Mallinckrodt Plc (MNK) Q3 2018 Results - Earnings Call Transcript

Mallinckrodt Plc (NYSE:MNK) Q3 2018 Earnings Call November 6, 2018 8:30 AM ET

Executives

Daniel J. Speciale - Mallinckrodt Plc

Mark Trudeau - Mallinckrodt Plc

Steven Romano - Mallinckrodt Plc

Matthew K. Harbaugh - Mallinckrodt Plc

Analysts

Anthony Petrone - Jefferies LLC

Young Min (Lucas) Lee - Raymond James

Patrick R. Trucchio - Berenberg Capital Markets LLC

Chris Z. Neyor - JPMorgan Securities LLC

David George Buck - B. Riley FBR, Inc.

Ami Fadia - Leerink Partners LLC

Annabel Eva Samimy - Stifel, Nicolaus & Co., Inc.

Gary Nachman - BMO Capital Markets (United States)

David A. Amsellem - Piper Jaffray & Co.

Sudan N. Loganathan - Cantor Fitzgerald

Thomas Chiu - Morgan Stanley & Co. LLC

Dana Flanders - Goldman Sachs & Co. LLC

Dewey Steadman - Canaccord Genuity, Inc.

Operator

Good day, ladies, and gentlemen, and welcome to the Q3 2018 Mallinckrodt Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. . As a reminder this conference call may be recorded. .

I would now like to introduce your host for today's conference, Mr. Dan Speciale, Investor Relations Officer. Sir, you may begin.

Daniel J. Speciale - Mallinckrodt Plc

Thank you, Crystal. Good morning, everyone, and welcome to today's call. Joining me are Mark Trudeau, our CEO; Dr. Steve Romano, our Chief Scientific Officer; and Matt Harbaugh, our CFO.

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

We will also provide selected non-GAAP adjusted measures related to our financial performance. A reconciliation of these adjusted measures to GAAP is available in our earnings release, which can be found on our website, mallinckrodt.com. We use our website as a channel to distribute important and time-critical company information, and you should look to the Investor Relations page of our website for this information.

We use this channel, for example, to consistently post our net debt leverage ratio on a quarterly basis and as you can see today, our net debt leverage was flat from the prior quarter at 4.5 times. As noted in our press release, unless otherwise specified, all quarterly comparisons are to the comparable 2017 calendar period and the net sales growth ranges we will be discussing are on a constant currency basis.

As you likely saw this morning, our 2018 guidance for adjusted diluted earnings per share has been raised to $7 to $7.07 per share.

With that, let me turn the call over to Mark? Mark.

Mark Trudeau - Mallinckrodt Plc

Thanks Dan. We're very pleased with our overall results for the quarter, which illustrate the progress we're making against our strategic goals and build on the strong performance in the first half of the year.

Today we'll cover some of the highlights from the period and some key milestones you can look forward to in coming months. Our billion-dollar hospital portfolio continues to demonstrate healthy growth and has performed at the high end of our mid-single to high-single digit expectations. And despite the ongoing market dynamics that challenge specialty products across the sector, the Acthar sales trajectory has steadily improved as we've worked through the patient withdrawal issues of 2017.

We also further advanced our lifecycle and development activities in which Dr. Romano will go through in his comments. 2018 is a year of transition for us and we've seen significant gains on the strategic priorities we established to support and accelerate our journey to be an innovation driven specialty pharmaceutical growth company focused on improving outcomes for patients with severe and critical conditions.

Let me remind you of these priorities and update you on some of the advances we've made.

With our first and most critical priority: maximizing the productivity and contribution of both in-line brands and the near-term development portfolio, we once again executed well this quarter.

For Acthar, we're pleased with the performance trajectory of the product where year-over-year sales declines are narrowing. We expect these trends to continue. We also see a number of important clinical data readouts in coming quarters that will build on those of 2018 such as the recently presented Phase 4 RA and MS registry data and support efforts to ensure appropriate patient access and utilization.

This data is the foundation of our discussions with both payers and prescribers. Our RA study design is a good example of how our clinical trial designs are helping us to define the appropriate patient populations and dosing recommendations.

Over the next year or so we plan to deliver a steady cadence of clinical data across key indications beginning with RA and MS. As we've consistently stated, we believe 2018 net sales for Acthar will be above $1 billion and expect 2019 net sales will also exceed $1 billion.

On INOMAX, growth continues to be driven by strong demand and contract renewals at or above historical levels, and we remain confident in the brand's market share and future.

It's important to keep in mind INOMAX isn't just nitric oxide; it's a sophisticated drug device combination with a long history of exceptional performance in the NICU. The integrated system, as well as our industry-leading, comprehensive service model and historically strong safety record are key value drivers for customers and patients, both in the U.S. and international markets.

We expect to have greater clarity on the INOMAX patent litigation process in the middle of 2019. In any event, if competition does arrive, we believe that it would likely be in the form of a branded device as opposed to a substitutable generic. Given the INOMAX value proposition for patients and customers, we believe that we are prepared commercially for any eventuality in the market.

Turning to OFIRMEV, the ongoing opioid shortage and an increased interest in non-opioid multimodal pain management combined with commercial execution drove sustained customer demand and growth. We anticipate this trend will continue.

Focused commercial efforts, particularly in Europe, drove continued growth of Therakos. In the U.S. we're pleased with the level of utilization of the product in appropriate CTCL patients. Therakos has shown strong growth in Europe as use grows across indications within the broader ECP label. In the quarter we also made significant progress in our development programs and Steve will detail this in a minute.

Our second priority is further streamlining our organization. We continue to make targeted reductions in our SG&A expenses to enable enhanced investments in programs and capabilities such as clinical development, digital innovation, and launch readiness that we anticipate will drive growth in the future. Our results in 2018 are well ahead of our expectations and are enabling us to accelerate implementation of our strategic objectives.

Our third priority is executing a highly disciplined capital allocation strategy with ongoing focus on debt reduction. We once again are making strong advances on that front and Matt will go into the details in a moment. We also remain opportunistic regarding other uses of capital. So we're very pleased with our progress year-to-date, both against our 2018 strategic priorities and with our long-term growth initiatives. We look forward to maintaining this overall momentum and looking ahead to coming quarters, there are a few key things you should expect to see.

First you'll see ongoing focus on strong execution, both with our in-line and development products. Second, we anticipate an increasing number of clinical data readouts and regulatory updates across our portfolio. Third, we'll continue to drive strategic capital allocation with debt reduction remaining a priority. And finally, we continue to explore a broad range of strategic options for the specialty generics business.

I'll now ask Steve to provide a more detailed update on some of the key lifecycle and development activities we're pursuing across our portfolio, Steve?

Steven Romano - Mallinckrodt Plc

Thanks Mark. We continue to progress a diverse portfolio of lifecycle management in mid- to late-phase development programs, with well over a dozen ongoing trials. In addition to substantial health economics and outcomes research and preclinical research activities, we are actively communicating our data generation efforts at key research meetings and through scientific publications and several programs are reaching important milestones.

Let's first discuss our activities supporting in-line brands, specifically company-sponsored trials. Additional data from the ongoing Acthar Phase 4 RA study was reported at the American College of Rheumatology last month. The study's midpoint interim analysis show that 61% of patients enrolled in the open label period with persistently active RA achieved low disease activity at 12 weeks and substantial proportions also achieved 20%, 50% and 70% improvement based on ACR response criteria. These results suggest there is a potential therapeutic utility of Acthar in this more challenging to treat sub population of RA patients, all of whom continue to experience signs and symptoms of the disease despite multiple disease modifying therapies and steroids.

The second portion of the study, a randomized withdrawal phase, will be completed in the first half of 2019 and will help clarify whether patients will benefit from an additional 12 weeks of therapy. Both phases of the trial help to define the most appropriate patient population and optimal treatment duration for Acthar in this condition.

Also last month, the first patient was screened for our Phase 4 Acthar uveitis trial. Enrollment in each of our sarcoidosis and lupus studies is progressing as planned, and the MS relapse registry continues. We hope to complete the latter early in 2019.

Our Phase 2 ALS proof of concept study has surpassed 25% enrollment target. In addition, our development of the Acthar self-injection device and the next generation INOMAX delivery device are ongoing, aligned with our previously communicated plans.

Now let me touch on development of our pipeline. VTS-270 is our development product to treat Niemann-Pick type C, a complicated, ultra-rare, neurodegenerative disease that typically presents in childhood and is ultimately fatal. In our recently completed registration trial, the product did not show a statistically significant separation from placebo. But importantly, neither the VTS-270 nor the placebo arm showed disease progression as would have been anticipated in a neurodegenerative condition over 52 weeks of observation.

The expectation was that both treatment groups in the study would worsen over the trial period but that the VTS-270 treated group might show an attenuated course based on an accrued benefit.

Accordingly, our review of the data from the Phase 2b/3 trial has required substantial effort and still continues. We expect a better understanding of the potential benefit of VTS-270 to emerge as we carefully consider the totality of data available to us. This is an important step.

At a meeting in August, the FDA indicated to us that their view on the potential approvability of VTS-270 will be based on the totality of data, not a single study or endpoint. And in the coming months we will continue to work with the primary investigators and the FDA to clarify a potential path forward.

We understand the importance of pursuing this potential treatment for Niemann-Pick type C and based on our current assessment of the safety data, at this time, we believe continued treatment with VTS-270 in the ongoing open label portion of the trial is acceptable. Patients, their families, and our patient group partners should know that we remain deeply committed to this work.

Several other late-phase programs are advancing as well. The pivotal trial for CPP-1X/sulindac in the treatment of patients with familial adenomatous polyposis has been completed achieving last patient last visit in October. We anticipate having top line results early next year.

Two of our most advanced late-phase internal programs, terlipressin and StrataGraft, are on target to plan. Our terlipressin Phase 3 trial for the treatment of hepatorenal syndrome type 1 is over 75% enrolled and we anticipate completing this program in the second half of 2019.

Importantly, this pivotal trial is being conducted under an FDA special protocol assessment which provides greater certainty as to the approvability of the program if positive. StrataGraft, our regenerative skin therapy in Phase 3 development for treatment of deep partial thickness burns and Phase 2 development for full thickness burns is progressing well. The Phase 3 trial is more than 50% enrolled. As I mentioned last quarter, given the RMAT designation awarded to this program, we will continue to engage with the FDA to evaluate an earlier submission if the data are supportive.

Considering stannsoporfin, we are preparing for a Type A meeting with the FDA late this year. Following robust discussions with key opinion leaders, we believe there may be an opportunity to advance the development program and specifically target a higher risk population of infants suffering from severe hyperbilirubinemia who are failing more intensive phototherapy intervention.

This is a population which clearly has few and very limited therapeutic options and we're looking forward to meaningful discourse with the agency regarding the population, trial design and other associated issues outlined in the CRL.

Last in our pipeline update, we are nearly halfway through our ex vivo proof of concept lung study evaluating the addition of nitric oxide to perfusate to enhance the viability of marginal lungs for potential transplant.

Finally, let me summarize specific milestones you should look forward to over the next several quarters. For Acthar, the RA trial and the MS registry will be completed and top line results available as early as the first half of 2019. We hope to complete enrollment in our lupus trial by the second half of 2019 and potentially have the ALS enrollment completed in that timeframe as well. For key development programs, CPP-1X/sulindac top line results are anticipated in the first quarter and both the StrataGraft and terlipressin pivotal trial results in the second half of the year.

With that, let me turn it to Matt who'll take us through the financials. Matt?

Matthew K. Harbaugh - Mallinckrodt Plc

Thanks, Steve. For the quarter net sales were $640 million, an increase of 6.7% over the prior-year period. We reported GAAP diluted income per share from continuing operations of $1.21 compared with $0.55. Our non-GAAP adjusted diluted earnings per share was $2.10 versus $1.82. Acthar net sales were $290 million, a 6% decrease resulting from the residual impact of patient withdrawal issues.

Turning to our hospital products, INOMAX generated $133 million in net sales, a 6.1% increase; and OFIRMEV continued to see strong growth with $87 million in net sales, up 15.5%. Therakos also performed well in the quarter with net sales of $60 million, an increase of 8.6%. AMITIZA generated net sales of $48 million in the quarter.

Now let me share some details on operating metrics. Total company adjusted gross profit as a percentage of net sales decreased slightly in the period to 82.9%, down from 83.6%, primarily due to product mix.

Our adjusted SG&A as a percentage of net sales was 27.5% as compared to 29.7%. We have been pleased with our ability to reduce SG&A through the benefits of restructuring and acquisition synergies. As you can see, we've made significant advances towards our strategic priority to reduce our annual SG&A run rate by $100 million. However, as indicated previously, a portion of these reductions are also to allow for reinvestment in the business related to our capabilities and product launch preparedness.

R&D expense as a percentage of net sales was 12.3% as compared to 7.8% which, much like last quarter, reflects sustained increased investments in advancing our pipeline and generating data for the in-line portfolio. You can expect to see both absolute R&D spending and R&D as a percentage of net sales to remain in the same range or increase in coming quarters.

Turning to liquidity, operating cash flow for the quarter was $219 million with free cash flow of $193 million. We have been very pleased to see strong cash generation year-to-date with $388 million of free cash flow.

As we've previously stated, our primary focus for 2018 capital allocation is debt reduction. Debt was decreased by $171 million in the third quarter, primarily comprised of $150 million in repayments on our revolving credit facility and a $15 million decrease in the variable-rate receivable securitization program. We are pleased to report we ended the third quarter with net debt below $6 billion.

Notably, subsequent to the quarter close, the company has further reduced its revolving credit facility to a balance of $220 million. Now let me turn the call back over to Dan who will take us into Q&A.

Daniel J. Speciale - Mallinckrodt Plc

Thanks, Matt. I'd like to remind each of you to please limit yourself to a single question with a brief follow-up if needed. Feel free to put yourself back in queue afterwards and we'll work to get through as many questions as possible.

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

Question-and-Answer Session

Operator

Thank you. Our first question will come from Anthony Petrone from Jefferies. Your line is open.

Anthony Petrone - Jefferies LLC

Thanks, and congrats on a good quarter. Maybe the first question will be on Acthar, maybe just an update on where contracting is in this cycle and how you see at least the data so far resonating with payers. And then the follow-up would be on INOMAX. Maybe just a recap of the pricing structure on INOMAX today and what percentage of hospitals are under long-term contracts. Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, thanks for the questions, Anthony. With regards to Acthar, I mean clearly we're pleased with the trajectory that we're seeing with this product. The fact that the year-on-year declines in sales continue to narrow and we anticipate that that trend is likely to continue. So we're quite pleased again to reaffirm that we believe Acthar net sales will be in excess of $1 billion in 2018.

With regards to our discussions with payers, one of the things that is obviously very helpful is that we are now starting to present some very robust data sets with the RA data now coming forward with both the first tranche at 25% of the open label trial, a portion of the trial, and now 50% data confirming what we saw in the first quarter. That information is intriguing to payers and to prescribers as well, because I think it answers a couple of questions or begins to answer a couple of questions. First of all with regards to the length of therapy that will likely show a specific benefit, at least as has been indicated by the first half of the data here. And also, importantly, it really clarifies the appropriate patients for Acthar.

Again we're targeting, as you know, patients that are highly refractory that are maybe on multiple therapies including steroids. And by introducing Acthar, this data is demonstrating that there's the potential for an incremental benefit. And of course that information coupled with the duration of therapy at 12 weeks is quite intriguing to payers. As you might imagine they're looking for the full data set including the randomized portion of the trial which again, we should have that information sometime in the first half of the year.

So overall, things are trending well there and we look forward to multiple additional data sets being presented and available on Acthar that will also help patients and prescribers we believe identify the appropriate patients and appropriate duration of therapy.

With regards to INOMAX, in terms of the growth of INOMAX, we continue to feel very pleased with what we see there. INOMAX continues to grow well in that mid-single digit range as we've described. And in terms of the proportion of hospitals under contract, I mean we've said pretty consistently that at any given year, we're going to have upwards of two thirds of accounts on some type of a contract. But what we're very pleased to see is looking forward, about a quarter of our business now into 2019 is captured in some type of a contractual volume arrangement and we think that bodes well for the future for the product as well.

Daniel J. Speciale - Mallinckrodt Plc

Thanks.

Anthony Petrone - Jefferies LLC

Thank you.

Daniel J. Speciale - Mallinckrodt Plc

Next question please.

Operator

And our next question comes from Elliot Wilbur from Raymond James. Your line is open.

Young Min (Lucas) Lee - Raymond James

Good morning. This is Lucas Lee on for Elliot. Do you think you could give us some update on generic disposition process? Given recent low transaction multiples, can an outright sale still meet the acceptable return criteria for shareholders? And as a follow-up to that, how long can operations be discontinued? Thank you.

Mark Trudeau - Mallinckrodt Plc

Yeah, so maybe I'll take the first half of your question and then ask Matt to comment on the second part. With regards to the assets that are currently in our Specialty Generics Disposal Group, as we've said consistently, we have a broad range of alternatives available to us and we're continuing to explore all of those going forward. So as that situation develops, whether it's a sale or any other option, we'll certainly be updating in the market at the appropriate time.

Matthew K. Harbaugh - Mallinckrodt Plc

Yeah, with regard to your question around discontinued operations, typically you have a year and then if you have not transitioned the asset to somewhere, else it would go back into your ongoing or continuing operations. I want to go back to the first call that we had and just clarify one point which is when Mark was talking about INOMAX, that roughly 0.25% under contract would be specific to 2019, but Anthony, a little bit more color on that, I would encourage you when we file our 10-Q to look at the disclosure. But I'm happy to report this morning that for 2019, 2020 and 2021 with contracting throughout the quarter, all three of those years you'll see a relatively significant increase in revenue that we anticipate in coming years.

Daniel J. Speciale - Mallinckrodt Plc

Thanks. Next question please.

Operator

And our next question comes from Patrick Trucchio from Berenberg Capital. Your line is open. Please check that your line's currently not on mute.

Patrick R. Trucchio - Berenberg Capital Markets LLC

Hey there. Good morning. Can you hear me now?

Daniel J. Speciale - Mallinckrodt Plc

We can.

Patrick R. Trucchio - Berenberg Capital Markets LLC

Great. So I have a couple of follow-ups on INOMAX and specifically the impact from Praxair's branded generic, Noxivent. First, is there a trial set for the appeal and if so, when is it? Secondly, is it possible for Praxair to inform hospitals about their product without officially launching it such that hospitals can plan more efficiently or is that not permitted? Third, do you know if Praxair plans to launch at risk? And finally, why shouldn't we expect hospitals to renegotiate better deals once the cheaper version of the product's on the market? Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, so lot of questions there on the situation with INOMAX. So as we've described previously in our comments, we expect to have a resolution of the appeal process sometime in the middle of 2019. And we would expect the actual trial to occur obviously sometime between now and then. In terms of a specific trial date being set, that's unclear at this point. But again, we would expect the whole thing to play out here in the next couple of quarters.

Certainly Praxair would have the ability to have discussions with hospitals and customers. There's nothing that we're aware of that would prevent them from doing that. With regards to whether or not they would launch at risk, I mean, that's purely up to them. Obviously if they were to do so and lose the appeal, that could have some challenging ramifications. But in general what we're quite pleased with is what we're seeing from customers. And as Matt described in some detail, the fact that we're seeing customers and significant, major customers signing up for multi-year contracts at this point suggests to us that they continue to see the long-term benefit of the INOMAX solution.

With regards to renegotiation, again, the way our contracts are structured it's typically not going to be in a hospital's best interest to do that. So in general, again, we continue to see INOMAX being a very attractive opportunity for the marketplace based on the totality of the product offering, the drug device, the service, the training, all of those things.

I think the other thing to keep in mind is that we also have a new next generation device in development which could dramatically change the game. It will be significantly more portable, significantly more user friendly, more automated, and could potentially cut down on significant human error. So this is a marketplace that's likely to move forward pretty significantly in terms of technology advancements that we're likely to lead.

And lastly I would leave you with just the final comment is recognize that whatever competition comes, if and when it comes, it is not really in the form of branded generic. It would be a separate branded offering that would compete with INOMAX in a branded marketplace. So I think that's really important that people understand we're not talking about a substitutable generic here. We're talking about a completely different branded offering that would complete potentially with INOMAX.

Daniel J. Speciale - Mallinckrodt Plc

Okay, thanks Pat. Next question please.

Operator

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

Chris Z. Neyor - JPMorgan Securities LLC

Hi. This is Chris Neyor for Chris Schott. Following up on your Acthar commentary, efforts to stabilize the franchise appear to be progressing well with 2018 guidance raised again, and although Acthar sales are down roughly 8% year-to-date. When we think about 2019, should we think about year-over-year growth for the product given the relatively easy comparison, or would you expect ongoing stabilization efforts to kind of carry into 2019?

And then I have one follow-up on new Acthar data. As that comes to fruition, could you help us frame the commercial expectations for Acthar on positive data results? I think historically we've seen a step up in prescription trends on new data, particularly for new indications. Is that a good analog, or how do we balance that against the ongoing payer dynamics? Thanks so much.

Mark Trudeau - Mallinckrodt Plc

Yeah, certainly. Let me take all your questions there on Acthar. So with regards to 2019, while we're not giving guidance on the overall business, nor on Acthar specifically we did indicate obviously this morning that we would see Acthar 2019 net sales again being in excess of $1 billion. But importantly, we're also quite pleased with the trajectory that we see of narrowing sales declines and we would expect that trajectory also to continue. So at this point, we think that gives the markets a pretty good idea of how we see Acthar going forward over the next few quarters.

With regards to data, and the way I think about this is in the long run, recognize now that we have initiated a total of seven clinical trials with the introduction most recently of our uveitis clinical trial. So we have seven clinical trials in the market, six of which are for labeled indications, and then we have the ALS trial. And the way I'd think about it in the long run is how that data plays out will dictate the trajectory, the growth trajectory for Acthar going forward. I think we can safely say if all seven of those trials are negative, it's probably not a growth product over time. But if a couple of those trials are positive, given the fact that Acthar today, being used for highly refractory patients with relatively low patient penetration, there's a significant opportunity to drive growth based on volume.

And again the clinical trials that we've designed are specifically addressed to look at those patient subpopulations where Acthar potentially can offer plans, payers, patients, prescribers, the most benefit. And so what we're really going to be able to determine really over the next 12 to 24 months is the future trajectory of growth of Acthar based on the outcome of the clinical trials.

Matthew K. Harbaugh - Mallinckrodt Plc

The only other thing I'd like to add to Mark's comments are you had suggested that the raise in guidance was driven by Acthar. What I would say is the Acthar business came largely in line with our internal expectations and where we really saw the opportunity to increase guidance significantly this morning was around the SG&A savings we had in the quarter as well as a hospital business that is really strong this year.

Mark Trudeau - Mallinckrodt Plc

And one final comment I'll just make on the data in general. We believe that Acthar clinical information is what we call a weight of evidence strategy. So the fact that we're continuing to produce increasingly robust clinical data sets, there's probably no single data set that's going to make a step change in prescribing patterns overall, but we believe that the weight of evidence over time is likely to be quite positive for the drug's future trajectory.

Daniel J. Speciale - Mallinckrodt Plc

Great. Thank you very much. Next question please.

Operator

Thank you. Our next question comes from David Buck from B. Riley FBR. Your line is open.

David George Buck - B. Riley FBR, Inc.

Yes, thanks very much. So my one question is on VTS-270, can you maybe give a little bit more color on how badly a miss it was versus placebo, or how close the P values might have been? And do you anticipate – I know the totality of data is what the FDA is looking for, but do you anticipate that you'll potentially be able to file this in 2019 or do you think that you might have to do some more clinical trial work?

And then just a quick follow-up on Acthar. Can you maybe talk about what changed, if anything, in terms of length of the prescription in 3Q 2018 versus 2Q 2018 and maybe year ago? Thanks.

Mark Trudeau - Mallinckrodt Plc

So maybe I'll ask Steve to take the questions on VTS and I'll come back and speak to the Acthar bit.

Steven Romano - Mallinckrodt Plc

Yeah, so on VTS, I'm not going to share the exact P value with you right now because we're still looking at the data. But what I will tell you is that the trajectory of both patient groups of those treated with VTS-270 as well as those treated with placebo over 52 weeks on average was pretty flat. So in other words, they did not progress.

And the surprising part of that is this is a neurodegenerative condition. There have been other studies including the NIH study that had a comparison with a cohort from a longitudinal population of patients who were matched by age and disease severity did show that they did differently. The trajectory of patients treated did better than those patients who were followed from the longitudinal cohort.

So the bottom line is we expected a separation; we also expected both to decline. We did not see either. So both placebo-treated patients and drug-treated patients stayed about the same over the course of 52 weeks.

Now you can argue that's a good thing, but we have to understand what was different in the placebo group. Why did these placebo patients not progress as anticipated? I'll just remind you, it was a 2:1 randomization and 56 patients were randomized. So we have more information that we could perhaps glean from part C of the study. It was a three-part trial. The first part was a dose finding; the second part was the randomized control portion of the study which I described to you; and the third part it is an open label treatment. We need to look at those open label treatment patients and see if there's any difference that gradually accrues over the course of that additional treatment period in patients who stayed on drug, who had started on drug and stayed on drug, versus those on placebo.

Regarding the totality of the data, yes, we have to look at the NIH data. We're going to look at a large number of patients who have actually been treated through compassionate use problems. That's a substantial amount of additional data as well as the part C data I mentioned. We'll look at all of that before we come to a conclusion about whether or not we have a opportunity to present this to the agency as a reviewable package

Mark Trudeau - Mallinckrodt Plc

And David, with regards to your question on Acthar and length of prescriptions versus prior quarter of 2017, I would say there's not really been a significant change in that. But what we are pleased about is at least the open label portion of the RA trial again speaks specifically to length of prescription in those patients, those highly refractory RA patients where the open label portion of the trial, as you know, with the patients treated over an initial 12 weeks.

And again the responses that we've seen in patients moving to low disease activity supported by their ACR 20%, 50% and 70% scores are pretty encouraging and in many ways consistent with what you might see in other RA type treatments where it takes a couple of months for the benefit to accrue. Again, that's answering a very important question we believe for payers and prescribers which is if you're going to put an Acthar patient, a refractory patient onto Acthar, how long do you need to treat before you should expect to see a benefit? And that's why we think the second half of the trial, the withdrawal phase, the blinded withdrawal phase, also helps to answer an additional question which, is there additional benefit that accrues by keeping the patients on for another 12 weeks, and/or is the affect that you see in the first 12 weeks sustainable over another 12 weeks?

So again, the way these trials are designed I think will specifically help us address that question with both payers and prescribers once the full data set's available.

Daniel J. Speciale - Mallinckrodt Plc

Okay, great. Next question please. Thank you.

Operator

Thank you. Our next question comes from Ami Fadia from Leerink Partners. Your line is open.

Ami Fadia - Leerink Partners LLC

Good morning. Thanks for the question. I have three. Firstly just on the generic side, would you consider selling part of the business? And with regards to the opioid litigation, could you help us put some sort of bookends with regards to the potential exposure you may have and what next steps in terms of timing we should look for? Secondly on INOMAX, what may be the difference between your device and that of Praxair that may differentiate your product? And could you help elaborate on the structure of your contracts that may prevent or dissuade hospitals from renegotiating it once Praxair launches?

And then just on VTS-270 what may be some of the contributors for why the placebo arm did not show progression of disease? Is it the duration of the trial or maybe something to do with the nature of or the severity of the disease of the patients that were enrolled in the trial? Thank you.

Daniel J. Speciale - Mallinckrodt Plc

Just a quick reminder. Please let's try to keep it to one question. I know we've got a lot of people that are in queue. Thank you.

Mark Trudeau - Mallinckrodt Plc

Well, I'll try to tick through these relatively quickly. With regards to the Specialty Generics Disposal Group, certainly we could sell the business in parts. As I said, we are exploring and have a whole range of strategic options in front of us and will continue to pursue all of those going forward.

With regards to opioid litigation, in our minds, there's no way to quantify at this point whatever potential exposure there may be or not. It's way too early to play that out and we think that this is likely to take a considerable length of time to really understand what if any liability may translate from the risks that exist.

And in terms of timing, again, I think it's very public that the first kind of trial cases, there are three of those, those are likely to start being heard towards the end of 2019. I believe third, fourth quarter is the timeframe for that. Again, we would see this as just kind of the first piece of information in something that's likely to be a long, extended process.

In terms of INOMAX and the differences between what INOMAX has and whatever device Praxair may introduce to the market, first let me be clear, we don't know what device has been approved. We do know what they were trying to get approved and based on what we've known in the past, if that's the device that was approved, it would be several generations less sophisticated than what INOMAX offers today. A really dramatic difference from what INOMAX is today. And then the evolved device, next generation technology, would be another significant step of advancement beyond what we believe might be the Praxair device.

Terms of elaborating on the structure of contracts, well typically, while we don't give the details of those contracts, typically what customers are signing up for is certainty, cost certainty and some type of volume or unlimited volume. And typically the economics incentive to sign up for longer term volume makes it very attractive for those customers. So those are the first couple of questions that you had and I'll ask Steve to comment on VTS.

Steven Romano - Mallinckrodt Plc

Yeah, so regarding VTS-270, I think a couple things to remember first of all. So we've gotten a fair amount of data from previous trials and from compassionate use that we're balancing against the interpretation of this current study. So, we're at an interesting place where, at least for this particular product, there have been a number of databases that we can evaluate. Now keep in mind also, this is a heterogeneous population. The patients enrolled in the study were anywhere from ages 4 up to their early 20s.

So, there is heterogeneity in presentation. You typically assume that most of that heterogeneity will be balanced across randomized groups, but this is a small study in an ultra-rare condition, so you bring up a very good point. We're looking very hard at that placebo group because what we are assuming right now is that there is a benefit of the drug which means we have to understand why placebo patients didn't progress as anticipated.

So we'll look at things like severity of disease, age of the patients at the time of onset of the disease, the extent of their neurological condition which is a consequence of the disease as you well know, et cetera. So we're in the process of evaluating that. But I do want to say very clearly, right now we're assuming there may be a benefit and we want to understand why the placebo group did not progress. Hopefully, we'll have good idea in a number of weeks or months.

Daniel J. Speciale - Mallinckrodt Plc

Great. Thanks, Ami. Next question please.

Operator

Thank you. Our next question comes from Annabel Samimy from Stifel. Your line is open.

Annabel Eva Samimy - Stifel, Nicolaus & Co., Inc.

Hi. Thanks for taking my question. I just wanted to follow up on VTS-270. So, some of the patients who've been on these compassionate use trials and extension trials have been on for relatively long periods of time. I've heard as much as four years. And I was just wondering if you had a sense of how long the FDA will want to be booking – the length of duration of some of these trials, that the FDA may want to look at and get comfortable with to be able to assess appropriate disease progression. And you said in the next weeks or months. Do you have a better sense of timing on that? Thank you.

Steven Romano - Mallinckrodt Plc

Yeah so a couple things. Number one is the agency has assumed, and we have as well, that a 52-week period was not an unreasonable period of time to observe for potential differences. That being said, in an ultra-rare condition such as this, you are always learning about the population. It's a very small population of patients affected, perhaps as many as 500 or 600 in the United States. So we're talking about a very rare disease. So we need to look at all of that data.

You were absolutely right as well, there is data from other sources of patients who have been treated with the drug now for several years. Interestingly enough that data suggests a benefit in many of those patients is persisting. So we do have to look at all data sources, we have to understand the trial that we just completed and we'll look at the totality of the information and make some inferences and decisions with regards to a strategy going forward. We will conclude this evaluation over the next several months.

Daniel J. Speciale - Mallinckrodt Plc

Great. Thanks. Next question please.

Operator

Thank you. Our next question comes from Gary Nachman from BMO Capital Markets. Your line is open.

Gary Nachman - BMO Capital Markets (United States)

Thanks. Good morning. On Acthar, just an update on how net pricing has been trending given that it appears access has been improving, and how you feel about formulary coverage next year if you guys have visibility on that. And then quick for Matt, how much more room is there for SG&A efficiencies and how should we think about that run rate for the next several quarters? Where have most of the cost cuts been coming from? Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, so I'll take the first two, Gary, on Acthar. With regards to net pricing, again, consistent with what we've said all year, Acthar net price is modestly positive and we would expect in the future that growth to be driven by volume, not price. And we spoke a little bit about that earlier.

With regards to formulary coverage, we're not anticipating at this point any significant changes as we look forward. Of course, keep in mind this is a very dynamic marketplace and formulary changes have occurred unexpectedly as we saw in 2017. But as we look forward at this point, we're not anticipating any significant change for 2019. What we are anticipating again is the emergence of a significant amount of clinical data which we've already began sharing with some of our payer customers and we would expect that dialogue to continue.

Matthew K. Harbaugh - Mallinckrodt Plc

Yeah, Gary, with regards to your question around SG&A, I would not take what we delivered in this quarter and run rate it. I want to be very clear with that. We are going to be launching products as we move into 2019 and so we're going to need to invest. We've got a number of other initiatives that we're investing in as well, digital innovation and a host of other areas. So you'll see – I'm sure you've seen in the release, we did have some restructuring. We took a charge in the quarter of about $15 million and that was to drive efficiency and we saw benefit from that in the quarter. But please do not take what we did in this quarter and use it as a run rate moving forward because of that investment cycle.

I would just echo what we said in the script this morning which is we remain committed to taking $100 million out, but that was set up for the early 2020s knowing that we've got a number of products to launch in the next coming years

Daniel J. Speciale - Mallinckrodt Plc

Thanks. Next question please.

Gary Nachman - BMO Capital Markets (United States)

Thank you.

Operator

Thank you. Our next question comes from David Amsellem from Piper Jaffray. Your line is open.

David A. Amsellem - Piper Jaffray & Co.

Thanks. Just a couple of quick ones. So on INOMAX, what's your working assumption regarding price degradation to the extent that Praxair is in the market and that is the only competition? And then secondly, you've had a couple of pipeline setbacks here, a few pipeline setbacks. So I guess maybe the question here is, are you taking a different approach or are you thinking about taking a different approach to business development? And are you going to continue to look aggressively or are you going to just focus on cleaning up the capital structure? How should we think about that going forward? Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, so with regards to pricing, I think that really remains to be seen. If and when competition does come, I think we feel quite confident that we'll be able to retain a significant amount of share. And again, that's really based on what we're seeing from customers.

Keep in mind, customers are quite aware that competition may be coming, yet we're seeing renewals of contracts on a long-term basis at or above historical rates. So again, we'll see how things play out if and when competition does come with regards to price and volume. But we think that the feedback that we're getting from customers is the INOMAX offering is something that offers a lot of value to them in this particularly fragile patient population.

With regards to our pipeline, the way we think about it is in a couple of ways. We think about pipeline as a portfolio as most companies do. It just so happens that a couple of the things that we would say carry more risk are coming in readouts a little bit earlier. But what we're looking at is the totality of our pipeline and I think what we want to do is step back and evaluate the success or failure of that over the next year or so, particularly as we see things like terlipressin and StrataGraft, which we've really been developing ourselves, play out. And of course as you heard, we believe there's a potential pathway forward on stannsoporfin and VTS as well. So at this point it's way too early to call whether or not our pipeline is going to be successful. But we think it's quite important that we have multiple shots on goal which we do. And like any pipeline, there are going to be some successes and some failures.

With regards to business development, while our primary focus of capital allocation in 2018 remains debt reduction and we've been very successful in doing that, we believe that there are additional and continuing opportunities in business development to enhance our pipeline as well as enhance our product line. And we'll continue to evaluate those going forward.

Daniel J. Speciale - Mallinckrodt Plc

Thanks David. Next question please.

Operator

Thank you. Our next question comes from Louise Chen from Cantor Fitzgerald. Your line is open.

Sudan N. Loganathan - Cantor Fitzgerald

Yeah. Thank you for taking my question. This is Sudan Loganathan in for Louise. So the question I have is, is the commitment to increase R&D spending over the next decade driven predominately by bringing current assets through the pipeline or is it driven by new internal product development? And if it's the latter, which therapeutic areas are the company prioritizing and why?

Steven Romano - Mallinckrodt Plc

Yeah, so actually it's a mix. So we bring in, as you know, late phase programs as well as in-line brands and those in-line brands like Acthar and INOMAX, Therakos, et cetera, we also invest in. We want to expand the label, expand the data sets and evidence generation in support of a value proposition for all those products. So what I would see is us continuing to do both, as Mark just suggested. And I think our sweet spot is going to be looking at opportunities that are really in the Phase 1b/2 space where we have the opportunity to design the programs, resolve the issues and apply our knowhow in trial methodology, CMC issues, et cetera to those programs. Perhaps more a bias towards that versus programs that are already well into their pivotal Phase 3 programs.

Mark Trudeau - Mallinckrodt Plc

And your question on therapeutic areas I think is an interesting one as well. So the focus of the company is really on underserved patients with severe and critical conditions. And by underserved we mean those patients who may have relatively few options to address the challenging diseases that they're faced with. Clearly there are certain areas that you can already see in our pipeline where we're likely to develop additional therapeutic expertise such as neurology, neurodegenerative diseases, potentially those that specifically afflict pediatric patients. Hepatorenal is another area of focus for us going forward. So those are clearly a couple of areas where we believe we already have expertise, that we have things already in our pipeline and we're likely to enhance those things going forward, those opportunities going forward, and bring additional opportunities in.

Daniel J. Speciale - Mallinckrodt Plc

Great. Thank you very much. Next question please.

Operator

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

Thomas Chiu - Morgan Stanley & Co. LLC

Good morning. This is Thomas Chiu for Dave. Just have one question. Could you just talk about the pipeline asset that you think is most underappreciated by investors? Thank you.

Steven Romano - Mallinckrodt Plc

Yeah, actually I think there are several. For instance, I think in late-phase development, terlipressin is a really very interesting compound. As you know, it's been targeted for treatment of hepatorenal syndrome type 1, and this is a very critically ill population and this product is standard of care outside the United States. So this is the product that physicians go to, to manage these critical patients whose median survival is in the range of two to four weeks when they actually are experiencing this exacerbation of their condition. So we think that is actually an undervalued asset and we think we have a good chance of actually establishing the efficacy in the current study.

I think StrataGraft is another one. This is really a remarkable product. This is a cell line that actually allows recapitulation of the patient's own skin and the data that we have in Phase 2 and that we're producing in Phase 3 gives us a lot of confidence that we might have a very interesting product, a very innovative product here that could displace, in some cases, the use of autografting. That is tremendous benefit to patients.

And then you haven't heard us speak too much about it, but we also acquired a smaller company, Ocera, and have a product which is a ammonia scavenger. That mechanism is very clear and very effective. We know that reducing ammonia in patients with hepatic encephalopathy, another confounding condition in patients with advanced cirrhosis or liver disease, is actually quite effective and associated with clinical improvement. And that program, we've been doing some good work to iron out some of the creases that we inherited so that we can move forward with a robust Phase 3 program, and that's going to initiate next year as well.

So I think we've got some very interesting products that happen to be focused in the area that Mark just underscored which is hepatorenal and organ care. So I think that's an area where we're evolving expertise and we're likely to experience some success moving forward. Thank you for the question.

Daniel J. Speciale - Mallinckrodt Plc

Great. Nice question. Next question please.

Operator

Thank you. Our next question comes from Dana Flanders from Goldman Sachs. Your line is open.

Dana Flanders - Goldman Sachs & Co. LLC

Hi. Thanks for the questions. Can you maybe just speak to how you're thinking about the changes to Medicare and indication-based formularies, I think starting in 2020, and just what that could mean for Acthar? And then just a quick follow-up. I know the other income line can be volatile for you guys. What drove that just $13 million benefit this quarter? Thank you.

Mark Trudeau - Mallinckrodt Plc

Yeah, so with regards to the healthcare system in the U.S. and how it's evolving, obviously there are a lot of potential changes that are being suggested. Let's recognize specifically for Acthar; Acthar, at least from a public payer perspective, is typically under Medicare Part D as opposed to B, and at least initially it does appear that some of the things that are being proposed are focused on B at this point. Doesn't mean things couldn't change around D, but at this point the focus does appear to be around B.

I think most importantly the way we think about it is that there is always going to be room for reimbursement of products that are innovative and demonstrate value to the healthcare system. And that's why our focus on clinical data, specifically on the patient types where we think Acthar can provide most benefit, those highly refractory patients. That's why the clinical data that we're in the process of generating we think is so important longer term, regardless of whatever changes come to the reimbursement system in the U.S.

Matthew K. Harbaugh - Mallinckrodt Plc

With regard to your question around other income and the $13 million, it does stand out. I'd say about $6 million of that are one-time events that are non-reoccurring. You'll see in our disclosures we have eliminated our position in Mesoblast over the course of the last year and we had the pension true up as well in there. So about $6 million of that is non-recurring. The bulk of the rest is a Lutathera royalty which is a product that we have in the portfolio that is being sold by another company. We do anticipate royalties going into next year so you will see some volatility in that line item moving forward.

Daniel J. Speciale - Mallinckrodt Plc

Thanks Dana. Next question please.

Operator

Thank you. Our next question comes from Jason Gerberry from Bank of America. Your line is open.

Unknown Speaker

Oh hi thanks for taking my question. This is Chi (56:48) on for Jason. A follow-up on the pricing for Praxair. As it pertains to Canada as an analogue for the Praxair launch, can you comment on the magnitude of U.S. price premium versus Canada prior to the introduction of generics? And would it be fair to sort of think about generics having a lot less room to cut pricing in the Canadian market? Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, so again, maybe just to clarify, we don't see a competitive environment where we're actually dealing with a generic. We actually would see a competitive environment in the U.S., much like Canada, that would be a branded competitor. And that's exactly what goes on in Canada at the moment is you have branded competition for INOMAX.

Canada is not a great analog for the pricing model into U.S. simply because the way things work in Canada, it's based on a province-wide tender system; so it's kind of all or nothing at a province level. In the U.S. it would be a much different situation whereby you would be account by account. And one of the things that we think is a strength of the INOMAX offering is the options that we present to customers whereby they can pick and choose what suits them the best. Many of our largest customers, for example, want to have a defined expenditure target with the ability to use the product in an unlimited fashion. Others contract differently on a cost per hour basis. And so we have a whole range of options that really are up to the customer to decide what works best for each one of their individual accounts.

And again, if and when competition does occur, we would anticipate that we would be competing in a branded space and that we would be comparing the offerings that we would provide versus any competitive product and pricing commensurate with those offerings.

Daniel J. Speciale - Mallinckrodt Plc

Thanks Chi (59:08). Operator, we've got time for a couple more questions. We'll try to go through them quickly. Thank you.

Operator

Thank you. Our next question comes from Dewey Steadman from Canaccord Genuity. Your line is open.

Dewey Steadman - Canaccord Genuity, Inc.

Hey. Thanks for squeezing me in. I guess can you remind us of your currently detail on marketing presence with OFIRMEV and how that will evolve with the LOE? In 2020 there was a $100 million reduction that had been talked about. And are you still interested in the post-ops, or the postsurgical pain space? And then sort of a dumb question on Acthar. For the uveitis trial, how does this administration work? Is it systemic or is it an intraocular injection? And maybe just give some detail on what the study looks like? Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, so let me take the hospital questions first and ask Steve to comment on the uveitis trial design. We believe we have the right commercial footprint both to drive OFIRMEV through its end of life cycle, but also in anticipation of products that we will be promoting in the hospital, predominantly in the critical care space such as terlipressin in the near future. So we're set up for what's appropriate for today with anticipation of products coming into that portfolio down the line.

With regards to postsurgical pain space, certainly we've had and continue to have very good success with OFIRMEV and we have expertise there. But we would consider our expertise, our commercial expertise in the hospital to be more wide-ranging given that we have both INOMAX and Therakos that are used in the hospital setting. And so going forward, if there are innovative opportunities that are consistent with our objective of severe and critical patients in the hospital and that did extend to this pain space, we would certainly be open to that.

But our primary focus as you can see are areas that are more in the neurology space, immunology space, hepatorenal space, probably less so in postsurgical pain management.

Steven Romano - Mallinckrodt Plc

Yeah, and just very briefly, the uveitis study is done like with many of the other conditions we treat; a subcu injection twice a week, so it's not a local injection.

Daniel J. Speciale - Mallinckrodt Plc

Thanks Dewey. Operator, maybe time for one question and then we'll have to have to wrap. Thank you.

Operator

Thank you. And our final question comes from Steven Regard (01:01:40) from Mizuho. Your line is open.

Unknown Speaker

Hey, good morning. Just really briefly on AMITIZA contribution this year, is it still your expectation for about $200 million? And maybe can you provide some color on how you see that progressing over the next few quarters into 2019? Thanks.

Mark Trudeau - Mallinckrodt Plc

Yeah, so we are very pleased, actually, with what we see with AMITIZA. Keep in mind that the primary strategic objective for AMITIZA was to deliver diversifying cash flow, and it's certainly delivering on that expectation. The top line is a bit lower than we expected but the cost synergies that we've been able to capture are significantly greater and more rapid than we expected. So this is a marketplace that continues to be very competitive. We have experienced a greater than expected price reduction in Japan. Longer term we think there's likely growth, particularly in Japan. And again, we're very satisfied with the strategic delivery of this product which was diversifying cash flow generation.

Daniel J. Speciale - Mallinckrodt Plc

Great. Thank you very much, everyone. I'd like to thank everyone for joining the call this morning again. As a reminder, a replay of the call will be available on the website later today and I'll also be available throughout the day to answer any follow-up questions you may have. So thanks, everyone, and have a great day.

Operator

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