pleased with the lupus data. We think this provides very meaningful clinically significant and statistically significant differences for patients that were on Acthar versus placebo. Given the fact that Acthar is already used to day with a number of lupus patients, we believe this data will provide further information to help physicians and payers determine where to appropriately use Acthar in this very challenging to treat patient population. Particularly the way this study was designed where we took some of the most difficult patients, very active disease, concomitant use of steroids. This is the type of information that both payers and physicians have been looking for. And the fact that we were able to demonstrate clinically meaningful and statistically significant differences versus placebo in standardized measures of disease activity in lupus is pretty impressive. So we think this is going to certainly be a benefit to prescribers over time and should drive additional growth for Acthar over time. Steve, maybe you can give some comments as to the specific things you've heard from physicians about the lupus data?

[Steve Romano:]

Yes. And had a - your question also implied a communication strategy for the data which is always very important. So naturally we've heard back from the ACR presentations that the data was very well received. There's a lot of interest and physicians are going to want to understand the dataset more completely. So what we typically do is when we have a poster that’s already been presented like this, we will get it into the hands of our medical organizations. So if a physician requests information about it, we can have a medical to medical chat about the data and that will certainly happen. Now naturally we also want to pursue publication and we want it published in a peer reviewed journal, so the manuscript is actually nearing completion. We could have that submitted as early as December of this year, certainly no later than January. Once we have that publication then we'll look at the data as a company and see to what extent we might be able to use that promotionally. But the data are very strong. It’s a pilot study, a lot of interesting information and we're clearly going to want to have conversations not just with physicians but also with payers.

[Coleman N. Lannum:]

And folks, let me remind you, one question please. We're pushing a little bit on the people putting in two or three questions. Operator, next question please.

[Operator:]

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

[Anthony Petrone:]

Great, thanks and good morning. Maybe just one on Acthar and I'll keep it there. Last quarter, Mark, you announced managed care coverage, additional coverage, another national payer. So I'm just wondering if that helped to contribute to the growth in the quarter? And then in quarters past, you have also spoken about specialty distributor networks increasing and so maybe an update on that front as well? Thanks.

[Mark C. Trudeau:]

So again, Anthony, just to confirm what we said in the third quarter is we had signed one national payer and we also have indicated that we have added a couple of more over time. Again, its really early days to determine whether or not these contracts are having an immediate effect. We're just quite pleased with the performance of Acthar in the fourth quarter. But again, I think it’s quite important to understand that at this point our thinking around Acthar going forward is consistent with the guidance that we gave historically. With regards to the Specialty Pharmacy accounts, again I touched on that a little bit earlier. We currently have about 6 Specialty Pharmacies that we use, again all third party arm's-length. But we think this increases the efficiency and the access that patients have to Acthar. So it’s a benefit not only to the business, but it’s a benefit to the patient. We'll continue to investigate if it makes sense for us to further expand that Specialty Pharmacy network. But at this point we're starting to get to the point where we think we're in a pretty good position.

[Coleman N. Lannum:]

Thanks, Anthony. Next question please?

[Operator:]

Our next question comes from David Amsellem with Piper Jaffray. Your line is open.

[David Amsellem:]

Thanks. So on Acthar, you have a lot of trials in clinicaltrials.gov. So beyond what you have already talked about and alluded to, can you give us maybe a roadmap over the next 12 to 18 months of other data readouts that we should be thinking about? And then also are there other pilots beyond ophthalmology that you are considering that you may green light during the next year? Thank you.

[Steve Romano:]

Yes. So we're going to talk a lot more in detail on December 7 about the trials that we are doing for Acthar. But just very briefly, we have 5 trials ongoing that are sponsored by the company. The list of studies in clinicaltrials.gov includes many of the IIRs that are funded by the company. So naturally you are seeing a large number there, over 30. But there are just five, a couple in nephrotic syndrome. There are two Phase 2 studies, one in ALS and one in diabetic nephropathy and of course we just completed the lupus data. But I'll wait until December 7th and hopefully you'll come and we'll be able to talk in detail about each of those.

[Mark C. Trudeau:]

And David, with regards to pilots beyond ophthalmology, combined the ophthalmology pilot is literally less than 6 months old at this point, so we really want to see how that reads out. But as you know, we also have a couple of indications for Acthar on label in dermatology and there may be an opportunity for us longer term to consider a pilot also in dermatology. There also may be some potential synergies between Acthar and dermatology and what we do with Therakos for CTCL patients. But that’s just at the conceptual stage at this point.

[David Amsellem:]

Thank you.

[Coleman N. Lannum:]

Thanks, David. Next question please?

[Operator:]

Our next question comes from Irina Koffler with Mizuho. Your line is open.

[Irina Koffler:]

Hi, good morning. Thanks for taking the question. Just wanted to go back to INOMAX and these multi-year contracts. Can you comment what percent of your key accounts have signed up for these multiyear contracts? And once an account signs up, is it expected to be a more profitable source of revenue over time, so as we see these contracts build we could see more growth in the brand? Thanks.

[Mark C. Trudeau:]

Yes. Thanks, Irina. So yes, with regard to INOMAX, typically what we are finding is that our customers prefer to be on a long – on some type of a contract and the reason for that is these contracts that we sign are typically for an essentially unlimited use of INOMAX. And if you think about the fact that we have 50% penetration rate today in the NICU, if you have a contract where you have essentially unlimited use, that enables us we believe to drive further patient penetration into that segment of the business and offer us longer term growth. So we have both multi-year contracts as well as single year contracts. And what we've seen is that that’s very beneficial to the accounts, but it’s also very beneficial to the business because we've got great clarity as to how this business is likely to perform over time. So again, it’s a win-win situation for both the company as well as the account.

[Irina Koffler:]

Thanks.

[Coleman N. Lannum:]

Thanks, Irina. Operator, we're nearing the bottom of the hour. Let's see if we can get two more quick questions in please.

[Operator:]

Our next question comes from David Buck with Northland Capital. Your line is open.

[David Buck:]

Yes, thanks you very much. Just a couple of quick ones. On OFIRMEV, can you talk a little bit more quantify what the volume re-growth was that you talked about, Mark. And maybe talk about whether you are expecting any decrement to net pricing going forward into fiscal '16? And then one quick one for Matt. On the generics business, can you talk about whether you are a potential buyer of some of the castoff products and some of the large generic consolidations? Thanks.

[Mark C. Trudeau:]

So with regards to OFIRMEV volume growth, what we did see is we saw the trough on OFIRMEV volume occur in roughly May of this past year and since that time the volume has progressively been increasing month-over-month from that trough. And if in fact you've tracked the Symphony data you can see that trajectory and that trajectory is considered to be quite positive over time. That’s why we believe on a go forward basis that you'll start to see year-on-year volume re-growth starting sometime in 2016, as well as year-on-year revenue growth occurring in 2016 as well. So we're quite pleased with what we are seeing with OFIRMEV volume. Again, it is not surprising given the fact that there is a relatively low penetration rate on available surgical procedures. And the fact that many hospitals and hospital systems protocols are starting to develop these enhanced recovery after surgery protocols, which typically favor products like OFIRMEV to get patients ambulatory quicker after surgery and out of the hospital. We believe that is a very good pharmacoeconomic proposition and think that’s going to favor OFIRMEV going forward. With regards to the impact on net price, in 2016 we actually believe that there is unlikely to be any negative price impact on OFIRMEV, largely because we have signed some contracts in 2015. Those contracts are performance based and we'll be evaluating those going forward to ensure that they are delivering the greatest value.

[Matthew K. Harbaugh:]

By far, 2016 it’s going to be driven by volume. So that’s really where to focus your time and attention. David, with regard to your question around the Specialty Generics platform, you should assume all of the businesses that have been sold over the last couple of years, we've taken a look at them. Strategically they may have made sense, but typically financially that’s where it got strained. We continue to be very active from a business development perspective to look to add to the Specialty Generics business. So that hopefully gives you the color you were looking for.

[Coleman N. Lannum:]

Operator, let's try to get one more in real quickly.

[Operator:]

Our final question comes from Douglas Tsao with Barclays. Your line is open.

[Douglas Tsao:]

Hi. Good morning. So going back to methylphenidate ER quickly, Matt, could you speak a little bit about some of these sort of why it took a little bit some time in terms of working through the channel, specifically what some of those dynamics might have been and whether that process might still be ongoing? And then also in terms of OFIRMEV, just thinking about sort of the process in terms of pricing and volume and sort of opportunities or would there be sort of any attempt to sort of be more aggressive on the contracting side to help drive volumes there, as well as thinking about R&D efforts, just sort of really show the value proposition of that product. Because I know in the context of multimodal pain regimens it is often hard to parse out one individual component and to define for hospitals the value contribution of your individual product? So, thank you.

[Matthew K. Harbaugh:]

Yes, let me start with methylphenidate ER and then I'll hand it over to Mark on your other question around OFIRMEV. Doug, one of the reasons, primary reason was between January and March there was a shortage in methylphenidate ER. I am sure you are remember that the FDA acknowledged that on their website at the time. So that also was part of what delayed kind of the conversion that we saw in the back half of this year. Now things are kind of smoothing out and I would say that was the primary driver back then. Mark?

[Mark C. Trudeau:]

So with regards to OFIRMEV, Doug, yes, there probably are significant volume drivers that we'll likely take advantage of in 2016. One of those you identified around contracting. Clearly we've got expertise now in contracting given our INOMAX business that we expect over time to potentially apply to other parts of our hospital portfolio, including potentially OFIRMEV. We're also looking at activities that would support volume, both through additional clinical data sets, but also significant amounts of health economic data that we're in the process of developing and presenting over time. And we are initiating a couple of additional studies for OFIRMEV to support long-term usage of this product outside of the surgical arena and we think that’s going to provide additional value to hospitals because this is a very effective product. The details of those clinical trials we'll be disclosing a bit more at our December 7 investor briefing.

[Coleman N. Lannum:]

Thanks, Doug, and thanks everyone for joining us today. I know there are a lot of things going on out there. As a reminder to everyone, there will be a replay of the call available later on today. Also as a reminder from the notes that I sent out yesterday and this morning, if you want to be – if you want to come to our investor briefing on December 7, please make sure that you pre-register. If anyone didn't get that, please contact me after the call. Have a great morning and a great week and a great Thanksgiving. Bye-bye.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.