Mallinckrodt's (MNK) CEO Mark Trudeau on Q1 2016 Results - Earnings Call Transcript

| About: Mallinckrodt PLC (MNK)

Mallinckrodt PLC (NYSE:MNK)

Q1 2016 Earnings Conference Call

February 02, 2016 08:30 AM ET


Coleman Lannum - Head of Investor Relations

Mark Trudeau - President and Chief Executive Officer

Matthew Harbaugh - Chief Financial Officer


David Amsellem - Piper Jaffray

Louise Chen - Guggenheim

Gregg Gilbert - Deutsche Bank

Marc Goodman - UBS

David Risinger - Morgan Stanley

Chris Schott - JPMorgan

Sumant Kulkarni - Bank of America Merrill Lynch

Douglas Tsao - Barclays

Shibani Malhotra - Nomura

Jason Gerberry - Leerink Partners

Anthony Petrone - Jefferies

Irina Koffler - Mizuho

David Buck - Northland Capital

David Maris - Wells Fargo


Good day, ladies and gentlemen, and welcome to the Mallinckrodt Pharmaceuticals First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the call over to Head of Investor Relations, Cole Lannum. Please begin.

Coleman Lannum

Thank you, Avagale, and welcome to today's call. Joining me are Mark Trudeau, President and Chief Executive Officer; and Matt Harbaugh, our Chief Financial Officer. Mark will start himself with some brief introductory comments followed Matt, who will provide details on our financials and then we'll go into our customary Q&A session.

Before we begin, let me remind you of a few important details. On the call, you'll hear us make some forward-looking statements and it’s possible that actual results could be materially different from our current expectations. Please note that we assume no obligation to update the information contained in these forward-looking statements even if actual results or future expectations change materially. We ask you to please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.

We'll also provide some adjusted non-GAAP financial measures with respect to our performance. And a reconciliation of these adjusted measures to GAAP is detailed in our earnings release and its related financial tables which should be found on our website,

As noted in our press release unless otherwise specified, all comparisons of quarterly performance are to the first quarter of fiscal 2016. 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 such information.

For the first fiscal quarter, we've reported diluted GAAP earnings per share from continuing operations of $1. After adjusting for specified items, our diluted non-GAAP adjusted earnings came in at $2.09 per share.

Now I’ll turn it over to Mark, who will go into some more detail on the first quarter results. Mark?

Mark Trudeau

Thanks, Cole, and thanks to all of you for joining us on today's call. I am very pleased to report that Mallinckrodt delivered a strong first quarter and fiscal 2016. Building on the momentum we saw on the fourth quarter and we are confident that our ongoing focus on execution will produce continued steady progress throughout the remainder of the year.

Net sales were up 20% for the quarter on an operational basis with exceptional commercial execution driving continued steady volume gains in the Specialty Brands portfolio. Adjusted EPS growth was strong as well as Cole mentioned up nearly 17% for the quarter. This strong performance particularly in key Specialty Brands products clearly demonstrates both the effectiveness of our strategy to create near and long term value for patients and shareholders and our ability to execute on our plans. Based on this, we also raised our adjusted EPS guidance range for the remainder of fiscal 2016 which Matt will cover in more detail later.

We continue to move at a rapid pace on a number of strategic fronts and made great progress in the quarter. In December, we announced our plan to acquire three commercial stage Global Specialty Hemostasis Brands to further diversify our hospital growth platform.

I am happy to report, we closed on this transaction yesterday and are already moving forward with the rapid integration of these assets.

We plan the market weaker [ph] immediately through OFIRMEV hospital focus team and expect the U.S. launch of PreveLeak and RAPLIXA later in the second half of the year. Also in December, we held an invested briefing to reinforce the diversity and durability of our growing portfolio and highlight the broad investments primarily in the branded portfolio that clearly demonstrate our strategy to grow the company both organically and inorganically well long term.

We hired top tier industry veterans in key positions which will be instrumental to our growth in 2016 and beyond. Ron Lloyd with 30 years of experience 15 of those in the hospital market joined as President of our hospital business reported to me. And Dr. Tunde Otulana has become our Chief Medical Officer coming to us with broad experience as a senior pharmaceutical executive, pulmonologist and former FDA officer. Tunde will report to Steve Romano, our Chief Scientific Officer.

We’ve continued to deliver on our Acquire to Invest business model reporting data for more than two dozen presentations from both clinical and heal economic studies two thirds of which worth for Acthar to further define patient outcomes and strengthen and reinforce the value of our portfolio for the healthcare system.

We finalized divestiture of the CMDS business moving us another step forward in focusing the company of Specialty Brands and Specialty Generics.

And last but certainly not least, we executed on commercial priorities across our entire Specialty Brand segment to drive volume in both top and bottom line growth enabling us to more than offset the ongoing challenges we have in Specialty Generics.

Simply stated, we know that the formula for continued success and to stick to our strategy of identifying and investing in under resource highly durable assets to expand patient access and accelerate volume growth and then maintain a laser focused on execution. And in the first quarter, we did just that.

Now let’s look at key products. Acthar delivered another solid quarter with net sales up nearly 8% in the period well within our expected range of ongoing mid-single to low double-digit growth. Quarterly performance was principally driven through volume growth in rheumatology and pulmonology and we are also seeing a positive prescribing rebound in mature Acthar indication such as infantile spasms. We are focused commercial executing is resulting in increased use in children with his devastating disease.

And while it’s still very early, we’ve seen strong physician interest in the lupus poster presented last fall at the American College of Rheumatology Conference. We expect that data to be published in the second half of this year. And when it is, we believe that it will further reinforce Acthar’s potential as a treatment for certain lupus patients with physicians and payers.

Additionally as you remember, a second open label phase of this multi-site trial have been ongoing, looking at both durability of patient response to Acthar and potential impact on Acthar treatment and reduction of steroid use in these patients. This phase of the study is now complete and we are in the process of submitting it for potential presentation and publication later in the year.

We continued to made good progress with regard to Acthar reimbursement. You remember that our long term objective is to bring the majority of covered lives under contract. Today Acthar commercial coverage stands at about a third of the total eligible U.S. patient population under contract with key payers and we continue to focus on expanding coverage with other major payers.

Looking to remainder of fiscal 2016 and beyond, we continue to be comfortable with our ability to grow Acthar sales volume in key indications through focused activities like these.

Now let me share a bit about INOMAX, our second largest product. With integration fully complete, we are very pleased with the performance in the quarter with net sales up 16% on a pro forma basis. This acceleration in historical growth rates reflects strong commercial execution and are focused expanding our contracting model which is beneficial to customers and importantly better insures appropriate patients have ready access to INOMAX.

Continuing with hospital products, in our first full quarter of ownership, we’re also pleased with the performance of Therakos and expect its historical high single-digit growth to continue near term as we more fully integrate the business into Mallinckrodt.

Longer term, we see a number of strategic opportunities we can pursue to potentially accelerate that growth. Rounding out Specialty Brands, I am happy to report that the first quarter saw continued volume recovery for OFIRMEV through strong execution by the commercial team and further penetration in key accounts. This makes us every more confident of a return to year-on-year revenue growth in the second half of fiscal 2016 driven by expanded OFIRMEV procedure penetration in an existing accounts couple with new account gains and recapturing volume and formulary status in other key accounts.

Now turning to Science and Technology, in the first quarter, we made significant incremental investments in our key in line and developmental products, particularly in Specialty Brands, all consistent with our Acquire to Invest model. The substantial R&D spend includes initiation of three new clinical trials and patient enrolment and others.

Let me share a number of additional highlights for the quarter. As I mentioned earlier, the 44 week open label extension of our Phase 4 company sponsored trial of Acthar and lupus is complete and we are working toward presenting that research later this year.

We’re also pleased to note registration of an Acthar a company sponsored randomized placebo-controlled multi-site double-blind trial in a key nephrotic syndrome product syndrome condition called FSGS on We expect to see first patient first visit in this trial in the coming months.

We’ve also just enrolled the first subject into our company sponsored Phase 3 open label single-arm multi-center study in acute graft versus host disease for Therakos Photopheresis. This study is successful, is a part of our long term label expansion strategy in the U.S.

Turing to drug development. We continue to have meaningful dialog with the FDA on our special protocol assessment request for the pivotal Phase 3 randomized double-blind placebo-controlled multi-center Terlipressin trial and plan to initiate the study later this year.

On the business development front, we continue to actively identify opportunities to add commercial and developmental assets to our portfolio. Our key areas of focus remain in Specialty Brands including hospital, autoimmune and rare diseases and Specialty Generics.

As we look ahead to the rest of 2016, we’ll continue using the time proven industry methods we know will build value. Based on the traction we see in key areas, we are confident we’ll reach our goals.

Now, I’ll turn the call over to Matt.

Matthew Harbaugh

Thanks Mark. Let me take a few moments to go a little deeper into our financials. As Mark said, first quarter fiscal 2016 was very strong both strategically and financially and Specialty Brands results fueled by our Acquire to Invest volume driven strategy where exceptionally robust.

Net sales from continuing operations for the first quarter of fiscal 2016 were $915 million versus $768 million in the first quarter of the previous fiscal year representing operational growth of 20.3%. We continue to make significant progress on further diversifying our portfolio as evidenced by the transaction we just closed for the three hemostasis products.

By the end of fiscal 2016, assuming our current business mix and expected growth rates, we believe we will be within a few hundred basis points of achieving our goal to have no single product represent more than one third of our overall operating income.

And importantly, we believe we’ll reach this goal even if we do no other business development this year and any additional product acquisitions we might make would only accelerate this time frame.

As noted in the press release issued this morning, we are raising our fiscal 2016 adjusted diluted earnings per share guidance on a full year basis to a range of $7.85 to $8.30.

First quarter net sales for the Specialty Brand segment were $543 million representing operational growth of 46% achieved through ongoing focus on driving volume across the portfolio and also impart through the inclusion and positive performance of INOMAX and Therakos.

Acthar posted good results in the quarter with $287 million in net sales over the prior year quarterly revenue of $266 million, a 7.6% increase. And we continue to believe that the next several quarters will be at the lower end of the mid-single to low double-digit range.

We continue to focus on commercial execution and are very pleased with steady volume increases and the overall performance of Acthar we’ve seen in the past few quarters.

But in the context of our view for the full year, a few reminders maybe in order; first, in every year, the first calendar quarter or second fiscal quarter is a challenging time to drive volume for Acthar as compared to other quarters, due to benefit resets and seasonality.

We expect the seasonality to continue in 2016 and anticipate this will impact gross profit as a percentage of net sales in our second quarter. And with the particularly strong performance of Acthar in the third quarter of fiscal 2015, we also anticipate the third quarter of fiscal 2016 will be a tough comparison.

Finally, the most significant impact of gross to net contracting pressure for Acthar is still ahead of us. Balancing of these factors, we believe we will likely remain at the low end of our long term normalized growth rate for Acthar for the next several quarters.

We’re pleased to report that INOMAX generated a $111 million in net sales as compared to $96 million in the equivalent pro forma quarter last year, a 16% increase year-over-year. With this recent strong performance, it’s clear that the growth rate for INOMAX will be higher for fiscal 2016 on a full year basis. But based on historical performance, we continue to believe that the long term compound annual growth rate for INOMAX is likely to continue to be in the mid-single-digit range.

For Therakos, while it’s still early we continue to anticipate high-single-digit revenue growth in coming quarters and beyond. It is important to note that the Therakos’ platform has a larger international component than most other Mallinckrodt Specialty Brand comparators and thus result should to be considered excluding foreign currency fluctuations.

Turning to OFIRMEV, we’re very pleased to see another increase in volume demand for the quarter though revenue did not keep pace due to inventory adjustments. With this demand as Mark mentioned, we’re even more confident that we will achieve year-over-year revenue growth in the second half of fiscal 2016.

Now let’s turn to our Specialty Generic segment, which continues to be challenged by the reclassification of methylphenidate ER and increasing competition across a number of categories. Both factors were reflected in the first quarter with net sales of $258 versus $284 million representing an 8% year-over-year operational decline.

Note, that we’re likely to see the toughest comparisons for Specialty Generics over the next couple of quarters. And year-over-year comparisons should start to moderate in the fourth quarter of fiscal 2016.

The tough comparisons in Specialty Generics will also be putting pressure on our gross profit as a percentage of sales which is likely to be lower than we saw this quarter.

Segment net sales for Nuclear Imaging for the quarter were $104 million compared with a $102 million in the prior year. Though we’re pleased with the stronger than normal net sales in this segment for the quarter, these results were driven by one time orders and we expect to return to historical growth rates in the second quarter and beyond.

Total company adjusted gross profit was $680 million, up from $559 million with adjusted gross profit as a percentage of net sales of 74% compared to 73% in the prior year quarter.

The strength of Acthar sales in particular contributed to these results and as I noted earlier, I’d caution that we’re not likely to see that level of impact over the next couple of quarters when combined with the anticipated though comparables from Specialty Generics.

Total Mallinckrodt R&D spending in the quarter came in at 7% of net sales overall with spending in our Specialty Brand segment significantly higher. Given our current trajectory, we expect fiscal 2016 Specialty Brands R&D spend as a percentage of net sales to approach double-digits give our focus on broad programs to generate clinical and health economic and outcomes research data across the portfolio.

We’ve also made continued progress in reducing SG&A, investing strategically, while at the same time focusing on cost management. Adjusted SG&A as a percentage of net sales improved a 100 basis points to 24.9% for the quarter.

Interest expense in the quarter was $98 million compared to $49 million. While this number rose significantly consistent with our 2016, we’ve remained comfortable that our strong cash flow will easily accommodate multiple of assets of our growth strategy.

Our adjusted effective tax rate in the first quarter was 17% compared to 20% in the prior year quarter.

Turning to the balance sheet and liquidity, in the fiscal first quarter, we generated more than a quarter of a billion dollars in free cash flow. We used the strong cash generation and proceeds from the divestiture of CMDS to repurchase 275 million in stock and also reduced total debt by just under $70 million.

The cash balance at the end of the quarter was 522 million. Our liquidity position remains quite strong resilient and we remain prepared to allocate capital towards additional share repurchases and potentially business development.

At this point, I’ll turn it over to Cole, who will take us into Q&A.

Coleman Lannum

Thanks Matt. We got a long list of questions this morning and I’d ask that you really do me a favor, if you’d really stick to the one question only policy that would really help me get through everything as quickly as possible. You can of course do a brief follow-up is needed. Feel free to put yourself back in the queue, afterwards I promise we’ll get through as many as we can. I know it’s a busy earnings day for everyone, so let’s try to get through as quickly as possible.

With that operator, please can we have the first question?

Question-and-Answer Session


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

David Amsellem

Thanks. So on Acthar, so you mentioned the high growth in rheumatology and pulmonology, but can you comment more specifics on the volume growth in multiple sclerosis and nephrotic syndrome historically those accounted for the bulk of sales, so maybe talk about trends there? And also talk about the sale mix among the various therapeutic segments for Acthar is used and how we should think about that in 2016? Thanks.

Mark Trudeau

Right, so - Thanks David, this is Mark. With regards to Acthar sales, we’re very pleased obviously with the quarter that we delivered here consistent I think with the momentum that we saw in the fourth quarter. We think that we’re driving Acthar sales volume consistently across the board. The real focus as I mentioned in the prepared remarks and the real growth drivers today, our pulmonology and rheumatology where we’re seeing double-digit growth rates in both of those segments of the business.

If we look at the mix of Acthar business, again historically it’s been about 30% in each of neurology, nephrology and rheumatology. And that mix is still roughly the same, the remaining 10% being all other. But we are seeing again continued good strength in pulmonology as an immerging opportunity for Acthar.

We’re very pleased with the performance that we’re seeing particularly in areas like lupus and also in RA and we would expect over the coming year that that’s where you’re going to see growth continuing to be driven in rheumatology and pulmonology. But we’re also encouraged in certain areas of neurology for example I mentioned infantile spasms where we put additional refocus on that particular indication and we’re seen a significant positive rebound in prescribing trends.

Likewise we see the same thing happening in nephrology that we’re seeing a rebound in prescribing trends. And again that’s the result of significant commercial execution in those areas. We’re also quite pleased with the fact that we continue to generate significant data in support of Acthar and that’s both clinical data which we referenced, it’s not just the lupus data but it’s a verity of other clinical mechanism of action and other studies that we continue to invest in and publish and also help economic data. As I mentioned, in the quarter we had over two dozen publications in total and about two third of those publications were focused on Acthar. So we think it’s this data generation, we think it’s the commercial execution and then of course we’re very pleased with the progress we’re making in managed care with regards to access.

We continue to make good progress in contracting and ensuring that the majority of Acthar covered lives overtime will be under contract. So across the board, we are very pleased with Acthar growth.

Coleman Lannum

Thanks a lot David. Next question please.


And our next question comes from the line of Louise Chen with Guggenheim. Your line is open.

Louise Chen

Hi, thanks for taking my question. So just curious how we should think EPS growth in 2017 in light of the extra week that we see in fourth quarter ‘16 this year? And then just on OFIRMEV, when we look at the Symphony data the demand look strong, yet I see the sales were down year-over-years. I was just wondering if you could let us know what we might be missing here. Thanks.

Matthew Harbaugh

So I’m go let Mark talk about OFIRMEV first and Louise, I’ll jump in and do my best on your guidance question.

Mark Trudeau

Yeah, so thanks Louise. Yeah with regards to OFIRMEV again, very pleased with the volume growth that we are seeing with OFIRMEV, this is now a consistent trajectory of consistent volume growth for several quarters from the trough we experienced in the second quarter of last year. And now as you can see, we’re starting to demonstrate volume growth year-over-year and that’s why we’re very confident that in fact we’re going to see revenue growth in the second half of fiscal 2016. It’s possible it could happen sooner than that if these trends continue.

With regards though to the revenue bid, it lags a little bit the volume growth simply because throughout the course of 2015, we did see some inventory adjustments in the channel and that’s not surprising given the fact that volume was a bit variable in 2015. Now that we think we’ve got a consistent volume trajectory going forward, we believe we got the right level of inventory in the channel.

Coleman Lannum

On your guidance question, Louise and obviously we’re focused right now on delivering on 2016. At some point in the future we’ll give more details on 2017. And let me add you know although it’s only the result from the first quarter, we’re don’t pleased with where we’re looking for 2016, that’s one of the reason why we raised the guidance range this morning. But I do think you bring up a great point, they cannot be repeated often enough. The accounting reality of 4.5 accounting convention which we are on is that once every 5.6 years, we do get a leap week that we will be experiencing in this year’s fourth quarter, we’ve talked about that, that will tend to everything else being equal help our year-over-year comparisons this year. But by the same token, it’s going to put some mathematical year-over-year comparison issues in 2017 in the fourth quarter. And it’s important that everyone take that into account when you look at 2017.

The only other think I’d say is that we talked very specifically at our Investor Day to try give everyone a long term idea of where we are managing the business. From a growth year, we absolutely think that we can drive organic revenue growth in the mid-single-digit range. And then we can use organic and financial leverage to leverage the earnings number beyond that.

Having said that you know I’ll tell there are a couple of people out there who don’t seem to have heard that message, we got a couple of people that have earnings growth in the high-teens in 2017. I hope we’re able to make that number. We’re not going to talk about it at this point. But I think given the pressure of that that extra week that something that I want everyone to take into account when you are accounting for 2017.

Next question please.


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

Gregg Gilbert

Good morning. A follow-up to the first question on Acthar growth, I am sorry if I missed it, but couldn’t you give Acthar volume growth in the quarter. And my question on business development Mark and Matt is on Specialty Generics, how would you characterize the availability and the price of assets that you would actually buy that could fit well with your business and what seem to be very tight criteria, it seems to me the most things you would like would probably be aggressively bid on by companies for whole generics are more core to their model. So, so to speak to how interested you are and sort of is it realistic that there are things out there and then you had medium term that you would actually do and get? Thanks.

Mark Trudeau

Yeah, so let me take the question on Acthar quickly Gregg and then I’ll ask Matt to comment a bit on generics. With regards to Acthar again very pleased with the almost 8% revenue growth that we saw in the quarter and again that’s on top of a strong quarter that we saw on the fourth quarter, so again we think we got a very good momentum here with Acthar.

We haven’t specified what proportion of this was volume but I can’t say that the majority of the growth for Acthar in the quarter as it was in the fourth quarter was volume based. And again, very pleased with what we’re seeing from a commercial execution standpoint, very pleased with what we’re seeing from a data generation standpoint and a market access team plan. Let’s keep in mind that we believe quite strongly that Acthar will continue to be in the range of mid-single to low-double growth. We believe that we’re playing a long game here with a very durable asset, a highly durable asset with currently low penetration and we think the strategy that we’re implying in investing in this asset executing against the data that we are generating and being very strong in the work that we are doing with managed care is the right long term strategy to ensure long term access for Acthar, long term growth for Acthar and benefit for patients.

Matthew Harbaugh

Yeah, Gregg, turning to your questions around Specialty Generics and asset valuation, I’d say a couple of things. I would argue that both on the Specialty Brand side as well as Specialty Generics that some of the price points paid have been relatively high when compared with historical frame. This being said, if you look at two of our acquisitions in particular in the multiples we paid that would be the Ikaria acquisition and the Acthar acquisition in particular. Despite the competition, we’re able to pay relatively low multiple premiums for those assets.

So we’ve shown an affinity to go after assets that really fits strategically and may not be as competitive as some of the other assets that have been sold overtime.

As it relates to Specialty Generics, I’d say a couple of things. The first is there are a number of assets out there that are available. There are more Specialty Generic opportunities out there now than there have been over the last say 24, 36 months. Even though there has been some consolidation, we still see an array of opportunities there.

The second is, some of the players in the industry that are consolidating are highly levered and that may slow them down from further consolidation. You may have seen on our website, we put a reconciliation out there of our net debt leverage which is a 3.5 right now. And as I mentioned in the prepared remarks, we had over $500 million as we came out of December. So we’re in an enviable position I would say from a liquidity view point to pursue targets.

Mark Trudeau

I would just add very quickly Gregg that keep in mind we’ve been quite creative about how we do business development and you know we’ve identified assets from a verity of different sources. Let’s also recognize that we don’t necessarily just do HOCO acquisitions as we’ve just demonstrated with our recent announcement in closure of the Hemostasis’ assets. We are happy to do product and there are certainly a number of those opportunities in the Specialty Generics space as well.

Gregg Gilbert


Coleman Lannum

Thanks Gregg. Next question please.


Thank you. Our next question comes from the line of Marc Goodman with UBS. Your line is open.

Marc Goodman

This morning on OFIRMEV, have you mentioned that there was an inventory adjustment, I am curious can you quantify that, was that just in the December quarter or I was a little confused by the way you answered one of the previous questions, it sounded like it was something that was going on as the year progress. If you could just help us understand that a little more.

And then just back on INOMAX, you mentioned increased contracting model helped but I mean sales are significantly above I guess the mid-single-digit trend line that we should be thinking, so if you could just help us understand what you doing there, was there something that’s - that was going on, that was big in the first quarter, that’s going to take away from the rest of the way and what you meant by this contracting model? Thanks.

Mark Trudeau

Yeah, sure, thanks Marc. So yeah with regards OFIRMEV is actually simple, the inventory adjustments occurred throughout the course of 2015, perhaps they were most significant in this particular quarter. As you might imagine when we change the price on OFIRMEV, it look a lot for the channel to readjust their volumes and including their inventory and that’s effectively the dynamic that we’re seeing at the moment.

Again I go back to the fact that we’re seeing this consistent trend now of volume growth and we’re very confident that we’ll see revenue growth in the second half of fiscal 2016. And with this kind of trajectory, it could even happen earlier than that. So again we are pleased.

Marc Goodman

So if you think about the inventories, I mean this is basically like a 70ish million dollar product, it’s not a $65 million on a run rate basis quarterly?

Mark Trudeau

Well, without getting into too specifics Marc, I think what we can say is that you know the type of growth that we should expect to see in coming quarters would be more consistent with the volume growth that we are seeing now that we work through the inventory, the inventory adjustments that occurred in 2015.

With regards to INOMAX, yeah, we’re exceptionally pleased with the performance of INOMAX, clearly with 16% growth in the first quarter. I think this is evidence in the fact that the commercial execution under Mallinckrodt’s ownership is really starting to drive some benefits here.

In terms of our contracting strategy, this is something that’s really good for patients, it’s really good for customers then it’s good for the business. This is something that customers like because it gives them good predictability and visibility to their potential expenditure. It’s obviously great for patients. Keep in mind that INOMAX today has about a 50% market share, the neonatal intensive care patient population that we treat. And it’s a therapy that compared to many the alternatives has significant benefits. So we think there is an opportunity to drive a lot more patient penetration here and one of the barriers historically has been you know that for some of the less sick patients, physicians are faced with a choice of you know do they use INOMAX or do they use something else that maybe less expensive but may have poor outcomes.

Now we contract in a way that enables accounts to really have you know unlimited usage. So there are - it removes that decision about what type of patient can benefit from INOMAX. Any patient they can benefit from INOMAX now can have access to it with this contracting strategy.

So again we think it’s great for us, great for the accounts and very, very good for patients. And you are seeing that impact now in the results here in the first quarter. Historically this has been a business as we said, that’s been in the mid-single-digit growth rate. And you heard Matt’s comments, with the performance rate; we’re currently seeing it’s obvious that we’ll be delivering at a growth rate this year significantly higher than that mid-single-digit growth rate. Longer term remains to be same but based on historical frame; you would expect that we would have a long term growth rate for INOMAX in the mid-single-digit range. But clearly in 2016, we’re going to drive something significantly higher than that.

Matthew Harbaugh

Yeah, the only thing I would add Marc is you’ve been integrating Therakos, obviously we had a full quarter in the first quarter and we’ve had INOMAX in the fold for two quarters. And based on what we’re seeing, the integration has gone exceptionally well and there’s been no material distraction as it relates to commercial execution. So that also correlates with our comments today.

Marc Goodman


Coleman Lannum

Thanks Marc. Next question please.


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

David Risinger

Yes, thanks very much. So with respect to your target for no product represent no more than one third of profits, could you just repeat what the timing is for that? And then also just wondering if you can provide any color on where that figure is today? Thanks very much.

Matthew Harbaugh

Yeah, thank you, David. So in the prepared remarks, we indicated that Acthar is still a bit above that but we’re getting very close within a 200 basis points to our commitment to try and get no one single product to be greater than third of our operating income. I also mentioned that that did not include any further additions to the portfolio beyond what we have today. So we’re already well on our way in making progress against that goal. I can’t give you an exact time frame. I will tell you, you saw our R&D spending jump in the quarter and I’ve been very clear to say that we expect R&D to continue going up. And a lot of reinvestment as Marc mentioned earlier is going into Acthar. So that’s putting a fair bit of pressure on the operating income for that particular product.

This being said, we are also investing in Therakos INOMAX, so there is a lot of reinvestment going on as well.

David Risinger

Thank you.

Coleman Lannum

Thanks David. Next question please.


Thank you. Our next question comes from line of Chris Schott with JPMorgan. Your line is open.

Chris Schott

Great, thanks very much for the question. Just Matt at two part, one margins, can maybe first elaborate on the strong gross margin trend we saw in the quarter, it seem like there might have been some, I would have thought some headwinds here between generics and Nuclear in the quarter, but result is obviously strong, just want to understand that a little bit better?

And second on SG&A as a percent of sale, that used to decline. When we think out the remainder of 2016, should we think about that trend continuing or their investments or timings of expenses we should keep on mind of SG&A line going forward? Thanks.

Mark Trudeau

Yeah, Chris, thank you for the questions. As it relates to the gross profit or gross margin, it was an exceptionally strong quarter without question. A lot of that had to do with the strength in the Specialty Brands business which was able to mute the effect of the supply disruption we had in Nuclear as well as the pressure we see in Specialty Generics.

This being said take my comments to note from the prepared remarks, we hit a high water mark at least in the short term for gross profit. We see significant pressure in the second and third quarter. In the second quarter, you’ve got two things really going on. We see Generics getting much more pressure what we saw in the first quarter combined with Acthar seasonality and benefit resets.

And then in the third quarter, we have a tough comp for Acthar. As you know last year was a real strong quarter for us. And then we also see significant pressure in Generic. So while we are pleased with the results we saw in the first quarter, the pressure is in the future quarters.

As it relates to SG&A, you are absolutely right. We have dropped pretty significantly over the last two to three years. Coming out of the gates, we were in the low 30s as you know. So I was very happy to see that we came in at 25%. This being said, the spend will pick up more than likely in the later part of this year, that’s because we’re investing the hemostasis products to launch those and we’re also reinvesting in Acthar and Specialty Brands.

So I would say while I was very pleased with the results. It was unusually low in the quarter but I really like the zone that we’re in right now.

Coleman Lannum

You know I don’t want to add to, I don’t want anyone to take away from this the fact that we are not optimistic on gross margins we are. But I think it’s important that people understand the message of this first quarter was just as you noted exceptionally good. And I don’t want anyone to take that and extrapolate and assume there were going to improve even further from what we’re almost record gross margin numbers in the quarter.

Next question please.


Thank you. Our next question comes from the line of Sumant Kulkarni with Bank of America. Your line is open.

Sumant Kulkarni

Good morning. Thanks for taking my question. And what could your new pricing environment for pharmaceuticals in general, has anything changed in your longer term true pricing outlook for your important brands and what about deep sales and shares and the timeline in which you could achieve those?

Matthew Harbaugh

Yeah, Sumant, thanks for the question. Again I think this goes back to the business model that we’ve been describing which is that are Acquire to Invest business model. And let’s recognize that we’ve been very specific and deliver about how we built our portfolio, we’ve looked for assets that serve unreserved patient populations typically where our products currently have low patient penetrations. So there is a long term volume play here.

And we’ve look for assets that have exceptional durability. So it makes good sense for us to invest in these assets and focus on driving volume growth. And that’s been our strategy from the beginning and that continues to be our strategy going forward. So whether it’s 3% patient penetration rate for Acthar, whether it’s 10% to 15% penetration in CTCL for Therakos. You know we think there is significant opportunity for our products to drive growth by driving volume.

In terms of market shares and those types of things, you know the long term trajectory that we’ve given is consistent with what we’ve said a couple of times now most recently at our Investor Day that our objective is to drive long term revenue growth in the mid-single-digits on an organic basis and that we would drive EPS at a rate higher than that and that’s our objective, that’s how we’re focused. And the way we’re going to go about doing that is through the Acquire to Invest strategy, driving volume and unreserved patient populations with highly durable assets.

Sumant Kulkarni


Coleman Lannum

Next question please.


Thank you. Our next question comes from line of Douglas Tsao with Barclays. Your line is open.

Douglas Tsao

Hi, good morning. Thanks for taking the questions. Just in terms of INOMAX, if you could provide a little color, you noted improvements are sort of growth you contract. I was just curious if we think about that in terms of sort of product volume growth versus additional placement which when you acquire a carrier sort of highlighted as an opportunity?

And then if you could just provide a little color in terms some of the dynamics we’re seeing in especially Generics, obviously a lot of variability - weaving aside methylphenidate ER, just what we’re seeing you know in terms of the Hydrocodone, Oxycodone and other controlled substances lines which have some sort of variability the numbers that we’re seeing there?

Mark Trudeau

So I’ll take the INOMAX question and then ask Matt to comment a little bit on the Specialty Generic. So yeah, the story for INOMAX is again I think a very straightforward and simple one. We think there is tremendous opportunity to drive utilization in more patients that can benefit from INOMAX and that’s what our strategy, our contracting strategy is all about is to make it more accessible and easier for accounts to use INOMAX in more patients that are eligible, that’s to the benefit of the patients. And we think at least in the near term, the opportunity is through that opportunity to access more patients through our contracting.

We believe that we have placements in the majority of the significant neck use around the country. There may be some opportunities for us to drive additional volume and revenue with some indication, some label expansion indications we have in market outside the U.S. For example we got a CV indication in both Japan and Australia, those are relatively smaller markets but there’s an opportunity for us to drive revenue there. But longer term we think there may be an opportunity to further expand INOMAX usage by expanding the label and potentially penetrating into lower level neck use. But the primary opportunity we believe over the long term is to just make INOMAX more accessible to more patients and to drive that current 50% patient penetration rate that we have today significantly higher.

Matthew Harbaugh

As it relates to your question on Specialty Generics, I would encourage everyone to look at the data in the second and third quarter last year. So Hydrocodone in our first quarter last year was relatively low when compared with future quarters. Part of that was some timing event as the conversion took place in the market place from C3 through C2. So the comps are going to get particularly tough as we move forward because those were the quarters where we saw exceptional growth in Hydrocodone.

On Oxycodone, really what we’re seeing here is a significant amount of competition which we’ve been talking about now for good nine, ten months. And so you can see while it’s still generating good revenue around $30 million at a good margin. We certainly are seeing that pressure and it’s really volume.

Coleman Lannum

Thanks, you guys are good pace, so please keep it to one question please. Next question.


Thank you. Our next question comes from the line of Austin Nelson with Nomura. Your line is open.

Shibani Malhotra

Hi, it’s actually Shibani Malhotra. The - in your press release specially you mentioned share repurchases and business development for capital allocation, does that imply the debt reduction as less with the priority. And if so, is this is driven by the rally and spreads for the Mallinckrodt debt or is this - is there another reason?

And also can you talk about whether you have repurchased shares and what your plan is for repurchases going forward? Thank you.

Mark Trudeau

Sure. So just to remind everyone, in the fourth quarter, we repurchased 75 million and that was a little under a million shares that we repurchased. And then we repurchased 275 million, about 3.9 million shares in the first quarter. And so we’ve been pretty aggressive, a lot of that had to do with the fact that we had a lot of cash flow that we were generating from the underlying business in addition to the proceeds from the divestiture of CMDS. So you know the share repurchases certainly are very attractive vehicle to return value to shareholders right now.

This being said, there are assets in the business development area that are of interest and we are also and will continue to look, it’s kind of an evergreen process here to see what we can bring into the portfolio.

As it relates to debt, you’ll see this in the details that we file in the Q shortly. We repurchased $26 million of our debt on the open market. We paid down the revolved to the tune of about a 100 million but we also drew on our AR securitization program and that lead to roughly a $70 million decrease in debt. So those are the mechanics of it.

The reason debt was not specifically mentioned in the release is you are absolutely right. Right now the spreads are tight. And so from a value perspective, we can drive more value focusing on the other two levers. But if the credit spreads where to open up again and widen, we would certainly contemplate focusing on debt again.

Shibani Malhotra

Okay, great, thank you.

Coleman Lannum

Thanks Shibani. Next question please.


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

Jason Gerberry

Hi, good morning and congrats on the quarter. I just wanted to understand the commentary on Acthar progression throughout the remainder of the year. So am I correct that where kind of at the low end of the guidance range where sales growth for the second and third quarter, but as we think about the four quarter with the extra week, I imagine that we’re with an uptick go through the high end of the guidance means which you mentioned something about gross to net adjustment being significant. So I am not sure that was more of a fourth quarter impact. And if I can just squeeze one in, the status on MNK-155 and XARTEMIS, you are looking at selling that business. I am in heard of 155 updates, so just kind of curious where that product stands? Thanks.

Matthew Harbaugh

I’m going to Mark talk about 155, XARTEMIS and then I’ll address your Acthar question.

Mark Trudeau

Yeah, just really quickly, XARTEMIS and 155 are two products that certainly are now outside of our strategic focus if you will, so we continue explore options to optimize and maximize the value of those two particular assets. And you know as we get further information and further progress down that line, we’ll continue to update you on that.

Matthew Harbaugh

As far as the specifics on Acthar, we don’t want to get on a quarter-by-quarter basis and that’s one of the reasons why we’ve just said quote over the next several quarters. But I think you should think of it as several quarters, this is not just a one or two quarter dynamic, there are a lot of changes going on right now on the contracting front. We feel really good about the long term growth characteristics of the product. But for now you know until we see some of that stabilizing, we think it’s probably visor to be conservative on this and we continue to be internally, and we would want you to be as well.

You’re absolutely right. Everything else being equal that extra week in the fourth quarter should give us a little bit of boost, so we might be a little bit better there. On the other hand as Matt noted earlier, we also have a very tough comp again in the third quarter this year. So you netted all out, you are still probably looking at the lower end of that range for the next several quarters probably even into the early part of 2017.

Jason Gerberry


Coleman Lannum

Next question please.


Thank you. Our next question comes from the line Anthony Petrone with Jefferies. Your line is open.

Anthony Petrone

Great, thanks. One quick one for Mark on Acthar, can you maybe just provide an update when we can potentially see additional managed care formula change is if any for I thought for 2016? And then for Matt really quick just to follow-up on the capital market environments, can you give us a sense of financing mix of future deals just considering volatility and the equity in debt markets, so mix between cash on hand, debt and equity going forward on future deals? Thanks.

Mark Trudeau

Thanks, Anthony. So yeah, we’re real pleased with the progress that we continue to make in our discussions with managed care organizations. Again just to reiterate, our long term objective is to have the majority of covered lives under contract for Acthar, we’re making good progress against that objective. As we stated in the prepared remarks, we’ve got about a third of covered lives today and we continue to make progress and continue to have the very good dialog with managed care. So it’s very tough to give you a specific timeline and trajectory for when we’re going to achieve that objective of having the majority of covered lives under contract. But obviously we strive to get that done sooner than later and again continued to be very pleased with the progress that we’re making.

Matthew Harbaugh

Turning to your question around the capital market, I mentioned to Cole yesterday as we are preparing for the call this morning, if we could have done the medicines deal in the first quarter and closed on it, we would have had strong evidence that we could buyback debt, we repurchase share and by products all on the same quarter. So the levers that we have in front of us right now never been greater. We’re generating really strong cash of certain many times that we expect to generate approximately a billion dollars in cash. We came out of the quarter with $522 million in cash. So if we were to find a deal that made good strategic and financial sense for us, we would certainly use our cash first. Second, we withdrawn the revolved, we are also used to AR securitization program. And after if you will exhaust all of those, then we would contemplate going out into the capital markets.

So that would be kind of the order that I would give you. But keep in mind too, we are also putting that cash back to work in buying back shares.

Anthony Petrone

Thank you.

Coleman Lannum

Thanks Anthony. We’re going to try to get through two or three more questions. Operator, next question please. Again, please keep in to one question only.


Our next question comes from the line of Irina Koffler with Mizuho. Your line is open.

Irina Koffler

Hi, thanks for taking the question and congrats on a nice quarter. I was hoping you could provide some clean up updates on the Praxair litigation, the marketing investigation into Syracuse and if you have any comments around ANIP and their Critical Troponin program? Thanks.

Matthew Harbaugh

Great job of making one question but we’ll try to get through quickly. Go ahead Mark.

Mark Trudeau

Alright, so let me start with the Praxair. Obviously we are very pleased last year when the IPR repelled four out of five drug patterns for INOMAX. And again that we believe that this is a very durable asset, those for drug patterns would give us exclusivity at least through 2029. Obviously the IPR process continues with the cup of the other device patterns and we are very confident again that the intellectual property that surrounds INOMAX is very strong. And we continue to develop additional intellectual property to potentially extend that franchise even further beyond 2029. So again highly durable asset, we’re real pleased with where we stand as a result of the IPR process.

With regards to any of the other discussions that we have ongoing with any federal agencies regarding investigations into any of our products that occurred certainly prior to are taking possession, I can’t really comment of the specifics of those other than we continue to work with the government and cooperate fully in these investigations and look to bring them to a rapid close.

With regards to ANI, ANI we don’t really have any new information other than we observed as you did in the public domain that the transaction is closed. We continue to believe very strongly that Acthar is an exceptionally durable product and I can’t emphasis enough how much we are playing the long game with Acthar in both our execution, commercial execution strategy, our managed care strategy and our data generation strategy. We believe that this is a product that can grow consistently and steadily over the long term as a result in investing in this product.

Again as we’ve said before, we don’t really know exactly what the pathway maybe or if there is a pathway for ANI to resurrect these doorman NDAs, it appears to unprecedented. And based on our experience, we would expect that would have long and complex process. But we really don’t have any additional information other than noting the fact as was public that ANI closed the transaction on these two doorman NDAs.

Coleman Lannum

We would try through one, maybe two more if we can do it quickly. Next question please.


Our next question comes from the line of David Buck with Northland Capital. Your line is open.

David Buck

Yes, thanks for the question. Just a quick one on volume, can you just confirm that volume was actually, it sounds like volume was lower than revenues for Acthar in the quarter. Can you talk a little bit of that what the affirmative volume growth was for the fourth quarter? And just a follow-up on the ANI question and answer, can you talk about whether you look to use a system process if standards for having resurrection of those NDAs are not thorough and there is not a full modernization label, where you look to use a system process to basically protect patients and your IP?

Mark Trudeau

So very quickly David, I think that’s actually three questions, but let me try to get real very quickly. As I mentioned, the growth on Acthar was driven significantly by volume, a little bit of price in there, a very little but a bit, almost exclusively by volume. In terms of affirmative volume growth, we went specific on that but again if you look what’s publically available information you can see that affirmative volume growth was in the high single digit range.

And then with regards to our strategy, regarding the durability of Acthar, we’re looking a whole variety of different approaches across the board that range from manufacturing to intellectual property, the whole verity of other issues. This would be - this is something that we will do regardless of whatever happens with the ANI situation.

Coleman Lannum

We try to one more quick question please. And this will be the last one, operator.


Yes, our last question comes from the line of David Maris with Wells Fargo. Your line is open.

David Maris

Good morning. Mark, do you have the figure for the breakdown in pharma of price versus volume for the year-over-year growth? And as anything in the recent debate on pricing or as the stock’s been down with the market recently, anything that you’ve heard from investors that has cause you to rethink either acquisition targets or pricing strategies going forward? Thank you.

Mark Trudeau

Yeah, so again we haven’t been particularly specific on price versus volume but what we can say is that the majority of our growth is driven by volume. And certainly as I mentioned earlier, this is what our strategy is all about. We’ve identified highly durable assets for unreserved patient populations where the products currently have relatively low patient penetration. We invent in data, we invest in commercial resources, we invest in variety of other arenas to drive that further patient penetration. So we actually believe that we well positioned in the environment going forward regardless of where pricing goes in the future. We think the real winning strategy for the Mallinckrodt portfolio is primarily based on driving volume.

And again I think there’s been some misunderstanding of our commercial model in our business model that’s why we’ve been really emphasizing the fact that we acquire and we invest and we look for opportunities to drive volume with highly durable assets.

With regards to our business development strategy, again we’ve been remarkably consistent I think since we spun in that we looked for areas where there are unreserved patient populations, unique assets that have a degree of complicity to them where we have a certain capability where we can take unreserved patient populations with products with low patient penetration and drive volume. We think there is a lot of products out there. And as you can through our acquisition strategy, we’ve been very specific in the areas in which we chose to play, that’s the hospital channel, we’ve not built about a billion dollar hospital portfolio well diversified unique assets and we think have a compelling volume in pharmacoeconomic proposition. We are in the autoimmune and rare disease space with an opportunity to build around specialties and rheumatology, pulmonology, nephrology and neurology. And we also like to highly specialized generic space, so we got three areas that we think are very attractive for the long term to continue to build out an acquisition strategy, build out the diversification of our portfolio and again focusing on durable assets.

I want to emphasis again, our objective from the beginning is to have no single product be more than a third of our operating income and you heard Matt say in the prepared comments, we’re getting very, very close to that objective. We can do that without any further business development, but we think there is a lot of assets here that are model, they are going to do very well in our hands and we’ll continue to be aggressive in seeking those.

Coleman Lannum

With that we’re going to wrap things. Everyone as you know have a replay of this on our website later on today and I’ll be around to answer any questions you may during the day. Have a good one and a good week, we’ll talk to you soon. Bye-bye.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

About this article:

Tagged: , Medical Instruments & Supplies, Ireland,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.