Mallinckrodt plc
Q2 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Mallinckrodt’s Second 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, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Cole Lannum, Senior Vice President of Investor Relations. Sir, please begin.

[Coleman Lannum:]

Thank you, [ph] Lillis, and welcome to today’s call. Joining me are Mark Trudeau, President and Chief Executive Officer; and Matt Harbaugh, Senior Vice President and Chief Financial Officer. Today, we will be making some forward-looking statements and it is 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 non-GAAP financial measures with respect to our performance today. A reconciliation of non-GAAP measures to GAAP measures could be found in our earnings release and its related financial tables. Earlier today, Mallinckrodt issued a press release outlining our fiscal second quarter results, which can be found in our website www.mallinckrodt.com. A replay of today’s call will be available beginning shortly after the call concludes, and for the next week on the Investor Relations section of our website. I will now turn the call over to Mark Trudeau. Mark?

[Mark Trudeau:]

Thanks, Cole, and thank you all for joining us on today’s call. We continue to move quickly here at Mallinckrodt and today just a little over two weeks after the close of our latest transaction, I’m happy to share the details of another solid quarter for the business. Here are some highlights of our performance on other recent activities. Mallinckrodt’s Specialty Generics segment delivered strong results, fueled in particular by our hydrocodone product line. In Specialty Brands, OFIRMEV contributed $68 million in net sales for the quarter, and relatively flat volume. Acthar net sales were $228 million for the quarter, led by rheumatology and pulmonology. And we continue to expect double-digit growth on a comparable full-year basis for fiscal 2015. We continue to accelerate the dissemination of clinical and pharmacoeconomic data for our key products, with Acthar studies published on multiple sclerosis and rheumatoid arthritis, as well as three posters presented on nephrology, and one new OFIRMEV study was published. And nine additional studies have been accepted for presentation or publication in the upcoming quarters, with others submitted and are awaiting responses. All of this added to the 10 presented in the first quarter. As I mentioned earlier, we closed our acquisition of Ikaria on April 16, just six weeks after announcing the transaction. And have begun integration, further diversifying our portfolio in the Specialty Brands segment, extending our footprint in the hospital and expanding our commercial leadership team to drive growth. And even as we’ve continued to build the business, we’ve also intensified our focus on running a leaner, more efficient organization to reduce our overall cost structure and increase profitability. We’re pleased with our results in the quarter, and the overall performance of the business. As such, we’re raising our fiscal 2015 financial guidance to reflect the underlying strength of our business and the addition of INOMAX to our portfolio. Matt will give you more detail on our updated guidance in a moment. Now, let me give you a brief summary of our results. In the fiscal second quarter, Mallinckrodt posted net sales of $910 million with operational growth of 67% over the prior year quarter. Our adjusted gross profit as a percentage of net sales increased 18 percentage points from 50% to 68%, and adjusted diluted earnings per share were up 81% for the quarter with our diversified portfolio of Specialty Brands and Specialty Generics delivering solid top-line and bottom-line results. In Specialty Brands, as we had previously discussed and consistent with the historical frame, we anticipated lower Acthar sales in the first months of calendar 2015, which we believe is due to prescribing seasonality and a lag following annual benefit changes. Acthar prescription referral growth was in the strong double-digit range for the quarter compared to the prior year driven by good growth in rheumatology and pulmonology. As we anticipated though, growth in paid and shipped files was 9% lower than historical comparisons, due partially to the expected seasonality and internal delays in prescription processing. We are focusing on improving the efficiency of our prescription processing and distribution systems, and importantly expect this effort to contribute to the achievement of double-digit net sales growth on a comparable full year basis for fiscal 2015. It’s important to think about Acthar in a longer, broader timeframe than simply the snapshot of a single quarter. With 19 approved indications, we believe Acthar is a highly durable asset. As we continue to document and publish clinical experience related to Acthar treatment and fully understand its value to patients, the more confident we are in its growth potential. Remember that today, Acthar serves only about 3% or roughly 10,000 of the approximately 300,000 potentially addressable patients with serious conditions who might benefit from the product. With this sort of substantial untapped potential, we believe we could recently double the number of patients treated with Acthar longer term. Turning to OFIRMEV, an emerging body of data around the use of OFIRMEV is highlighting the benefits of the product as part of the multimodal pain management approach for surgical patients including reduced use of opioids and faster recovery times. We expect these benefits and recognition of the positive impact for patients to drive long-term volume growth for the product. We see stabilization of OFIRMEV volume trends and we continue to view this product as a highly durable asset with long-term net sales potential of at least $500 million. Turning to Specialty Generics, net sales were exceptionally strong reflecting improved volume and pricing as we continue to focus on maximizing value from the segment. Hydrocodone and oxycodone were notably strong in the quarter with hydrocodone benefiting from our first quarter fiscal 2015 launch of new Schedule II products. Methylphenidate ER continue to also make meaningful contributions and continues to have good traction in the marketplace. We remain confident that Methylphenidate ER is safe and effective and we’ll continue to market the product for patients in need of attention deficit hyperactivity medicines. While we were very pleased with the exceptional Specialty Generics sales results posted in the second quarter, it’s important to note that our performance in this area benefited from large contributions across a variety of areas that are not expected to repeat in future quarters. Looking at our most recently acquired assets, we’re excited about the potential INOMAX brings to our portfolio. This highly durable drug device combination product has a strong established presence in Neonatal Intensive Care Units or the NICU and a 24/7 Total Care service package that delivers seamless, uninterrupted support to clinicians treating fragile newborns. The acquisition creates value in a number of ways. First, it expands our Specialty Brands segment with a durable high-value product that is expected to further diversify our operating income. Second, it builds our overall reach and impact in the important hospital growth platform. And third, it brings us a promising late stage developmental asset for our portfolio, terlipressin for injection. Terlipressin is being investigated for treatment of a life threatening condition for which there is no current FDA approved therapy. And we believe it will add a new unique differentiated asset to our portfolio. Staying with the topic of development, we continue to focus our efforts on generating clinical and pharmacoeconomic data for Acthar and OFIRMEV, developing ANDAs for specialty controlled substance generics, and pursuing development of new devices and products lifecycle extensions for OFIRMEV and INOMAX. To help us continue to accelerate and refine these broad based R&D programs and oversee our publication strategy, we are pleased that Dr. Steve Romano has joined Mallinckrodt to lead our Science and Technology functions. Dr. Romano comes to Mallinckrodt after more than 20 years in the pharmaceutical industry, including the past 16 years at Pfizer, most recently as Senior Vice President and Head, Global Medicines Development in Pfizer’s Global Innovative Pharmaceuticals business. Touching briefly on business development. Our recent acquisition of Ikaria is another good example of Mallinckrodt identifying and moving on assets that fit well into the strategic growth platforms we have created and where we believe that we are the best owners, able to apply our unique skills and experience to drive growth and unlock additional value. Our opportunity set has never been richer. As we look across the options, we’re currently contemplating, we’ll continue to focus in areas that allow us to leverage our ability to manage complexity, maximize our commercial infrastructure and diversify our portfolio with an ongoing goal of having no more than a third of our operating income coming from any one product. Now, let me turn the call over to Matt for some more detail on the quarter. Matt?

[Matthew Harbaugh:]

Thanks, Mark, and let me add my welcome to everyone on the call this morning. I’ll provide a brief commentary on our updated guidance for Mallinckrodt’s fiscal 2015, and discuss our results for the fiscal second quarter in greater detail. As a reminder, our second quarter ended on March 27, 2015, and all of our results are compared against our performance for the same period in the prior year. This morning, we raised our fiscal 2015 net sales guidance to a range of $3.75 billion to $3.85 billion and our adjusted diluted earnings per share guidance to a range of $7.10 to $7.50 per share driven by anticipated contributions from our diverse portfolio. Turning to the quarter, net sales were $910 million versus $558 million, are up 67% on an operational basis compared to the prior year quarter. Solid performance that reflects increased contributions from both our Specialty Brands and Specialty Generics segments. Specialty Brands’ net sales were $334 million, up $279 million due to the additions of Acthar and OFIRMEV to our portfolio. In our Specialty Generics segment, net sales were $363 million resulting an operational growth of 36.4% compared to the prior year. Strong performance in hydrocodone, BioVectra API and oxycodone were the key drivers in the quarter as well as ongoing resilient net sales from methylphenidate ER. Results from Specialty Generics in this quarter were exceptional, but it’s important to note that we benefited from outsized contributions in a variety of areas that are not expected to repeat in future quarters. Global Medical Imaging net sales were $203 million, down 2.1% excluding the impact of changes in exchange rates, which we view as strong performance in a highly competitive market demonstrating the team’s focus on continuing to drive operating income and in turn cash. Total company adjusted gross profit was $615 million, up $336 million with adjusted gross profit as a percentage of net sales of 67.6% compared to 50.1% in the prior year quarter. As those of you who have consistently followed us know our performance in driving our gross profit has been quite remarkable over time, and there is more we can do as we continue to restructure and diversify the portfolio further. Selling, general and administrative expenses or SG&A for the quarter were $344 million compared to $194 million. The increase in SG&A reflects additions to the Acthar and OFIRMEV commercial teams, a $30 million legal settlement and $22 million of Questcor related non-cash stock compensation costs that will dissipate by the first quarter of fiscal 2016. Our second quarter fiscal 2015 SG&A also included a $13.3 million non-cash charge for the same environmental matter for which we recorded a $23.1 million charge in the prior year quarter. On a non-GAAP basis, our adjusted SG&A as a percentage of net sales was 28.8%. As we continue to streamline our business, we anticipate greater use of our restructuring program in the back half of fiscal year 2015, and plan for material reductions, particularly as it relates to our SG&A. As I mentioned on our last earnings call, longer term we intend to bring our adjusted SG&A as a percentage of net sales more in line with our peer set over time. Mallinckrodt’s R&D spending in the quarter was $47 million, up from $41 million in the prior year period. As our business has grown, R&D spending as a percentage of net sales has dropped from historical levels, and we expect this to continue at similar levels in the next two quarters and into fiscal 2016. We still plan significant investments in Acthar, OFIRMEV, INOMAX in our Specialty Generics business and believe that continued spending in the current range will fully support the investments we need to make for the future. Total company operating income was $95 million, up significantly from $4 million in the prior year due to solid performance in both our Specialty Brands and Specialty Generics segments. Interest expense in the quarter was $57 million, compared to $12 million due to debt incurred from recent acquisitions. In April, the company incurred $1.6 billion in debt associated with our purchase of Ikaria. Given this recent financing, we expect our interest expense to rise in coming quarters to approximately $290 million to $300 million on an annual basis. As of Monday, this week, our net debt leverage stood at 3.3. As you can see in our release today, we have further reduced our non-GAAP tax rate guidance to a range of 18% to 20% for fiscal 2015. When thinking about this on a longer term basis, we expect to see our tax rate continue to decrease and plan to get to the mid-teens over time. For the fiscal 2015 second quarter, adjusted diluted earnings per share were a $1.72 compared to $0.95 a share. This is based on weighted average diluted shares outstanding of $117.2 million for the fiscal 2015 second quarter. With Mallinckrodt’s rapid growth and significant portfolio change, some of you may not fully appreciate the cash generation capabilities of the company. With Ikaria included, in future years we anticipate that we will generate no less than $1 billion annually in free cash flow. Now I’ll turn to over to Cole for questions.

[Coleman 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 and only if needed. You’re free to push yourself back in the queue afterwards, and I promise we’ll get through as many questions as possible. With that operator can we have the - can you read the instructions for queuing up and then the first question please?

[Operator:]

Certainly. [Operator Instructions] Our first question comes from the line of Marc Goodman with UBS. Your line is now open.

[Marc Goodman:]

Yes, good morning, Mark. Maybe you can go through Acthar just in a little more detail. I mean, clearly Acthar is growing, but it just doesn’t seem like its growing as much as we would have expected it to be growing? And maybe you can talk about numbers of patients, maybe number of doctors that are prescribing, whether that’s changed, has the sales force changed at all relatively over the past three months to six months? And you mentioned, that there were strength in rheumatology and pulmonology. Pulmonology is still small, I believe. And maybe you can talk about nephrology, which is one of the other big areas and whether there is still growth there? Thank you.

[Mark Trudeau:]

Yeah. Thanks, Marc. So a couple of things to think about with Acthar. First of all, the product is performing actually exactly to our expectations. I mean, if you remember back in October, when we gave guidance around Acthar, we said that we expect that Acthar would have double-digit revenue growth in 2015, and essentially that’s exactly where we see it performing. In fact the product performed a little better than our expectation in the first quarter, a little bit less than our expectations in the second quarter, but for the first half it’s almost exactly on what we had anticipated. I think it’s also important that to put in perspective to say that you want to compare Acthar to Acthar. So, if you had looked at prior numbers that included BioVectra or Synacthen, then you need to take those out of the comparators. If you look at just the absolute growth in prescriptions, we see double-digit prescription growth across the entire portfolio of Acthar indications. And that strength in prescription growth is consistent with what we saw in the first quarter. And you saw in the first quarter, it was on the order of 15%. We see that similar types of growth rates in the second quarter in terms of prescription growth or referral growth. And that I think is reflective of the fact that we’re starting to get some additional efficacy from the sales forces enhancements and the additions that we made particularly in the pulmonology and the rheumatology area. What we see in the second quarter is something and a little bit different. Again this is what we had been projecting is that you’ve got a bit of slowdown in the pull through, which accounts for the 9% in the second quarter. That slowdown in the pull through is due to three factors. One is the resetting of benefits which we referred to, we did see some of that in the quarter. We also see as payers put additional barriers in place to - put additional barriers in place towards reimbursement. What we’re seeing is that prescriptions written in a given quarter may not be actually filled until the secondary quarter, and that’s what we saw in the second quarter. And so, these are factors that I think are driving the performance of the 9% in the second quarter. And a third component for us is the fact that now that the product is much larger, 10,000 patients approaching a $1 billion in revenue. We still have the same internal processing hub. We still have the same single source specialty pharmacy for distribution, and we’re finding that that’s becoming a bottleneck. So, as we look forward, we think that there’s a couple of things that we’re going to be able to do to open up the pull through in subsequent quarters. One is to improve the efficiency of our internal processing hub. Second is to look at expanding our single source distribution, and going to multiple specialty pharmacies. And three, the other aspect of this is what we’ve been talking about for quite some time is the fact that the dialogue that we’re now having with managed care at the policy level, we believe we’ll appropriately position Acthar patients to help drive pull through and reimbursement in subsequent quarters. So, in terms of the overall health of the brand, we think prescription volume is as strong as it’s ever been, again double-digit growth. We’re seeing growth in prescriptions across the portfolio. It’s rheumatology and pulmonology currently driving it, but we’re also seeing increases in prescriptions for nephrology, neurology those indications are relatively flat, those are the most mature. And we think there is an opportunity to potentially reinfuse growth in neurology longer-term, but across the three out of the four therapeutic areas we’re seeing good prescription growth and new patients coming in. Yeah, and Marc I would just take you back about a year ago, when we’re on the road in the process of purchasing Questcor at the time. We said all along that our deal model actually was lower than where the street was at, at the time as well as the financials of Questcor put together as we were in the process of acquiring that company. So from an internal perspective, we’re right in line with what we were thinking all along.

[Marc Goodman:]

Thanks.

[Mark Trudeau:]

Thanks, Marc. Next question please.

[Operator:]

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

[Gary Nachman:]

Hi, good morning. On generics what are those one-time benefits in the quarter that won’t repeat? Can you tease that out for us? And do you still have flexibility with more price increases for the portfolio, especially when it comes to the controlled substances? Thanks.

[Mark Trudeau:]

Yeah. Thank you, Gary. A couple of things in the Specialty Generics that I would highlight, one is, if you look at the release this morning on oxycodone, you see that we have 34% growth. As we move forward into future quarters we’re going to be anniversarying some of the benefits that we put in place this time last year. So the percentage growth in the future quarters will likely be slower. Hydrocodone, I would say just was exceptionally strong in the second quarter and there has been a resetting of the market if you will that we saw in the last few months as competitors were kind of readjusting internally for Schedule II, and we see that smoothing out in future quarters. Methylphenidate ER, I think we’ve been very clear to say we plan to continue shipping it, but it’s certainly, with the BX rating is below where we were this time last year, albeit we always assume we’re going to have competition in the marketplace, so we’re not surprised with where Methylphenidate ER is playing out. In the other controlled substances line, you’ll see that it’s up about 9%, and that really is the authorized generic on EXALGO that’s the only real thing that’s driving that particular line item. And then you’ll see in the other category, a 90% increase in the release and most of that is driven by BioVectra, which is what Mark mentioned earlier as it relates to Acthar, BioVectra had a very strong quarter that we do not expect to repeat. And that was the lion share of that increase. So that’s really what’s going on in Specialty Generics. And with regards to your question about future price increases, Garry, I think that there’s always opportunities for us to take price across a pretty broad spectrum of controlled substances. The way I think about it is, we’ve taken now some significant pricing actions in a couple of the major categories that Matt described. Future price increases will be more opportunistic in nature, and that’s one of the very good things about being a broad supplier across 43 different categories in controlled substances. You can take full advantage of opportunities when they come up to take price, but on a go forward basis, more than like you’re going to see the price increases be more muted overall and more opportunistic. Thanks, Garry. Next question please.

[Operator:]

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

[David Amsellem:]

Thanks. Just an OFIRMEV question. Can you talk about what you can do to jumpstart significant volume growth on the product or should we think about significant further growth to get to that $500 million peak is more of a function of price and volume. Thanks.

[Mark Trudeau:]

Thanks, David. Our plan for OFIRMEV is to really drive volume. Again, if we look at the utilization of OFIRMEV today, in terms of how often it’s currently used across the spectrum of surgical opportunities, it’s used probably in less than 10% of surgeries today. And so, we think there is tremendous volume opportunity, tremendous growth opportunity. And one of the things that we can clearly see in the marketplace is this emergence of the concept of a multimodal analgesic approach to managing pain and - in patients pre, and post, and during surgery. And, that multimodal approach is really designed at actually minimizing opioid use. And, OFIRMEV is the analgesic that has the opportunity we believe to become the center point - the centerpiece of that multimodal analgesia. And again many of the studies that are coming out, not just with our product, but with other products in this space, speak to that change in concept. So, we think longer term getting to $500 million is driven primarily by volume. Of course, we still believe that OFIRMEV is actually underpriced in the market relative to the value that it contributes to moving patients out of the hospital quicker. But longer term, we believe there are tremendous volume upside opportunities, particularly as this multimodal analgesia concept continues to take hold. Thanks, David. Next question please.

[Operator:]

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

[Mark Trudeau:]

Gregg, you there?

[Gregg Gilbert:]

Can you hear me okay now?

[Mark Trudeau:]

Yep. Yeah, Gregg, now we got you. Go ahead.

[Gregg Gilbert:]

Thank you. Guidance question. Matt can you talk about how much of the - the current year guidance changes due to Ikaria versus other factors? And in longer term your new tax rate guidance is a pretty big deal. So I just want to make sure that continued downward pressure to the mid-teens over time would happen even in the absence of deals, of course, we know you’ll do deals but, just want to make sure that’s clear that your guidance on tax longer term does not rely on any future M&A? Thanks.

[Matthew Harbaugh:]

Yeah. So let me start with your last question, and then I’ll move to guidance. From a tax perspective, there’s no assumption in the guidance that we provided today, nor the longer term guidance that I provided in the script, any assumption around doing future deals. Now obviously we will continue to look for opportunities in business development. But you should take the tax rate guidance and the verbiage around that is base Mallinckrodt and what we can do with what we have in our hands today. As it relates to the broader guidance, Gregg, we said at the time of the acquisition of Ikaria that we expected no less than $150 million in revenue from INOMAX, and no less than $0.25 a share from bringing that into the portfolio and that is within this guidance. From a net sales perspective, you may see a bit of some adjustments if you will within there. I would encourage you to look at the impact of currency that has been very significant over the last six months. And then obviously with Methylphenidate ER, with the change to the BX rating, that also added some pressure in there. But we’ve been able to strengthen the bottom line if you will from an earnings per share perspective by getting gains from restructuring that’s done historically. You’ll see that the Global Medical Imaging business has had a very strong quarter. Generics had a strong quarter. So, one of the benefits of being such a diverse portfolio is that when we have issues come up that that are challenges, we have been able to find the write-off offset if you will.

[Gregg Gilbert:]

Thank you.

[Mark Trudeau:]

Next question, please.

[Operator:]

Our next question comes from the line of David Maris with BMO Capital Markets. Your line is now open.

[David Maris:]

Good morning. On the Generic Methylphenidate ER, can you update us on the FDA’s actions. What the key upcoming rates are, and how comfortable and why are you comfortable that it will remain on the market? Thank you.

[Mark Trudeau:]

So, with regards to Methylphenidate ER, David, from our standpoint, there are actually no upcoming FDA dates that we’re aware of. And again, as you know we have been engaged with the FDA in a variety of fronts around this particular topic. We continue to believe based on data that our product is safe and effective. And we also were very encouraged by the FDA’s own press release that stated there were no safety issues with either of the Generic Methylphenidate ER products. So, based on all of this information, we continue to plan to keep Methylphenidate ER in the market for the foreseeable future. We plan to be in the Methylphenidate ER market for the long-term. We’re continuing to develop alternative formulations with the new guidelines. We continue to look for dialogue with the FDA around our current formulation, and we believe that this is a long-term business for us, including our current formulation in the market. One of the very good things that you see is that our market share is holding in pretty well. And that’s because even as a BX-rated product, Methylphenidate ER, our Methylphenidate ER can be prescribed in virtually every state in the U.S., and the District of Columbia, either freely or with some pharmacist intervention. So again, we see this as a very important and long-term business for us, and we continue to plan to have it on the marketplace.

[David Maris:]

Okay. Is there any opportunity, I think I had asked this last quarter, given the price increases that Acthar put through, I mean, is there any opportunity to address price coming up, I mean given that you’re not seeing any loss of share, given the BX rating?

[Matthew Harbaugh:]

Yeah. So just to clarify, we haven’t seen some gradual loss in share, but of course, our share is - our share decline is actually fairly shallow, in terms of the shape of the curve. Keep in mind as well, we had always projected that we were likely to lose share in the Methylphenidate ER market. We’re just not losing it for different reasons. The first - that the original reason is we were likely to see competition coming to the market. Now that’s very unlikely, but we’re losing share because of our BX rating, but it’s on a pretty shallow decline. You raised an interesting point about price, and you’re right, there is a price differential in the market between our product and some of the competitors’ products. And as I said earlier, with regards to generics, we would always look for pricing opportunities in an opportunistic way. And Methylphenidate may represent one of those in the future.

[Mark Trudeau:]

Thanks, David. Next question please.

[David Maris:]

Okay. Thank you very much.

[Operator:]

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

[David Risinger:]

Thanks very much. So my question relates to OFIRMEV, could you just provide a little bit more perspective on the current rate of volume decline, and when you expect it to turn positive. Thank you.

[Mark Trudeau:]

Yeah. So, David, we - when we look at weekly volume, what we’re seeing is a fairly stable volume, it’s fairly flat at this point. And what we’re anticipating is that, as we go forward, and we continue to engage with formularies as well as engaging with prescribers and practitioners, and presenting new data that’s emerging, and I referenced some of that earlier, there’s an opportunity for us to reengage and reclaim some of the formulary restrictions and losses that we experienced in the last year or so, that have led to that flattening of volume. Keep in mind, OFIRMEV is actually performing pretty much to the way we expected it. If you recall, when we took the price increase, we had suggested that, the volume was likely to take a hit, that hit was going to be somewhere in the order of 25% to 30%. And in fact, we’re seeing about a 26% decline in volume from peak before we took the price increase. The volume is now flat on a weekly basis, and we would expect towards the back half of this year, that we would start to see a re-growth in OFIRMEV volume. Keep in mind that we have this product through the end of 2020, we believe we’ve got exclusivity, we believe through the end of 2020. We’ve been able to effectively defend the intellectual property including an appeal. And so, we think we’ve got this product for a number of years, and that’s why we’re comfortable with the number that we gave here in terms of long-term sales revenue potential of at least $500 million. So, again we would expect to start to see growth towards the second half of this year towards the backend of the year as we get a chance to reengage with formularies. One of the things that we’re finding, which is quite interesting, as you might imagine is that, in many instances, in accounts, where we’ve been restricted or taken off of formulary, of course there a natural experiment has been created, and we have an opportunity now to go back in and discuss with accounts. The impact of that natural experiments on the cost of care, patient satisfaction scores and other things, which actually we believe are going to strengthen our ability to grow the product in the near-term to mid-term.

[David Risinger:]

Got it. And, just one follow-up. So, you talked a lot about sequential trends, I tend to model year-over-year. So, any more color on how much the OFIRMEV volumes are declining year-over-year? And then, when they’ll start growing year-over-year. Should we think about them growing year-over-year starting in 2016?

[Mark Trudeau:]

I think that again, consistent with a - with what I said before, I think that we should expect to see volume growth year-on-year, starting towards the end of this fiscal year.

[David Risinger:]

Okay. Thank you.

[Mark Trudeau:]

Thanks, Dave. Next question please.

[Operator:]

Our next question comes from the line of Chris Schott with JPMorgan. Your line is now open.

[Christopher Thomas Schott:]

Great, thanks very much. Thanks for the question. The question was on M&A priorities, and business development capacity at this point. Can you just elaborate where we are for the organization, and maybe as part of that answer, given the success that you’re having in the Generic business, should we consider high barrier to entry in generic businesses as a potential area you’d look to add in the form of M&A, or is the focus still very much on branded specialty, as we think about this stuff. Thanks very much.

[Mark Trudeau:]

Sure. So, let me start with the answer around our priorities, and I’ll ask Matt to describe a little bit about our capacity. So when we think about business development, we think about building out our company in three platforms. And again, whether that’s through business development or organic growth. We’ve really laid down three platforms for growth. One of those is Specialty Generics, and we like high barrier to entry Generics, that are similar to the types of things that we do in Specialty Controlled Substance Generics. So that’s clearly, we think an opportunity for growth, and one that we would look to enhance our portfolio through M&A as well as organic development. Second platform for us is clearly in the hospital space, but again in very focused parts of the hospital in the acute care arena around OFIRMEV, and now in the critical care arena around INOMAX. And we would look to build out those specific focus areas in the hospital around those two platform assets. So, you could see us adding additional products that would be complementary for OFIRMEV, for example, in the acute care setting and complementary to INOMAX in the critical care setting. And then, our third platform for growth is really autoimmune and rare diseases, and that’s anchored by Acthar. In the case of Acthar, we really have four distinct therapeutic areas where we’re currently marketing the product. That’s rheumatology, pulmonology, nephrology, and neurology. And again, we would look to build out each one of those specialty areas within autoimmune and rare diseases with a more diversified portfolio around Acthar. So, you can see we’ve got a fairly broad set of options to consider, but some pretty focused ideas about how we’re going to build out the business. And so, that’s why when we talk about the fact that our opportunity set and our deal pipeline has never been richer, it’s because we’re focused in the areas that I just described which tend to be pretty specialized, and have a certain set of assets for which we believe Mallinckrodt is the likely best owner.

[Matthew Harbaugh:]

Yeah. And, I would add, we also want to continue to diversify the portfolio. I would echo what Mark said on the - during the script around diversifying the portfolio such that no one product arrives greater than a third of our operating income. If you think about it from a capacity viewpoint, there are few things that I would highlight. The first is, we’ve said all along that the cash generation within Mallinckrodt tends to hit its zenith in the back half of our fiscal year. And we certainly have seen that our cash flow has been incredibly strong throughout the month of April. And so, to that end, when we financed Ikaria, few folks were curious as to why we’ve drawn our revolver at the time. And clearly we saw the cash horizon being so strong, that we knew we could draw on the revolver and then pay it down. We do anticipate paying down the revolver by the end of this quarter. So that will give you an indication of the strong cash flow that we’re seeing. I would also highlight that when we announced the Ikaria transaction, we said that we would have an approximate net debt leverage of 3.6, and as you heard earlier, in our prepared remarks, we’re already down to 3.3. So, all of those are really strong signals, I think around how we’re thinking about the cash flow and the strength of the underlying cash generation of Mallinckrodt. I would also go back to what we said in the script, which is, as we see the cash horizon in the future, we expect to generate a $1 billion or more in future years. I truly think this is an area that really haven’t gotten our head wrapped around just yet, that’s why we’re going out of our way to highlight it. But, if you take our net debt leverage at 3.3, and you think about our debt capacity, it certainly is very strong, and could enable us to pursue very large transactions. And, just to put a cap on that, if we think about overall, what are we trying to do through business development, we’re looking to diversify our portfolio as Matt articulated, but we’re also looking for assets that are highly durable, that are differentiated, that fit within those platforms of growth that I described to you. Typically, we work for things that have a certain amount of complexity to them, because if you look at what Mallinckrodt’s core competency is as we can manage very complex businesses, whether they’re regulatory complex like specialty controlled substance generics or they’ve got a complex supply chain like our nuclear imaging business or the INOMAX business that’s what really sets Mallinckrodt apart. So we look for assets that are durable, but we also look for those that can drive growth and enhance our profitability and you see that we’ve dramatically enhanced both our growth as well as our profitability through the acquisitions that we’ve completed over the last 12 months. So we’re really transforming the portfolio with the bottom line really focused on creating significant shareholder value, and we believe the way to do that is with the diversified high growth, high profit generating specialty portfolio, whether it’s in Specialty Branded products or Specialty Controlled Substances or Specialty Generics with high barriers to entry?

[Christopher Thomas Schott:]

Thanks.

[Mark Trudeau:]

Thanks. Operator, next question.

[Operator:]

Our next question comes from the line of Douglas Tsao with Barclays. Your line is now open.

[Douglas Tsao:]

Hi. Good morning. Thanks for taking the question. So, Mark, maybe if you could just help us understand a couple of things at Methylphenidate ER. You referenced sort of working on new formulation presumably to meet the new standard. So just curious when you might be in position to file with those with the FDA. And then also if you could talk about any efforts you’re making in terms of working with managed care to preserve your share in the market as it is today especially given the fact that some of your competitors have taken some price and so, obviously there would be some interest on that - their part to continue to see your volumes hold in there? Thank you.

[Mark Trudeau:]

Yeah. So, thanks, Doug. So, in terms of the longer term view of Methylphenidate, again our short-term view is our current formulation will stand in the market as the BX rated product until which time we bring out a new product, and hopefully that would be within the new guidelines. Now developing a product according to the new guidelines essentially requires a complete new ANDA, and it’ll take us some time to develop the formulation we’ve been actively engaged in that really since we got the new guidelines. It will take us some time to do that, and then of course, there is the regulatory process to get through. So, you’re probably looking at a couple of years at a minimum before we would have a product on the market that adheres to the new guidelines, but in between then and now our current product, our current BX rated product will continue to be on the market from our perspective. With regards to preserving market share, again what we’re primarily focused on is, is maximizing revenue for Methylphenidate ER. And so like we do with all of our other specialty controlled substance generics products, we look for the sweet spot between price and volume. And right now we think that sweet spot is where we are today, but certainly as the marketplace continues to involve, as I said earlier, there may be opportunities for us to consider a different mix between price and volume.

[Douglas Tsao:]

Okay, great. Thank you.

[Mark Trudeau:]

Next question, please.

[Operator:]

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

[Anthony Petrone:]

Thanks, and good morning. Maybe a quick two part question. Just an update on Global Medical Imaging as it relates to portfolio structure over the next year or so, and jus on a carry some comments on terlipressin. Mark, maybe, can you give an early view on timing for terlipressin and estimated market size. Thanks.

[Matthew Harbaugh:]

Yeah, Anthony, it’s Matt, long time, no see. Thank you for the questions. As it relates to Global Medical Imaging, obviously we’ve been talking about it for some time. And so, we are continuing to look at options there. We were very pleased with the results in the last quarter, we’ve seen great stabilization in that business. We said this time last year that we are managing the business for cash, and the team is - has really delivered for us. So, we’ve seen good stabilization in the business, and we continue to look at alternatives as it relates to the business. And with that, I’ll turn it over to Mark on terlipressin.

[Mark Trudeau:]

Yeah. So, terlipressin, we think is a very exciting asset for us over the long-term. Just to put this in perspective, this is an injectable product, it would be sold through our acute care division or hospital business. So, in terms of the way, we would launch it, it fits squarely in both our acute care as well as potentially longer term our nephrology business. So, it’s a great strategic fit for us. I think it’s very interesting because this is a product that is used as standard-of-care in many countries outside the U.S. for a very devastating condition that has a high mortality rate. Yet the product is not approved here for use in the U.S., but it is included in some of the treatment guidelines in the U.S. So, we think that this product has potential to come onto the market, it’s just a matter of when. And this would be a product that already would have likely Orphan designation as well as an expedited review. So, at the point at which there is a sufficient data package available. The regulatory process for this product could move relatively quickly. Now, where we are today is, trying to determine whether or not, in fact, we have a regulatory package, a data package that’s sufficient to be able to get into that regulatory process that I just described. So again, we believe this is a product that will come to the market, it could come within the next year, it could be a couple of years. And it’s all dependent on the dialogue that we have with the FDA around the sufficiency in the data package, or whether we would need to do additional clinical work. In terms of the market potential, if you just look at the condition for which it would be indicated, it’s a condition called HRS Type 1, which is an orphan condition afflicting somewhere in the order of about 10,000 patients or so. And again, we’re just now starting to look at the market potential in terms of dollars, because given the fact that this would have likely orphan pricing associated with it. It could be a very attractive market. And again, at which point that we got approval, it would qualify as an orphan drug we believe, which would give it seven years of exclusivity. So for a whole variety of reasons, strategic fit, the potential that really significantly benefit patients at need, the fact that it’s approved, the standard of care in the number of countries outside the U.S., and it may offer some very attractive financial opportunities. We think this is a very attractive product in our portfolio. And now it’s just a matter of determining the length of time that it’s going to take to get it from filing through approval. Thanks, Anthony. Next question please.

[Operator:]

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

[Sumant Kulkarni:]

Good morning. Thanks for taking my question. You referred back to your deal model related to Acthar, in that model did you have any relatively exceptional years in terms of growth rates on the product? What’s the earliest that could happen and what drives that? And could you give us an update Synacthen?

[Mark Trudeau:]

Yeah. I’m sorry, I didn’t really hear your question very clearly. Could you repeat it? I know it’s on Acthar, and what was in the model, and what we’ve seen from a growth rate, is about where we were in the model when we did the acquisition a year ago.

[Sumant Kulkarni:]

I mean in future years, do you have any relatively exceptional years in terms of growth rates, what drives that and what’s the earliest that could happen?

[Mark Trudeau:]

Yeah. No, we - from a modeling perspective, as I mentioned earlier for the long-term, our expectations for Acthar, we’re more modest than where the Street was this time last year. And far more modest than what Questcor management thought at the time. Obviously, they were in the process of selling the business. So, our dataset was relatively consistent in future years. We do believe this is adorable product, but certainly more modest in expectations.

[Matthew Harbaugh:]

Yeah. And there is a couple of ways to think about how we expect to drive growth. And I referred to the fact in the earlier comments that we think it’s very reasonable to expect that the number of patients treated with Acthar over the long-term could at least double. And what drives that is the fact that we have relatively low patient penetration in the currently marketed indications which are nine out of 19. So, we have 10 additional indications that are already on label that we believe could be marketed, and the product - usually the product driven there. We’ve seen very good efficacy when we start up new indications and pulmonology, pulmonary sarcoidosis for example is a perfect example of that. A year ago, there was relatively few scripts in that area even though the product is indicated there. And over the course of a year, with first the pilot effort, and then long - and now a much more full-term effort, we’re able to drive good growth in pulmonology. The next area of development for Acthar that’s on-label would likely be in ophthalmology, where there are probably six indications. And we think there’s potential for Acthar to benefit patients in a number of those ophthalmic condition. So we would look over time to and continue to enhance the growth of Acthar, not only for the current set of market indications, but also looking to expand into ophthalmology. As you know, we also have a couple of for preliminary studies that are looking at some label expansion opportunities for Acthar, but specific to our model, we hadn’t really included any of those as part of future growth potential for the product. We think there’s plenty of opportunity to drive volume growth, in particular, across the currently marketed set of indications, as well as some of the new ones that I just described.

[Mark Trudeau:]

Yeah. And, Sumant, to answer your question as it relates to Synacthen. If you look in the release under Specialty Brands, in the select product line net sales, Synacthen is in the other category, and you’ll see that that category was up 25% year-over-year. Roughly, half of that was Synacthen, and the other half was Gabaldon. So, that’s where it is. So, it’s a very modest product in the total. Certainly, as I mentioned earlier, the BioVectra sales were exceptionally strong in the quarter, which is in the Generics segment.

[Sumant Kulkarni:]

Thank you.

[Mark Trudeau:]

Thanks, Sumant. Next question please.

[Operator:]

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

[Jason Gerberry:]

Hi, good morning, thanks for taking the question. Just a quick question on Ikaria. I guess we had heard previously that INOMAX sales were kind of closer to $400 million on an annualized basis. So, I’m just curious as our sales weaker in your fiscal second half or is it - should we be thinking about this more as a $300 million sales business on an annualized basis growing at mid-single digits as you guys kind of previously communicated when you announced the deal?

[Mark Trudeau:]

No, the math has something to do with the calendar, and when we closed the deal, your analysis is correct, it’s ballpark $400 million annually growing mid-single-digits - just so we didn’t close it right at midyear. So you’re correct.

[Jason Gerberry:]

Okay. Thank you.

[Mark Trudeau:]

Next question please.

[Operator:]

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

[Akiva Felt:]

Thanks. I have a follow-up to the question before last. I wanted to ask about the Acthar clinical study for ALS and the updates for lupus trial, Questcor had guided to data being available around this time. And I know ALS is a bit of long short, but are these datasets part of the pending publications that you mentioned during your prepared remarks?

[Mark Trudeau:]

Yeah. So, thanks. With regards to the publications that I referenced, those two particular studies are not included in those numbers. But to give you an update on those two studies, both of the studies have effectively completed enrollment. We are doing data analysis as we speak and we would expect to be able to read out the data on both of those trials, sometime towards the second half of this year, this calendar year. Just to put them in perspective, one as you mentioned is an ALS trial, but it’s really a trial in ALS patients. So it’s not designed to identify whether or not that Acthar as efficacy in ALS. It’s to determine whether or not Acthar potentially could be used safely in ALS patients and would potentially give us some insight as to whether or not we should consider a developmental program for Acthar and ALS, so an ALS indication in a developmental program would be well down the line if in fact we choose to develop Acthar for ALS. With regards to the Lupus trial, the Lupus trial is a Phase IV trials, it’s on label as I said. It’s completed enrolling, we’re assembling the data now and we would expect to read that out some time toward the second half of this year.

[Akiva Felt:]

Great. Thanks.

[Mark Trudeau:]

Thanks, operator. We have time for one, maybe two more questions. Next question please.

[Operator:]

Our next question comes from the line of Swati Kumar with Guggenheim Securities. Your line is now open.

[Swati Kumar:]

Hi. Thanks for taking the question. So with respect to your SG&A goal as a percentage of sales, how long do you think it will take and does it include M&A, and excluding business development M&A, what are potential upside and levers within your existing business that you are not factoring into your guidance?

[Matthew Harbaugh:]

Yeah, so as it relates to SG&A, when we look at our competitive set, we see a lot of our competitors in the low 20, so that would be our aspirational goal, but it’s going to take a number of years to get there. I would say that we are hopeful to get some modest leverage in the back half of the year from where we’re at right now, but these things do take time, the good news is as we still have room in our restructuring program. And as we said in our prepared remarks, we had relatively modest restructuring charges in the first half of the year, but we expect that to pick up in the back half of the year. So that kind of gives you some color around SG&A and how we’re thinking about it. But its long ball, it’s going to take time

[Mark Trudeau:]

Operator, time for one more question, then we’re going to wrap up please.

[Operator:]

We have a follow-up question from the line of Anthony Petrone with Jefferies. Your line is now open.

[Anthony Petrone:]

Mark, just a question on how margins play out in the second half with adding in INOMAX from a gross margin standpoint? And then the go forward run rate for R&D? Thanks.

[Mark Trudeau:]

Yeah. So let me just speak quickly to the margin profile, as it applies to INOMAX. And then, I’ll have, Matt, talk a little bit about how we see R&D going forward. So if we look at the INOMAX platform, this is again a product that not only offers good growth and good - very good durability we believe, but it’s also highly profitable product. It certainly offers a margin structure that’s higher than our corporate margin. And you saw in the second quarter, we reported 68% as our kind of gross profit as a percent of sales. And so, the INOMAX platform is well north of that. So it would actually be accretive to our overall margin profile. Another reason why we really like that product, again, not only is it highly durable, diversifies our portfolio and provides a platform of growth in critical care, but also, we believe offers us a tremendous profitability both short-term and mid-term.

[Matthew Harbaugh:]

Yeah. So, Anthony, I would also add and Swati asked this question as well. So, these questions are kind of merging well together for us. We have assumed in our projections as we move forward that Ikaria is fully in the fall that’s obvious, because we closed on that transaction. But our comments today, whether it would be cash flow, whether it would be the tax rate, whether it would be SG&A leverage as we move forward. And also, our R&D are on the businesses that we have in our hands today. So, you should take the projections that we’ve provided, as what we have today. Now as we do more transactions, obviously we hope to continue to drive the P&L further, but there is a lot we can do with the businesses we have. Turning to your specific question around R&D, we see it kind of in the range that it is today. It’s on a year-to-date basis, about 5% in that range, and that’s what we see in the back half of the year as well as, as we move into 2016. It’s not a lack of desire to invest. We’re very focused on making sure we get return for everything we do from an R&D Science perspective, but we feel good about our spend level at the current rate. Anthony, let me add one more thing back on the margin side of things. There is no question of the Ikaria business is very attractive on margins. And I think you guys are going to be very pleased with that asset over time, but as Jason mentioned earlier, it’s a $400 million revenue business, don’t forget your algebra. When it comes on the margin side of things, I’m happy to talk specifically offline, but as a weighted basis to the overall Mallinckrodt base, keep that in mind. And let me just toss with one additional comment on the R&D focus. Again, Matt gave you the range, where we think it’s going to be as a percent of sales, but as you can see our absolute spend in R&D is going up, because our sales have gone up fairly dramatically. And as I mentioned earlier in the call, our focus on R&D is to develop the products that we have in our portfolio, that we brought in either through acquisition or we’ve been developing organically with focus primarily on enhancing the dataset for Acthar as well as for OFIRMEV particularly around pharmacoeconomic data for both Acthar and OFIRMEV, as well as clinical data, and some pre-clinical data that we’ll be publishing around Acthar. We’re going to be looking to extend the lifecycle for OFIRMEV and INOMAX and that would include developing different presentations, and potentially different devices for INOMAX. And, of course continuing to develop specialty controlled substance ANDAs in a pretty focused way to continue to build out that portfolio. So, we’re real focused in where we’re going with our R&D, sorry, the one other piece is obviously there to develop terlipressin, so that we can bring that product to market. So, we’re very focused in where we are with R&D, but it’s specifically targeted to what’s going to enhance shareholder value with the products that we brought on board.

[Anthony Petrone:]

Okay.

[Mark Trudeau:]

With that, operator, we’re coming up on the bottom of the hour. So, I’m going to cut it off there. I want to thank everyone for joining us. I remind you that a replay of the call is going to be available on the website later on today. Both John and I are available in the office to talk about any follow-up questions you have. Don’t hesitate to give us a ring. Have a great day. Thank you very much.

[Operator:]

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