Mallinckrodt plc
Q1 2023 Earnings Call Transcript

Published: 9 May 2023

[Operator:]

Good day and thank you for standing by. Welcome to the Mallinckrodt First Quarter 2023 Earnings Announcement. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Speciale, Chief Investor Relations Officer. Please go ahead.

[Dan Speciale:]

Thank you, Catherine. I’d like to welcome each of you to the call today. With me this morning are Mallinckrodt’s CEO, Siggi Olafsson; and CFO, Bryan Reasons. Siggi will start with an overview of the business performance, and Bryan will take you through the financials. Before we begin, let me remind you that this morning you’ll hear us make some forward-looking statements, and it’s possible that actual results could be materially different from our stated expectations. Please note, these forward-looking statements are made as of today, and we assume no obligation to update them even in the event of new information or if the actual results or future expectations change materially. We encourage you to refer to the cautionary statements contained in our SEC filings for a more in-depth explanation of the inherent limitations of such forward-looking statements. We will also provide selected non-GAAP adjusted measures related to our financial performance. A reconciliation of these non-GAAP measures is included in our earnings release, which can be found on our website, mallinckrodt.com. We use our website as a channel to distribute important and time-critical company information, and you should look to the Investor Relations page of our website for this information. As noted in our earnings release, our first quarter ended on March 31, 2023, and the comparative period we’ll be discussing this morning is the predecessor quarter ended April 1, 2022. As a result of the application of fresh start accounting, the company’s GAAP financial statements for the periods prior to June 16, 2022, may not be comparable to those periods subsequent to June 16, 2022. Further, unless otherwise specified, the net sales percentage changes we will discuss will be on a constant currency basis. With respect to our results, Mallinckrodt reported a GAAP net loss of $249 million for the first quarter. But after adjusting for specified items, our non-GAAP adjusted EBITDA was $124 million for the quarter. With that, I’ll turn the call over to Siggi. Siggi?

[Siggi Olafsson:]

Thanks, Dan, and good morning, everyone. We appreciate you joining us to discuss Mallinckrodt’s first quarter results. We have a solid start to 2023, and we were pleased with our overall performance in the first quarter despite some top-line softness on Acthar Gel. Bryan will provide details on our financial results later in the call and I’ll kick things off with updates business and progress of our strategic initiatives. As we have discussed, we are focused on three priorities to stabilize the business in the near-term and position Mallinckrodt for long-term sustainable growth

[Bryan Reasons:]

Thank you, Siggi. I’ll now go into more details on our results for the first quarter. Mallinckrodt’s total net sales in the first quarter of 2023 were $425 million as compared to $491 million in the first quarter of 2022, a decrease of 13% on a constant currency basis. Our Specialty Brands segment reported net sales of $252 million, as compared to $339 million, a decrease of 26%, primarily due to the impact of competition and continued scrutiny on overall specialty pharmaceutical spending. During the quarter, Acthar contributed $82 million in net sales. And our critical care products, INOmax generated $83 million in net sales, Therakos had $59 million in net sales, and Terlivaz reported $2 million of net sales in the quarter. Lastly, Amitiza net sales were $25 million. In our Specialty Generics segment, we reported quarterly net sales of $173 million as compared to $152 million last year, a 14% increase, primarily due to growth in finished product – finished dosage product on both opioids and ADHD as the broader market experienced disruptions in product quality and supply. The company’s net loss in the first quarter was $249 million. Diluted loss per share for the first quarter was $18.93 with adjusted diluted EPS of $1.68. Mallinckrodt’s adjusted EBITDA was $124 million in the quarter as compared to $177 million last year. This decrease was primarily due to a lower net sales and investments associated with the launches of Terlivaz and StrataGraft partially offset by reductions in selling, general and administration expenses and research and development expenses as a result of our initiatives to improve our overall cost structure. Moving forward, we expect our SG&A expense to grow as we continue to support new product launches and reintroduce long-term incentive compensation plans. With respect to operating metrics in the quarter, adjusted gross profit as a percentage of net sales was 59.9% driven by product mix. Adjusted SG&A as a percentage of net sales was 27.5%, reflecting the company’s balanced approach on investing in our launches and cost containment measures and R&D as a percentage of net sales was 6.7%. We ended the quarter with roughly $680 million of liquidity. We reported cash and cash equivalents of $480 million, which included the receipt of the CARES Act refund and maintained an undrawn accounts receivable credit facility of up to $200 million. Total principle debt outstanding at the end of the first quarter was $3.523 billion with net debt of $3.043 billion. We entered into an interest rate cap agreement during the quarter, which serves to reduce volatility on a portion of our floating interest rate exposure. In all, we’re leave with the start of the year for the business overall and our ability to reaffirm our 2023 net sales and adjusted EBITDA guidance. We remain highly focused on improving our balance sheet in the months ahead. I’m now hand the call back to Siggi for some closing remarks. Siggi?

[Siggi Olafsson:]

Thanks, Bryan. Mallinckrodt began the year well and I’m confident that we will continue to make good progress throughout 2023. I can personally attest to the strides we have made across the company to put the business into a stronger position for the future. While we need to stay intensely focused on our goals and priorities, it gives me a great pride to see what our teams have already achieved. I look forward to all that we will accomplish the remainder of the year for our patients and each other. And with that, we’ll now open the – for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Rishi Parekh from JP Morgan. Your line is open.

[Rishi Parekh:]

Thanks for taking my questions. If we could just focus on Acthar, one, I wanted to clarify the 15% to 20% decline that you’re alluding to, is that for the full year or is that for the second quarter?

[Siggi Olafsson:]

That’s for the full year.

[Rishi Parekh:]

Okay. So I assume there’s some seasonality to Q1, hence, the reason why the decline is not going to be as much for the full year. But you also highlighted that there were challenges due to competition pay and reimbursement challenges and obviously, the pricing being an issue. I believe a lot of this goes hand in hand, but do you think the competition is benefiting from the higher pricing and payer reimbursement challenges or are these all separate issues and if it’s all separate issues, are – is there a way to just bucket where the pressure’s coming from? Is it mostly from a competitive standpoint, mostly from payer reimbursement challenges, et cetera?

[Siggi Olafsson:]

Yes, so great question. So let start and then Bryan, I think, will add to it. So, overall obviously Acthar is quite a complex product. It has multiple indication. It’s promoted in quite a few therapeutic areas. I think the opportunities what we have seen is we have seen a stabilization in naive patients and even growth in our naive patients, which is really a big step forward versus previous years. We have seen that now over the last two quarters and they’re really happy to see that improvement in the business. We – I mentioned in the prepared remarks is the returning patients that have been a challenge for us in the first quarter. The returning patients are patients that have been on drug sometime in the last few years and getting a prescription again. We feel and we have looked into this that the key reason for that is the restructuring of salesforce that we did early in 2022. We’ve restructured the salesforce. So we now have a sales rep that visit all therapeutic areas, so they’re geographically put down. But they focus the – all therapeutic areas within the geography. And we think that offset [ph] the returning patients because of relationship with the doctors. We already see that improving significantly in April. So, we feel really good about where we are coming out now on the returning. It’s much more stable as we see after the first quarter. So that’s the key reason. Obviously, there is a competition in the market that came to the market last year. We see that the market has grown a little bit. The overall market has grown a little due to that. But clearly obviously when you get a competition on a product like Acthar, we will feel it. But probably the biggest impact is the affordability. It’s the issue and because you need a pre-approval for reimbursement for every prescription, these are patients that are getting this which have gone through multiple therapies before they go on Acthar. We have shown that in our multiple clinical trials how important this product is. So we are working very, very hard with the payers to find the opportunity for the right patients to get reimbursement for this product. So that’s an ongoing challenge. It’s a big challenge. It has been the challenge over the last few quarters. But we feel now we understand how we need to work, where the focus is and also what are the right patients that benefit from Acthar.

[Bryan Reasons:]

And I think just to touch on your one point around seasonality. It is hard to bucket exactly, but if you look back historically, the first quarter has been the lower quarter because of seasonality and that’s really impacted by benefit plan resets and typically once the – once you get through the holiday season, the – it takes a little bit before kind of ordering resume. So I think you could probably look back historically and see the seasonality impact.

[Rishi Parekh:]

And then you mentioned affordability many times. I get that you’re talking to the payers to determine whether, what are the best options, but are the – what are the initiatives that you’re implementing to address the affordability aspect?

[Siggi Olafsson:]

So, we are looking at everything under sun [ph] is to understand what patients benefit the most. Basically working with the payers to get the patients that really need Acthar at the end of the day to get them reimbursed. That’s the main thing for us. Obviously, the patient scope, the – is so that we understand very well where Acthar play roles after 70 years on the market. There is a deep understanding and through our clinical programs are – there’s also a deep understanding with doctors. But the main thing is with the payers to understand what patients should really get Acthar at the end of the day.

[Rishi Parekh:]

And that 15% to 20% guide for this year, does that fully adjust for all these initiatives that you’re talking about, the full success of these initiatives or is it just partial success of these initiatives and there’s incremental upside?

[Siggi Olafsson:]

No, we – what we are obviously guiding 15% to 20% based on the initiatives we are taking on today, of course.

[Rishi Parekh:]

Okay. And then just lastly on the new delivery method at what point do you just decide that you’re not going to move forward with this partner, given their challenges and you’re just going to move to another partner? And if you were to do that, what is the turnaround time to actually getting that, because it seems to be an important part of your strategy here. Is this another year to two years out or do you think you could actually accelerate that?

[Siggi Olafsson:]

No, so Rishi, you can trust us on that. There’s no stone left unturned in bringing this product as quickly as we can to the market. Obviously, I can’t talk about the detailed strategy behind that. But you can be assured we are doing everything possible to bring this important treatment to the patients as quickly as we can.

[Rishi Parekh:]

Great. I’ll hop back on. Thank you.

[Dan Speciale:]

Great. Thanks, Rishi. Operator, any other questions?

[Operator:]

I’m showing no other questions in the queue.

[Dan Speciale:]

Okay, great. We’ll go ahead and wrap then. Thanks, Siggi. Thanks, Catherine. We want to thank you all for your interest in Mallinckrodt. We look forward to engaging with you all in the coming days ahead. If you have any questions, the best way to get ahold of Derek and I today will be via email and we’ll obviously work to get back with you guys as quickly as possible. Thanks for your interest and have a nice day.

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.