Earnings Transcript for MNK - Q2 Fiscal Year 2020

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Mallinckrodt Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Daniel Speciale, Vice President of Finance and Investor Relations Officer. Please go ahead.

Daniel Speciale: Thank you, Sarah. Good morning, everyone and welcome to Mallinckrodt second quarter earnings conference call. Joining me this morning are Mark Trudeau, our CEO; Dr. Steve Romano, our Chief Scientific Officer; and Bryan Reasons, our CFO. 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 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 more in-depth explanation of the inherent limitations of such forward-looking statements. We will also provide selected non-GAAP adjusted measures. A reconciliation of these non-GAAP adjusted measures are included in our earnings release, which can be found on our website, mallinckrodt.com. We use our website as a channel to distribute important and time-critical company information, and you should look to the Investor Relations page of our website for this information. As under our press release, unless otherwise specified, all quarterly comparisons are to the comparable 2019 period and the net sales growth ranges we will be discussing on a constant currency basis. I would also like to note that we’re conducting today’s earnings call with participants at different locations. We ask that you please bear with us if there is any technical issues or handoffs should take a little longer than usual. Turning to today’s agenda, Mark will start with the discussion regarding the uncertainties facing the business. And then provide an overview of the quarter, including the steps we are taking to mitigate the impact of COVID-19. We also have, Steve to provide an update on recent science and technology activities before Bryan walks us through our financial results for the quarter. In light of the ongoing discussion with financial creditors and litigation claimants and their respective advisors, we will not be holding a Q&A session today following our prepared remarks. We appreciate your understanding. With that, let me turn the call over to Mark. Mark?

Mark Trudeau: Thank you, Dan. Good morning, everyone, and thanks for joining us. I hope you are all staying safe and healthy. Before I get in to the business for the quarter, I think its important to discussion the recent events and the various challenges facing the business. Over the course of the last two years, the Company has faced significant pressure from the opioid litigation claims and more recently the retrospective one-time Acthar Gel Medicaid rebate liability. As result of the adverse ruling in the Medicaid rebate calculation matter in March, and the prospect of having a $640 million liability coming due this fall, in addition to the opioid litigation pressure and other risks, as well as our overall debt levels, we been considering a range of options with our advisors. This includes engaging in dialogue with financial creditors and litigation plaintiffs and their advisors. While no decision has been made, these discussions could potentially result in the filing for Chapter 11 reorganization by Mallinckrodt plc and the majority of its subsidiaries in the near-term. This is a challenging situation and we are considering what's in the best interest of all of our stakeholders. We continue to work toward a comprehensive resolution to the opioid litigation and pursue our appeal of the Medicaid rebate calculation matter. However, due to the appeal briefing and argument schedule it is unlikely that our appeal of the lower court adverse ruling in the CMS matter will be ruled on before payment obligations begin to arrive. As such, we feel we have been left with no option, but to explore our comprehensive resolution of these matters. Turning to the second quarter. Despite the company's uncertainties compounded by COVID-19, the underlying specialty brands and specialty generics businesses continue to operate relatively smoothly and we continue to advance our strategic priorities furthering our pipeline and maximizing the value of our diversified inline portfolio, which is a testament to our employees hard work and commitment to our business, patients and customers during these unprecedented and challenging times. The swift actions we took last quarter to adapt our operations have enabled us to maintain business continuity and continue providing our customers and patients with uninterrupted access to our medicine. This quarter we continue to evolve our operating model by leveraging the use of technology for face-to-face interactions with customers to meet the needs of patients. We've continued to manufacture, supply and deliver our products largely without interruption. And looking ahead, we do not anticipate any supply disruption from COVID-19. Turning to the pipeline. We achieved important milestones in the past toward FDA approval for two key therapies. In June, we announced the completion of rolling submission of a Biologics License Application or BLA to the FDA for StrataGraft regenerative skin tissue. And on July 15, we received the positive vote from the FDA advisory committee for terlipressin. If approved, terlipressin will provide an important treatment option for patients in the U.S. who have significant complications with liver disease. We anticipate launching terlipressin with our current hospital sales team immediately after a positive approval in September. In addition, we look forward to the potential approval of StrataGraft early next year. We're continuing to progress on a franchise modernization initiatives with our Acthar Gel self-injector and INOmax EVOLVE products, which if approved we expect to launch in late 2021. In addition, we anticipate the upcoming start of our Phase 3 trial for MNK 6105. Additionally, we look forward to the outcome of several previously announced studies of the potential effect of INOmax in COVID-19 patients suffering from advanced lung complications. Later on this call, Steve will provide further color on all of our development and clinical activities. Now turning to portfolio highlights in the second quarter. Despite the unprecedented challenges created by COVID-19, we continue to make significant progress toward maximizing the value of the diversified in-line portfolio. As expected the combination of stay-at-home orders, reduction of elective surgeries and a drop in overall patient procedures impacted our business. Notably, we saw decreases in the performance of Acthar Gel, Therakos and OFIRMEV, as these products continued to be the most sensitive to the restriction. These declines were offset by an increase utilization of nitric oxide, which resulted in double-digit growth for INOmax. We are uncertain if this trend will persist in the back half of the year. While we're confident that business and promotional activity will likely recover as the impact of COVID-19 subsides, there's still a high degree of uncertainty surrounding the duration of the pandemic and its effects. We expect we will continue to feel the impact into the back half of the year. For Acthar Gel, the performance in the quarter was slightly ahead of our expectations. This was primarily driven by retention of returning patients who are staying on therapy longer than historical trends for the brand. The focus of the Acthar Gel business will continue to be improving new patient starts as certain markets open, and our field teams returned to face-to-face customer interactions, which has recently begun. This is primarily driven by our brand modernization efforts with our clinical development activities. We expect the recovery to be relatively slow as physicians and patients navigate local COVID-19 restrictions. We also saw the partial impact of the retrospective one-time Acthar Gel Medicaid rebate liability starting June 15, which has essentially eliminated Acthar Medicaid net sales prospectively. We've quantified this as an approximate $90 million to $100 million revenue stream on an annual basis, which will now be going away. We expect that this change will be an additional contributing factor to a sequential decline in the product for the remainder of the year. Performance of INOmax continues to be bolstered by the use of nitric oxide as a treatment for critical COVID-19 patients. Although, INOmax is indicated for the treatment of pulmonary hypertension in newborns, many hospitals across the U.S. have chosen to utilize this important therapy as a therapeutic option for critical patients suffering from acute respiratory distress syndrome, as caused by the COVID-19 virus at the discretion of the treating physician. During the second quarter, we saw an increase in volume, which speaks to the broad level of utilization as the pandemic hits different parts of the country over time. In the second half of the year, we expect both volume and price pressure from competition on the brand as the COVID-19 health crisis begins to potentially subside. The total care approach for INOmax has allowed our customers to feel confident in our commitment to them and their patients, as they continue to battle the impact of COVID-19. We believe that this approach to exceeding customer expectation will continue to differentiate INOmax in the marketplace against potential competitors. We believe the EVOLVE next generation device for INOmax will be a significant technological advancement in the delivery of nitric oxide to the healthcare system. Turning to OFIRMEV injection. We've seen a significant downturn in demand for the product due to the COVID-19 related postponement of elective surgeries across the United States. As we look at the trends in the market, we do not expect the demand for the product will recover prior to the loss of exclusivity in early December of this year. We expect multiple generic entries into the market at that time. Our focus for the brand will be to work closely with accounts that are bringing elective surgeries back into their schedule in order to ensure that OFIRMEV is available to patients that can benefit from the multimodal analgesia approach to pain management. As we said last quarter, we're focused on realigning our organization to reflect this, including shifting teams and driving reductions in selling general and administrative expenses. With respect to the Therakos immunology platform, overall our patient demand was down in the quarter due to the reduction in procedures and patient visits related to the pandemic. We are however, beginning to see CTCL patients return to treatment. We expect the platform to continue to be an important choice for physicians and their patients, as healthcare practices recover from the impact of COVID-19. In especially generic segment, while we saw a slight sequential growth in the quarter, we do expect the business to be down in the second half of the year due to COVID-19. We continue to believe that this business is poised for long term growth driven by a U.S. based manufacturing and vertical integration. Now, let me turn it over to Steve to provide some more details on our pipeline and data generation efforts. Steve?

Steven Romano: Thanks, Mark. As Mark mentioned, despite the continued challenges of COVID-19, we achieve critical milestones during the quarter for terlipressin and StrataGraft regenerative skin tissue regenerative skin tissue, two of our late phase development programs. On July 15, the Cardiovascular and Renal Drugs Advisory Committee of the FDA convened a virtual meeting to review data on terlipressin and the committee voted to recommend approval of the investigational agent terlipressin to treat adults with hepatorenal renal syndrome type 1. The advisory committee's recommendation in favor of approval supports the potential clinical value terlipressin can bring to patients. Particularly given that there are no proof therapies in the U.S. we look forward to working closely with the FDA as it continues to review our application and anticipate a PDUFA date of September 12. Turning to StrataGraft. In early June, we completed a rolling submission of Biologics License Application to the FDA for StrataGraft regenerative skin tissue for patient with the deep partial thickness thermal burns. The completion of our BLA submission is an important step toward our goal of providing an innovative therapy to adult burn patients in the US. And we are confident in its value as a potential new treatment option for deep partial thickness thermal burns if approved. Our achievement of these substantial development and regulatory milestones demonstrates the maturing capabilities of our science and technology organization, as well as our deep commitment to meeting the unmet needs of patients with severe and critical conditions. To that end, we continue to leverage our extensive understanding of the physiological effects of inhaled nitric oxide, to identify means of exploring the potential effect of INOmax in patients suffering from advanced lung complications associated with COVID-19. Last quarter, we announced two trials evaluating INOmax nitric gas -- nitric oxide gas for inhalation therapy for COVID-19 infection and associated lung complications, including the evaluation of the potential direct antiviral effect. We remain committed to increasing our understanding of this potential therapeutic option for use by healthcare providers on the front lines of this unprecedented health emergency. Finally, in the coming weeks, we're planning to initiate a retrospective review of medical records to gather more immediate real world evidence on how inhaled nitric oxide is being used currently in hospital settings to manage complex and challenging cases. In terms of our work with hospitals and health systems to support the needs of coronavirus patients, our respiratory therapists who routinely support INOmax use for the management of persistent pulmonary hypertension and newborns continue to make themselves available on request to ensure the safe use of the INOmax platform in any setting. In addition, our Customer Care Center continues to respond around the clock to provider inquiries during this difficult time. Turning to our evidence generation efforts for Acthar Gel, we made a difficult decision to end two of our Phase 4 studies one in uveitis and the other in relapsing-remitting multiple sclerosis flares. This decision was based on several factors, including one, the impact of COVID-19 on the activity of study sites, which compounded in particular the difficulties and logistical challenges of enrollment. And two, need to prioritize investments due to business pressures arising from the ongoing COVID-19 health crisis and others as noted by Mark. We've resumed several other ongoing Acthar Phase 4 studies, which were temporarily paused due to the pandemic, including one in patients with keratitis and one in sarcoidosis. In addition, we recently published additional data from our previously completed rheumatoid arthritis study, as well as the results of retrospective data evaluations in patients with sarcoidosis and MS relapse, and expect to communicate results from our recently completed trial and systemic lupus erythematosus as well as the complete MS registry results later this year. These above mentioned clinical activities along with our work to modernize our manufacturing processes, and develop a more patient friendly self-injector, all underscore our extensive investments in support of modernizing the Acthar Gel franchise. Although we experienced some delays related to the pandemic, we continue to progress administrative and startup activities for the initiation of our global Phase 3 trial of MNK 6105, L-ornithine phenylacetate for the treatment of patients with advanced liver disease suffering from hepatic encephalopathy. You will recall that due to the complexity of this condition and the challenges of conducting a single large pivotal registration trial, we saw greater alignment with the FDA and worked closely with them to finalize study requirements. We now anticipate the start of this potent [ph] trial by the end of the first quarter of 2021. We've also completed a Phase 2 PK/PD study to clarify appropriate dosing for the oral formulation of L-ornithine, phenylacetate, MNK 6106 and expect to report this data later this year. Turning to the other in-line brands. We continue to advance our efforts to complete the development of the EVOLVE next generation INOmax delivery device, as well as our new Acthar Gel self-injector. We expect to be in a position to launch both programs in late 2021. We've also made important progress in expanding the availability of our Therakos ECP platform to Japan. In May, we submitted the medical device application to the pharmaceuticals and medical devices agency the PMDA for Therakos in supportive of an ECP therapy in steroid resistant or intolerant chronic graft versus host disease indications. We anticipate the review of this dossier to conclude within the second half of 2021. Lastly, we continue to make progress on our early research and development collaborations to advance therapeutics in the area of autoimmune and other immune mediated conditions. Regarding our collaboration with Silence Therapeutics, you will recall, we obtained a license to a C3 complement preclinical asset based on Silence's proprietary RNAi technology platform. In July, in addition to making strides in the nomination of a specific C3 targeted compound to advance into GLP tox studies to support an IND filing, we exercised our option to pursue two additional compliment targets. The addition of these new targets further advances our strategy to become a leader in the treatment of underserved patients with immune mediated diseases. In addition, we continue to progress work with Transimmune including the generation of new preclinical data. This data will allow us to gain greater clarity regarding the specific mechanisms underlying the benefit of Therakos platform across various conditions. In summary, despite the challenges of COVID-19, we continue to deliver significant progress towards our goals in the first half of this year. Major catalysts in the coming quarters for our science and technology organization, include the completion of a rolling submission of a biologics license to the FDA for StrataGraft regenerative skin tissue, the PDUFA date for terlipressin in September and the initiation of our Phase 3 trial for MNK 6105 by the end of the first quarter of 2021. I'll now turn it over to Bryan to discuss the financials, Bryan.

Bryan Reasons: Thank you, Steve. And good morning everyone. In the second quarter of 2020, we reported adjusted diluted earnings per share of $1.89 with adjusted net sales of $701 million, as compared to adjusted EPS of $2.53 and net sales of $823 million, a decline of 25% and 15% respectively. With respect to the segments, especially brand segment, net sales were $523 million, while specialty generic segment net sales were $178 million. Acthar Gel contributed net sales of $240 million, a decline of 20%. The quarterly decline was primarily driven by continued reimbursement challenges impacting new and returning patients, continued reduction in patients as a result of COVID-19 pandemic, which is anticipated to impact results in the second half of the year, continued payer scrutiny on overall specialty pharmaceutical spending, and to a partial extent the change in Medicaid rebate calculation. INOmax delivered $155 million in net sales, an increase of 11% driven by overall increased consumption of nitric oxide by our customers, including variable revenue contracts and strong utilization within COVID-19 patients. OFIRMEV contributed $52 million in net sales, a decrease of 42% driven by a reduction in elective surgeries due to public health orders and institutions focused on responding to COVID-19 pandemic. You likely also saw we impaired the intangible asset for OFIRMEV this quarter in light of the COVID impact as we approach loss of exclusivity in December. Therakos provided $48 million in net sales, a decrease of 21%, driven largely by COVID-19 stay-at-home directives impacting patient's ability to receive treatment. Lastly, AMITIZA generated net sales of $49 million, a decrease of 5% due to the continued impact of competition in the U.S. and the biannual price reduction in Japan. Specialty generic segment, net sales in the quarter were $178 million as expected with a slight sequential increase. Turing to operational measures in the quarter. Total Company's adjusted gross profit as a percentage of adjusted net sales was 72.1% compared with 73.4% due primarily the product mix. Adjusted SG&A is a percentage of adjusted net sales for the total company was 28.2% as compared to 25.3%, impacted by the decline in net sales, while overall adjusted SG&A expense actually declined due to our continued focus on cost containment and reductions. Overall company R&D expense as a percentage of adjusted net sales was 11.8% compared to 9.7%. The adjusted effective tax rate was 4.6% in the second quarter. Turning to the liquidity, cash provided by operating activities in the second quarter was $171 million, with free cash flows of $160 million with year to-date free cash flows of $193 million. We ended the quarter with $4.5 billion in net debt, and our current cash balance at the end of the second quarter was $818 million. I'll now hand the call back to Mark for a few closing remarks. Mark?

Mark Trudeau: Thanks, Bryan. In closing, I'd like to emphasize a few main points. First, our team continues to do an excellent job serving our customers and ensuring patients have uninterrupted access to our medicines throughout the pandemic. Second, given the amount of uncertainty that continues to surround the COVID-19 health crisis, we continue to adjust and refine our business approach. Though we remain confident that our operations will recover as the impact of COVID-19 potentially subsides, we expect we will continue to see challenges in the back half of the year. Third, we're continuing to drive forward on our strategic priorities and make important progress toward advancing our pipeline, including continuing to work closely with the FDA, after a positive vote by the Advisory Committee for terlipressin, the completion of a rolling submission for a Biologics License Application to the FDA for StrataGraftregenerative skin tissue and maximizing our diversified in-line portfolio. And finally, we continue to be highly focused on addressing all legal and financial challenges as we work with our advisors to determine the best path forward for the business. We appreciate your time this morning and continued interest in Mallinckrodt. The challenges impacting the business are unfortunate and require us to consider a range of options to address them. We'll work relentlessly to drive appropriate resolution to these matters. And finally, on a personal note, I want to wish you and your families well during the pandemic. Thanks for joining us on the call this morning.

End of Q&A: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a great day.