Earnings Transcript for MNK - Q3 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Mallinckrodt Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] 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, Mr. Daniel Speciale. Thank you. Please go ahead, sir.

Daniel Speciale: Thank you, Skylar. Good morning, everyone, and welcome to today’s call. Joining this morning are Mark Trudeau, our CEO; Bryan Reasons, our CFO; and Dr. Steve Romano, our Chief Scientific Officer. 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 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. As noted in our press release, unless otherwise specified, all quarterly comparisons are to the recast comparable 2018 period, and the net sales growth ranges we’ll be discussing are on a constant currency basis. From a guidance perspective, we are raising our low end of our adjusted diluted earnings per share guidance range to $8.50. Thus, we now expect the full year 2019 adjusted diluted EPS to be $8.50 to $8.70. With that, let me turn the call over to Mark. Mark?

Mark Trudeau: Thanks, Dan. And good morning everyone. I’ll start off with some business highlights including positive trends in the business and an update on uncertainties that we continue to address. Steve will take you through the latest advancements in our R&D pipeline followed by Bryan who will provide you with third quarter financial highlights. Finally, we’ll open it up for some Q&A. We had another solid financial quarter and we continued to be pleased with the financial strength and cash flow capability of our business resulting in raising for the third consecutive quarter our EPS guidance this year. In addition, we remain focused on driving the transformation of the business and operating efficiently and effectively. Before I get into the quarterly results and business highlights, I want to touch based on where we are and our efforts to address the uncertainties driven by the ongoing opioid litigation, the pending resolution of the CMS matter and our near term debt maturities. Our goal is to reach clarity on these issues in the coming months. First with respect to opioid litigation, during the quarter, we reached a settlement on the initial cases in Ohio. We are in active discussions and we remain optimistic that a framework for a global resolution to these matters can be developed in the coming months. With regards to strengthening our balance sheet, we continued to be focused our net debt reduction. Earlier this morning, we launched a private exchange offer for our unsecured notes, which Bryan will comment later on our call. Finally, on the CMS front, we continue to wait for ruling which could come at any time. We developed a range of strategies to address any potential impact of that ruling. In short, we’ll be aggressively and diligently working to address these matters in an attempt to remove the associated uncertainty impacting the business. We remain focused on our four strategic pillars laid out at the beginning of the year, one, advancing the pipeline, two, completing the Specialty Generics separation, three, maximizing the value of the diversified inline portfolio, and four, executing discipline capital allocation with net debt reduction as our primary focus. Developing and delivering success from our pipeline remains a priority. We’ve been successful in data generation and are encouraged by the advancements we see across our portfolio. We took a significant step forward in the recent pivotal Phase 3 top line readouts associated with terlipressin and StrataGraft. We continue to believe that the separation of brands in Generics businesses which are distinct and independently operated is the best way to maximize the value of both. We remain optimistic and our efforts to ultimately separate these businesses and our clues that generics has continued to show return to growth as evidenced by the last three quarters. Turning to our inline portfolio, we’re encouraged by what appears to be trends emerging in certain key brands including a growing volume of Acthar Gel RA prescriptions following the compelling Phase 4 data presented earlier this year as well as continued demand for our total care approach for INOmax. Based on these apparent trends, we believe the performance of both the hospital portfolio and Acthar will be within our previously communicated ranges for the full year. Despite this potentially promising trend in new patient demand in certain therapeutic areas including RA, Acthar continues to face reimbursement pressures as payers challenge longer duration prescriptions in certain indications. We continue to believe that the ongoing modernization strategy should allow us to stabilize and potentially improve the reimbursement landscape for Acthar Gel. We’re beginning to see this potentially play out in recent interactions with payers since the availability of the Phase 4 RA data for the product. The focus of our approach with payers is to ensure a clear identification of the appropriate Acthar Gel patient, the dose and duration of treatment, and essence of budget certainty for commercial payers. Our approach is to limit the budget impact for payers to an annual subscription model similar to what exists for INOmax. This could allow patients and healthcare providers a clear pathway for reimbursement for the product in additional labeled indications while eliminating one of the greatest concerns of the payer budget uncertainty. We’re currently in the preliminary stage of this strategy. Although the Acthar label currently includes use in lupus patients, we believe that the Phase 4 trial readout expected in the coming months, if successful could provide further information for appropriate patients including dosage and duration. Patients suffering from lupus unfortunately have very few options to treat this extremely debilitating disease. Acthar Gel remains an important product for the company and the patients that we serve. We expected the story of Acthar Gel will be determined in the next year or so as we await further clinical data in programs like lupus, uveitis and sarcoidosis while working towards the next generation presentation of the product with a self-injector device. Looking at INOmax, we continue to see strong demand for INOmax’s Total Care offerings as measured by growth in the volume of nitric oxide delivered to patients by our customers. We're at an all-time high in the amount of business that’s coming from multi-year agreements for INOmax as customers continue to see the value in the total care model. Although more utilization came from multi-year unlimited use tracks, we saw that this high consumption rate did not directly translate to higher net sales. We expect this to normalize in the fourth quarter, which we believe will return the product back to historical growth rates. We continue to execute on the total care model as an important differentiator for INOmax. INOmax has a history of providing life saving therapy to the most fragile patients in the NICU as well as excellent customer experience that leads to confidence the positive usage of the product. We don’t expect that to change based on our continued investment in the product and EVOLVE device under development as well as potential label expansion. Next, on Ofirmev, we saw a decrease in net sales during the quarter as a result of certain guideline changes from hospitals favoring oral versus IV acetaminophen in certain procedures and as a result of quarter-to-quarter order variability. Prior to this quarter, this product has experienced consistent, strong growth over a number of consecutive quarters and we believe this performance may improve in the fourth quarter. Therakos performance in the quarter was driven primarily by growth in CTCL patients in the U.S. Our efforts to expand the appropriate use of Therakos for this important indication area is a result of our relentless focus across the portfolio on patient identification and capture at the physician level. In short, the hospital business continues to perform well and we expect the portfolio will see high single digit growth for the full year. Finally, for Amitiza, we have continued to see strong growth in Japan, partially offset by increasing competition in the U.S. We continue to expect the product will be at least $200 million in net sales for the year. Moving into next year, we will likely see a decline in net sales due to Japanese biannual pricing reduction and continue increasing competition in the U.S. Overall on the branded side of the business, our long stated objective has been to become an innovation driven biopharmaceutical company. With our pipeline continuing to build momentum, we’re beginning to realize this transformation. In the Specialty Generics segment, we were pleased to report another quarter of growth for this diversified primarily non-opioid portfolio of dosage and API products even while dealing with some slight disruption due to this suspension of our spinoff plans and changes in the management structure. We expect that the Specialty Generics segment will likely perform towards the low end of our guidance range for the full year, but continued to be pleased with the return to growth for the business. We believe this business is poised for long-term growth with a majority of the pipeline opportunities coming from non-opioid generic products. Before I turn the call over to Steve, there are three things I’d like to reiterate today. First, we are working aggressively and diligently to address near term overhangs and remove uncertainty. Second, we are executing against clear strategic pillars and approves with the underlying strength and good cash generation of our business. Finally, our transformation continues and it’s driven by strong R&D capabilities that are delivering on a pipeline of innovative and critical therapies across various stages of development. With that, let me turn the call over to Steve to provide some more details on our pipeline and data generation efforts. Steve?

Steve Romano: Thank you, Mark. This year has been a successful year for our science and technology organization. Over the last quarter, we have achieved critical milestones for two of our late phase development programs. In August, we reported top line results for our pivotal Phase 3 CONFIRM trial demonstrating the efficacy of terlipressin in the treatment of hepatorenal syndrome type one. And in September, we reported top line results for our pivotal Phase 3 trial demonstrating the benefit of StrataGraft regenerative skin tissue in patients with deep partial thickness burns. Having established our development organization only several years ago to support the company’s transition to an innovation driven by a pharmaceutical company achieving two positive Phase 3 program readouts is a testament to the organization’s fundamental capabilities. In addition to the above key development milestones, we also demonstrated continued progress on the execution of our Acthar evidence generation efforts reporting positive results for our multiple sclerosis registry and initiating our Acthar Phase 4 keratitis pilot study in October. I’d like to now summarize the data from our recently completed development programs. Let’s first discuss terlipressin. As a reminder, HRS-1 is a life threatening, rare and acute disease characterized by complications of advanced liver disease that lead to kidney failure. HRS-1 has a very poor prognosis with a median survival time of less than two weeks and greater than 80% mortality within three months. At present, there are no approved drug therapies for HRS-1 in the U.S. or Canada. HRS-1 is estimated to affect between 30,000 and 40,000 patients in the United States annually. The CONFIRM clinical study evaluated the efficacy and safety of terlipressin in 300 adults with HRS type one. The study met its primary endpoint of verified HRS-1 reversal with a P value of 0.012. Importantly, verified HRS-1 reversal includes three clinically relevant components, renal function improvement, avoidance of dialysis, and short-term survival. We’re planning to submit our NDA to the FDA in early 2020. We also are very excited about the opportunity to present these findings at the upcoming American Association for the Study of Liver Diseases meeting on November 11 in Boston. Turning to StrataGraft. It's important to remember that our overall objective for this potential product is to reduce substantially the need for autograft for certain wounds. Autograft is considered to be the standard of care by many for deep partial-thickness thermal burns. Such wounds are complex skin injuries in which the damage extends through the entire epidermis, the outermost layer of the skin and into the lower part of the dermis, the innermost layer of the skin. As autograft involves a surgical harvesting of healthy skin from uninjured site on the patient and transplanting the skin graft to the injury, patients are left with two wounds requiring care. Patients who received an autograft may experience pain, itching, scarring and impaired function at the donor site. The pivotal Phase 3 trial evaluated the efficacy and safety of the single application of StrataGraft in the treatment of deep partial thickness thermal burns. Each study participants served as his or her own control. Results show that a significantly smaller area of burn wounds treated with StrataGraft tissue required autografting by three months compared to the area of burn wounds treated exclusively with autograft with a P value of 0.0001. Additionally, results show that the proportion StrataGraft treated wounds that achieved durable wound closure at three months exceeded the predefined threshold for statistical significance. Based on a positive Phase 3 data we plan to submit a BLA for StrataGraft tissue to the FDA in the first half of 2020. We also plan to submit these data for presentation in the American Burn Association spring meeting in 2020. Regarding the Acthar MS registry, it was designed to assess characteristics of patients receiving Acthar Gel for MS exacerbations. Data showed that patients treated with Acthar Gel reported significant improvements in symptoms associated with MS exacerbations at two months from baseline as measured by the MS Impact Scale for primary measure of the study. Importantly, the response was sustained at six months. Physicians also reported an improvement in physical symptoms and patients treated with Acthar Gel based on the Expanded Disability Status Scale. Regarding other key development programs, we continue to progress our preparation 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. Given the complexity of the disease, we think that it’s important to put in the time to gain confidence in our ability to find the alignment with the regulatory agency for Phase 3 trial. Thus, we’ve decided to seek further alignment with the FDA through utilization of the special protocol assessment or SPA procedure. Though this may add several months of the time line to this trial starts, it should provide greater confidence in our ability to execute a program aligned with FDA’s guidance. Regarding adrabetadex, one we referred to as VTS-270 and being developed to treat the ultra-rare neurodegenerative condition Niemann-Pick disease type one. We also are generating additional analyses on all available databases. These analyses are in response to interactions with the FDA as we continue to seek of viable path through an NDA submission. Turning to further developments with in-line brands, we continue to advance our efforts to complete the development of EVOLVE, our next-generation INOmax delivery device as well as our new Acthar self delivery injector. Both programs are expected to be completed in 2020 with specific plans for submission to follow. We’ve also been successful expanding the reach of Therakos achieving approvals for Uvadex and Therakos ECP in Australia for both chronic graft versus host disease and cutaneous T cell lymphoma. Lastly, we are progressing our early research and development collaboration with Silence Therapeutics. Recall, we recently obtained the license to their C3 compliment preclinical asset SLN500 with options to license up to two other compliment targeted assets based on their RNAi technology platform. We also have been progressing our work in the collaboration with Transimmune including the generation of new preclinical data, allowing us to gain greater clarity on the specific mechanisms underlying the benefit of Therakos ECP across various conditions. In summary, significant progress has been made across our portfolio over the past quarter and year. Looking forward to major milestones and catalysts over the next two quarters, we will be presenting the full data set for the terlipressin CONFIRM trial, AASLD the liver meeting on November 11. In the first half of 2020, we also plan to submit both terlipressin NDA and StrataGraft BLA as well as have top line results for the Acthar Phase 4 lupus trial. Finally, certain key post-hoc aggravated X analyses may be available by first quarter 2020 that will inform further discussions with the FDA. I’ll now turn it over to Bryan to discuss financials. Bryan?

Bryan Reasons: Thanks, Steve, and good morning, everyone. In the third quarter of 2019, we reported adjusted diluted earnings per share of $2.07 with net sales of $744 million. The brand segments net sales were $580 million with the hospital products collectively generating $284 million in net sales and Acthar contributing net sales of $230 million. INOmax delivered $137 million in net sales, a growth of 3%. Ofirmev contributed $86 million in net sales, a decrease of 1% and Therakos provided $61 million in net sales, an increase of 3%. Lastly, Amitiza generated net sales of $53 million in the quarter, an increase of 9%. Specialty Generics segment reported $163 million in net sales in the quarter, an increase of 2% as we continue to benefit from share recapture across the portfolio of products. Now let me share some details on operational measures for the quarter. Total company adjusted gross profit as a percentage of net sales was 71.7%, a decrease of 120 basis points driven by the changes in product mix and in particular Acthar. Adjusted SG&A as a percentage of net sales for the total company was down significantly at 24.5% as compared to 25.7% as a result of our ongoing SG&A costs contained. Overall company R&D expense as a percentage of net sales was 13.9% compared to 10.8% which is driven primarily by our upfront payment relayed to our collaboration with Silence Therapeutics. Turning to liquidity, our operating cash flow in the quarter were $67 million, bringing the year-to-date operating cash flows to $534 million and year-to-date free cash flows up $425 million. The third quarter cash flows were achieved despite legal expenses and certain working capital changes from a key customer in Specialty Generics segment, as well as certain onetime payment, including the Silence Therapeutics upfront payment and the legacy Questar DOJ settlement. We continue to expect our annual free cash flows to exceed 2018 levels and be approximately $600 million for the year. Lastly, we continue to be mindful of our near term debt maturities. And as Mark indicated, we launched private exchange offers this morning to holders of our unsecured notes, including the 2020 maturities in which holders have an opportunity to exchange their holdings into new second lien note with longer maturities. Details of these exchange offers can be found in our press release issued earlier today. As the exchange offers are currently open we’re unable to comment further on this call. Next debt at the end of the quarter was $5.3 billion, having been reduced by nearly $1.1 billion since the end of the first quarter of 2018 following this Sucampo Acquisition. Lastly, our net debt leverage grew slightly higher in the third quarter to four times as published on our website today. Now let me turn the call back to Dan who will take us through Q&A.

A - Dan Speciale: Thanks, Bryan. I like to remind 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 when the work to get through as many questions as possible. With that operator, may we please have the first question?

Operator: Our first question comes from Chris Schott with JP Morgan. Your line is now open.

Chris Schott: Great. Thanks very much for the question. My question was on Acthar. And just if you could elaborate on a high level for the outlook for reimbursement and growth for that product in 2020, I realize you are focused on data monitorization and we have further readouts of that data will hopefully ultimately stabilize the business. But it sounds like it's going to take some time. In the meantime, you're seeing further pressure on sales that we saw this quarter. So directionally, should we be thinking about another step down in sales next year, even before we consider the Medicaid reimbursement dynamics? Or do you believe you'll be able to start to stabilize this business from the data you already have on hand? Thanks very much.

Mark Trudeau: Yes, thanks Chris. So with regards to Acthar 2020, even though we're not giving guidance at the moment, I think, you hit on a couple of key points, one is that we're anticipating that we're going to have some pressure on sales due to the CMS situation, which we would expect to be resolved hopefully soon, but certainly into 2020. The second point though, I think, with regards to reimbursement is a challenging one to predict at this point for two reasons. One is that we're very pleased with the fact that at the Acthar clinical data is now starting to readout so positively. Obviously the RA data was very, very positive and that's clearly had an impact on prescribers that we can see prescriptions from rheumatologists for refractory RA patients are definitely trending up. It's also enabling us to have a different level of dialogue with our payers. And of course we have several additional new datasets that are likely to readout. In addition to the MS registry which was also positive, but clearly the lupus trial readout is imminent, as well as uveitis and sarcoidosis. As we've always said, we think it's going to take another year or so for us to have a real clear view of where Acthar trends are likely to go and it's going to be based on the outcome of the data. Obviously we're very encouraged by the first couple of studies reading out so positively. And again with those other studies also readout positively, we think that's likely to have a positive impact on prescribing. The other thing that we noted today though is we're looking quite differently at reimbursement going forward. And we're engaging with payers now around a different type of model for Acthar prescriptions and reimbursement. And that's something potentially similar to what we do with INOmax, where for most of our large customers we have what's called a subscription model, whereby it gives payers a degree of certainty with regards to what the budget impact may be. And again, I think, those discussions are at the early stages, but we've had some very positive initial reactions from payers to that proposal. Obviously we've had very good experience doing that with INOmax. And importantly, what we're going to do is with the combination of the data which facilitates these discussions and potentially a new way of capturing reimbursement, we would first stabilize the Acthar reimbursement and revenue. And then longer term if all of these things are positive, then we would be well positioned for growth. In addition to that, of course we have the self-injector for Acthar that's in development. And we do think that that could be a significant advantage for patients as well as prescribers and potentially payers as we look at some of these more creative ways to explore reimbursements. So in summary, really the story is going to be told over the next 12 months, it's a little preliminary at the moment to project. We think initial trends are quite positive. But we would – we continue to feel more positive as we get more data readouts for the product in key therapeutic areas.

Dan Speciale: Thanks Chris. Operator next question please.

Operator: Our next question comes from Gary Nachman with BMO Capital Markets. Your line is now open.

Gary Nachman: Hi, good morning. What are the different strategies that you're considering depending on the outcome of the CMS decision? And are you considering any significant restructuring initiatives in a worst case scenario? And then Mark just comment on the next steps with the opioid litigation, has the Track 2 and the Ohio MDL been defined yet? And what about the other states and the timing of those trials? And maybe just comment on the number of cases that are pending at this point. I know there's a lot going on but maybe just give us a little bit of a sense of just how you envision the next three months sort of playing out if possible? Thank you.

Mark Trudeau: Yes. Thanks, Gary. So with regards to Acthar strategy and the CMS decision, I would say this, the outcome of the CRS decision really has a marginal impact on our longer term strategy for Acthar. Clearly if the decision goes unfavorably for us infantile spasms, which is largely a Medicaid population we could have some change in strategy on the margin there. But fundamentally the strategy for Acthar is tied significantly to the data readouts and our engagement with payers around a reimbursement model that I just discussed. And those two things are in combination, the strength of the data and the discussions on innovative contracting models go hand in hand. We would again see the investment model for Acthar and the strategy for the products really being driven much more by the data and the engagement with payers around that data. Transitioning to the discussion around opioid litigation, so just in terms of how the cases play out, really the next case for us that’s currently on the docket is in the State of New York, which is in the March, April timeframe of 2020. Track 2 in Ohio is in the very early stages of scheduling and we expect that would be significantly after the New York case. But as you might imagine, we're considering a whole range of options because our objective is to resolve these cases and come to some type of a global resolution so that we can eliminate the overhang that exists on the company. Clearly we think that the Track 1 settlement in Ohio at least opened up a potential pathway for that type of a global settlement. We’re obviously also considering the whole range of other propositions that have been communicated in the market. We do believe that we're in a situation that could enable us to achieve that global resolution and simultaneously separate the brands in generics business or in close concert separate those two which is an objective of ours. But again there's a lot of ground yet to cover, there's a lot of uncertainty. We look to continue to engage in negotiations and try to resolve this thing again come to a global resolution we hope in a relatively short time. But again, there's a lot more that needs to be negotiated before we come to that outcome.

Gary Nachman: Great, thank you.

Dan Speciale: Thanks Gary. Next question please.

Operator: Your next question comes from Jason Gerberry with Bank of America. Your line is now open.

Ashwani Verma: Hi, this is Ashwani Verma on for Jason. So question is on opioid litigation any color that you can provide on why Mallinckrodt paid a relatively higher settlement to settle the Ohio MDL Track 1 cases. Given the small brand business should investors think about this number as reflecting that is pertaining just to branch or the genetics as well?

Mark Trudeau: Yes. So I don't think you should necessarily read anything specifically into the size of the settlement in the Track 1 cases with regards to the ultimate path towards the global resolution. As we've currently seen there’s been a range of settlements amongst companies and ours was kind of towards the low end of that. But again, I think, the read through here is probably minimal at best. Our objective was to settle those cases, to provide us appropriate time to be able to come to a global resolution. And we continue to pursue that. And hopefully we can get that resolved. But again, as I said earlier, there's a lot still to be negotiated. We do think that the company has a range of options and we'll consider all of those options as we negotiate this forward.

Ashwani Verma: Thank you.

Dan Speciale: Thanks Ash. Yes next question please.

Operator: Our next question comes from Gregg Gilbert with SunTrust. Your line is now open.

Gregg Gilbert: Hi. I was hoping you could comment a little more on Acthar in the quarter and how much of the decline was tied to price versus volume? And on INOmax, Mark, can you give us a sense of what portion of the business at this point is in these multiyear contracts and whether pricing is locked in there regardless of the competitive landscape, any way you can kind of bucket the different pieces of that business for us by contract type, that would be helpful. Thanks.

Mark Trudeau: Sure. So with regards Acthar’s performance in the quarter, it was virtually our volume price was really neither here nor there. And again, I think, what's important is that we signaled earlier in the year based on a range of uncertainties around Acthar that the product was likely to be down more in the second half than it was in the first. We continue to believe that that's the case. But as we've said in the quarter in the prepared remarks, we don't think that Acthar’s full year revenue there's any change to that from our perspective. We are very encouraged by the fact that – we are very encouraged by the fact, however, as I said earlier, that we are generating very good prescription response particularly for refractory RA patients with rheumatologists. We've seen that historically when new data is presented, but we typically get a corresponding positive response in prescribing. Given the strength of the RA data, we've seen that now in rheumatology. But of course the payer response is much slower and that's why we're not yet seeing any direct impact yet of that increased prescribing translating through to sales. And yet our belief here is that that will take some time. And as I articulated earlier, a lot depends on the continued data readouts depending on how those play out, it does help us with our negotiations with payers. With regards to INOmax again, we've typically described that at any given point in time there's about a two thirds or so of the business that's under some form of a contract. And that's a range of both multiyear contracts, as well as single year contracts. And again, we can get a good sense of the type of business that's in multiyear years, the proportion of business just by looking at our public filings. But in general, the way those multiyear contracts work is they are for somewhere in the range of three years or so. Typically a customer is going to sign up a contract for what we call an unlimited use type of an application, which again, is the subscription model that's been very successful and beneficial to both patients and our customers. Sometimes those have price escalators associated with them, sometimes they don't. But again, beyond that kind of general concept there's not much more than I can say about it at this point.

Gregg Gilbert: Great, thanks.

Dan Speciale: Next question please.

Operator: The next question comes from Anthony Petrone with Jefferies. Your line is open.

Anthony Petrone: Apologies I was on mute. Apologies for that. Just two questions from me. One on Acthar and one on the announcement of the exchange offer on notes. On Acthar maybe just within the indications, I know that the category has been pressured but is there anything within the indications outside of infantile spasms where you're seeing more or less pressure? And is there anything in particular as you renegotiate with healthcare payers on any of those particular indications where you can see perhaps those trends improving sooner rather than later? Again, this is all on the data strategy. So in particular is RA holding up after the data readouts? And on the exchange offer what is the expectation for participation? If the participation is not high, what are the alternative plans for some of the maturities? Thanks.

Mark Trudeau: So Anthony, let me take the, Acthar question. I'll turn it to Brian to discuss the exchange. So, again as we mentioned in our prepared remarks where the pressure for Acthar has come really for the last year plus has been primarily on longer duration prescriptions. So those would typically be in adult indications like rheumatoid arthritis, or lupus, or sarcoidosis, or nephrotic syndrome. And in this case payers typically are asking patients to essentially re-qualify as new patients every 30 days in some cases, which again is pretty challenging just from an administrative burden perspective. And I think what the RA data clearly shows at least from your interpretation of the experts is that like most RA products in order to determine whether or not a patient is actually going to have benefit from Acthar, again you saw the highly refractory patients who still have active disease despite being on multiple additional RA therapies. But typically it takes about 90 days or so to see if there's going to be patient benefit. Not every patient benefits, but in our study, about two thirds of the patients in this highly refractory category actually do benefit. They benefit after 90 days of therapy. And let me go on to have additional benefit with an additional therapy beyond that. But that's where payers have really pressured the product is in trying to restrict the prescriptions to a much shorter course of therapy, which really does not appear to be in the best interest of patients. And that's part of the discussion we can now have with payers using the RA data now to support that. So again, as we look at Acthar going forward, that's why these data readouts are some important because we're able to discuss with payers and prescribers who is the appropriate patient, what's the appropriate dosing duration for Acthar that’s likely to result in the greatest benefit for patients. So let me pass it on to Bryan to talk about the exchange transaction.

Bryan Reasons: Thanks Mark. Like I said in my prepared comments we’re really precluded to comment further than what I said. Yes, I really would encourage everyone to read our SEC filings this morning, which has the full offering memorandum, which would add a lot of detail to it. Yes, just to reiterate what I said, we're throughout our debt stack offering to the exchange the unsecured notes into second lien notes with longer maturities pushing everything out to 2025. But there's a lot of detail around the exchange in the SEC filings.

Dan Speciale: Sure. Thanks. Next question, please.

Anthony Petrone: Thank you.

Operator: Our next question comes from David Amsellem with Piper Jaffray. Your line is now open.

David Amsellem: Thanks. So apologize if I missed your commentary on the generic business. But I wanted to get a sense from you Mark as to how you’re thinking about longer-term sustainability here. You talk about share recapture and that’s not lost on me. But as you look at what is an opioid heavy business, realizing that there are some intrinsic barriers to entry here, what are your views on overall sustainability? And I guess not just for the opioid piece, but the non-opioid piece? And then secondly to that what are you doing to cultivate an actual ANDA pipeline here? So if you could help me with that that would also be helpful? Thank you.

Mark Trudeau: Yes thanks David. So may be just a couple of things to clarify, this was actually a very heterogeneous business. Opiod products are actually a minority of the business, may be about 30%, may be a third or so. Much of the business is actually API business, particularly acetaminophen, but it also includes things like ADHD treatments, which are controlled substances, addiction treatment, as well as a number of other products in the portfolio. And the long-term viability of this business we actually think is quite strong for a couple of reasons

Dan Speciale: Great, thanks. Next question please.

Operator: The next question comes from Elliot Wilbur with Raymond James. Our line is now open.

Lucas Lee: Good morning. This is Lucas Lee on for Elliot. I have two questions. On INOmax, has the Praxair launch impacted the sales at all? And do you believe Praxair is focused largely on new customers or current customers?

Steve Romano: That’s still, based on what we observe, it doesn't appear actually that Praxair has launched. What it does appear is they may be doing some test marketing in a few select accounts. But best of our knowledge, they haven't done any type of a national launch at this point. In terms of what they ultimate – if they ultimate launch or how they ultimately launch, it's difficult to understand simply because it appears that they're testing a range of different options. In the test marketing, as much as we can determine, they're going to where you expect they might go, which is where their customers are, keep in mind Praxair is an industrial gas company for the most part that supply hospitals with medical gases. So that appears to be at least where they are initially moving. I think a couple of things are important to understand. We believe that the INOmax business is quite sticky. We think it's quite sticky based on the fact that we have a total care model that is highly valued by customers, particularly our largest customers are very interested in the total care offering that we provide, which really enables us to service those accounts in total and ensure that anytime a baby needs INOmax we're there with the product. Even in the case where we have to swap out within four hours, we really are focused on ensuring that NICUs are completely covered when it comes to INOmax. Whatever competition does occur if and when it does occur, it’ll be on a brand to brand basis. This is not a generic offering, Praxair offering would be a separate brand requiring completely separate offering to what we offer. And then keep in mind longer term, we believe that developing and moving to our EVOLVE platform gives us an opportunity not only to put a significantly superior technology into the market, but because of the greater simplicity that the potential reduction for human air, the portability of that particular offering we believe there's likely to be a potentially significant brand or sorry, market expansion opportunities. For all these reasons while in the near term if competition does come, we may see some bumpiness in the INOmax sales. Longer-term we that for all the reasons I just described, this is likely to be a very sticky business for us.

Dan Speciale: Thanks Lucas. Next question please.

Operator: The next question comes from Patrick Trucchio with Berenberg Capital. Your line is now open.

Patrick Trucchio: Thanks. Good morning. My question is on CMS arbitration. I'm wondering should we anticipate knowing one way or the other a decision by the end of 2019 or is it possibly an early 2020 event? And then related to this, if the ruling is adverse, what dollar amount is possible or probable? And what funds you do upfront, or could it be paid out over a number of quarters or years?

Mark Trudeau: Yes so with regards to CMS I’ll may be speak to the timing and I’ll ask Bryan to comment a little bit on some of the other questions that you had Patrick. With regards to timing, look at this point, it's in the hands of the federal judge. The ruling could come any time. It could come by the end of the year, it could stretch into the first quarter or it could be longer. Typically these cases settle sooner than later, but to try to speculate on the specific timing of this particular ruling is difficult at this point. But it would be helpful for us to be able to resolve that uncertainty. And of course we have a range of options depending on the outcome, we've put together a series of plans depending on what the outcome might be. But in terms of timing it's just very difficult, if not impossible to predict with any certainty. Bryan, are you going to comment on the other stuff, yes.

Bryan Reasons: Yes, thanks Mark. So as far as the exposure, we had previously disclosed that and we will update that disclosure on our 10-Q this afternoon. But essentially the worst case would be if we had to reset base year AMP and that would essentially wipe out Medicaid revenue back to 2013. We estimate retroactively that would be about $600 million. Going forward, we disclose that we think that's about 10% of the Acthar business, so roughly $100 million prospectively. So that would be the kind of the worst case scenario.

Patrick Trucchio: Okay.

Bryan Reasons: I guess, how it would be paid, I mean that I think is unclear, right. I mean, I think, it's safe to say that there's a high likelihood that if the ruling came out in the worst case scenario, we'd most likely appeal that. And then exactly how the bond would work for that is unclear. So I guess how it would be paid is still unclear until we see the ruling.

Mark Trudeau: Yes Pat, we've done obviously a lot of looking at this and I think to Bryan's point, I think, that there's a bit of uncertainty as to what that payment would ultimately look like. And certainly fair to assume in the event that it was the worst case, we would look to limit the immediate out-of-pocket expense of that through an appeal through some sort of a stay, a request for a stay. But at this point we're just uncertain as to what it's going to look like.

Patrick Trucchio: Thanks.

Bryan Reasons: Thanks Pat.

Dan Speciale: Okay, next question please.

Operator: Our next question comes from Jacob Hughes with Wells Fargo. Your line's now open.

Jacob Hughes: Hey, good morning. I was wondering if you could just comment on, I think, Ofirmev was a decline this quarter and below our expectations. I know you called out some order variability. But how should we think about the weakness this quarter and how the readthrough for fourth quarter?

Mark Trudeau: Yes, for read through the fourth quarter, I wouldn't read through anything. Again, that's why we’ve reiterated that we’re not commenting on specifically each individual product. Our confidence that the hospital portfolio is likely to deliver growth in the high single digit range is unchanged by the performance in the portfolio in the third quarter. It is OFIRMEV specifically there is quarter-to-quarter variability that goes on here. One of the things we are seeing though is some accounts are looking to replace some of the OFIRMEV use with oral acetaminophen. We've seen that previously. And I think the product in many ways has been such a success in helping physicians manage pain associated with surgery. Many times growth of the product is one where pharmacists may try to target it for reductions and we are seeing some impact in some accounts of some initiatives in that area. But we think primarily what's going on here is typical order-to-order variability – sorry, quarter-to-quarter variability. And we have great confidence that OFIRMEV is going to see growth again in the fourth quarter.

Dan Speciale: Great.

Jacob Hughes: Okay, then just a follow-up on CMS. Based on the uncertainty on what it could be, is it just want to confirm that you haven't reserved anything for that suit?

Mark Trudeau: That's right. We've not reserved anything.

Steve Romano: Yes, that's been consistent for the last couple of quarters now since we filed. And obviously, we await the ruling.

Jacob Hughes: Thanks Steve.

Dan Speciale: Next question please.

Operator: Our next question comes from Annabel Samimy with Stifel. Your line is now open.

Annabel Samimy: Hi, thanks for taking the question. Just back on INOmax for a minute, you mentioned that the quarter was impacted by some multiyear contracts and the unlimited utilization. So why do you think this is going to normalize in the fourth quarter? What are the pushes and pulls there that would allow it to recover in fourth quarter? And then separately you're going to be filing for terlipressin and StrataGraft within months now. Can you outline broadly some of your go-to-market strategies there? And can you tell us what kind of how capital, and investment and sales that's going to be required for these launches? Thanks.

Steve Romano: Thanks Annabel. Yes with regards to INOmax we have a real good idea of how the product mix comes in and it’s driven by two things. One is the underlying demand, the consumption for nitric oxide. And that is very strong, as strong as we’ve seen it which is a very good measure of the strength of the underlying business. So we’re quite pleased with that. The mix sometimes doesn’t come exactly in a quarter of the way we would expect it. And that’s important because different customers have different contracting arrangements and that can translate into slightly different revenue in a quarter. And what we actually saw in the third quarter was more of our business, more of our volume coming out of multiyear contracts, which is actually a good thing for the long term versus what we would’ve expected that some of those would come from shorter contracts. So overall, we would expect as these things typically do for that mix to normalize in the fourth quarter. And again, we continue to see growth for INOmax in the third quarter just a bit of – little bit on the lower range of the mid single digit range we typically see for this product. So we expect the mix to normalize in the fourth quarter, which, again, now we have very good confidence that the business and the portfolio is going to be in that high single-digit range for the full year. Speaking of terli and StrataGraft, it’s great to talk about these products because we’re quite excited about them. We think that these fit very well with our mission, and that is to focus on underserved patients in severe and critical conditions. And both of these products go right to that mission in the critical care space, particularly in hospitals, in the case of StrataGraft, burn centers. Our general overall strategy for these products is the investment that we have in the hospital today, both with regards to access and support – direct selling support is already in place for the most part with the Ofirmev team as well as the INOmax and Therakos teams. So we really think we have the infrastructure laid in. There will, of course, be some launch expenses that we can look forward to in 2020. That’s a very good thing. And then we’ve also been quite clear that we believe that long-term peak year sales for the combination of these two products, truly, plus StrataGraft at peak should exceed the peak year sales estimates that we have for OFIRMEV. So in general, the investment will be limited in 2020 primarily to launch expenses with relatively minimal additional fixed expense on the infrastructure side.

Annabel Samimy: Great, thanks.

Daniel Speciale: Yes, thanks Annabel. Next question, please.

Operator: Our next question comes from Rishi Parekh with Barclays. Your line is now open.

Rishi Parekh: How are you doing? I just had two questions. First, on Acthar, are the issues that you’re facing with Acthar in terms of the step-throughs and prior authorization similar to what you saw a few years ago? And is it with the same payer? And I don’t know if you’ve ever given an exposure to that particular or to the payer that you’re dealing with today in terms of your constraints on Acthar. And the second, in terms of the exchange, I know you said that you’re filing the documents. But in terms of the exchange, you have $600 million of cash on your balance sheet as of today. You probably will add another $200 million to $300 million by the time of your April maturity, so you have an ample amount of cash. But I’m just trying to better understand what your pro forma secured capacity is going to look like post the exchange. By my calculation, you had $1.3 billion to $1.8 billion. Should we – if we were just to subtract 100% participation or so of that $1.1 billion from that number, is that your pro forma secured capacity? And can that all be first lien? Or do the new exchange documents limit the amount of first lien debt you could issue going forward?

Mark Trudeau: Yes. So I’ll take the Acthar question and then I’ll ask Bryan to comment on the exchange again. So with regards to Acthar reimbursement, again, we’re seeing similar trends from those that initially started to arise back in, I think, the third quarter of 2017 when they started primarily with a large payer. But now they’ve really extended across the payer network with, again, this focus primarily on longer-duration prescriptions being shortened and patients having to requalify as being new patients every time with significant incremental administrative burden. What’s different now versus what was in 2017 is now we have a much more robust data set that actually supports in key indications, like refractory RA, the fact that it makes a lot more clinical sense once a physician has determined that a patient can benefit from Acthar to actually keep that patient on therapy much longer than 30 days, at least 90 days, again, based on the data that we are now able to discuss with payers and prescribers. And potentially, there’s an additional benefit that can accrue by keeping these patients on therapy for six months. So again, that’s a big difference than we had two years ago. And that’s why we think the discussions that we’re having with payers now are taking on a different tenor and another reason why we believe it’s the right time to come forward with a more innovative, value-based contracting models, such as the subscription model, which can provide benefit for the patients, but also some certainty for the payer budget holders. And again, we’re intrigued by the initial conversations that we’re having with payers. It’s early days, but we think the combination of the data and this type of innovative contracting model could change the landscape over time with regards to Acthar reimbursement.

Bryan Reasons: Thanks, Mark. Again, I’d love to talk about the exchange really beyond what we’ve already said. I can’t really comment and certainly can’t comment on pro forma secured capacity as well. So I’d really encourage for you guys to dig into the SEC filings, which has a lots of details around the exchange.

Daniel Speciale: Thanks, Rishi. Looks like we’re coming to the bottom half of the hour. We think we’ve got time for maybe one more question.

Operator: Our last question comes from Ami Fadia with SVB Leerink. Your line is now open.

Ami Fadia: Hi, thanks for bringing back onto the queue. Maybe just a quick two follow-ups since a lot of my questions were answered. You talked about the subscription models for Acthar for which calendar year would you be negotiating for, some type of structure of that sort if some of that were to be successful? And with regards to the self injector for Acthar, can you talk about how you think that this could potentially help stabilize the volumes for Acthar? Thank you.

Mark Trudeau: Yes, certainly. So with regards to the subscription model, our intent would be to consider a range of indications, again, particularly those that are supported with the data. We know today that refractory RA is supported by the data. And again, that’s what’s opened up these discussions as things like lupus, uveitis, sarcoidosis start to play out, our discussions and negotiations around a subscription model could include those. But I would say it’s early at this point, it’s a concept that’s clearly gotten the attention of payers, but it’s going to take quite a bit of time for us to negotiate something if, in fact, we can be successful with this model. With regards to the self-injector, we’re quite excited about this product, one, because on its presentation. One, because it effectively takes the Acthar multi-dose vial, which, today includes five doses of Acthar and requires patients to draw a dose from the vial and inject them. So essentially, a unit dose with a self-injector, that’s just much more patient-friendly, but it’s actually much more conducive to doing innovative contracting around some of these longer-duration therapies. So effectively, you could have two very different Acthars. One in a multi-dose vial, which would be almost exclusively for use in the pediatric infantile spasms patient population, where you have to dose by weight and therefore you need a multi-dose vial. And virtually, all the other adult indications could be packaged and contracted around a unit dose self-injector. It gives you tremendous amount of flexibility to investigate and negotiate value-based contracting model. I think the other thing that we’re intrigued by is there’s an opportunity for this presentation to be much more efficient. Whenever you would have a multi-dose vial, inherently, there’s probably some waste associated with it. And this would enable us, we believe, particularly with regards to the prescription model to effectively eliminate some of the waste that occurs with the multi-dose vial. So we think it opens up a whole range of pricing, packaging, contracting and patient-friendly dosing in a way that we’re limited by with the multi-dose vial. All of those things, in conjunction with some really strong data, like we see in RA, in some of these other indications could enable us drive longer-term volume-based growth, which is where our focus is.

Daniel Speciale: Thanks, Ami. I’d like to thank everyone for joining us this morning. This is a final reminder. A replay of the call will be available on a website later today and also be available throughout the day to answer any follow-up questions you may have. Have a nice day. Thanks, everyone.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.