Mallinckrodt plc
Q3 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Mallinckrodt Pharmaceutical's Third 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. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Cole Lannum, Senior Vice President of Investor Relations. Sir, please begin.

[Coleman N. Lannum:]

Thank you, Howard. And good morning and welcome to today's call, everyone. Joining me are Mark Trudeau, President and Chief Executive Officer, and Matt Harbaugh, our Chief Financial Officer. We'll be making some brief introductory comments and then spend most of the time this morning answering your questions. On the call, you'll hear us making 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 will also provide some adjusted non-GAAP financial measures with respect to our performance today. A reconciliation of these adjusted measures to GAAP are detailed in our earnings release and its related financial tables which can be found on our website, www.mallinckrodt.com. For fiscal third quarter, we reported diluted GAAP earnings per share of $0.49. After adjusting for certain specified items, our diluted non-GAAP adjusted earnings came in at $2.0.5 per share. Now, I'll turn it over to Mark who will go to more detail on the third quarter results. Mark?

[Mark C. Trudeau:]

Thanks, Cole, and hanks to all of you for joining us on today's call. As you've seen from our news of the past week, we continue to execute on our strategy here at Mallinckrodt. And now, I'm happy to share with you the details of another solid quarter. Here are some key highlights of our performance and other recent activity. In its first partial quarter in the Mallinckrodt portfolio, INOMAX contributed $82 million in net sales, consistent with its historical and expected long-term mid-single-digit growth rate. Net sales of OFIRMEV were $62 million for the quarter, an increase of 17% over prior year. Despite a very tough year-on-year quarterly comparison, Acthar net sales for the quarter were $269 million, an all-time record for the brand, driven by growth in pulmonology and rheumatology. We continue to focus on accelerating development and dissemination of clinical and pharmacoeconomic data for our key products, in particular for Acthar. We're very pleased to note that the data from our company-sponsored lupus trial will be presented at a major medical conference in September. This eight-week double-blind randomized placebo-controlled pilot study assessed the clinical efficacy of Acthar in patients with persistently active lupus despite moderate-dose corticosteroids. Also in the quarter, Acthar studies on nine topics were published, more than a dozen studies have been accepted for presentation or publication throughout the next two quarters, and a number of additional studies were submitted for publication and are awaiting response. All this adds to the 20 already published or presented in the first two quarters. Noting strategic transactions, as you saw on July 27, we announced the planned divestiture of our contrast media and delivery systems or CMDS business to Guerbet, a company we believe is ideally suited to maximize its value. With this announcement and other ongoing initiatives, we continue to look to refine our portfolio and increase our focus on running a leaner, more efficient organization to reduce our overall cost structure to increase profitability. We're pleased with our strategic progress, the results in the quarter and the overall performance of the business. Now, let me give you a brief summary of our results. In the fiscal third quarter, Mallinckrodt posted net sales of $965 million with operational growth of 52% over the prior year quarter. Our adjusted gross profit as a percentage of net sales increased more than 18 percentage points from just under 53% to 71% and adjusted diluted earnings per share were up more than 70% for the quarter, with our diversified portfolio delivering solid overall results. In Specialty Brands, let's look first at our newest portfolio addition, INOMAX. We continue to be excited about the potential of this unique combination product and service offering to further diversify our operating income and help us continue to build our reach and impact in the important hospital growth platform. This highly durable drug device product has a strong established presence in neonatal intensive care units and a 24/7 Total Care service package that delivers seamless, uninterrupted support to clinicians treating fragile newborns. The service platform and contracting options for INOMAX promote a high degree of customer intimacy while providing a level of predictability rarely seen in the specialty biopharmaceutical space and we anticipate historical mid single digit growth will continue. We're also pleased that last week the U.S. Patent and Trademark Office affirmed the patentability of four INOMAX patents, denying Praxair's request for an administrative trial proceeding concerning these claims. We will continue to vigorously enforce the company's intellectual property rights specific to INOMAX along with all of our other products. Turning to Acthar. As we've previously discussed, we anticipated the third quarter would be challenging when compared to the prior year and our expectations were borne out. We've talked to you quite a bit about continued payer pressure on Acthar as Mallinckrodt, like the rest of the industry, is affected by the increasing focus on the cost of healthcare and drugs. We don't expect this pressure to lessen any time soon and indeed believe it may even increase with ongoing consolidation in the insurance sector. But we continue to work proactively with payers to improve understanding of the strong value Acthar brings to patients and with the third quarter now behind us, we see a number of bright spots and are optimistic about Acthar looking forward. As I mentioned earlier, we're focused on data generation and communication and our discussions with payers in particular have begun to gain some traction. Acthar was recently added to one of the dominant payers' preferred drug list and we've expanded our specialty pharmacy coverage and enlarged our field sales force in rheumatology and pulmonology to better serve patients. Our comprehensive efforts to improve the efficiency of our internal prescription processing and distribution system are also beginning to take hold. We anticipate each of these levers will help us counterbalance external forces and provide favorable long-term impact. With all of these, while we do expect to see improvement from this quarter's 4% reported growth over the next several quarters, we expect Acthar grow at the low end of our long-term normalized expectations. With 19 approved indications, we continue to believe Acthar is a highly durable asset and has substantial untapped potential. Strengthening clinical and pharmacoeconomic arguments for use of the product will aid further penetration over time and we now feel comfortable with long-term growth rates in the mid-single to low double-digits. Now, let's look at OFIRMEV. Here, too, we continue to focus on data generation around OFIRMEV's use, highlighting the clinical and economic benefits of the product as part of a multimodal pain management approach for surgical patients. We expect recognition of these benefits, including reduced use of IV opioids and faster recover times, and the positive impact of these benefits on patients to drive long-term volume growth for the product. As we said previously, we expected OFIRMEV volumes to decline after the price reset last May. And in our discussion last quarter, we noted that unit volumes appeared to be reaching their trough and we expected that they would subsequently begin to gradually rebound. We've now begun to see some positive movement in monthly trends and we're optimistic that our value story is gaining traction with the hospital community. And we believe this upward trajectory will enable us to reach and exceed historical OFIRMEV volume levels by the second half of fiscal 2016. While there's still a long way to go, we expect OFIRMEV sales to grow in the mid-single digits sequentially, beginning in the first quarter of fiscal 2016. We continue to view the product as a highly durable asset with long-term net sales potential of at least $500 million annually. Turning to Specialty Generics, as we fully expected, the exceptionally high growth rates we've seen over the last few quarters have now returned to much more normal levels. Net sales for the quarter were $308 million, down 5% operationally from the prior year. These results were driven by several factors

[Matthew K. Harbaugh:]

Thanks, Mark, and let me add my welcome to everyone on the call this morning. All of my comments on our results will refer to adjusted non-GAAP numbers excluding, among other things, the effect of foreign currency. Notably though, as you saw in our press release today, we did incur significant negative pressure from currency, impacting our third quarter net sales by $25 million, roughly half of which came directly from the CMDS business that we are divesting. For the fiscal 2015 third quarter, Mallinckrodt net sales were $965 million versus $653 million, up 52% on an operational basis compared to the prior-year quarter, solid performance, primarily reflecting the additions of Acthar and INOMAX into our portfolio. Specialty Brands net sales were $446 million, up $361 million, largely due to the inclusion of Acthar. In our Specialty Generics segment, net sales were $308 million, resulting in a decline in operational growth of 5% compared to the prior year. While we saw continued strength in hydrocodone resulting from the launch of new Schedule II products earlier in the fiscal year, this was more than offset by a decline in oxycodone as we anniversary the price resets taken last year and the continued decline of methylphenidate ER net sales, driven by the FDA's action last November changing the rating on our product from AB to BX. In fiscal 2014 and 2015, Mallinckrodt saw outsize contributions from the Specialty Generics segment driven by thoughtful planning, strategic initiatives, and solid growth in methylphenidate ER, particularly in 2014. But as we've seen in the third quarter results, and as we move into future quarters, we expect pricing to continue to normalize and be more competitive. This will result in declines in net sales as compared to previous years which could run into double digits in any given quarter, especially with continued pressure on methylphenidate ER. We expect these tough annual quarter-on-quarter comparisons in Specialty Generics to continue until we have fully lapped this period of industry-wide market reset, and then expect more normalized results from the segment going forward, albeit from the higher plateau that has been established. For Global Medical Imaging, net sales were $202 million, down 3% excluding the impact of changes in exchange rates, as previously noted. As Mark mentioned earlier, Mallinckrodt recently reached agreement to sell our contrast media and delivery systems business to Guerbet in a transaction valued at $270 million. Starting in fourth quarter fiscal 2015, we will report the CMDS business as a discontinued operation. So, for your modeling purposes, it's important to realize that it will no longer be reported in continuing operations after the quarter just ended. We expect to close the transaction in the coming months, subject to regulatory approvals and other customary closing conditions. Please also note that our nuclear imaging business is not a part of this transaction. We remain committed to meeting the needs of nuclear medicine patients globally. Now, turning back to the income statement, total company adjusted gross profit was $685 million, up $340 million, with adjusted gross profit as a percentage of net sales of 71% compared to 52.9% in the prior-year quarter. We have successfully driven our adjusted gross profit significantly higher in the past few years, and we expect further upward movement over time as we continue to restructure cost of goods sold and diversify the portfolio. Adjusted SG&A for the quarter was 28.2%, an improvement of 140 basis points from the adjusted number in the fiscal third quarter last year. Over the next several years, we expect improvements in our adjusted SG&A as we continue to undertake a variety of initiatives across the business to increase efficiencies and reduce costs. R&D spending in the quarter was $45 million, up modestly from the prior-year period. We expect R&D spending to continue to remain at current levels in future quarters. This level of funding will still allow us to pursue significant investments in Acthar, OFIRMEV, INOMAX, and our Specialty Generics business. Net interest expense in the quarter was $72 million compared to $22 million, due to debt incurred from recent acquisitions. As of last week, our pro forma net debt leverage stood at 3.1. Our adjusted effective tax rate in the fiscal third quarter was 18% compared to 23.4% in the prior-year quarter. For the fiscal 2015 third quarter, adjusted diluted earnings per share were $2.05 compared to $1.20 per share. Finally, the cash generation capability of our portfolio remains quite strong. And even after the divestiture of CMDS to Guerbet, we expect to exit the year with an annualized free cash flow generation run rate of approximately $1 billion. Now I'll turn it over to Cole, who will take us to Q&A.

[Coleman N. Lannum:]

Thanks, Matt. Before we start the Q&A session, I want to remind you to please limit yourself to a single question with a brief follow-up if needed. I know it's a busy earnings morning for all of you, and we're going to try to get through as many calls as we can. With that, operator, can we have the first question, please?

[Operator:]

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

[Douglas D. Tsao:]

Hi. Good morning, guys. I was hoping you could provide an update on the specialty sales force and, in particular, the promotion effort around XARTEMIS right now. Thank you.

[Mark C. Trudeau:]

Yeah. Thanks, Doug. So, as we mentioned, I think, a little bit earlier in the year, we have been evaluating the performance of XARTEMIS XR. And certainly, as the company has changed its focus to autoimmune rare diseases in the hospital sector, our emphasis on the office-based pain activities has certainly been less strategic. And so, in light of that change in strategic direction coupled with a performance of XARTEMIS XR, as of June, we have discontinued promotion of XARTEMIS XR and we're considering a number of different strategic alternatives for that product.

[Douglas D. Tsao:]

And does that apply for the hydrocodone product as well that was in development?

[Mark C. Trudeau:]

Yeah. So, the product that you're referring to, Doug, is called MNK-155 and it's a combination product of hydrocodone and acetaminophen with similar technology to that of XARTEMIS XR. And, again, it would be focused on the office-based pain marketplace which, as I mentioned, is not really a strategic focus for us going forward. So, both of those products, we're considering a variety of different alternatives to maximize their value.

[Douglas D. Tsao:]

Okay. Great. Thank you.

[Coleman N. Lannum:]

Thanks, Doug. Next question, please.

[Operator:]

Next question comes from the line of Chris Schott, JPMorgan.

[Christopher Thomas Schott:]

Very much. Just a question with (19

[Mark C. Trudeau:]

Yeah. So, first of all, let me say that we're quite pleased with our performance for Acthar in the quarter, $269 million for the quarter, that's an all-time record quarter for the product. And we're pleased that we're continuing to be able to drive growth, particularly given the fact that last year's third quarter was a particularly strong quarter when it was in the previous owner's hands. We're very encouraged by the promotional effort behind Acthar, but one of the things we are experiencing certainly is a more difficult payer environment certainly then was the case a year ago. And that's really what's changing our perspective with regards to the long-term prospects of Acthar. As I mentioned earlier, we anticipate long term that Acthar will be growing in the mid-single to low-double-digit range over the next couple years. We're very encouraged by the fact, though, that we're making now very good progress with payers. We're having, I think, very productive dialogue with payers and the result of that is what we announced this morning, is that we've been put on at least one major payer's preferred drug list for Acthar which is a significant event for us. And we continue to have dialogue with a variety of additional payers, primarily around the database behind Acthar and the appropriate positioning of the product as it's used in its variety of indications in autoimmune and rare diseases. We've also made significant investments in the sales forces, particularly in pulmonology and rheumatology, with Acthar. Again, these are two areas that continue to grow quite well. And in some of the more mature areas like neurology and nephrology, we're looking at opportunities to drive additional value through both a combination of promotion as well as medical affairs activities and, in particular, we're reemphasizing some of our opportunities in infantile spasms. The last area I would draw your attention to is the fact that we're now also focused on creating and publishing pharmacoeconomic data to drive the value equation for Acthar. I mentioned some clinical data in lupus which is going to be presented here in the next month or so. We also have several pharmacoeconomic posters which will be presented at various meetings in the upcoming quarters, again, to reemphasize the value equation behind Acthar. So, we think all of these activities collectively give us comfort that the mid-single digit to low double-digit growth rate over the coming years for Acthar is appropriate.

[Matthew K. Harbaugh:]

And Chris, you asked about how long we might be at the low end. I don't want to get too nuanced here, we'll certainly give you more details whenever we give you 2016 guidance sometime later on in the fall. But I think the point we're trying to make is certainly for the next few quarters, it's probably wise of you to be at the lower end of that just given what we're seeing right now.

[Christopher Thomas Schott:]

Thank you.

[Coleman N. Lannum:]

Next question, please.

[Operator:]

Thank you. The next question comes from the line of Marc Goodman, UBS. Your line is open.

[Marc Goodman:]

Yes. Morning. Just a continuation on Acthar. I guess a couple of things within Acthar. Number one, can you talk more about the hub and what's going on there? That seemed to have been a bottleneck in the past quarters. So, is that something that got better? I mean we're all hearing you kind of take the guidance down a little bit on Acthar and you're saying that it's the payer environment that's more difficult. So, is everything else improving to kind of offset that? Can you give us a sense of like what was vial growth this quarter? And last year, in the upcoming quarter, we never really got the revenue number because it was a partial quarter. So, can you give us what that revenue number is so we'll know how the growth will be when you actually report? And one other question, I just want to know on the contrast sale, it seems like it was a pretty inexpensive sale. I mean, I was just wondering why such a low number when you sold the asset? Thank you.

[Mark C. Trudeau:]

Yes. So a lot of questions in there, Marc, and let me try to get to a variety of those. I'll take the Acthar questions. I'll actually have Matt speak a little bit to the CMDS divestiture. So with regards to Acthar, yes, the hub, the internal processing part of Acthar, is something that we've spent a lot of time really since we brought the product on board. We spent a significant amount of time working on the efficiency of that internal processing hub, primarily because that's completely within our control. And as I mentioned in the prepared comments, we're making quite good progress on the efficiency there. And we've improved dramatically the efficiency and throughput of prescriptions through that internal processing hub. So we're getting good prescription growth. We're getting good internal processing. I think where we still have a bit of work to do which is not completely within our control is our dialogue with payers. And that's why I emphasized both in the prepared comments as well as the answer to the previous question that that's our real focus now, to communicate data both the new clinical data, existing clinical data, and new and emerging pharmacoeconomic data with payers. In terms of vial growth, vial growth for this quarter versus the previous year last quarter was relatively flat. And so again, we're driving growth in portions of the Acthar portfolio, pulmonology and rheumatology. And in nephrology and neurology, obviously, we're in a situation where we're having to focus a lot more on growth over the next couple of quarters in those particular categories. And we think there's good reason to believe that we can drive growth in those areas, particularly in the area of infantile spasms, for example, in neurology where we really haven't had a significant promotional effort for a number of quarters. So, in terms of last year, the comparator that we were using was $262 million for Acthar and we did $269 million this year. So, again, it's an all-time record quarter for Acthar, and we're quite pleased with that.

[Matthew K. Harbaugh:]

Yeah. On your question related to the contrast media and delivery systems divestiture, we thought we got a good deal, Marc, so I wouldn't agree with your thinking on this. As we look to the future, one, we have not put money in research and development in that business for a number of years. So, the opportunity set for that business under Mallinckrodt ownership was low. We also looked at the requirement for the amount of capital that we would have to invest back in that business in the coming years. Four plants are specifically devoted to the contrast media and delivery systems business and the amount of cash we would have to put into that business with the growth prospects or lack thereof that we see under our ownership were such that we felt it was a good transaction both for ourselves and Guerbet.

[Coleman N. Lannum:]

Thanks. Next question, please.

[Operator:]

Thank you. Next question is from Gregg Gilbert from Deutsche Bank. Your line is open.

[Gregg Gilbert:]

Thanks. Good morning, gentlemen. First for Matt, can you expound upon this industry-wide reset you were talking about in the generic discussion? Are we talking about a price reset and/or a change in terms forced by the consolidated buyer base or something else? And my follow-up for Matt is sort of a bigger picture question. How do you balance the need to refocus or to focus the company on improving volume growth trends for Acthar and OFIRMEV balanced with the desire to continue an aggressive M&A strategy. Does one really not have to do with the other or is this time to step back and sort of dig deeper on internal growth and not pursue as aggressive an M&A strategy as we've seen in the past year or so? Thanks.

[Matthew K. Harbaugh:]

Sure. I'll answer your industry-wide reset question as it relates to Specialty Generics and then Mark will actually answer your other question around how we're focused on M&A. As it relates to the industry-wide reset, there are a number of things going on, Gregg. One of those is the consolidation does continue, so our customers are consolidating pretty quickly and you see the headlines as much as we do and so that is creating some market pressure. I would also say that as a result of some of the price resets that have happened in the controlled substance category in particular, over time, and as you know I've been watching this with a front-row seat for eight years now, as these opportunities for price have come up, what you typically see is some of the smaller players that have been in the controlled substance space for some time. Some of the smaller players that have lower volumes or lower quota, when the market dynamics are favorable for good strong gross profit generation, they come back into the market and that creates downward pressure. And so, all of those factors are kind of coming to a head here. We saw this months ago and, as you know, we talked about it on our earnings call for the second quarter, and we expect some of these headwinds to continue. And the good news for Mallinckrodt shareowners is we've had two really strong years. We've taken the cash from that business and we reinvested it with the acquisitions that we've done and so we've reduced our dependency on the Specialty Generics segment from where we were just a mere two years ago. Before I hand it over to Mark, inherent in your question around whether we do more business development or not, gets around what our financial capacity is and we were really happy with our cash generation in the third quarter. Our net debt leverage on an as-reported basis dropped to 3.1. As you know, in early May, we were at 3.3. So, we're at a really good place as it relates to being able to fund an acquisition should that become available to us. So, Mark, I'll turn it over to you.

[Mark C. Trudeau:]

Yeah. Thanks, Matt. And so, Gregg, with regards to your M&A question or the balance of M&A versus organic and operational growth, we're very, very focused actually on both of those. Organic growth, particularly for the assets that we purchase, is quite important and we need to demonstrate that we can grow our assets. And we're in the process of doing that, I believe, and I'll talk about how we balance the two. But I think most importantly is that we're right in the middle of really repositioning and rebalancing and refocusing our portfolio to emphasize high growth, high durability, high profit-generating specialty branded products. And in fact, as we've said many times, our deal pipeline has never been more attractive and more robust and that, in fact, continues to be the case. We also believe that there's an opportunity actually for us to drive a lot more synergy with the platforms that we've established. So, within the hospital, we really have two products today with OFIRMEV and INOMAX, and we think we have the ability and, in fact, it's to our advantage to add more products into that platform. Likewise, on the autoimmune and rare disease side of the business, we've got capacity in our sales organizations to drive additional value into some key therapeutic areas. So, our aggressive M&A strategy will continue but in the areas of focus that we've described. Simultaneously though, we operate our businesses in two segments, Specialty Brands and Generics and API products. Within Specialty Brands, we have a hospital division and we have an autoimmune and rare disease division. And so, those businesses can run somewhat independently. And so, while we're bringing on an acquisition in one, we can focus on driving growth in the other. So, we're simultaneously focused on driving operational growth, organic growth for the assets that we have, but we believe it's to our advantage to continue to supplement those platforms with additional products, and very attractive assets exist in the marketplace, consistent with the growth platforms that we've built. We also are looking long term as to, how do we develop a more robust developmental pipeline. And much of that work is going to come through M&A as well. So, the bottom line is that we're quite focused on driving operational growth. I think you're seeing some of the early signs of the efficacy of that, with both OFIRMEV and Acthar. And then more importantly, we want to continue to drive that M&A strategy so that we've got a well-diversified, robust growth and profitability platform, particular in specialty branded products.

[Coleman N. Lannum:]

Thanks, Gregg. Next question, please.

[Operator:]

Next question is from David Amsellem, Piper Jaffray. Go ahead.

[David A. Amsellem:]

Thanks. Just on OFIRMEV, maybe you could provide more color on the drivers of volume growth, or return to volume growth? Is it mainly a function of hospitals returning to historical volume levels, or are you actually adding new customers for the product? Maybe talk about that and then also, can you talk about what you're seeing in terms of the average number of days of treatment per patient, and how that's trending? That's a metric that I believe Cadence talked about a lot. Maybe you can shed some light there? Thank you.

[Mark C. Trudeau:]

Yeah. Thanks, David. So the answer is actually, it's both. And if we go back and think about, after we took the pricing action that we took, what happened in the marketplace. What drove volume, what's driving volume today. First thing I'm going to say is that our strategy to take price was clearly a solid success. If you look at the fact that we took 140% price increase on OFIRMEV and at its trough, we had a reduction from peak of about 30% in volume, you can see that we've put OFIRMEV on a much higher plane, and a much different growth trajectory from a revenue standpoint, than it was on previously. So without question, the strategy has been successful. I think what we saw when we had a reduction from peak to trough, we saw some accounts take OFIRMEV off formulary. More accounts put some significant restrictions on OFIRMEV, in terms of the number of vials that could be used or the types of surgery. And what we're finding now is that, in many of those accounts, we're having the opportunity to come back onto formulary or to relax the restrictions, simply because the utility of OFIRMEV is pretty well established and the fact that it certainly has the potential, in a variety of different patients, to reduce the use of IV opioids and potentially get patients on their feet and out of the hospital faster after surgery. So there's clear benefit, both from a utility standpoint, but also from a pharmacoeconomic standpoint, and that's what we're communicating today. But of course, when Cadence had the product, it was pretty focused in a certain select set of accounts, some of the very large accounts in the U.S., some of the very large hospitals and integrated hospital networks. But certainly, there was a tremendous opportunity, we felt, to continue to expand that network. And in fact, we're seeing de novo formulary acceptances for OFIRMEV in accounts that never had it before. So, you're getting a combination of both reuse, relaxation of restrictions, and the product being put back on formulary in previous accounts as well as completely new accounts. And that's why we feel quite enthusiastic about the potential for OFIRMEV, because of the utility of the product and because we are starting now to see that regrowth from the trough in volume. And again, we expect that it will get to previous volume levels, and perhaps exceed those levels – certainly exceed those levels – towards the second half of fiscal 2016.

[David A. Amsellem:]

Thank you.

[Coleman N. Lannum:]

Thanks. Before we get to the next question, I just want to throw something in there. We talked earlier about some trends in Acthar. Just want to make sure everyone is aware that, obviously, last year in the fiscal fourth quarter, we closed the acquisition of Questcor. For modeling purposes, because it was a partial quarter, what you should think of for Acthar for the previous fiscal fourth quarter is somewhere in the $240 million to $250 million range as a base, whenever you're looking at trying to do growth rates going forward. With that, operator, next question, please.

[Operator:]

Gary Nachman from Goldman Sachs, your line is open.

[Gary J. Nachman:]

Hi, guys. Just a follow-up on OFIRMEV, are you giving up any economics to get back on some of these formularies with bigger discounts? And have you gained any leverage in conversations with hospitals by having INOMAX in the portfolio, to get better access with OFIRMEV? Are you seeing benefits from that strategy? I know you've talked about that in the past. Thanks.

[Mark C. Trudeau:]

Yeah. Thanks, Gary. So, actually, when we did take the pricing action last year, we started contracting OFIRMEV for the first time, and so many of those contracts have in fact lapsed now. And so, we're having a chance to evaluate whether or not it makes sense to continue to contract, or in what way do we believe that we need to contract going forward. So, the answer is, we have given up some economics, but certainly it's been to our advantage typically to do that to preserve some volume, but the equation, obviously, has been quite favorable in favor of Mallinckrodt. There is, we believe, certainly the potential for leverage between INOMAX and OFIRMEV, simply from the standpoint of – that you've got two products, two what we believe are very important products, that provide significant benefits to patients and have compelling pharmacoeconomic propositions for the hospital. Moreover, if you think about the way that INOMAX is typically used in a hospital, it's typically on a contract. That contract could be for a single year. It could be for multiple years. And in many cases, for the major hospital systems, those contracts are of significant value. So we believe that, over time, there's lessons to be learned in contracting from what INOMAX does very successfully, but also to look at having discussions with similar decision makers around both OFIRMEV and INOMAX contracts going forward. So, that's where we believe the likely synergy will exist for both OFIRMEV and INOMAX on a go-forward basis.

[Matthew K. Harbaugh:]

Yeah. The only other thing I would add, because it helps to frame things by numbers a little bit, if you go back just a mere 18 months ago or so, Cadence on their own generated about $100 million on a full-year basis for revenue. We were pleased to see that we got above $200 million in the first nine months of this year. We'll let you come up with your own estimate for the fourth quarter. But to Mark's point, sure, there have been some discounts that have been offered, and those would have been gross to net adjustments. But the aggregation and the value creation is very significant in this product category.

[Gary J. Nachman:]

Okay. What are the gross to nets now, Matt? Can you comment on that?

[Matthew K. Harbaugh:]

Say it again, Gary. What are the gross...

[Gary J. Nachman:]

What are the gross to nets now on OFIRMEV?

[Matthew K. Harbaugh:]

They're pretty much in the range that they've been for the last couple years, a little bit higher but not significant. Not material.

[Gary J. Nachman:]

Okay. Thanks.

[Coleman N. Lannum:]

Thanks, Gary. Next question, please.

[Operator:]

The next question is David Risinger from Morgan Stanley. Go ahead, sir.

[David R. Risinger:]

Great. Thanks very much. So, with respect to Acthar, I just wanted to better understand how to think about the growth outlook. And I guess, first, with respect to the base, Cole, that you mentioned for the fiscal third quarter of last year of $240 million to $250 million, how much of that was impacted by channel inventory work-down since Questcor had boosted channel inventory in the June quarter of last year? And then with respect to the payer actions, obviously, you've commented on pressures from payers offset by a preferred formulary win. Maybe you could just sort of net those comments to help us understand what your net comments are on the payer outlook? And if you could, just tell us which payer added Acthar to the preferred formulary? Thank you.

[Mark C. Trudeau:]

Yes. So, let me start with the kind of the netting of the payer environment. I think that was your last question. So, what we see is the payer environment, as I mentioned, is certainly eroded a bit from where we were a year ago. It's more difficult, we think, across the board, across the industry to get reimbursement on key products, and Acthar is no different. In the case of Acthar, of course, historically, there had been relatively little discussion at the payer policy level regarding the data set around Acthar and the proper positioning of the product. And I think in previous discussions, we had talked about the fact that we had initiated those discussions. And in fact, what we're seeing now, we believe, is the first fruits of those labors where we are getting put on a preferred drug list. In addition, we've also been looking at our distribution network. Acthar, historically, was distributed primarily through one specialty pharmacy. And that was fine when Acthar was 3,000 patients and roughly a couple indications. And now that it's over 10,000 patients with nine marketed indications, that was a bit of a bottleneck. So, we've expanded our specialty pharmacy network from one to six. If I net all of these things out, I think that right now, the pressure from the payer environment is perhaps a little bit stronger than the progress that we've been able to make to this point. But clearly, we're starting to push in the opposite direction. And we would think over time those things would balance themselves out. And I think that's why we're giving the direction of, well, how to think about Acthar in that the revenue growth rates are likely to be towards the lower end of our range for the next several quarters until we can make further progress on the payer environment which we believe will still take us a number of quarters to achieve.

[Matthew K. Harbaugh:]

Yeah. With regard to your question around inventory levels, I wouldn't spend a lot of time worrying about that this time last year. Just to be clear, Cole's comment, you said Q3, that would be our fourth quarter, the $240 million to $250 million. It would be the third quarter calendar, just so that everyone's clear. But keep in mind this is a highly-priced (42

[Mark C. Trudeau:]

And I think you also asked about the name of the payer, we're not at liberty at this point to disclose that without their approval. What we can say is it's a significant payer, a major payer in the marketplace. And we're very pleased about the fact that we've been able to be put on their preferred drug list.

[Coleman N. Lannum:]

Next question, please.

[Operator:]

Swati Kumar from Guggenheim Partners, your line is open.

[Swati Kumar:]

Hi. Thanks for taking my question. So, can you give us some color about dynamics with INOMAX now that you've had it for the first quarter, also, about your thoughts on lifecycle management opportunities there? And also, would you be able to quantify the impact of these CMDS divestitures in terms of margins? And also, if you can give us any timings on the nuclear imaging business potential sale? Thank you.

[Mark C. Trudeau:]

Yeah. Let me start with the INOMAX discussion, Swati, and then I'll ask Matt to talk a bit more about the imaging business. So, with regards to INOMAX, first of all, we're really pleased with this acquisition, love the product, love the durability, thrilled that the USPTO made their determination on four out of the five patents that were being challenged by Praxair under the IPR, and very pleased with the revenue number that we posted in a partial quarter. This is a product that we have described as being approximately $400 million in annual sales, growing in the mid-single digit growth rate. And again that's right where we see it going. The thing that we like about INOMAX is there's a fair amount of the business that's actually tied up into contracts, both single-year contracts as well as multi-year contracts. So, it gives you a certain amount of dependability, if you will, and it's a product that tends not to have – with the exception of occasional seasonality in the winter season, it's pretty consistent quarter-on-quarter. And we think that this is not only a very good growth product for us with great durability but also has very good margins as well. From a strategic standpoint, it gives us another strong foothold in the hospital market. Again, in the critical care arena particularly in the neonatal intensive care unit where it's making a tremendous difference in the lives of patient but it also has a very, very solid relationship or established position with neonatologists and respiratory therapists. And we think that this is a platform to build around. It adds value, we think, to the OFIRMEV position, as we described earlier, but we think there's an opportunity to build further around critical care assets, many of which we think are quite attractive in the hospital marketplace. So, we'll continue to build both around OFIRMEV in the acute care setting but INOMAX in the critical care setting to build out a diversified portfolio in the hospital of products all which share the same type of characteristics

[Matthew K. Harbaugh:]

Yeah. As it relates to your question around Global Medical Imaging, I'll start with nuclear and then I'll turn our attention to the contrast media and delivery systems business. I wouldn't expect a transaction on nuclear anytime soon. I will tell you that business has had a strong year. The performance for the business has been very notable in the first nine months of the year. And the stability we've seen in nuclear this past year has been really good. As it relates to your question around contrast media, obviously, our earnings per share will go down by nature of taking the business out. But I think investors may not fully appreciate what this transaction enables us to do. Our business has about 5,500 employees today. The contrast media business has about 1,000 employees, so that will reduce significantly the work involved there alone. It also reduces our plant network by four plants. As I mentioned earlier, those plants do require a fair bit of capital that needs to go back in. And then we also mentioned in the prepared remarks, we did have some currency volatility far greater than I have seen historically with this business in the last quarter. And half of that came right out of the contrast media. So, some of that volatility will also be lessened, hopefully, as we move forward into the future. So, a lot less complexity going on. If you think about 1,000 employees and four plants for a business that's roughly 10% of the total revenue that we have, that gives you a sense of the reduced complexity level that we're talking about. If you look over on the balance sheet side and the P&L side, the cash generation of the CMDS business, I would say, was very modest, one of the lowest in our portfolio. I'll take you back a few years. Two years ago, our gross profit as a percent of sales was 46.5% and half our business at the time was Global Medical Imaging and half was specialty pharmaceuticals. And so certainly, Global Medical Imaging, the dynamics have not changed over the last two years materially unlike what we've seen on the specialty pharmaceuticals side of the house. So, with CMDS leaving the portfolio, that actually will strengthen our gross profit as a percent of sales. We didn't put a lot of money in R&D, as I mentioned earlier, so there won't be a significant change from an R&D perspective. The SG&A as a percent of sales was lower than our corporate average. So, I hope that kind of gives you a good sense as to how to think about it.

[Mark C. Trudeau:]

And the only thing I would add from a strategic standpoint is that if you think back to the very first when we spun the company, we were quite clear to say that we were going to focus on driving shareholder value by focusing on highly durable, highly profitable growth products that were typically going to come from our specialty pharmaceuticals portfolio and focus on that side of the business and that we were going to de-emphasize Imaging and, long term, move away from that. And we also gave you a timeframe as to when we expected that we were going to take that action and essentially this transaction delivers on those strategic objectives that we established two years ago.

[Matthew K. Harbaugh:]

Yeah. And finally, nuclear, once CMDS leaves the fold, again, it's going to be a small component of the total portfolio. It does generate more cash than the CMDS business. So, as I said, not anytime soon, but while we have that business, we certainly are very focused on driving cash.

[Coleman N. Lannum:]

Thanks, Swati. Next question, please.

[Operator:]

Next question is from Anthony Petrone from Jefferies. Your line is open.

[Anthony C. Petrone:]

Thanks and good morning. Maybe just a couple on Acthar and one on Ikaria. For Acthar, Mark, in the past, you've given us the prescription fill rate. I'm wondering if you have an update on that? And in terms of the guidance, I appreciate the longer term guidance. But for 2015, just wondering how it stacks up into the fourth quarter? Are you still guiding for low double-digit growth overall for fiscal 2015? And then on Ikaria, can you just review terlipressin, the development cycle for that product and potentially where you see peak sales for that asset settling out over time? Thanks.

[Mark C. Trudeau:]

Yeah. So with regards to the Acthar fill rate, maybe, Anthony, just clarify are you talking about prescriptions that translate into paid and shipped? Is that right?

[Anthony C. Petrone:]

That's correct.

[Mark C. Trudeau:]

Yeah. So obviously, the prescription volume that we generate is higher than those that are actually paid and shipped. There is a reimbursement rate differential. And essentially, that rate has been declining slightly quarter to quarter and that's the result of, as I mentioned, what we see is a bit eroding payer environment that's both market driven as well as Acthar driven. But that rate typically ranges from a high in the mid to high 80%s for infantile spasms. And it can drop down into the 60%s for some of the other indications but it's really indication specific. So overall, you'd look at a rate somewhere in probably the low 70%s as a refill rate, if you will, or a fill rate. And again, that is ticking down a bit of over time. With regards to terlipressin, what we see on terlipressin is that we're looking at whether or not this product – what's required to further develop this product. We're very excited about its prospects. We think that this is a very unique product in the sense that it is a rare disease. It's one that has very high mortality associated with it. And it's one that's standard of care outside of U.S. for a particular condition called hepatorenal syndrome type 1. What we're evaluating is what requirements the FDA may have to get approval for this product. And we're setting up discussions with the FDA to determine what additional things we need to do. We would expect that we'll be able to bring this product to market over the next couple of years. It probably will take some additional development, but we're really excited about the prospects of it.

[Coleman N. Lannum:]

And Anthony, in terms of your question on double-digit, I don't want to get too deep into quarterly guidance here, because we don't want to do that. I think we talked very carefully earlier in the prepared remarks about what you should think going forward on the product over the next several quarters, being at the lower end of that longer-term growth rate. You combine that with the pro forma base that I mentioned earlier on the call, that should give you a general idea of what you should be thinking for. Next question, please.

[Operator:]

Next question is Sumant Kulkarni from Bank of America Merrill Lynch. Your line is open.

[Sumant S. Kulkarni:]

Good morning. Thanks for taking my questions. I have one and a quick follow-up. You mentioned some of the things that you could do to drive COGS efficiencies to drive gross margins higher. What product, specifically, would be impacted positively? And my follow-up is, given some of the dynamics in your Specialty Generics business, would you say you have optimal scale? And is it also fair to say that several of the assets that are out there right now are commodity ANDA heavy and are not of interest to Mallinckrodt?

[Matthew K. Harbaugh:]

Yeah. From a cost of goods sold perspective, we're really referring primarily to the legacy Mallinckrodt businesses, particularly in specialty pharmaceuticals. If you look through our public disclosures both pre and post spin, we have mentioned a number of programs over time that we're investing in. One of the challenges when you're streamlining your plants is, it does take time and capital. So you have to invest on the front-end. I will tell you, our supply chain team had a very strong third quarter, and you can see the evidence of that in our gross profit as a percent of sales. It was one of the best quarters they've posted since I've been with the company. Can you repeat your second question? You cut out.

[Sumant S. Kulkarni:]

Sure. So, I was saying that some of the dynamics in your Specialty Generics business seem to present some challenges. So, would you say you have optimal scale in that segment? And is it also fair to say that some of the assets that are out there for sale are commodity ANDA heavy and are not of interest to the company?

[Matthew K. Harbaugh:]

Yeah. So, obviously, we're focused from a business development perspective, where it makes sense, we would want to supplement our specialty controlled substance generics business. But the type of businesses we would look at need to be Specialty Generics. We would not be looking at broad generic-type businesses. We're not really focused on therapeutic categories. We're more focused on the market dynamics that kind of are akin to the business that we have today.

[Sumant S. Kulkarni:]

Thank you.

[Coleman N. Lannum:]

Next question, please.

[Operator:]

Jason Gerberry from Leerink Partners. Your line is open.

[Derek C. Archila:]

Good morning. This is Derek on for Jason. Hi. I just wanted to follow up on the INOMAX business. With the recent IPR that was filed this past weekend, I just want get an update on your thoughts on the legal front there for the methods patent, as well as the device patent. Thanks.

[Mark C. Trudeau:]

Right. So, again, we really believe that INOMAX has tremendous durability and it's durability not only around the intellectual property, which applies to both the drug and the device, but it's also the manufacturing, it's the business model, it's the fact that the product itself is validated with most, if not all, of the major ventilation systems in the NICU. So, it's got a tremendous thicket of protection, and we think all of this protection extends its durability well into the next decade. Specifically with the IPR challenge, Praxair's challenged both – there's 13 Orange Book-listed patents, Praxair challenged five on the drug and five on the device. We prevailed, or at least the USPTO basically dismissed, four out of the five. They've allowed one of the others to proceed, and we'll continue to vigorously defend that one. There are five others on the device which, the IPR hearing on that is scheduled for, we believe, towards the end of September. So, we'll get a view on those five. But keep in mind, in order to give competition to INOMAX, whether it was Praxair or anybody else, you're going to have to navigate a tremendous ticket of barriers to entry for this business and, again, we think it's highly durable and very pleased with the direction that the USPTO took, particularly in an IPR where the burden of proof, if you will, to progress is relatively low. Four out of the five patent challenges on the drug were dismissed. So, we're very pleased with that.

[Matthew K. Harbaugh:]

Yeah. And in general, as we left the office last Friday for the weekend, I would tell you that, on balance, we felt very positively on the legal developments that occurred last week. So you need to juxtapose, I think, the fact that we prevailed on four of those five patents for a product category that's $400 million, has great durability, and is going to be in the portfolio a long period of time. On the methylphenidate ER situation, we've already seen the impact, right, and that product category is, on a nine-month basis, is $113 million in the aggregate of total Mallinckrodt. So, we felt good about how things played out last week. You can't win every time, but we won where it really matters for the long term.

[Mark C. Trudeau:]

Yeah. Let's keep in mind the meth ER story is far from over. While we were disappointed with the current ruling, as I mentioned, we're planning to appeal this. And we believe that, if we can have a discussion on the scientific merits, that there's a very compelling story here for meth ER to support its original rating of AB. Be that as it may, we'll continue to keep the drug on the market at BX rating, and we stand staunchly behind the safety and the quality of this product. And we think that having a discussion on the scientific merits with the FDA is essentially what we want to do, and we'll continue to exercise every avenue to make that happen.

[Coleman N. Lannum:]

Operator, we're coming up on the bottom of the hour. Could we have one more question, please, then we're going to have to cut it off.

[Operator:]

Akiva Felt from Oppenheimer. Your line is open.

[Akiva Y. Felt:]

I just wanted to ask a quick follow-up on the Acthar promotional strategy. So, I've noticed a good clip of new investigator-sponsored studies come up over the last few months. Does the company sort of have a hand here, and is the plan to use data from these studies in a marketing sense or is it also more about getting new physicians hands-on experience with the drug? Thanks.

[Mark C. Trudeau:]

Yes. So, you're absolutely right. We've focused significantly on a variety of different platforms to drive Acthar growth. One of those has been the creation and dissemination of data, both through investigator-initiated trials as well as accelerating and communicating company-sponsored trials, be they clinical trials or pharmacoeconomic. We're very excited about the fact that the lupus poster will be presented next month. We're quite pleased that we're getting acceptances for a variety of pharmacoeconomic studies and work that we've been doing. And again, those will be presented and published over the next coming quarters. And the investigator-initiated study work continues to accelerate. And what we do is on our website, we update our bibliography consistently. And I would draw your attention, virtually every month, we're adding additional citations around Acthar. Keep in mind this a product that's been on the market for 60 years. It's successful treated tens of thousands of patients. It's been used by thousands of physicians. There's a lot of data out there and our job is to collate it and communicate it and that's effectively what we're doing. We can use a number of these studies, the clinical studies, the investigator-initiated studies and the pharmacoeconomic studies, in promotion. It varies a bit depending on the data itself. But typically, we are able to use these studies. We'll continue to do that particularly in driving some of the newer indications that we have such as pulmonology. And when we look to expand the business into ophthalmology, for example, as data emerges to support physician use and patient use of Acthar in these indications, we typically use those in promotion. And that's, again, why we feel quite confident that Acthar over time will grow in the mid single to low double digit growth rate on a revenue basis over the next coming years.

[Coleman N. Lannum:]

With that, operator, and with apologies to the people still in queue, we're going to need to cut it off. I want to thank everyone for joining us. As a reminder, the replay of this call will be available on our website later today. John and I are available throughout the day to take any follow-up calls you may have. Have a great morning and great week. Bye-bye.

[Operator:]

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