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Mallinckrodt PLC (NYSE:MNK)

Q2 2014 Earnings Conference Call

May 8, 2014 7:30 AM ET

Executives

John Moten – VP, IR

Mark Trudeau – President and CEO

Matt Harbaugh – SVP and CFO

Operator

Good day ladies and gentlemen and Welcome to the Mallinckrodt’s Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder this conference call is being recorded.

I’ll now introduce your host for today’s conference, John Moten, Vice President of Investor Relations. You may begin.

John Moten

Good morning. This is John Moten, Vice President of Investor Relations for Mallinckrodt Plc. The press release with details of our second quarter results was issued earlier this morning and is available on our website as a newswire. As a reminder, shortly after this call, we will be hosting a fireside chat that can be found on the Investor Relations page of the Company’s website and also as a separate call.

Today, we’ll be making some forward-looking statements and into the past told that actual results could be materially differently from our current expectations. Please not that under the Safe Harbor rules, we are 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 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 today. A reconciliation of Non-GAAP measures to GAAP measures can be found in our earnings release and related financial tables.

With that, I will turn the call over to Mark Trudeau, President and Chief Executive Office of Mallinckrodt Plc. Mark?

Mark Trudeau

Thank you John and thank you all for joining the call today. Let me start my remarks by saying that, Mallinckrodt is continuing to have a great year, so strong in fact that we are again raising our guidance for revenues and adjusted dilutive earnings per share. Despite the challenging comparisons of the last year when had not yet spun-off to become an independent company, we’ve had another very solid quarter and made significant additional strides toward achieving our strategic vision.

Our evolution to become a top performing specialty pharmaceutical company is progressing quickly as we continue to see strong results across our base business as well as the addition of new assets to our portfolio via acquisition. Furthermore, our year-to-date performance continues to be strong particularly on the bottom-line with adjusted diluted earnings per share up over 10%.

In the quarter, we closed the Cadence’s acquisition and moved integration forward, saw our brands business grow 15.3% which included FDA approval and launch of both our XARTEMIS XR and PENNSAID 2% and the addition of a firm note continued to drive stronger profitability with strategic pricing and implementation of significant projects under our restructuring program through a stabilization of our nuclear imaging supply chain with the return to more normal levels and last but certainly not least, announced our intended acquisition of Westcore Pharmaceuticals.

We’ll provide more specific details on each of these activities on this call. In terms of the second quarter, though sales and earnings were down versus the same period a year ago, these results stem from top comparisons to launch activities we were undertaking in the same prior year period and a variety of strategic profitability actions on our part. Mallinckrodt’s underlying business drivers continue to grow, what’s most important is that, overall our adjusted diluted earnings per share significantly exceeded expectations.

Our very strong first half results clearly spotlight the rapidly increasing strength of the base business, performance that even without the recent Cadence Pharmaceuticals acquisition was surpassing expectations. This performance coupled with the additional Cadence led to our decision to increase our financial guidance in key areas. Matt will address the specifics of that new guidance later in the call.

For the fiscal second quarter, a 4.2% decline in total company net sales on an operational basis reflects strategic decisions implemented to strengthen the bottom-line of our business on a full year basis and unfavorable comparisons to prior year quarter in which we were launching and stocking Methylphenidate ER. Underlying profitability is improving driven by strategic pricing initiatives in our Specialty Pharmaceuticals segment and complemented by ongoing benefits from restructuring.

Though adjusted diluted earnings per share in the quarter were down 5% compared to the prior year, this was due again the sales timing of last year Methylphenidate ER product launches and interest expense related to $900 million of debt issued in April of 2013. It’s easier to see the momentum building in our business by comparing year-to-date results, while we see first half fiscal 2014 adjusted diluted earnings per share up about 10% compared to the prior year.

Importantly, key products in Mallinckrodt Specialty Pharmaceuticals portfolio including EXALGO, Gablofen and Methylphenidate ER are up significantly year-to-date, contributing to the increase in our guidance. The Global Medical Imaging business is stabilized somewhat in the quarter and profitability modestly improved. Second quarter net sales were down 2.1% on an operational basis for the segment with a Nuclear Imaging business once again impacted by supply chain issues. Both with the High-Flux Reactor or HFR in molybdenum and the moly processing facility there were offline for large promotions or all of the quarter. The good news is that, both have now resume operation, the HFR in February 14, and the moly processing facility on April 17th.

Although we do expect profitability to improve somewhat in Nuclear Imaging, the normal in this business includes primarily increased cost which will limit our ability to return to historical profitability levels. Our focus in both Nuclear Imaging and Contrast Media and Delivery Systems remains on seeking efficiencies and managing the segment for cash flow, while we continue to evaluate strategic alternatives for the businesses.

Turning to Mallinckrodt’s Specialty Pharmaceuticals segment. The net sales decrease of 5.7% on an operational basis, primarily reflects the comparison we previously mentioned to the prior year quarter in which initial stocking of some Methylphenidate ER dose constraints was underway. Though this unfavorable comparison was partially offset by increases in branded products. Notably, ongoing product demand for Methylphenidate ER has remained strong with year-to-date net sales of 40.5%. As noted in our revised guidance, we now expect revenues of no less than $160 million for the product in fiscal 2014.

In specialty control substance generics, the selective price increases we implemented previously continue to positively impact profitability as evidenced by improved operating margins in the overall Specialty Pharmaceuticals segment, a trend we expect to continue. The positive impact of this strategy can also been seen clearly in the growth of the other control substances category where sales up $40 million year-to-date over the same period a year ago.

Oxycodone sales were down in the quarter, primarily reflecting timing of strategic pricing actions. Based on the market response and recently improved order trends, we expect results from Oxycodone will improve in the second half of this fiscal year. In a highly competitive lower margin hydrocodone market, volumes continue to trend down due to ongoing aggressive competitive pricing activities. Despite this, overall our specialty control substance generics business continues to perform above expectations.

Our brands business posted solid results with new sales up 15.3% for the quarter led by revenue from the recently acquired OFIRMEV, the launches XARTEMIS XR and ongoing increases in our intrathecal products. Net sales and brands are up 21.5% on year-to-date basis, reflecting both ongoing EXALGO growth and new product introductions. EXALGO continues to post solid results due in part to the continue lack of expected generic competition. In fact, while EXALGO second quarter net sales were essentially flat with the prior year quarter, year-to-date results are up 12.2% compared to year ago.

As we said previously, we still anticipate generic competition this fiscal year and that will likely impact EXALGO’s future results which is factored into our guidance. We continue to successfully commercialize our internal pipeline and in late March launched our XARTEMIS XR standard tablets. As a reminder, XARTEMIS XR is the first and only extended released oral combination of two clinically proven paid medication oxycodone and acetaminophen for acute pain. XARTEMIS XR has both immediate and extended release components. So, we expect the products to provide very modest revenue contributions to our fiscal 2014 results, overtime we believes our XARTEMIS XR has potential to contribute substantial revenue to our brands portfolio. We began commercial treatment, pharmacy stocking and physician detailing in the product toward the end of March. Initial market access trends are positive with payers granting coverage at the Tier 3 level with no prior authorization. Initial prescribing with surgeons is particularly promising which may lead to interesting future synergies with the newly acquired OFIRMEV.

In addition to XARTEMIS XR, we also launched PENNSAID 2% in the quarter, further extending this franchise. PENNSAID 2% is a topical non-steroidal anti-inflammatory drug approved for used in the treatment from osteoarthritis of the knee. This product comes in a convenient meter dose pump and improve deliver from that should provide for easier patient use. We’ve already seen new pump product grow to account for 40% of overall PENNSAID prescription volume, reflecting positive responses from clinicians and patients.

We also continue to advance other branded products in our clinical pipeline like MNK-155, another controlled-released long-acting combination product that conveys the same active ingredients as Vicodin. Similar to XARTEMIS XR, MNK-155 is targeting indication for the acute, moderate-to-sever pain market and we continue to see a large market opportunity for both products, and we are continuing to invest in our Specialty control substance generics portfolio for we have filed multiple abbreviated knee drug applications in the quarter.

Now, turning to the Cadence acquisition, on March 19th we closed the acquisition of Cadence Pharmaceutical and integration is well underway. This transaction as OFIRMEV to our brand portfolio enhancing our franchise and pain management with non-opioid product and significantly broadening our capabilities in the important hospital channel. Today OFIRMEV is on formulary in over 2,300 hospitals in the U.S. and is primarily used with patients undergoing surgical procedures. To-date, an estimated 6 million to 7 million patients have been treated with the product.

The integration of Cadence into Mallinckrodt organization is moving forward as planned. We are now some 7 weeks in and we are pleased to see OFIRMEV continue its strong trajectory and believe it will become a meaningful contributor our fiscal 2014 revenues with the potential to contribute peak year sales of at least $0.05 billion in revenues to our brands portfolio.

We are more convinced than ever that there is significant untapped value in OFIRMEV and believe it is currently undervalued as the treatment relative to the potential it may have to reduce hospital days for surgical patients. We see additional growth opportunity to begin in several key areas. First, by expanding its use in hospital departments and surgical specialty areas where OFIRMEV is already on formulary and secondly, by expanding the number of values used per patient were medically beneficial. Overtime, we also believe that, we expand the network of hospital in which OFIRMEV is used.

Now, I’d likely briefly discuss Questcor. Questcor is another ideal strategic fit for Mallinckrodt. Successfully completed the transition will be immediately accretive to Mallinckrodt fiscal 2014 adjusted diluted earnings per share and significantly accretive to adjusted diluted earnings per share in fiscal 2015 and beyond, but more important is what the transaction does to position for future growth.

With the acquisition of Questcor and its products H.P. Acthar Gel and Synacthen added to are already solid core business in brands and specialty control substance generics and the newly acquired OFIRMEV franchise, we will create a strong, nicely-balanced specialty pharmaceutical platform with the breadth of both portfolio and channel reach to position us for significant, sustainable future growth. Acthar is an exciting product and naturally drive injectable complex biological product. Acthar is approved by the FDA for the treatment of 19 separate indications with the bulk of sales driven by four key areas of focus, acute observations of multiple cirrhosis, protein area and idiopathic types of nephritic syndrome in children less than two years and rheumatology related conditions.

The Questcor transaction will also bring Synacthen into Mallinckrodt’s future pipeline. In June of 2013, Questcor acquired the rights to develop Synacthen and Synacthen depo in the U.S. as well as in certain countries outside of the U.S. Questcor is and the early stages of evaluating Synacthen and several potential indications for possible clinical development. We believe that, Mallinckrodt is in the best position to maximize the value of these great products because of the considerable skills and experience we bring to the transaction, including relationship with rheumatology and urology specialist which we believe will ultimately make the value of Acthar understood by more physicians and available to more patients.

Our long-standing manufacturing expertise with complex substances including those that come from naturally-derived sources. The ability to use our strong payer relationship to further standardize and optimize the efficiency and speed of reimbursement processes to make the product more accessible to a broader number of patients. Substantial synergies including relatively modest synergies in general and administrative areas and R&D and more significant ones in tax and possible long-term opportunities to market both XR and Synacthen internationally.

Following on the hills of the Cadence acquisition as well as the FDA approval of XARTEMIS XR and PENNSAID 2%, the acquisition of Questcor when completed will solidify our position in the Specialty Pharmaceuticals industry by significantly increasing the scale cash flow and profitability of our business and adding a strong product to our growing portfolio. These two transactions have also created a clear frame for us to further focus both our ongoing strategic BD&L and R&D activities.

In BD&L, we will continue to be aggressive and opportunistic in looking for complementary external assets including those that will bring value for hospital patients and highly specialized therapeutic areas like CNS, rheumatology and autoimmune disorders. In R&D, in addition to our efforts in abused and formulation technologies we intent to focus on further developing the current indication set for XR as well as potentially new indications in the same highly specialized therapeutic areas.

In summary, we believe that, added to our strong core business, the recent acquisition of Cadence and the pending acquisition of Questcor will create substantial, sustainable value from Mallinckrodt shareholders by significantly accelerating our transformation to become a leading global specialty pharmaceuticals company.

Now let me turn the call over to Matt to provide more detail on our quarterly results and revised guidance. Matt?

Matt Harbaugh

Thanks Mark and let me add my welcome to everyone on the call this morning. I’ll discuss our fiscal second quarter results which includes Cadence from the period beginning March 19th through March 28th. I will also provide revised guidance for full year revenue and full year adjusted diluted earnings per share to include OFIRMEV.

At some point, we plan to again update our guidance to reflect the edition the Questcor. As noted in the April 7th press release, we expect the Questcor transaction to close in the third calendar quarter of 2014 and to be immediately accretive to adjusted diluted earnings per share for fiscal year 2014 and significantly accretive to fiscal year 2015.

As a reminder, our second quarter ended on March 28th and all our results are compared against our performance for the same period in the prior year. We’re happy to report the second quarter was one of significant achievement as we executed on our key strategies to build our Specialty Pharmaceutical segment. This morning we’ve raised our fiscal 2014 revenue guidance to $2.28 billion to $2.38 billion and our adjusted diluted earnings per share guidance to $3.30 per share to $3.60 per share, driven primarily by the improving profitability of our Specialty Pharmaceutical segment as well as the addition of OFIRMEV.

Turning to the quarter, net sales were $558 million versus $585 million or down 4.2% on an operational basis, compared to the prior year quarter. As Mark previously mentioned, prior year net sales comparisons reflect strong sales of Methylphenidate ER last year when we saw initial stocking of the 36 and 54 milligram dosage range in the distributor channel. Current quarter net sales reflect benefits from strategic pricing action in certain specialty controlled substance generics products. Oxycodone net sales declines were due to a combination of market competition, strategic pricing actions, quarterly timing and contractual payments. Overall, we feel positive about our Specialty Pharmaceutical segment based on results posted year-to-date in addition to expected trends in the back half of the year.

Global Medical Imaging net sales for the quarter were down 2.1% on an operational basis. In Nuclear Imaging, net sales were essentially flat despite supply chain disruptions due to facility shutdowns. As Mark mentioned earlier, we have restarted our moly processing facility in the Netherlands, which should slightly improve our profitability for the year, largely in the fourth quarter.

One item of note, we have continued to undertake significant restructuring in this segment since the initiation of the program last August and we believe this has led to prove results in the second quarter. Net sales in our specialty Pharmaceuticals segment were $324 million, a decline of 5.7% on an operational basis. The decline in segment net sales reflects the Methylphenidate ER launch comparison and the initial reduce volumes of oxycodone due to the impact of the strategic pricing initiatives we have undertaken. These pricing actions, which began last fall, continue to gain traction and as I mentioned we expect improved top-line and bottom-line in second-half of the year. Net sales for our Brands portfolio were 15.3% for the quarter, reflecting the initial inclusion of OFIRMEV, a late March launch of XARTEMIS XR and increase in our intrathecal products.

Total company gross profit was $263 million, down 11 million. Gross profit as a percentage of net sales was 47.1%, compared to 46.7%. This increase was driven by improved profitability form strategic pricing initiatives in the Specialty Pharmaceuticals segment, partially offset by our Global Medical Imaging segment, where gross profit was lower compared to the prior year due to roughly $9 million of incremental raw material reflecting the temporary shutdown of the HFR and our moly processing facility.

Selling, general and administrative expenses or SG&A for the quarter were $194 million, compared with a $161 million in the prior year quarter, reflecting current year expenses of $23 million for an environmental remediation charge and $19 million for BD&L transaction cost. Additionally we incurred launch expenses for XARTEMIS XR and PENNSAID 2% though these expenses were more than offset by restructuring savings.

Shortly after spin, we announced the three year $100 million or 125 million restructuring program. We moved aggressively on this initiatives already implementing one-third of the program in eight short months and will continue to seek efficiencies wherever possible.

As previous discussed, our current restructuring initiatives are focused on projects with a relative quick payback. In particular, there is a direct co-relation to the restricting action we have taken in Global Medical Imaging and you see that reflected in our profit posted this quarter. In the second quarter, we incurred $22 million in restricting charges overall, taking actions which will further streamline our cost profile. Our restructuring actions have expanded beyond SG&A to also now include a focus on cost of goods solid.

R&D spending during the quarter was 41 million up slightly from 39 million in the prior year quarter due to the advance of MNK-155, our continued pursue of the view deterrent labeling for XARTEMIS XR and further development of specialty control substance generics and intrathecal portfolio.

Operating income for the quarter was $4 million, compared to $54 million in the prior year, primarily attributable to the $23 million environmental remediation charge and 15 million in higher restructuring charges and Cadence transaction cost. In the Specialty Pharmaceuticals segment, operating income as a percentage of net sales was 32.7%, compared to 30.5% in the prior year reflecting the benefits from pricing initiatives.

You’ll notice our non-GAAP effective tax rate for the quarter was 23.7%, which reflects the close of the Cadence transaction. The base Mallinckrodt tax rate would have fallen into our February guidance range of 25% to 28%. You’ll note that, we have taken our tax rate guidance lower as we continue to achieve efficiencies and to reflect the Cadence acquisition.

We currently have $335 million in cash, compared to $288 million at the end of December. Keep in mind, this change in our cash balance is net of roughly a $100 million in cash utilized in the Cadence transaction. We expect our cash generating capabilities to improve significantly as a result of the robust cash profile of our base business combined with OFIRMEV and ultimately the expected addition of Questcor, which will allow us to aggressively reduce our post-acquisition debt.

Second quarter adjusted diluted earnings per share was $0.95, down 5% compared to the prior year quarter. For the first half of fiscal 2014, adjusted diluted earnings per share were up 10.2%. As evidenced by our updated increased financial guidance, fiscal 2014 will be a very strong year for Mallinckrodt. This performance will be driven by the strength of our Specialty Pharmaceutical segment and in particular the specialty control substance generics business along with restructuring to streamline our organization and the addition of Cadence, all of which will provide meaningful top and bottom-line growth.

I will now hand the call back over to Mark to make some closing comments.

Mark Trudeau

Thanks Matt. As I said earlier, this has been another exciting quarter in a year and that looks very promising by any measure. Our actions and accomplishments in the second quarter and the first half of the fiscal year clearly demonstrate our focus on rapidly accelerating growth and profitability to levels consistent with those of a leading global specialty pharmaceuticals company. As you track our progress, lots for us to implement strategies that will capitalize on the broad growth platforms we have created.

First, we’ll execute on the opportunities we’ve created in our Specialty Pharmaceuticals business, leveraging our core strengths in brands, specialty generics and active pharmaceutical ingredient to accelerate the shift towards the Specialty Pharmaceutical segment. Second, we’ll advance our internal pipeline to deliver long-term growth utilizing our expertise in managing controlled substances and our scale in developing difficult formulation. Third, we’ll continue to drive for increased profitability by improving efficiency across the business and executing our restructuring plan. And finally, we’ll continue to pursue focused BD&L opportunities in core businesses and adjacent therapies.

We are confident these strategies will drive sustainable growth, improve our profitability and deliver a bright future for Mallinckrodt and long-term value to shareholders. Thank you for your interest in Mallinckrodt and for joining us on today’s call.

I’ll now turn the call back over to John to provide some logistical details related to the Q&A session.

John Moten

Thanks Mark. Let me remind you that materials concerning today’s earnings release and the replay of this call will be available on the Invest Relations page of our website. Our live Q&A session will begin at 8:15 AM Eastern Time at the St. Regis New York Hotel and also will be available by conference call and webcast. Further details are contained in the press release on our website, we hope you would join us for that session. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s program. Listeners can press 1 to automatically transfer to the Q&A session. Listeners on the webcast don’t need to close webcast players and open a segment of Q&A webcast. Thank you.

Question-and-Answer Session

[No Q&A Session for this event]

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Source: Mallinckrodt's (MNK) CEO Mark Trudeau on Q2 2014 Results - Earnings Call Transcript

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