Mallinckrodt plc
Q1 2015 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Mallinckrodt Pharmaceuticals' First 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 call is being recorded. I would now like to turn the conference over to your host for today, John Moten, Vice President, Investor Relations. Please begin.

[John Moten:]

Yes, thank you and welcome to today's call. This is John Moten, Vice President of Investor Relations for Mallinckrodt Plc. Joining me today 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 under the Safe Harbor rules, we're under 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 make some non-GAAP financial measures with respect to our performance today. A reconciliation of non-GAAP measures to GAAP measures can be found in our earnings release and its related financial tables. One such measure we will discuss today is operational growth which measures the change in net sales between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. I also want to point out that any comparisons noted for the first quarter results are compared against our performance for the same period in the prior year. Earlier today Mallinckrodt issued a press release outlining our fiscal first quarter results, a release which also reflects our new business segment reporting. The new reporting structure provides better insight into the performance of our specialty pharmaceutical businesses following the transformational acquisitions we made in fiscal 2014. Please refer to the release for additional details, it is available on our website at 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 John and thank you all for joining us on today's call. I am happy to report that Mallinckrodt is off to a very strong start in fiscal 2015 with excellent performance across our businesses. We worked hard to transform ourselves into a leading specialty biopharmaceutical company and as I step back and look at the results, I am gratified by how remarkably different the company is today than it was just a year ago. In this quarter our new specialty brands and specialty generic segments accounted for over 75% of total company net sales and we remain highly focused on continuing the momentum, broadening and deepening our portfolio to provide durable sustained growth. In the first quarter of fiscal 2015 Mallinckrodt posted net sales of $866 million, operational growth of 63% over the prior year quarter. Our adjusted gross profit as a percentage of net sales increased 20 percentage points from 49% to 69% and our adjusted diluted earnings per share were up 109% for the quarter with our increasingly diversified portfolio of specialty pharmaceutical products, both brands and generics, delivering robust top line and bottom line results. As I mentioned these results were led by strong performance in both the specialty brands and specialty generic segments. With operational growth advancing 527% and 15% in the quarter respectively compared with the prior year quarter. Specialty brands net sales included a full quarter contribution from Acthar and OFIRMEV meaningfully enhancing our top and bottom line results. Specialty generics achieved operational growth of 15% in the quarter reflecting increases in both volumes and price. Over the last year we focused on maximizing the value of selected products in this large portfolio to better reflect their worth in the market. We also continue to leverage our experience in controlled substances to make the most of opportunities that arise as you saw us do when we were able to quickly launch a new line of Hydrocodone, Schedule II combination products following the FDA reclassification. Despite the fact that Methylphenidate ER was downgraded to a BX rating in the quarter, we continued to see important contributions from the product though we did see some modest reductions in revenue compared to prior year. Looking more closely at key assets within our specialty brand segment, we were pleased to see that we have continued to maintain a strong growth trajectory for Acthar. Operational results remain solid in our first full quarter of ownership with net sales advancing approximately 16% compared to the prior year quarter and continued overall volume growth of 15% in patent shipped Acthar prescriptions. Rheumatology and pulmonology were key drivers of this mid double digit volume growth. Rheumatology where the product has five separate FDA approved indications and pulmonology where we continue to see strong growth following our 2014 pilot launch. The more mature therapeutic areas in neurology and nephrology demonstrated volume growth as well albeit modest. As we said previously with 19 FDA approved indications, Acthar is not just another product in our portfolio. It’s also the foundation of our autoimmune and rare diseases business, and we continue to see significant opportunities for growth. Today in the nine indications in which the product is now commercialized, Acthar serves only about 3% or roughly 9000 of the approximately 300,000 potentially addressable patients with serious conditions we believe might benefit from the product. And in addition to this untapped opportunity in currently marketed indications, there are more approved indications that are yet to be explored with ophthalmology, the next likely therapeutic area for expansion. Our focus for Acthar continues to be driving prescription volume growth and our near-term plans are straight forward. First, we intend to further document and publish clinical experience with the product including data regarding the potential health economic benefits that Acthar may provide. Second, we’ll focus on streamlining the reimbursement process for patients and increased payer engagement at the policy level to support reimbursement. And third, we plan to substantially increase spending in R&D, medical affairs, and commercial resources to continue to build and communicate data supporting the product and the approved indications that have high unmet medical need. Turning to other assets in our portfolio, it’s important to remember that while today Acthar is our largest product we are well diversified with two thirds of our revenues in the quarter driven by strong performance across the balance of the business. This starts with OFIRMEV, the cornerstone of our specialty brands hospital platform. During the quarter OFIRMEV net sales were $71 million representing a 115% increase compared to the same quarter in the previous year prior to Mallinckrodt's acquisition of the product. We saw early signs of OFIRMEV volume growth in the quarter albeit modest and expect that growth to continue particularly in the back half of fiscal 2015. Volume growth from OFIRMEV will come from the following four focus areas; first, by increasing the number of hospitals using the product; second, by increasing the number of vials used in each procedure where additional treatment with a non-opioid pain reliever maybe medically beneficial to the patient; third, by expanding the use of the product across a broader range of surgical specialties and procedures; and fourth, by expanding utilization more fully in the outpatient setting. Similar to Acthar we are also supporting the growth of OFIRMEV with additional investments in medical affairs, R&D, and commercial resources, an example of which is the recent realignment of our branded acute pain franchise to focus on surgical specialties. With our office sales team now carrying both XARTEMIS XR and OFIRMEV as they call on surgeons in the office and outpatient settings, we have a unique synergistic approach that provides a continuum of pain management for physicians and their patients. This extends from pre-surgery planning to procedure and then onto the patients release and recovery at home with the potential to drive complimentary long-term growth particularly for OFIRMEV. Moving to Specialty Generics, as I said we couldn’t be more pleased with our results in this segment, particularly since gains in this area are especially valuable to shareholders. In the quarter, segment performance was solid with oxycodone related products net sales advancing 305% following investments in the first quarter of fiscal 2014 and we have successfully launched our Schedule II Hydrocodone combination products which we expect to produce meaningful increases to drive top and bottom line results over the next several quarters. Turning to business development, further portfolio development is a key priority for us to drive sustainable long-term growth. We will pursue options that will leverage our ability to manage complexity, maximize our commercial infrastructure, and continue to diversify our portfolio with the goal of having no more than a third of our business coming from any one area or product. We remain very active in business development and our reservoir of potential opportunities has never been richer or more diverse. We see several that we believe are available and actionable and well aligned with our growth strategies. We will continue to focus on undervalued assets where we believe Mallinckrodt can add significant value and where we think we are well positioned to take advantage of these opportunities. As Matt will discuss in greater detail, we have a strong cash position and the financial flexibility to consider a wide range of transactions that will build upon our core business as well as expand our new growth platforms. We have also demonstrated that we have the organizational bandwidth and focus to manage concurrent initiatives and will continue to seek both commercial and late stage opportunities. This leads me to science and technology. While we haven’t spoken a lot about this previously, I am excited about the direction in which we are heading and the traction we are beginning to see. We are active on many fronts with efforts structured around extending the durability of existing products and developing additional products that collectively will drive long-term growth. With regards to Acthar we have refined our focus and continue to advance key companies sponsored trials to further demonstrate the clinical utility of the drug in lupus and proteinuria in nephrotic syndrome and we are also exploring its potential in ALS and diabetic nephropathy. In addition we are progressing a number of preclinical trials to further articulate the mechanism of action of Acthar and differentiate the product. In addition we have significantly enhanced and ramped up our publications engine. In first quarter fiscal 2015 two manuscripts were published in key journals and 10 posters presented an important Congresses on a broad range of topics related to Acthar. And we anticipate no fewer than 25 additional submissions for publication or presentation this year, some of which are already in place and accepted. In the product development space, we are investing in OFIRMEV and pursuing opportunities to expand the products range with new presentations to broaden our offering in surgical pain management. Beyond Acthar and OFIRMEV, our broader pipeline now includes more than two dozen products in varying stages of development to fuel our portfolio in coming years including ANDAs and innovative NDAs. And we remain focused on developing abuse-deterrent technology for both our specialty brands and specialty generics opioid portfolios. So let me pause now, I will turn the call over to Matt and come back at the end to summarize. Matt.

[Matthew Harbaugh:]

Thanks Mark and let me add my welcome to everyone on the call. Before I get into our quarterly results, I would like to take a moment to highlight our new business segment reporting which you will see outlined in the release today and detailed in the 10-Q we will file soon. As John mentioned, as Mallinckrodt continues grow our specialty biopharmaceuticals businesses we have aligned our new segments to give investors better insight into the performance of these businesses as we move forward. You will see that we have expanded our historical business reporting segments from two specialty pharmaceuticals and global medical imaging to now three that includes specialty brands, specialty generics, and global medical imaging. The new specialty brand segment encompasses all of our branded pharmaceutical products including Acthar, OFIRMEV, XARTEMIS XR, and Gablofen as well as other brands that are not promoted. The new specialty generic segment contains our specialty generics portfolio, our API franchise, and third party manufacturing agreements. The businesses within the global medical imaging segment remain unchanged. Turning to our fiscal first quarter results. Net sales were $866 million versus $540 million representing operational growth of 62.5%. Notably and unlike previous quarters we did see increased total Mallinckrodt currency impacts of $11 million in the quarter. As a reminder, all results are compared against our performance for the same period in the prior year and we have a September fiscal year end. In the specialty brand segment, net sales were $374 million versus $60 million in the prior year quarter. This strong performance reflects the additions of Acthar and OFIRMEV into our portfolio, both of which were not in the year-over-year comparisons as they were acquired later in fiscal 2014. As Mark mentioned earlier, we were very pleased with the growth rates in financial performance of both Acthar and OFIRMEV in the quarter. In our specialty generic segment, net sales were $284 million compared to $250 million representing 14.6% year-over-year operational growth. Notably Oxycodone continued the strong trend we saw in our fourth quarter. In the global medical imaging segment, net sales declined 5% excluding the impact of changes in currency rates. We were happy to see the business continue to be stable throughout the quarter. Total company adjusted gross profit was $595 million up $331 million with adjusted gross profit as a percentage of net sales of 68.7% compared to 48.9% in the prior year quarter. Our adjusted gross profit continues to strengthen as we shift towards higher margin specialty pharmaceutical products. In addition to reductions in our cost of goods sold through our ongoing restructuring efforts over the last year and a half. Selling general and administrative expenses or SG&A for the quarter were $263 million compared to $146 million. The increase in SG&A reflects the additions of the Acthar and OFIRMEV commercial teams and non-cash stock compensation expense related to the accounting for Questcor Employee Equity Awards that were exchanged this part of the acquisition. R&D spending as a percentage of sales was lower in the quarter than we have seen historically. We expect spending to pickup as we move further into fiscal 2015 driven by significant investments in Acthar, OFIRMEV, and our broader based business. Total company operating income was a $127 million up $54 million year-over-year driven primarily by the ongoing strength of both our specialty brands and specialty generic segments. Interest expense in the quarter was $49 million compared to $10 million due to debt incurred associated with our 2014 acquisitions and higher accrued interest from the transfer of intellectual property. Our non-GAAP effective tax rate in the fiscal first quarter was 20% compared to 27.2%. Fiscal first quarter adjusted diluted earnings per share were $1.84 compared to $0.88 a share. This is based on weighted average diluted shares outstanding of $116.3 million for the first quarter of fiscal 2015. Recently our Board of Directors approved a $300 million share repurchase program which we plan to use opportunistically overtime. While our key priority continues to be pursuit of attractive business development opportunities, the announced share repurchase program reflects our strong financial position, our belief that our cash generating capabilities will remain strong as we continue to realize growth from the portfolio, and our commitment to being disciplined in how we allocate capital. Finally, at the end of the quarter we had $899 million in cash on hand compared with $288 million at December 27, 2013 and our current net debt leverage is roughly 2.5. In closing, we expect fiscal year 2015 to be another strong year for Mallinckrodt. As we look to the near future, we do expect both Acthar and OFIRMEV to be impacted by ongoing seasonal timing in our second fiscal quarter much like we have seen in the past with both of these products. However, we continue to expect strong growth in Acthar, OFIRMEV, and specialty generics particularly in the back half of fiscal 2015. Thank you. Now I will ask the operator to open up the line for questions.

[Operator:]

Thank you. [Operator Instructions]. The first question is from Anthony Petrone of Jefferies, your line is now open.

[Anthony Petrone:]

Thank you. Maybe to begin couple on spec forming and one on the P&L. First on OFIRMEV, if you can dig in there a bit, I think if we go back to Analyst Day, I think the call really was for the second half to really get back to sort of volume growth. I think as Matt suggested that a little bit -- it was a little bit more deceleration in the fourth quarter and again Mark you called out some of the drivers for the second half. So maybe just a little bit more color on OFIRMEV this quarter, what happened with volumes, is pricing still steady, and what your expectation is for the second half?

[Mark Trudeau:]

Yes, thanks Anthony. So, if you recall at the Analyst Day when we spoke about OFIRMEV, we didn’t mention that the product had had some price volume, that the volume had been impacted somewhat by the price increase and that we saw a trough of about 20% in volume from the peak. And what we are seeing now through the first fiscal quarter is that trough it appears that we have come out of that trough and the product is certainly regaining momentum. We see that in the Symphony Data in both December and now what we see trending in January. So it is heading in the right direction. This is quite reflective of what we also see in the marketplace and that of the major accounts where we have OFIRMEV on formulary. We have continued to maintain those accounts and in the few cases where the product was removed from formulary for a short of time we have actually seen regains of those formularies. And we feel like the product is on the right trajectory going forward. We real pleased with what happened in the first fiscal quarter and as we have always said we believe that OFIRMEV will return to at least approaching historical growth rates on volume towards the second half of 2015 and that is exactly the trend that we are currently see in the marketplace.

[Anthony Petrone:]

That is helpful, maybe shift gears to Acthar, one quick question just from booking things standpoint, I think there is a difference between the quarter end for Questcor and the quarter end for Mallinckrodt. So was there a difference in selling days specifically under their reporting structure versus Mallinckrodt and if so what was the kind of delta there from that difference?

[Matthew Harbaugh:]

Yeah, thank you Anthony. Good morning. There was a delta we used 454 schedule as you know and Questcor was operating on a calendar basis. So, I believe it was five days in the quarter that would not have landed on our results and that is why we have been very careful and considerate and focusing on patent ship vials and also being very transparent as to the revenue growth for the product in the quarter. And as we move forward, we are going to continue to report in this fashion. And so you can't take the release from last year and just do the math, unfortunately it is a little more complicated than that. But that will give you a good sense as to the difference.

[Anthony Petrone:]

And then just the last one, let us jump in just pricing on Acthar was relatively flat from last quarter or any major shifts there?

[Matthew Harbaugh:]

Yes, I would say it was modestly up but not material. The gain in the quarter was really the hard way driving volume.

[Anthony Petrone:]

Great, thanks.

[Operator:]

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

[Christopher Schott:]

Great, thanks very much. First question is for Mark, as you pointed out, the company is in a very different place relative to a year ago. When you contemplate your business development ambitions here, can we envision a similar level of transformation for Mallinckrodt over the next year or should we think about more incremental moves now you have built up some of these core categories? And then the second thing, it is a question just on the guidance, can you just comment on the 2015 guidance. I think we see a pretty decent step up from 1Q levels to remaining three quarters of the year to hit the midpoint of that range. Can you just help us understand some of the pushes and pulls in the business as we think about the next few quarters? Thanks very much.

[Mark Trudeau:]

So let me take at least the initial shot at both of those questions. Certainly in the business development and I’ll give you my perspective on the guidance and then Matt can give you his as well. So on the business development side, we certainly don’t rule out doing something similarly transformational to what we did in 2014. What we’re looking for are assets that fit very well with our strategic platforms that we built, that was the whole intent in 2014 was to really set the table to create a company that has diversified long-term, very attractive top and bottom line growth profile. And we think we’ve established the right foundation to do that. There are some very attractive assets we believe that fit very well into those strategic platforms whether it’s the hospital or the autoimmune and rare disease platform, as well as our generics platform. And so we’re aggressively pursuing a number of what we believe are potentially near term actionable acquisitions of a variety of sizes if you will. So the good news for us is we have the cash flow, we have the financial flexibility, we have the operational capability of bringing in multiple new assets whether they are companies or products that fit into these portfolio. So I would see 2015 as being at least from our standpoint even more attractive from a business development perspective than 2014 was for us. Turning to guidance what I would say is that based on the numbers that we posted today, on the bottom line you can see that we’re trending towards the upper range of our original guidance. So we actually are feeling quite good about our performance in the first fiscal quarter of 2015. As we said all along, historically 2014 tends to be our slowest quarter but certainly the third and fourth quarters are typically very robust for us. But again if you were to just think about what we posted in the fourth quarter and do simple math, our first quarter do simple math you can see on the EPS side we are trending towards the upper end of our original guidance.

[Matthew Harbaugh:]

Yes and the only thing I would add Chris is as it relates to guidance, we see a lot of our industry brethren that have currency fluctuations going on. I did acknowledge in the write up that we were impacted 11 million which is very modest when compared with 866 million we posted. From a bottom line perspective its almost meaningless, the impact from an EPS viewpoint. So we’re not concerned about impacts from currency. It’s interesting to me because a few years back investors were beating us up because we were highly dependent on the U.S. market and now are in an enviable position where we’re actually not going through some of the volatility that the rest of the industry is going through. The only other thing I would highlight is what I said in our prepared remarks. I’m in St. Louis so this is a baseball town, so I think we’re playing a 12 inning game here and we are only 3 innings in and we do tend to see softness in Acthar and OFIRMEV in our second quarter. And so we need to navigate through that but the back half of the year should be strong for us. I am particularly excited as to where we are with our specialty generics franchise and watching that unfold as well.

[Christopher Schott:]

Great, thanks so much.

[Operator:]

Thank you. The next question is from Swati Kumar of Guggenheim Securities. Your line is open.

[Swati Kumar:]

Hi, thank you for taking my question. So my first question is on generic considerate. If you can give us an update on your conversation with the FDA, how the market dynamics are shifting out and what you expect going forward? And second I wanted to ask you about your R&D and SG&A spend, now that you plan on investing more for Acthar and OFIRMEV do you expect their spend to go up as a percentage of sales, how should we view this going forward? Thank you.

[Mark Trudeau:]

Thanks Swati, let me take both of those questions. So first of all with regards to generic considerate or Methylphenidate ER. I am clear you can see that in the quarter we posted a very strong quarter. We’ve continued to maintain good share in the marketplace and our product continues to be on the market as a BX rated product which is our plan for the foreseeable future. We believe very strongly as we’ve stated that our product is safe and effective and we believe the data supports that and will continue to aggressively defend this product in the marketplace. So it’s clearly a BX rated product, going to be overall the course of 2015 at a lower revenue rate than it was in 2014. But as you can see it is certainly not dropping off the table and our plan is to continue to maintain the product throughout the foreseeable future at a BX rating. So it has been an important product for us and an important contributor just not of the same magnitude that it was in 2014. With regards to research and development spending which was your second question, you saw a slightly lower rate than you have seen from us historically in the first fiscal quarter and that's actually reflective of the fact that we have done a pretty comprehensive review of our capabilities in science and technology. And I referred to that in the script and that we have now refocused our attention primarily on developing ways to extend Acthar, ways to extend OFIRMEV, and also looked at enhancing our overall pipeline of products and you can see where we used to talk about a very few number of projects in R&D, we are now looking at a significantly greater and more diversified set of projects in which we have opportunities to invest, which are likely going to be very good returns for shareholders. So, we have never really tied to a specific percentage of sales rate for R&D, it is more reflective and we will spend when we have good projects available. We think we have got a lot of good projects available and historically we have typically had our R&D expense in the 6% to 8% of sales range that is probably a reasonable estimate on a go forward basis. But it is going to ebb and flow a little bit quarter-to-quarter based on the attractiveness of the projects that we have.

[Matthew Harbaugh:]

Yes, as it relates to SG&A, I would encourage you to look at the disclosure because there are some onetime items that we have -- that we have itemized there. The way I do the math, it looks like our SG&A is roughly at 28% if you take out those onetime items. And we have said many times that our goal over a longer period of time is to get that down into the low 20s and so we are endeavoring to do that. This quarter though really I think was about really strong performance. We were very pleased with the net sales coming in where they were and I would say our cost of goods sold, our gross profit as a percent of sales on an adjusted basis jumped 20% and that was really notable and a fair bit of that actually was we are starting seeing real efficacy in some of our operations and our supply chain as we are furthering to streamline kind of base Mallinckrodt. So all in all a very strong quarter. We didn’t get as much SG&A leverage in this particular quarter but overtime you should see it trending down.

[Operator:]

Thank you. And the next question is from Douglas Tsao of Barclays. Your line is open.

[Douglas Tsao:]

Hi, good morning. So just maybe Matt, when we think about the gross margins that we saw in the quarter, should we think about this as a new baseline for the company or were there any sort of factors that we should consider just given the sort of very significant improvements we are seeing?

[Matthew Harbaugh:]

Yes, thank you for the question. We pretty much said at the moment that we closed on the Questcor transaction that we thought our gross profit as a percent of sales was going to be definitely in the 60s and at the time we said mid to upper 60s and that is what you are seeing now. There will be some fluctuations in the first quarter, our API franchise in general tends to be lower and that franchise for us has lower margins. So it is going to bounce around in that area that we have been talking about now for six or seven months. But as Mark mentioned, as we are preparing the materials a few weeks ago, our margin profile really is akin to the specialty biopharmaceutical space at this point. And that's part of why it is so remarkable that, that evolution has occurred so quickly over the last year.

[Mark Trudeau:]

Okay, the thing that I would add there Doug is obviously I am assuming the question is on the basis of the business that we have today and keep in mind that we have also been pretty explicit to talk about the fact that we want to continue to add assets that fits strategically but also make good financial sense for us. And those assets that we would acquire typically are going to come with higher margins than the businesses that maybe historically Mallinckrodt has had. We have also been clear to talk about the fact that we take a careful look at those businesses that are less profitable or have less opportunities for growth and we’ll continue to do portfolio management throughout the course of what we’re doing here. So overtime we would expect these margins to continue to increase. Again more reflective of the transformation that we’re undertaking to really become a leading specialty buyer of pharmaceutical company.

[Matthew Harbaugh:]

Yes, and to Mark's point I think some investors may have missed some of the comments we made at the investor briefing in October because there was at the time discussions around our guidances that relates to revenue and I can tell you in the first quarter we did see some pairing of some of these lower margin businesses and that was intentional on our part. So we, in global medical imaging this time last year we talked about how we were dropping the number of countries that we were in. We were at 90 at spin and we were down to 65 now and that’s because we’re driving profitability which you are seeing in the results of both in the fourth quarter and in the first quarter. Similarly we’re also looking on the other side of the house in specialty pharmaceuticals, particularly specialty generics within that segment and there is some pairing going on in there for lower margin or near zero type margin products. So that’s also in the results and that will continue in future quarters. This being said, as you dig into the results and really understand them deeply, now that we have split out the segments you really can get a good sense of the underlying profitability of the specialty generic franchise that we have. And I think you will find those results are very strong and we’re really focused on where we can drive value. So it’s not about the top line, it’s about driving value. It’s about driving earnings per share and that’s why we’re so pleased with our results today.

[Douglas Tsao:]

Okay, great and then just a follow up Mark on Methylphenidate ER. You have noted that you should have expected to be a contributor for the foreseeable future. I think when the FDA reclassified the product to a BX rating they gave you sort of certain, I think there was a six month window to perform certain bioequivalent testing to see if you hit the new standards and then at which point you’d have to take the product off the market. Is there -- do you have a sense that you will be able to keep your BX rated product on the market indefinitely or should we still be thinking about sort of the current run rate through May and then it sort of to be determined situation?

[Mark Trudeau:]

So at the time that the product was rerated we had a number of different discussions with the FDA and a range of options were discussed. As I’ve said, our plan and you know that we’re engaged with certain dialogue with the FDA around the future of Methylphenidate ER. Again I just want to reaffirm that we believe very strongly in this product and we believe that the data supports the safety and efficacy of this product. And I will just reaffirm the fact that from our standpoint we will continue to maintain the BX rated product on the market for the foreseeable future.

[Operator:]

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

[Marc Goodman:]

Good morning. First on OFIRMEV, can you just give us a sense have all the hospitals now done their look and decided whether they are going to change the status for OFIRMEV, just give us a sense of how much of that is done already and how much we still have to look forward to? And then on Acthar, I mean obviously good growth you gave us a sense a few weeks ago to expect the numbers but just stepping back broadly, obviously the product was growing very, very quickly under its previous owner and now it’s slowed to very good growth but not nearly as fast as it was and I was just curious have there been –- has there been a broad change in controls that you have put in place maybe compensation things that you put -- anything that you put in place that would potentially dampen a little bit of it now but maybe will get the benefits of that in the long term as its much better controlled in the long term.

[Mark Trudeau:]

So two things, on the OFIRMEV side the formulary discussions where we have had situations where either the drug has been restricted or in some cases minor cases was removed for short time from formulary, in most of those topic that those discussions have occurred and the products been put back on the formulary or restrictions have been relaxed. There are few accounts where those discussions are still ongoing but we feel very good about where this is tracking and I think the other thing we are quite excited about is as we’ve gotten in and had re-discussions with companies, with hospitals about the formulary position those accounts where the drug has been restricted or in some cases removed they’ve actually seen some negative implications of that. So their pain scores have gone in the wrong direction or their cost of surgical pain management effects has risen. So it’s actually much easier to go back in with that data in hand and have those discussions which is why we are feeling quite good about where OFIRMEV is from the position today but also from the future standpoint. And again we continued to develop a pharmacoeconomic data in support of what we think is a very compelling economic story for OFIRMEV and the hospital. So overall we actually think we are in a quite strong position now for OFIRMEV as we have formulary discussions with key hospitals. With regards to Acthar, again keep in mind the product is growing at a very good rate. 15% prescription rate in the first quarter particularly that’s our first full quarter of ownership when we handed that product over from the previous owners. We’re quite pleased with that and again you want to be thoughtful here about the large numbers, this is a product now that’s trending towards over a billion dollars in revenue. So the absolute growth rates are actually quite strong with Acthar. We think that as we look forward, as we’ve described, because of the low penetration rate, low patient penetration rate for some of the key indications that we have for Acthar, we’re looking at the 3% overall patient penetration rate and some of the newer indications the penetration rate is less than 1%. We think there is ample opportunity for us to drive volume growth as we developed and publish more clinical data, as we develop and publish more preclinical data, and as we developed and published and engaged with managed care in pharmacoeconomic studies which we think will demonstrate the promise of Acthar and it’s a very key indication. So, we’re quite pleased with the growth rate. We think the integration has gone incredibly smoothly with the former Questcor organization, much like went very smoothly with the former Cadence organization. And I think what we are doing here is we’re developing a capability whereby we can identify undervalued assets, integrate them into Mallinckrodt, and continue to or even accelerate the potential growth rates for these new products and companies.

[Matthew Harbaugh:]

And it’s such a durable asset as we have talked about over the last few months, we really want to reinvest whether it’s in science and technology, in the field sales force. So we feel like we’re really in an investment cycle with Acthar to continue to build on the foundation that we bought if you will. But there is no lack of reinvestment in this part of our portfolio because we do see future growth for many years to come.

[Operator:]

Thank you, the next question is from Greg Gilbert of Deutsche Bank. Your line is open.

[Gregory Gilbert:]

Thanks, good morning guys. First another one on Acthar, Questcor used to report prescription growth and then separately file growth and then separately net sales growth and net sales growth was usually much higher than prescription growth. So what’s changed here, are you not seeing the vial growth at this point or is there some other noise there? And my second question is about Methylphenidate ER, are you prepared to offer any updated quantification on sales for the year on that? Thanks guys.

[Mark Trudeau:]

I’ll take the first one Greg and I’ll ask Matt to comment on the second one. So what we are doing and we did this at JP Morgan, is we want to give you a prescription rate for Acthar that you can look at quarter to quarter to quarter that’s rock solid. And Questcor overtime reported a variety of different measures. Understandably so they were a one product company. What we want to do is give you an underlying volume growth rate for Acthar and that’s this paid and shipped vials. There is some variability because of the nature of the reimbursement cycle for Acthar, certain prescriptions may come in a quarter, but they may be reimbursed for example in another quarter. So this paid and shipped prescription volume rate is actually what you can count on quarter-to-quarter as the actual underlying volume growth rate for Acthar. And that’s what we are going to continue to report. So what you see is a 15% growth rate in the quarter and again that’s consistent with what we said when we had the Investor Day that we believe that Acthar in 2015 you should look for growth rates, volume growth rates, underlying volume growth rates in the low double-digit range. And that’s exactly where we are in the first quarter. What you can see is there is a little bit of price impact that’s trailing and that’s what contributes to the 16% growth rate. There is a little bit of variability in terms of the number of days here but that will iron itself out throughout the course of the balance of the year. But that 15% growth rate of paid and shipped prescriptions, we believe is the solid underlying volume growth rate to track quarter on quarter for Acthar and that’s what we’ll continue to report.

[Gregory Gilbert:]

Before you start on that, is that prescriptions or vials because they used to report both, you just use those interchangeably I believe Mark?

[Mark Trudeau:]

Yes, paid and shipped vials.

[Gregory Gilbert:]

Okay, thanks. That clears it up.

[Matthew Harbaugh:]

And just to be clear our quarter ended on December 26, 2014 to the question that was asked earlier. I just want to be crystal clear but the way we did the calculation for the paid and shipped vials was apples to apples based on Mallinckrodt’s closed calendar. So we made sure to endeavor to give you an apples to apples comparison with what we provided a few weeks ago at JP Morgan. To your question around Methylphenidate ER Greg, we didn’t give guidance as you know in October on Methylphenidate ER and its really because focusing on one product in a company of our scale you kind of loose the story. I mean Methylphenidate ER has historically been an important product category for us. We booked a little over 200 million last year but with the scale that we have, with the opportunities that we have it just doesn’t make sense to just focus on one product category because we’ve got a lot of moving parts. As I mentioned earlier the specialty generics franchise, I would encourage you to continue to look at Oxycodone, look at Hydrocodone, as we move forward into future quarters and also other controlled substances. So there is a lot of other activity going on in the portfolio and as Mark mentioned in the prepared remarks, we don’t want to have one product represent greater than 30% of the entire portfolio. And that diversity really matters and so much like we’re not enduring a lot of currency hits right now we’re also trying to also have a very diverse portfolio so that when things go against us if you will, we have the right of offset in another pockets of the portfolio.

[Mark Trudeau:]

And Greg thanks for clarifying on the vials paid and shipped. Again the reason why we want to use that measure of course is because depending on the indication for Acthar, the prescription could be shorter or longer where obviously vials are consistent across the indication set. So that’s why this rate of vials paid and shipped we believe is the real underlying volume measure to look at quarter-to-quarter.

[Gregory Gilbert:]

Thank you.

[Operator:]

Thank you the next question is from David Risinger of Morgan Stanley. Your line is open.

[David Risinger:]

Thanks very much. I have a number of questions so please bear with me. First, with respect to the inventory adjustment in the quarter it was $31 million and that’s been stepping up sequentially and obviously one adjust for that to yield the 68.7% normalized gross margin in the quarter but can you just provide a little bit more color on that inventory investment and how we should think about that on a go forward basis.

[Matthew Harbaugh:]

Yes, thank you for the question. That really is an accounting convention and that’s basically if you will doing accounting at the time of closing on the transaction in this particular case where it’s primarily Questcor and it is valuing that inventory at fair market value at the time of the close. So, I would say it’s an accounting convention, it will work its way through our results throughout the year. In the grand scheme of things as it relates to Mallinckrodt, its rather modest in impact but we are making sure to call it out. Many companies have to do the same thing when they do acquisition so it’s really just a GAAP accounting approach that I think was put in place in an attempt to kind of smooth out margins. But more broadly and I would say importantly I would encourage you to look at what we’ve actually done with inventory management over the last couple years. The inventory balance has dropped very significantly and very rapidly and it’s in keeping with this methodology that we have of maximizing the assets that we have to drive share on our value. And so we been generating a really strong cash flow both operationally as well as from our balance sheet. And as I mentioned earlier, at the end of the first quarter we had $899 million in cash on hand at the time. Here we are little over 30 days, 40 days later and we’re well above 1.5 billion. So the cash generation continues and so the step up is really an accounting issue but if you look at the underlying fundamentals from a balance sheet perspective we have been able to mind a fair bit of cash flow and we expect that trend to continue. Our inventory returns have continued to improve for a number of quarters consistently.

[David Risinger:]

That’s helpful. Thank you. And then turning to Methylphenidate, could you just characterize how many states in the country and what percentage of the population is covered in states where they allow pharmacist substitution of a non-AB generic?

[Mark Trudeau:]

We believe that the majority of states enable the BX rated product to be substituted. Again it varies state to state. In some states it can actually be freely substituted and other states it can be substituted only when Methylphenidate ER is written for example. But our assessment of this is that the majority of states actually allow for this BX rating which is consistent with what we’re seeing in the marketplace in the sense that Methylphenidate did very well in the first quarter. Part of the performance in the first quarter obviously was the fact that this was still new information and there were some changes being made. And we anticipate that the product will continue to decline in revenue over the subsequent quarters. But as I’ve said, we plan to keep this product on the market as a BX rated product and we think it will continue to be an important contributor for us overtime albeit at a reduced rate from what it was historically.

[David Risinger:]

Got it, thank you. And then in terms of Acthar, it’s just not clear to me exactly how to think about formulary changes ahead. So can you just characterize if there are any important positive or negative formulary changes expected for Acthar in 2015?

[Mark Trudeau:]

Well of course our objective for Acthar is to continue to make the product widely available and widely reimbursed and that’s part of our strategy is to engage very readily with managed care. And with payers at a variety of points along the value chain but most importantly at the policy level which we believe is an opportunity that was not necessarily leveraged this strongly as it could have been in the past. Again as we develop more data and as we developed what we think are some very compelling pharmacoeconomic propositions, the dialog that we have with managed care is taking out a much more robust character than it has historically. We think that’s a positive. Of course formulary’s and reimbursement plans are subject to a variety of different factors. It’s impossible for us to predict at this point exactly what direction they will take. But our objective and our strategy is to continue to keep Acthar’s reimbursement very robust. And if you look historically, Acthar’s reimbursement has continued to be robust on the order of 9 out of every 10 prescriptions written ultimately get reimbursed and that’s been pretty consistent over the last several years. Our objective is to continue to support that rate again using the strategy that I just described.

[David Risinger:]

That’s helpful, thank you. And then in terms of the March quarter you had mentioned that Acthar and OFIRMEV would have some softness. So are you indicating that the year-over-year percentage growth of those products in the March quarter of 2015 will be slower than you booked in the December quarter of 2014, is that what you’re indicating?

[Matthew Harbaugh:]

Yes, typically we have seen net sales go down from the first quarter to the second quarter on Acthar but when you do the year-over-year comparable as to the percent growth, it stays relatively consistent. So it will go down and that if you look at historical frame that’s very consistent, it’s a consistent pattern. Operator at this point can we move on to the next caller in the interest of time.

[Operator:]

Yes sir and the last caller is David Maris of BMO Capital Markets. Your line is open.

[David Maris:]

Good morning, a few questions Matt, a bit of clarification on what are the incremental equity conversion cost, are those cash or non-cash and what we do had in later quarters? And then if there weren’t enough questions on Concerta, the price of Concerta now versus before the BX rating and versus maybe a year ago? And then lastly, should we take it as a sign that you are still shipping Concerta or generic Concerta that you don’t think the FDA will take you off the market and have you estimated what the cost might be related to if you do have to take it off the market at the six months point? Thank you.

[Matthew Harbaugh:]

Yes, good morning David, I look forward to seeing you next Monday. Your question around the incremental equity cost that’s going to continue throughout the year and basically what that is, is again it’s an accounting issue. It’s the acceleration of the restricted share units that were provided to Questcor employees. They had varying number of years with their programs and that was shortened to one year. So the accounting impact will continue throughout this year that’s why we are calling it out. Once we get through the end of this year you won’t be seeing that call out specifically related to that acquisition.

[Mark Trudeau:]

So with regards to first of all David pricing in the Meth ER marketplace, obviously since there was a change to the market as a result of the rerating. There has been some dynamic change in pricing and if you look across the competitive set you can see now a difference or some differential in pricing between the various suppliers. We as you know watch these types of things quite closely and we will determine our strategy on a go forward basis. Again we are quite pleased with what we saw in the first fiscal quarter and our plans remain to keep the product on the market with its current rating for the foreseeable future. So again all I can say on this one is, this is a product that we believe will continue to be a significant contributor to the overall Mallinckrodt portfolio for the foreseeable future. And certainly we will evaluate all opportunities to maximize value for shareholders as a result of some of the changes to the market place.

[Matthew Harbaugh:]

So, thank you David. Appreciate your questions. I look forward to speaking to you next week. I did want to take the opportunity to highlight for investors we sent out a release earlier this morning under my name that, Cole Lannum is going to be joining us leading our Investor Relations Group as we move forward. I don’t know if you’ve had a chance to meet Cole but he has a very distinguished career. I had the pleasure of working with him for six years so we know each other extremely well. But, his career spans four decades including stints in Investor Relations as well as the Senior Wall Street Analyst and Portfolio Manager. Most recently he was in charge of Investor Relations at Covidien and a fun fact for everyone is he also worked for Mallinckrodt back in the 90s. And so couldn’t be any pleased to have Cole come in and lead our IR function working alongside John. And with that I’ll turn over to Cole for a few remarks and then Cole is going to turn it over to Mark to wrap up the call.

[Cole Lannum:]

Thanks Matt, I appreciate it. That’s a very kind introduction and I am absolutely excited to be back here in my hometown and back here to rejoin Mallinckrodt. As any -- I do know a lot of you that are on the call and as many of you know, if anyone has asked my opinion over the last couple of years about this company I have been not shy at all about telling you my enthusiasm for the management team and for this company. And it is thrilling to be back here as actually part of the organization again. Obviously I’ll be working closely with John and with Matt and Mark in the coming weeks to come up with what will be certainly a fairly steep learning curve because as Mark has noted and I think everyone knows this is a company that has changed incredibly since the period of time where I was involved with it under Covidien. So I look forward to working with a lot of people that I just worked with not that long ago and some faces that I haven’t seen for a long, long time. So I look really forward to working with all of you in the future. So thanks again Matt with that I’ll turn it back over to Mark.

[Mark Trudeau:]

Thanks Cole and let me extend my personal welcome as well. It’s great to have you onboard as part of -- to lead our IR function on a go forward basis. So I just want to say in closing that as I look forward the opportunities that I see in front of Mallinckrodt today is dramatically richer and more attractive than ever before. We built great foundations in the hospital channel with OFIRMEV and the autoimmune and rare diseases space with Acthar, and in our core specialty generics business and we intend to leverage these commercial platforms to accelerate growth. We plan to invest in R&D and medical affairs to enhance the data generation for these key products. Our BD&L pipeline has never been more robust, this populated with projects that should enhance our product offerings across the entire specialty pharmaceuticals portfolio. So whether it is the hospital channel or key therapeutic areas in autoimmune and rare diseases, we are focussing in spaces where believe we can bring significant additional value to patients and the marketplace. And we are actively pursuing a number of exciting opportunities. And importantly we have been very disciplined in executing on our strategy and will continue to be. Mallinckrodt is building a consistent track record of simultaneously executing on a variety of different strategic and operational initiatives across the portfolio. We have been very effective in restructuring the organization and driving continuous improvement and we will continue to focus on operating a very lean and efficient business model. Together these activities are combining to produce a more robust, diversified product portfolio that can deliver enhanced top and bottom line growth and significant shareholder value in fiscal 2015 and beyond. In closing let me remind you that today's earnings release is available and a replay of this call will be available on the Investor Relations section of our website. Thank you for your interest in Mallinckrodt and for joining us on today's call.

[Operator:]

Ladies and gentlemen, you may now disconnect at this time. Good day.