Mallinckrodt's CEO Discusses F1Q2014 Results - Earnings Call Transcript

| About: Mallinckrodt PLC (MNK)

Mallinckrodt Plc (NYSE:MNK)

F1Q2014 Earnings Call

February 6, 2014 8:30 AM ET


John Moten – VP, IR

Mark Trudeau – President and CEO

Matt Harbaugh – SVP and CFO


Chris Caponetti – Morgan Stanley

Chris Kuehnle – Leerink Partners

David Amsellem – Piper Jaffray

Anthony Petrone – Jefferies & Company

Tim Chiang – CRT Capital

Jim Dawson – Buckingham Research Group

Gary Nachman – Goldman Sachs

David Maris – BMO Capital Markets


Good day, ladies and gentlemen, and welcome to the Q1 2014 Mallinckrodt’s Earnings Conference Call. My name is Steve, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a Q&A session towards the end of the conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to John Moten, Vice President of Investor Relations. Please proceed, sir.

John Moten

Thank you, and welcome to today’s call. This is John Moten, Vice President of Investor Relations for Mallinckrodt Plc. Joining me today is 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 are under no obligation to update the information contained in these forward-looking statements, even if the actual results or future expectations change materially. We ask you to please refer to the cautionary statements contained in our SEC filings for more detailed explanation of the inherent limitations of such forward-looking statements.

We will also discuss some non-GAAP financial measures with respect to our performance. 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 is operational growth, which measures the change in net sales between current and prior year periods using a constant currency, the exchange rate and 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 first quarter fiscal 2014 results. You’ll see that we’ve updated our guidance for the full fiscal year in that release. These materials are available on our website at

A replay of today’s call will be available beginning shortly after the call concludes, and for the next week on our Investor Relations section of our website.

I will now turn the call over to Mark Trudeau.

Mark Trudeau

Thank you, John, and good morning everyone. I’d like to add my welcome to our fiscal 2014 first quarter conference call. As you’ve likely seen in our press release, I am pleased to report that Mallinckrodt achieved strong fiscal first quarter results, led by our Specialty Pharmaceuticals segment. And today we’ve raised guidance based in part on the robust performance in this segment.

Specifically, company’s sales grew 8% on an operational basis, and we’ve reported adjusted diluted earnings per share of $0.88 compared to $0.65 in the prior year’s first quarter. Growth was driven by a sustained strength in our Specialty Pharmaceuticals segment, from both Branded and Specialty Generic products, advancing the ongoing mix-shift to our more profitable segment.

We also continued our focus on cost management and restructuring initiatives to help offset increases in Global Medical Imaging cost of goods, and we improved our first quarter gross profit margin to 47.3%, up from 46.3% last year.

As I noted, given these strong results, we’ve raised our guidance on full-year revenue and full-year adjusted diluted earnings per share, largely reflecting the strength we’re seeing in our Specialty Generics controlled substance products. These products fall into a unique specialized category of generic products, that are highly regulated and more complex to manage due to controlled substance requirements.

Through a strategic pricing initiatives that began late in fiscal 2013, the first significant pricing action we’ve taken in nearly two years in our Specialty Generics portfolio, we’ve now positioned these products to more fully realize their inherent value. As a result, we’ve seen significant revenue growth in some select products in this category.

In addition, timing factors provided more positive impact this quarter than in the same period last year. For example, fiscal 2014 included a full first quarter of Methylphenidate ER net sales, compared to only one week in the prior year first quarter. And while we have additional competition in the market and still expect another competitor in the second half of fiscal 2014, Methylphenidate ER market fundamentals appear to be playing out in line with our assumptions.

On the Brands side, the solid performance was led by continued strength in EXALGO, due in part to the lack of generic competition that we were anticipating. While we can’t predict the timing of competitive entrants for EXALGO, we will continue to maximize its value in the marketplace.

We also saw continued growth in our Gablofen intrathecal product portfolio, were sales improved 16.9%.

As previously announced, we recently entered into a multiyear agreement with Medtronic to advance intrathecal therapeutics in the U.S. markets for the treatment of chronic pain and severe spasticity. This collaboration will allow each organization to leverage its respective strengths; Mallinckrodt in Specialty Pharmaceutics and Medtronic in Implantable Drug Delivery Technology.

We’re excited about the future of our intrathecal product line and this agreement will enable us to deliver meaningful solution to this market.

Now, I would like to provide an update on XARTEMIS XR. As we’ve described to you before, the product is a complex formulation built on Mallinckrodt’s platform of abuse-deterrent technology. And we expect to hear a decision on our NDA submission from the FDA by the end of this month.

If approved, XARTEMIS XR will be the first and only oxycodone HCl and acetaminophen combination for acute pain with immediate and extended relief analgesia, providing fast acting and long lasting continuous pain relief with a benefit of 12-hour dosing for patients.

We’re excited about the prospects for XARTEMIS XR and are on track to launch soon after we receive approval. While we’re taking a measured approach to expanding our sales organization, we’ve already hired nearly 100 contract sales representatives and additional expansion is ongoing.

As we explained to you in our November Investor Briefing, we also believe our new additional XARTEMIS XR patents, will give us a longer time horizon, over which we can maximize the revenue of this asset through lifecycle management. This expanded intellectual property may potentially provide an extended exclusivity period around our proprietary formulation and may also provide a technology foundation for future Mallinckrodt abuse-deterrent products.

Turning to Global Medical Imaging, our businesses in this segment continue to face a variety of challenges. In the quarter, we saw ongoing price pressure in Contrast Media and Delivery Systems of CMDS, and rising costs in our Nuclear Imaging business driven by supply chain challenges. These cost increases are a result of overlapping outages of the High-Flux Reactor or HFR and our own molybdenum-99 or moly processing facility in the Netherlands. Moly is the raw material used to manufacture our technetium-99m generators.

Now I’d like to discuss our R&D pipeline, which we’re aggressively moving forward. In addition to XARTEMIS XR, we continue to advance the development of MNK-155, and as of now have completed the Phase III efficacy clinical trials meeting the primary endpoint of the study. MNK-155 is an investigational extended release, oral formulation of hydrocodone and acetaminophen, and has the same active ingredients as the branded drug, Vicodin.

It was studied for the management of moderate to moderately severe acute pain, where the use of an opioid analgesic is appropriate. We’re targeting an NDA filing during the second half of fiscal 2014.

Now let’s move to our most recent new product approval. At January 16, the FDA granted approval of PENNSAID 2%, our diclofenac topical solution formulation. This product is indicated for the treatment of pain associated with osteoarthritis of the knee and is an extension of our PENNSAID franchise. PENNSAID 2% is supplied in an easy-to-use, metered dose pump bottle and is applied only twice each day.

It delivers a precise amount that can be applied directly to the effected knees. The product is now available and our expanded Brand sales team will launch it commercially next week.

On the Generic side, we continued to advance our pipeline of Abbreviated New Drug Applications or ANDAs in specialty-controlled substance products. We remain in active discussions with the FDA and the ANDA for Methylphenidate ER 18 milligram dosage strength tablet, and have recently received a complete response letter from the agency requesting additional information. We’re working quickly to address the items outlined in the letter.

Looking externally, we continue to proactively evaluate business development opportunities oriented towards helping us accelerate growth in the Specialty Pharmaceuticals segment. We are exploring near adjacent therapeutic areas and channels to those we’re currently in, with a particular focus on options that capitalize on our core strengths in controlled substances and formulations, in both, Brand and Specialty Generic products.

We’re working to assemble multiple sources of value creation to complement our attractive internal assets and are evaluating several opportunities with particular focus on those that are accretive in the near-term.

Before Matt takes over, I’d like to reiterate a few key points. Our first quarter results fully demonstrates the strength of our Specialty Generic products and these outcomes combined with effective restructuring efforts are driving strong sales, improved profitability and overall drove our decision to increase guidance on the full-year revenues and on full-year adjusted diluted earnings per share.

We’ll continue to accelerate our growth in the Specialty Pharmaceuticals segment through our internally developed pipeline assets, as well as pursuing BD&L opportunities that are complementary or adjacent to our existing businesses or channels. And we continue to implement restructuring plans to make us more competitive and further drive profitability.

We believe all these initiatives position us well for the long-term, and we’re excited about the progress we’re making on our key strategies.

I’ll now turn the call over to Matt, who will provide a more detailed view of the quarter. Matt?

Matt Harbaugh

Thanks, Mark. And let me add my welcome to everyone on the call this morning. I’ll provide comments on our fiscal first quarter results and our increasing guidance for full-year revenue and full-year adjusted diluted earnings per share.

As John mentioned earlier, all results are compared against our performance for the same period in the prior year. As a reminder, we have a September fiscal year-end and our first quarter ended on December 27, 2013.

As Mark previously indicated, we have sustained business momentum in the first quarter, in both, our Brands and Specialty Generics portfolios, and we are off to a strong start for fiscal 2014.

We’ve raised our revenue guidance, now expected to be $2.2 billion to $2.3 billion, and our adjusted diluted earnings per share guidance is also increased to $2.65 per share to $2.95 per share reflecting the strength of our Specialty Pharmaceuticals segment, most notably, our Specialty Generics controlled substance products.

Turning to the quarter, net sales for the first quarter of fiscal 2014 were $540 million versus $504 million last year. This represents operational growth of 8%. Strong net sales in the Specialty Pharmaceuticals segment drove these results.

Net sales in the Specialty Pharmaceuticals segment advanced 18.9% and were led by our core specialty generics portfolio of products, particularly Methylphenidate ER with net sales of $56 million in the quarter. Despite the increased competition from Methylphenidate ER, we continue to see steady demand trends, leading to our updated fiscal year guidance for this product.

Our Brands portfolio had strong results as well, with net sales advancing 27.9% due to continued sales of EXALGO and growth of our Gablofen intrathecal products. EXALGO had a stronger than expected performance due to the absence of expected generic competition to-date. For the 32 milligram dosage strength, we’ll possibly see competition in May. Assuming the entry of generic competition, it’s still likely we will see net sales decline for this product in full-year fiscal 2014.

In the Global Medical Imaging segment, as expect, net sales declined 4.8% in the quarter. Net sales of CMDS were $112 million, down $10 million or 8.1%. Nuclear Imaging first quarter net sales were $107 million versus $108 million, down 1.2%.

As Mark mentioned, we experienced another unscheduled outage of the HFR which overlapped an unplanned shutdown of our moly processing facility in the quarter, so we can’t specify a date for return to normal operations. We’re working closely with NRG, the license holder of the processing facility and with the regulatory agencies in the Netherlands to resume moly processing as soon as possible.

As this work progresses, we will continue to maintain technetium-99m generator production to meet our customers’ needs.

Clearly, these repeated unplanned disruptions to nuclear medicine supply have become the new normal for this industry and contributes significantly to our increased costs. We’re working through the challenges and we remain focused on managing the Global Medical Imaging segment for cash while driving operating efficiencies through restructuring.

For the first quarter, we delivered total company gross profit of $256 million, up $22 million. Gross profit as a percentage of net sales was 47.3% compared to 46.3% last year. This improvement reflects the benefits from Specialty Generics pricing actions and the continued mix-shift towards our Specialty Pharmaceuticals segment, which enjoys higher gross profit returns.

Selling, general and administrative expenses or SG&A for the quarter were $146 million, essentially flat. While we’ve incurred incremental administrative expenses related to the spend, we’ve offset these increases through cost containment and restructuring. In the quarter, you will also see we incurred restructuring charges of $8 million, mostly targeting SG&A, which will provide a relatively quick payback to the P&L.

We continue to focus on restructuring as we move forward in an effort to further streamline our business wherever possible.

As a result of the 90-day FDA extension for XARTEMIS XR, we incurred very modest launch expenses for the product in the quarter. As Mark mentioned, we’ll be ready to launch XARTEMIS XR as quickly as possible following a positive decision by the FDA. We will see increased second quarter expenses in the Brands business to allow for building the long-term commercial platform.

R&D spending during the quarter was $39 million or 7.2% of net sales, which is flat and in line with our planned spending range of 6% to 8% of sales.

In the Specialty Pharmaceuticals segment, operating income for the quarter was $113 million, an increase of $78 million, driven by sustained performance in our branded products and higher margin sales from Specialty Generics products. The segment’s operating margin for the quarter was 36.5% compared to 13.5%.

For the Global Medical Imaging segment, operating income for the quarter was $4 million, compared to $49 million last year. The decline in operating income reflects continued price pressure as we expected in the CMDS business and higher costs in our Nuclear Imaging business.

Regarding our tax rate, we continue to implement measures to reduce our rate overtime, as illustrated by our updated guidance issued today. The first quarter non-GAAP effective tax rate of 27.2% was squarely in the middle of our new guidance range.

First quarter adjusted diluted earnings per share were $0.88 compared to $0.65. Adjusted net income excludes amortization, restructuring, separation costs, discontinued operations and a current year gain on a license of intellectual property.

As evidenced by the updated guidance today, we expect fiscal 2014 will be a strong year for Mallinckrodt. When we look toward the fiscal second quarter however, we see tough year-over-year net sales comparisons due to strong fiscal 2013 second quarter results, which benefited from Methylphenidate ER timing and strong underlying sales in general.

As you may recall, we launched two dosage strength of Methylphenidate ER in that quarter, so our net sales in this product category were exceptionally strong last year. In addition, we expect to see this year challenging market fundamentals in both CMDS and Nuclear, and we have factored these into our revised guidance for the full-year.

Now, I’d like to quickly highlight a few balance sheet and cash flow items of note from the quarter.

We’re pleased to report we had positive cash flow from operations of $22 million in the quarter. As we’ve mentioned previously, our cash flow is typically lowest in the first quarter. We continue to feel positive about our cash generation capabilities on a full-year basis and remain focused on maximizing our cash position to enable us to realize our long-term strategies.

Additionally, you’ll also see in the earnings release we issued this morning that full balance sheet details are included which we plan to provide moving forward. That release also provides other supplemental information to our disclosures today.

Regarding our revised earnings guidance, the strong first quarter results in Specialty Pharmaceuticals, combined with our improved fiscal year outlook for that segment outweigh the challenges we see in Global Medical Imaging. This has resulted in our increased expectation of higher adjusted diluted earnings per share for the balance of the fiscal year.

I’ll now hand the call back over to Mark to make some closing comments, and then we’ll be glad to take your questions.

Mark Trudeau

With just over seven months under our belt as an independent entity, we continue to make strong progress towards our goal of becoming a leading global specialty pharmaceutical company delivering top quartile performance.

We’ve demonstrated this progress with the strong first quarter growth in our Specialty Pharmaceuticals segment, and will continue to execute on the following strategies. First, we’ll leverage our core strengths in controlled substances for Brands, Specialty Generics and Active Pharmaceutical Ingredients to accelerate the shift towards the Specialty Pharmaceuticals segment.

Second, we’ll advance our internal pipeline to deliver long-term growth. Third, we’ll drive profitability via mix-shift, restructuring and managing Global Medical Imaging for cash. And finally, we’ll pursue focused BD&L opportunities in core businesses and adjacencies.

We’re confident these initiatives will drive growth, improve our margins and deliver sustainable value for our shareholders.

Now, I’ll ask the operator to open up the line for questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Please standby for your first question. And your first question comes from the line of Chris Caponetti from Morgan Stanley. Please go ahead.

Chris Caponetti – Morgan Stanley

Thank you very much. Congratulations guys on the quarter. I have 37 questions but I’ll keep it to three. First, on oxycodone, saw the revenues there declined 70% year-over-year. Just hoping you could offer some color on what drove that decline, and should we be assuming $11 million would be appropriate quarterly run rate? Second, if you could just offer some color on how much Actavis’ delayed launch of generic EXALGO contributed to EPS in the quarter, and how sustainable we should think that specialty segment operating margin is and the way that EXALGO going generic and higher spending on XARTEMIS? And then finally, on Imaging. What sort of operating margins should we be assuming for the remainder of the year? Is 2% the appropriate run rate? Thank you.

Mark Trudeau

Hi Chris, it’s Mark. Thanks for the questions. Let me take the oxycodone situation first and foremost, then I’ll talk about the situation with Actavis and EXALGO and then I’ll ask, Matt, to speak a bit about the margins in Imaging.

With regards to the oxycodone decline that you see in the quarter, keep in mind that’s quarterly impact. As you know, we’ve been implementing a number of strategic pricing initiatives in select categories in the generic space. And you’ve seen some of the impact on that in some of the other categories in our generic portfolio.

The decline that you see in the quarter is reflective of some penalties that we’ve had to pay as we’ve implemented that pricing strategy. We fully expect that over the balance of the year, in fact the oxycodone category will be very strong, so that this decline that you see in the quarter is really just reflective of those penalties that we pay initially with the impact occurring later in the year.

With regards to the situation of EXALGO and Actavis, we’re currently assuming that we will see competition for EXALGO in the March timeframe. We don’t anticipate at this point any changes to that assumption. However, if for example, EXALGO were to be or Actavis were to be delayed in the market for some reason. Clearly that’s an upside to us for the balance of the year.

At this point, we’re very pleased with the way EXALGO has performed. It’s performed very strongly. As you know, we are likely to lose exclusivity on the 8, 12 and 16 milligram strengths in that March timeframe, that’s our current assumption. We do have the 32 milligram strength, which is growing very rapidly. And we have exclusivity on that particular strength through May at this point.

So we’re very positive and very pleased about the results on EXALGO. And the assumptions going forward, assume that we will have competitions starting in March.

Matt Harbaugh

Yes, as it relates to Global Medical Imaging, probably a better comparator versus year-over-year would be looking at our fourth quarter results versus our first quarter results. In the fourth quarter, we delivered about $31 million in operating income, and as you saw this morning, we came in at $4 million.

In our 10-Q filing, you’ll see that we’re going to provide some itemization here, but the big issue certainly is the HFR reactor being down in addition to our own processing facility. And the straight impact on that is $15 million in the first quarter, and that’s hitting our cost of goods sold.

In addition to that, we had some loss of some business in Japan related to not being able to supply to those customers. We’ve been able to maintain excellent supply though for our customers in North America and also Europe.

And then in addition to that as we’ve noted on an ongoing basis for some time, our Contrast Media and Delivery Systems business has suffered ongoing price pressure and that also occurs one quarter to the next. So generally for Global Medical Imaging with the HFR reactor down and our own processing facility down for some time, we’re going to have some downward pressure.

We certainly reacted to that very aggressively in the quarter. I would note that you will see that we took a restructuring charge of $8 million. Virtually all of that charge was focused on the Global Medical Imaging segment, because we’re trying to do the best we can to shore up the bottom line performance of that segment for us.

So typically when these reactors go down and we have these issues, as you know from what occurred last year, they tend to last six to eight months. So we’ve reflected that in the revised guidance that we provided today.

Chris Caponetti – Morgan Stanley

Great. Thanks very much.


And your next audio question comes from the line of Jason Gerberry from Leerink Partners. Please go ahead, Jason.

Chris Kuehnle – Leerink Partners

Hi guys, it’s actually Chris Kuehnle in Jason. Thanks for taking the question. So with respect to that reactor again, if we’re thinking six to eight months out, what gives you guys’ confidence that once we get to that point that you’ll be able to resume production given previous problems. Is the new normal for the industry that these problems just keep rising or do you expect that to be the end of it? Thanks.

Mark Trudeau

Yes, so thank you. The way we think about this, first of all is that the HFR and the processing facilities have been down roughly four months to this point. So you could argue that potentially if history plays out we’re kind of the middle of it at the moment. What we’ve described is kind of a new normal situation going forward and what we’re seeing now between last year’s first quarter and this year’s first quarter is kind of the range of that spectrum.

If you look over history, you see that the profitability of this segment – this business is typically somewhere in the middle of that. So we would expect overtime that on an [Technical Difficulty] middle range between those two extremes, but on a quarter-to-quarter basis you may have seen some variability, which we’re experiencing based on the way product supply situation shapes up.

This is fundamentally a symptom of the fact that the raw material supply is coming from a very aged infrastructure that affects the entire industry. And if you look back in history, you see these intermittent outages of supply overtime. We expect that that is likely to be the case going forward, but as we think about profitability on a blended basis over a number of quarters, it’s much more in the middle of the range of what you’re seeing between our first quarter this year and our first quarter last year.

Chris Kuehnle – Leerink Partners

Great. Thank you.


And your next question is from the line of David Amsellem. Please go ahead, from Piper Jaffray.

David Amsellem – Piper Jaffray

Thanks. Just a couple. So I wanted to touch on the business development. There has been a lot of anticipation that you’ll execute on a bolt-on transaction or something larger. I guess the question is, is the FDA approval of XARTEMIS a gating factor to executing on brand acquisitions, how should we think about that?

Mark Trudeau

Yes, thanks David. Yes, absolutely we’re very active in identifying and pursuing a number of near-term opportunities to do M&A actions. And we’ve identified a number of what we believe are actionable assets, things that would be complementary to our strategy and would be immediately accretive to our business. And we would expect that we will have the opportunity to act on one or more of those in the near-term.

With regards to the gating, the launch of XARTEMIS XR and everything that we do from an M&A perspective are completely independent. They are related only in the sense that we want to make sure that they are strategically aligned and then they could sound financial sense for Mallinckrodt.

We have the capability to fully launch XARTEMIS XR and to acquire and integrate any type of bolt-on or larger acquisition simultaneously.

David Amsellem – Piper Jaffray

Okay, thanks. And then just a couple of quick ones on the Imaging segment, just on Contrast Media. Do you see pricing at some point down the road stabilizing, or should we continue to think of pricing as essentially a slowly melting ice-cube? And then expand around both, the Contrast Media and Nuclear business. Just give us some color on the extent to which you continue – you can continue to manage spend as sort of an offset on the top line pressures?

Mark Trudeau

So when we look at pricing in Contrast Media, if you look historically across the market, you see particularly in the developing – in the developed world, just ongoing downward pressure on price. The marketplace itself has been declining at mid-single-digits for a number of years and that’s having the same impact on our business.

We don’t really expect that to change going forward. We have been very clear I think to say that Imaging for us is not a long-term strategic platform. We are currently and have been, looking at a number of different strategic options for both of those businesses. And in the near-term, we’re managing the business very aggressively for cash. And by that, we mean that we’re not investing in those businesses from an R&D perspective and we’re very aggressively looking at our entire cost structure up and down the P&L.

As Matt mentioned, much of our restructuring activities in the quarter, and a good chunk of the restructuring activities that we did in the previous quarter have been focused squarely on the Global Medical Imaging business to ensure that we can at least maintain some cash flow – some positive cash flow overtime, while we investigate other strategic alternatives.

We’ll continue to do that. As we’ve said before, that’s a bit of an asymptotic strategy. We know we can only cut so far, but at this point there are still opportunities to further optimize that business and preserve cash flow.

David Amsellem – Piper Jaffray



And your next question is from the line of Marc Goodman from UBS. Please go ahead. Marc, your line is open, you may be on mute.

Mark Trudeau

Operator, next caller please?


And your next caller is from the line of Anthony Petrone from Jefferies. Please go ahead, Anthony.

Anthony Petrone – Jefferies & Company

Thanks, and good morning. Maybe a couple for Matt, on restructuring and guidance, and then I’ll jump over to Mark on a question on the Specialty Pharmaceuticals portfolio. Just to stay on restructuring Mark, you have $100 million to $125 million total called out, $8 million this quarter. I am just wondering in light of the headwinds in Imagining, does that become a moving target, and do you sort of have to allocate more to restructuring to that business to sort of preserve the cash flows that Mark was talking about a moment ago?

Matt Harbaugh

Yes, so as it relates to restructuring, what I would say is if you look at our fourth quarter, we booked $15 million and then this quarter obviously we booked $8 million. And as Mark mentioned, most of that was squarely focused on Global Medical Imaging. The lion’s share of it was Global Medical Imaging. And while we do get a relatively quick payback to the P&L, it does take some time for these initiatives to follow through.

As it relates to the $100 million to $125 million, we do have the plan. We’re implementing the plan. We’ve had that plan pretty much since we announced it, and we’re working on it prior to spend. And we’re doing everything we can to go as fast as we can, but it’s a balancing act of making sure that we’re continuing to deliver to our customers around the world, while putting in restructuring where we can streamline our internal operations.

But I feel pretty good that we have been acting very aggressively with this program. And to Mark’s point earlier, there is more we can do, it just does takes some time.

Anthony Petrone – Jefferies & Company

Great. And then a couple for both, Matt and Mark. Can you provide just an update, what you are reflecting in revised guidance for the new formulation of PENNSAID for one, and maybe what we should be expecting for that product overtime? And then the final question would be maybe an update on the ANDA portfolio, and maybe when we can expect to see additional launches out of that or an expansion of the portfolio in totality? Thanks.

Mark Trudeau

Yes, so let’s talk about PENNSAID first. We’ve been very consistent Anthony to say that, we’re very excited about the PENNSAID 2%. We believe this product is certainly an improvement upon the old formulation, primarily because it’s twice a day, it’s in a metered dose pump and it’s just a much more elegant presentation than our original formulation of PENNSAID 1.5%.

But still this is a relatively small market and we believe over time, that PENNSAID 2% has potential in the tens of millions of dollars as a contributor in 2014 to be a relatively minor contributor in terms of revenue, but it is a very nice complimentary product to our current portfolio of EXALGO and XARTEMIS, which we hope is going to be approved here by the end of the month.

With regards to our ANDA portfolio, as we mentioned, we did receive a complete response letter on the 18 milligram strengths for Methylphenidate. We believe that Methylphenidate 18 milligram will be still launched some time here in fiscal 2014.

We continue to develop our other pipeline on our products on the ANDA for other controlled substances. Those will come overtime. We’re not projecting in 2014 that they will be significant contributors, but overtime that portfolio on an individual basis would typically be in the tens of millions of dollars, each one of those opportunities that we currently have.

Again I want to make very clear to everybody is that we have significant power in our generics portfolio, and I want to make sure that that’s clear. The strategic pricing actions that we’ve took starting in 2013 are really starting to pay off for us and you can see that in our other controlled substances volume in the release. We took some selective price increases in our Methylphenidate IR portfolio, our morphine portfolio.

And you can see that those actions that we took in 2013 are actually now starting to pay off in 2014. We would expect to see the same type of a situation occurring for the oxycodone category as we go further into 2014. The actions that we took on oxycodone actually just happened in the first quarter, that’s why we’re experiencing somewhat of a downside, if you will, in the quarter on oxycodone. And it’s driven strictly because of the fact that we paid penalties when we take the price increases. Then when the price resets later in the year, we enjoy much higher sales as a result.


Your next audio question comes from the line of Tim Chiang from CRT Capital. Please go ahead.

Tim Chiang – CRT Capital

All right. Thanks. Mark, Matt, could you talk a little bit about how your acetaminophen API segment did? I noticed that you sort of put that into other controlled substances this quarter.

Mark Trudeau

Yes, Tim. Acetaminophen was down, and that is expected as we’ve mentioned before. We’ve shutdown a plant in Chesterfield, the United Kingdom, couple of years ago. And so last year, we were burning off some of the inventory build that we had. And much like the Global Medical Imaging business, we do manage the API business for cash.

And so, even though the top line has pressure, the bottom line has been shored up through that restructuring activity. So it’s right at expectations for us.

The other thing that we’ve said before is that’s one of our lower margin businesses. So it’s not very impactful in the aggregate, anywhere near when compared with what we see going on in our Specialty Generics business and our Brands business, which really are the significant drivers of our financial performance, both in this quarter and as we think about it on a full-year basis.

Tim Chiang – CRT Capital

And let me just one quick follow-up, just to your Vicodin and Percocet franchises, I mean are you expecting growth from both of those segments this year or not?

Mark Trudeau

You are talking about hydrocodone APAP generic and the oxycodone APAP generic. Is that correct?

Tim Chiang – CRT Capital


Mark Trudeau

Yes. Again assuming that the strategic pricing initiatives that we’ve initiated in any of the categories that we take those actions, that will drive the success of those businesses going forward. So I specifically referenced the oxycodone APAP, we would expect that there would be growth in that category and likewise the oxycodone as well.

Tim Chiang – CRT Capital

Okay. Great, thanks.


Your next question is from the line of David Buck from Buckingham Research Group. Please go ahead.

Jim Dawson – Buckingham Research Group

Yes, hi. It’s Jim Dawson for David Buck. Can you talk about the impact of pricing in the quarter, specifically in the Generics and API?

Mark Trudeau

As we’ve seen the – we have significant enhanced revenues and particularly operating income in our generics portfolio. Keep in mind that we have a very focused generics portfolio all in controlled substances. And we’ve been doing these controlled substances and these generics for a long time. It’s really only recently that we’ve started to think about how do we capture the full intrinsic value of these categories through some of these strategic pricing initiatives. And the impact that you’re seeing in the quarter is a direct result of that.

So I think it just shows the opportunity that we have and that we can exert as a market leader in this space.

Matt Harbaugh

Jim, the other thing I would add is the price increases that we’re talking about here are really focused on the Specialty Generics franchise. In the API franchise, it’s a bigger challenge to raise price.

Mark Trudeau

I think a big factor in raising guidance for us as well is the fact that we now are seeing the impact of this power in the generic category – in the controlled substance Specialty Generics and that gives us a very good confidence to raise our guidance going forward.

Jim Dawson – Buckingham Research Group

Also just – there was a swing in the API sales in the quarter. Is there anything unusual there?

Matt Harbaugh

Just timing. When we get at the end of the year, sometimes quotas is running out for our competitors or for ourselves. So there are some timing advents, but nothing that really caused us any pause that we see in the quarter as it relates to that franchise.

Mark Trudeau

I just want to emphasize that our API business – we’ve said this before, we consider that business to be much more strategic than financial in the sense that it really enables us to support our generics portfolio, but it also gives us great access to the controlled substance raw materials and great visibility to what’s happening in the competitive environment. That’s particularly true in the controlled substance arena, but of course since we are heavily involved in products that contain acetaminophen. Being a major manufacture of acetaminophen is a significant benefit for us as well.

Jim Dawson – Buckingham Research Group

And now lastly, just could you get into a little more detail on just M&A in specialty brands?

Mark Trudeau

Sure. So as I’ve said earlier, we are planning and continue to be very aggressive in pursuing M&A opportunities for our business. We see a number of different avenues, whereby we can bring on large bolt-ons or even bigger acquisitions that are going to be complementary to our controlled substance and formulation expertise. And some of the therapeutic area expertise that we have, for example, in pain or in central nervous system diseases, we tend to look at things that are going to benefit us from a financial standpoint, in the sense that that will be immediately accretive, but also complementary to what we do.

And when we think about complementary, we think about complementary – complementing things that we already do well on a variety of different avenues. So we look for multiple avenues of value creation, whether it’s manufacturing, commercial, R&D or other. And we’re also particularly interested in some certain adjacencies whether they are therapeutic adjacencies or channel adjacencies, where we can essentially export our expertise in controlled substances or pain, into other complementary therapeutic areas and channels.

Jim Dawson – Buckingham Research Group

Okay, thank you.


And your next question is from the line of Gary Nachman from Goldman Sachs. Please go ahead sir.

Gary Nachman – Goldman Sachs

Hi, good morning. First, I am curious, what have been the reactions by your competitors to some of the big price increases you’ve taken in generics so far? Are they following you? Do you get a sense or not? And have you actually lost any share as a result of the price increases, in particular for some of the controlled release products? And then Mark, maybe you could just expand on the penalty that you’ve talked about, just exactly what is that that you’ve taken upfront?

Mark Trudeau

Yes. So with regard to the generic pricing, again typically when we look at strategic pricing initiatives, we’re looking in markets where it’s a controlled substance arena, so it’s essentially supply constrained because the DEA [ph] is essentially constraining the quota that’s available in that category.

Typically there will be very few competitors. And in many cases Mallinckrodt is likely to have significant share in that category. So that is a recipe for saying, well, there may be an opportunity for us to take some price. And keep in mind on an absolute basis, the prices that we’re taking are not large, because these products are very, very inexpensive to start with, but on a percentage basis, they may look large.

We have seen in certain instances, some of our competitors following us. And in other instances, they haven’t followed us immediately, but keep in mind, that when you have a supply constrained environment, it’s very difficult to lose all of your share, and we have in some instances lost some share but we’ve significantly made up for that in the price increase, so it’s been a net positive for both revenue and for income.

So we think that’s a very good strategic decision. Obviously there are some risks that’s associated with that. The risk comes in the fact that when we take price outside of a range, we essentially break contracts when we pay a penalty. That’s effectively what’s happened in the first quarter with regards to our oxycodone category. We’re essentially breaking contracts and paying penalties.

Now you take the penalty in the quarter were you take the pricing action, and then you essentially reset the market, if you will, at a higher price point, that’s the bet you’re taking. That higher price point sets 60 to 90 days after you take the price increase, and you expect then that you will be selling perhaps less product on a volume basis but much higher prices going forward.

That’s why we think the strategy is a positive one for Mallinckrodt. And we can see the benefit of that. In our other controlled substance categories, particularly as I mentioned meth IR, morphine ER and a couple of other products.

With regards to the penalty that we paid in oxycodone in the quarter, it was in the order of about $20 million. So it’s a significant bet, but we place that bet on the basis of doing experiments in other much smaller categories in 2013. And we found many cases that it was a bet. That was a bet worth taking. And again we’re seeing the benefit of that already in the first quarter in the other controlled substance categories. And of course we’re anticipating that bet is going to pay off as we’ve evidenced by raising our guidance going forward.

Gary Nachman – Goldman Sachs

And in your guidance, do you factor additional penalties if you continue with this strategy with other products where you may break contracts again at some point? Is that also based in there?

Mark Trudeau

Yes, of course. We’ve now tested this strategy in a couple of different categories. And look, not every category is identical, but we’ve got a pretty good idea in general how this plays out. And our guidance fully reflects all of our plans, strategic pricing initiatives at this point for 2014.

Gary Nachman – Goldman Sachs

Okay. And then next question on XARTEMIS XR. Just where are you in terms of the labeling discussions? It sounds like you are very optimistic for a timely approval later this month. And what are some of the pre-launch activities that you’re doing? You said you’re up at about 100 additional reps, there’s still a bit more to go there, but also specifically with formularies, just provide an update on what your sensing is going to be, the coverage for this product and any update you might have on pricing? Thanks.

Mark Trudeau

So yes, Gary, we’re actually quite optimistic around XARTEMIS XR. One, we just think it’s an excellent product that’s bringing a lot of innovation to an underserved market. There is a large underserved market and we’re quite excited to bring that product to the market for the benefit of patients certainly.

We have had very productive ongoing discussion with the FDA around labeling in this 90-day extension period that we’ve experienced. And we’re fully anticipating at this point that we will receive approval by the end of the month, but of course you never know until you actually have it in your hand, but clearly we feel pretty positive about it, given the fact that we have ramped up our sales organization. And you’re right, we brought out a 100 additional folks and we’re in the process of bringing approximately another 50.

So the traditional kind of commercial activities have been really ramping up in anticipation of XARTEMIS XR. We’re also benefiting from the fact that we got approval of PENNSAID 2% which rounds out that on our commercial portfolio. And we’re still continuing to promote EXALGO while we have the exclusivity still on that product, and EXALGO continues to do really well.

Simultaneously, and really extending back into 2013, we’ve been building up our capability in the market access arena. We’ve hired a number of very seasoned individuals in that category, and we continue to have very good discussions with managed care organizations regarding formulary access, but we are clearly going to price this product. We’ve indicated that at a premium certainly to generics and in the range of what we would see with other branded pain products.

So with regard to our formulary access, our objective is to ensure that we have access on the majority of managed care formularies. That’s partly determined by the label that we get, but much more determined by the pricing and discounting strategy that we have.

Our objective is to ensure that we get broad coverage. And we’re expecting primarily a tier-three access type level without prior authorization.

Matt Harbaugh

And I would just add that as we think about the updated guidance that we provided today and the uplift that we see in Specialty Pharmaceuticals on a full-year basis, the lion’s share of that net sales increase is really coming out of our Specialty Generic franchise.

So XARTEMIS is important for us from a long-term viewpoint, but as we are thinking about the guidance today, the pricing initiatives that we’ve been talking about and our underlying Specialty Generic franchise are certainly a real core driver to our results as we see the year unfolding.

Mark Trudeau

Yes, I think that’s a really important point is that our Spec Pharma business really is both our Brands business and our Generics business. As it sits today, our Generic business is really driving a lot of the growth and profitability that we’re seeing. And it’s primarily due to these strategic pricing initiatives that are now starting to bear fruit.

Over the long haul, just as Matt said and we’ve said before, we fully expect that the Brands business is going to be the significant driver of our growth in the future, but in the near-term of course as these products just come off approval, they will be relatively minor contributors in the short-term. Longer term we’ve said, XARTEMIS XR, we believe has a sales potential in a couple of hundred million dollar range. And we’ve said the same thing about MNK-155, assuming that it gets approval and it’s about a year behind in development – a year behind XARTEMIS XR development.

Gary Nachman – Goldman Sachs

Okay. Thank you.


And your next question is from the line of David Maris from BMO Capital Markets. Please go ahead.

David Maris – BMO Capital Markets

Good morning. So couple of emails already that I’ve received have asked that given the part of the beat versus expectations was lower than expected spending. Some say, okay, well this isn’t sustainable given that you’re going to ramp up as you already mentioned for the launch of XARTEMIS. So obviously it’s going to increase, but it seems like based on the results today, it’s going to increase off of a much lower than expected base. So maybe you can provide some sort of idea of what this quarterly step-up might be relative to this past quarter? Then I have a follow-up.

Matt Harbaugh

David, this is Matt. So as we think about our expense burden, I think it’s pretty incredible actually if you think about the journey we’ve been on over the last year and the fact that we added all the necessarily items to spend, and here we are, seven months post spend and you’re not seeing that manifest itself in our cost structure. And that’s due to all the restructuring that we’ve done, both pre-spend and post-spend.

So I think we’ve done a pretty good job around looking to remove cost. And as we mentioned earlier, there are more opportunities for us to continue removing costs. The way I would encourage you to think about this, David, is we are looking at driving efficiencies across the business. The only area where you’re going to see significant increases are going to be for the launches for XARTEMIS XR and it’s going to be in the Brands business.

You should be thinking about the rest of our SG&A in particular as being very, very tightly managed, and our restructuring is looking at, how can we optimize ourselves even further. So as you are thinking about your model, that would be a good way to kind of portray how we’re thinking about SG&A.

We’ve also said that our restructuring program is not just limited to SG&A, it’s any line item in the P&L where we can drive efficiency. And so overtime, we’re also looking to drive our gross profit as a percent of sales up, and anywhere that we can optimize our cost of goods sold, we’re also focused on that.

Mark Trudeau

The other point I would make on that is if you recall when we spun, we talked about having $40 million in incremental SG&A expenses that we had to take on just to perform the duties as an independent company. And we’ve effectively been able to eliminate that or compensate for that $40 million to restructuring activities. That’s the type of power that we have in our ability to further streamline our operations. And as Matt said, you’ll see more of that going forward.

David Maris – BMO Capital Markets

Mark, someone else emailed me saying that during the fourth – during the past quarter, you had mentioned that there were multiple late stage assets that were ideal for the company, and now we’re here at the same – a quarter later, and you’re saying, look, we hope to be able to pull the trigger on one or more items that might be accretive sometime in the near-term. Is it – listen, these things take time and – or have you taken some shots on the goal and prices are just out of hand. Is it a delay or just this is the pace in which you’re doing it?

Mark Trudeau

Yes, so we are in the same places we were before. We have several very attractive options we believe and we continue to pursue a number of those. As we’ve said these things just take a little bit of time. You’re right, prices at the moment are relatively high, but we also believe that we can act on one or more of these near-term opportunities. It’s just a matter of actually getting into closure. So we’re quite confident that we will be able to do something. We expect that we’ll continue to advance our set of options that are very attractive, complementary to what we’re doing, immediately accretive.

And from our standpoint that’s been very, very good strategy for us to accelerate our growth and profitability in a way that will complement the internal assets that we’re bringing to market. So we think this is a very good option. We still think that there are very attractive assets out there. We’ll continue to pursue these aggressively, and we look forward to announcing something when we can get there.

David Maris – BMO Capital Markets

Okay. Thank you very much.


Thank you. And now I would like to turn the call over to Mark Trudeau for closing remarks.

Mark Trudeau

Well, thanks to all of you for your questions. And let me just remind you that materials concerning today’s announcement and a replay of this call will be available on the Investor Relations section of our website.

As I said before, the underlying strength and performance of our Specialty Pharmaceuticals segment shows that we’re progressing on our operational plans, and we remain focused on the future and driving value for shareholders. Thank you all for your interest in Mallinckrodt and for joining us on today’s call.


Thank you. Ladies and gentlemen, that concludes your conference call for today. Thank you for joining. You can please now dial off.

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