Earnings Transcript for MNK - Q4 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Mallinckrodt Q4 2019 Earnings Conference Call and Business Update. At this time, all participant lines are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the call over to Daniel Speciale. Please go ahead.

Daniel Speciale: Thank you, Michelle. Good morning, everyone. I would like to thank you all for joining us today. Joining me on the call this morning are Mark Trudeau, our CEO; Bryan Reasons, our CFO; and Mark Casey, our Chief Legal Officer, who will be available during Q&A to provide clarity where possible on the announcements today. In addition to our traditional earnings announcement, we’ve also shared significant developments with respect to the opioid litigation and addressing our near-term debt maturities. We strongly encourage you to read the filings this morning in their entirety as we’ve thoughtfully prepared these materials and our remarks today to provide information of the markets. Before I turn the call over to Mark, let me remind you, on the call that 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 non-GAAP measures is 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. Lastly, you will note that we do not provide formal guidance for 2020 at this point, which has been our general practice as we began the fiscal year. While we’re not providing specific guidance due to the complexities of the settlement, financing and the Acthar CMS matter, you will hear us make some comments regarding specific products which should help you model the business for 2020. In general, total net sales for 2020 are expected to be in line with presentation consensus. However, we expect performance across the products to be weaker on a year-over-year basis in the first half of the year and rebounding in the back half of the year. Obviously, there are a number of moving pieces, so we will keep you updated as we go. With that, let me turn the call over to our CEO, Mark Trudeau. Mark?

Mark Trudeau: Good morning, everyone, and thank you for joining us. Before we discuss our strong fourth quarter and full-year 2019 results, I'd like to share some important updates regarding some of the uncertainties facing our business and the significant actions we are taking to address these. Over the past year, there have been three major uncertainties facing our business

Bryan Reasons: Thanks, Mark, and good morning, everyone. Before getting into the details of our earnings results, I will start with the proposed settlement and the refinancing update. Under the terms of the proposed settlement, Mallinckrodt and its subsidiaries would pay $300 million upon Specialty Generics emergence from Chapter 11 and $1.3 billion in structured payments over 8 years. The $1.3 billion in structured payments would include $200 million payable on the first and second year anniversary of Specialty Generics emergence from the court supervised process and $150 million payable on the third through eighth year anniversaries. Upon Specialty Generics emergence from the contemplated Chapter 11 process, we'd also issue warrants to the Trust exercisable at $3.15 per share to purchase ordinary shares of Mallinckrodt. These warrants will represent approximately 19.99% of the company's fully diluted outstanding shares after giving effect to the exercise of warrants. And Specialty Generics business will agree to abide by certain agreed-upon operating covenants. It should be noted that there are a number of important conditions to the proposed settlement, including among other things, gain the support of additional plaintiff constituencies, resolving other claims against the company on satisfactory terms and addressing near-term maturities. With respect to the near-term maturities condition, the company has entered into a support agreement with certain of the existing term lenders as well as certain of the existing noteholders that if affected would provide for a new $800 million term loan to among other things, address the April 2020 maturities and amend our credit agreement as outlined in the filings this morning. The company has also entered into an exchange agreement whereby certain senior noteholders would exchange their 2022 notes and under certain circumstances a portion of their 5.625 2023 notes for new 10% second lien notes due in 2025. These refinancing activities are subject to a number of conditions. We expect these refinancing activities, if completed, will provide flexibility for us in the near-term as we work to complete the opioid settlement. Given the importance of this morning's announcements, I strongly encourage you to read the filings in their entirety for full details. Now turning to our financial results. In the fourth quarter of 2019, we reported adjusted diluted EPS of $2.40 with net sales of $805 million. The specialty brand segment net sales were $611 million, while Specialty Generics segment reported net sales of $194 million. For fiscal 2019, adjusted diluted EPS was $8.88 with net sales of $3.16 billion. The decline in net sales for the fourth quarter and year were primarily attributable to Acthar Gel and partially offset by strength in the Hospital Products and Specialty Generics segment. For the Specialty brand segment in the fourth quarter, Acthar Gel net sales were $233 million, a 17.8% decrease, INOmax delivered $144 million in net sales, a growth of 3.8%, OFIRMEV contributed $112 million in net sales, an increase of 28.2%, while Therakos delivered net sales of $53 million, an increase of 11.3%. Lastly, AMITIZA net sales were down 21.2% to $51 million. The diversified Specialty Generics segment performed well and saw an increase of 6% in net sales in the fourth quarter. Turning to operational measures. Total company adjusted gross profit as a percentage of net sales was 71.5% compared to 72.8%, driven primarily by product mix. Adjusted SG&A as a percentage of net sales for the total company was 23.8%, down from 25.4% due to our ongoing focus on SG&A reductions. Overall company R&D expense as a percent of net sales was 10.1%, down from 12% due to the completion of certain developmental programs. Turning to liquidity. Cash provided by operating activities in the fourth quarter was $209 million with free cash flow of $185 million. For the year, operating cash flow was $743 million and free cash flow was $610 million. Lastly, as Mark mentioned, we executed a debt exchange offer in the fourth quarter, which reduced total principal debt by $383 million. With this exchange offer, cash generated from operations and debt repurchased at a discount early in the year, the company reduced net debt by $1.18 billion in 2019 and end of the year with net debt of $4.63 billion. Our covenant calculated adjusted EBITDA was $1.353 billion for 2019 fiscal year, which resulted in net debt leverage at December 2019 of 3.4x, a full turn reduction in the last 12 months. You can find this calculation on our website as of this morning. With that, I'll now turn the call over to Mark. Mark?

Mark Trudeau: Thanks, Brian. We’ve obviously shared a lot of important updates in detail this morning. While it's clear that we still have work to do, we're pleased to be taking steps to resolve key uncertainties in our business. As we think about our strategic priorities in 2020, we’re focused on

Daniel Speciale: Thanks, Mark. Just a couple of administrative things here before moving to Q&A. First, please recognize given the complexity and fluidity of the opioid situation announced today, or maybe limited on what information we can provide during Q&A. We have our Chief Legal Officer, Mark Casey on to help address questions that you may have. The second item I wanted to highlight is we’re expecting to file our Form 10-K after the market closes today as well. And then, lastly, I want to remind you to limit yourself to a single question with a brief follow-up if needed. Feel free to put yourself back in queue afterwards, and we will work to get through as many questions as we can. With that, Operator, can we please have the first question.

Operator: [Operator Instructions] Our first question comes from Elliot Wilbur of Raymond James. Your line is open.

Elliot Wilbur: Thanks. Good morning. First, I want to ask a question on the channeling injunction. I presume that it's your belief that this will effectively resolve all-known claims as well as any potential future claims that may emerge with respect to payers, individuals, unions, etcetera. But I just want to confirm that, that it's your belief that it would have effectively resolve that potential bucket of claims as well. And then as a follow-up question. How do you now think about the SpecGx business and the opioid components within it? Obviously, this settlement would resolve any claim for past action or behavior, but this seems to be a class of products for every 5 to 10 years there's some new round of litigation commenced against companies operating in this space. And that’s still financially an important part of the business. So how do you just think about that product category as a component of that segment going forward? Thanks.

Mark Trudeau: Yes. Thanks for the question, Elliot. I’m going to ask Mark Casey to comment on the legal aspects of your questions. And then I will come back to how we think about the long-term strategic options for the generics business. Mark?

Mark Casey: Thanks, Mark. Yes, so you should expect that a channeling injunction, if issued, would resolve all the claims against Mallinckrodt plc when I say all claims. All claims that have been asserted or could have been asserted prior to the emergence of SpecGx from the Chapter 11 process.

Mark Trudeau: With regards to the strategic options for the business, Elliot, first of all, this is a very well diversified business, which I think is that’s something that's clearly understood. Let's recognize that a big portion of this business is actually active pharmaceutical ingredients with the biggest chunk of that being API for acetaminophen. And then the generics, the oral dose part of the generics business is again a fairly well diversified business that is focused and controlled substances, but not just opioids or opioids associated with pain. It also has addiction treatment business embedded within there, there is an ADHD business as well. And we're very pleased that this Specialty Generics business has continued to perform very well. And as you saw today, it's now delivered four consecutive quarters of growth after a long period of contraction in both the market as well as that particular business. Longer-term, we believe that this business also has a very interesting pipeline, the majority of which are non-opioid pain products. And so over time, this business will become again even more well diversified. We do think that there are a number of strategic opportunities for the business. We will continue to evaluate those as we move through the Chapter 11 process and we will continue to update the market at the appropriate time. Meanwhile, we will continue to own and operate this business throughout the Chapter 11 process.

Daniel Speciale: Thanks for the question, Elliot. Next question, please.

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

Annabel Samimy: Hi. Thanks for taking my questions. So just a quick -- couple of quick questions. First, I want to understand the timing of the emergence of specialty generics out of Chapter 11 bankruptcy. And what are the requirements for them to do so? And then the second is, to what extent could this hamper any of your other operational activities? Clearly, you’re going to have -- on the verge of launching a couple of products next year, what kind of launch expects to -- launch expense you expect to have through 2020? And have any of those has to be revisited with the -- this arrangement that you’ve made today? Thanks.

Mark Trudeau: Great. Thanks for the questions, Annabel. Once again, I’m going to ask Mark Casey to comment a bit on the Chapter 11 process, and how it impacts SpecGx business. And then I'll come back and speak about our launch plans.

Mark Casey: So thank you, Annabel. Look, the timing of the emergence from Chapter 11 is fairly well dictated by how we enter the Chapter 11 process. There are various flavors of Chapter 11 and including prepackaged or prearranged. And the more support we get for our plan going into the process, the quicker we can come out. And so right now it's not clear, which flavor we will use. But we anticipate the process would take several months up to potentially a year. And the critical factor is when the court approves the plan to restructure, and that would happen sometime towards the end of the process.

Mark Trudeau: And with regards to our launch plans, first of all, we're very excited about the upcoming filing opportunities for both terlipressin and StrataGraft. Obviously, we were very, very pleased to see that the Phase 3 programs for both of these products delivered such strong results, which we reported on -- in 2019. We're also excited not only to file these products, but have the opportunity to launch them. And these products would largely be launched within our existing infrastructure. So keep in mind, we have extensive capability in the hospital products. These two products, both of them would actually fit squarely in our existing hospital products, commercial infrastructure. With regards to launch expenses, we don't really have incremental infrastructure expenses, again, because they are going to slot into our existing hospital organization. But we would have the normal launch expenses that you would expect from products that require market preparation and development and appropriate promotion. The bottom line, though, is that the activities regarding the SpecGx business and what we're going to do in Chapter 11 have absolutely no bearing on what we're doing in the branded business. These two businesses operate very independently today and that would be the case throughout the process of SpecGx going in and out of Chapter 11.

Daniel Speciale: Great. Thanks, Annabel. Next question, please.

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

Gregg Gilbert: Thank you, team. Pardon me for the, perhaps, overly simplistic observation or question about this, but it almost seems too good to be true that you could ring fence these potentially very significant liabilities and the bankruptcy proceeding and protect the rest of the company and its shareholders for the future. So do I have it right, that’s what you’re trying to accomplish here? And what’s the push back then from those three AGs or others that have not agreed to this? And then, secondly, on the CMS matter. Do you have any insights at all about the timeline or the process there that the market doesn't have and could the outcome of that matter affect anything that you announced today? Thank you.

Mark Trudeau: Yes. So, Greg, again I’m going to ask Mark to comment on your first question, that involves the legal situation around SpecGx. I'll come back and speak of a little bit on the Acthar CMS matter.

Mark Casey: So, thanks, Greg. And the answer is yes. The Chapter 11 bankruptcy restructuring process is a well-known, well tested vehicle for doing just that and that is to manage -- otherwise unmanageable liabilities of coming. So it does truly ring fence of those issues.

Mark Trudeau: And with regards to the Acthar CMS matter, there are no updates at this time. Again, we, as you know had a hearing with the federal judge in August of last year. We felt that hearing went very well. But in terms of when or how the judge may rule on the matters at hand, we don't have any other further insights at this time.

Bryan Reasons: Greg, maybe just to clarify, you made reference to 47 parties onboard, I mean that’s effective to the stage AGs and territory AGs as well, not simply the states, which I think is what your reference was. So just for clarity.

Daniel Speciale: Thanks. Next question, please.

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

Gary Nachman: Hi. Good morning. On your directional sales guidance for 2020, could you break that down between brands in generics? And perhaps give some color on Acthar specifically, how we should think of that product versus consensus? And then could you provide any directional guidance for EBITDA in 2020? With all the debt refi activities, where is net leverage expected to go? How much higher than the 3.4x that you hit at year-end? Thank you.

Mark Trudeau: So, Gary, let me ask Bryan to address your questions around directional guidance, and then I'll come back and give a little bit more color on Acthar.

Bryan Reasons: So, Gary, right now we decided just to give directional guidance because of -- kind of the fluidity of both the settlement and the refinancing. So I would say, if you go back and look at some of Dan's comments, on the first half of the year it's going to be a little bit weaker, but overall for the full-year we'd expect to be right around where current consensus is.

Daniel Speciale: Yes, we certainly appreciate the question, Gary. We are just not at a point, obviously, to be able to provide more firm guidance than what we’ve provided this morning on the call. So, we will obviously keep you updated as the year progresses, and we have better clarity as things start to narrow. But at this point, that’s what you got.

Mark Trudeau: And with regards to color on Acthar, Gary, there's maybe three or four things I’d like to highlight. One, the performance in the fourth quarter was largely in line with our expectations. Secondly, we are actually quite pleased with the positive response that we’ve seen to the Acthar Phase 4 RA data in refractory patients, particularly with rheumatology prescribers. However, there we still are experiencing payer pressures, and the payers are particularly focused on the duration and classification of patients as new, which puts administrative hurdles -- additional administrative hurdles in moving patients from prescription to reimbursement. And we expect those kind of pressures to persist in 2020, particularly in the first half of the year. But we believe that long-term stabilization of the product is really going to be driven by three things. One would be the continued emergence of clinical data. We've got a number of Phase 4 programs that are going to continue to complete and readout throughout '20 and '21. Second thing is we plan to introduce a new Acthar self injector sometime in 2021. And the third thing is that we're looking very carefully at the current commercial model for Acthar and we're in advanced talks with a number of different payers to consider pilots in 2020, potentially as early as the first half of 2020 for an Acthar subscription model, which could significantly change the way we think about our commercial model for Acthar. Again, it's modeled somewhat after the success that we've seen with INOmax. So, again, 2020 first half payer pressures are likely to persist on Acthar. Longer-term stabilization is driven by the three things I just mentioned.

Bryan Reasons: And I guess on the net debt leverage, we are not going to give you guidance on that. But the proposed refinancing will be largely neutral to the quantum of debt.

Mark Casey: Next question, please. Thank you.

Operator: Our next question comes from Chris Schott of JP Morgan Chase. Your line is open.

Christopher Schott: Great. Thanks very much for the questions. Maybe just two on the settlement. Sorry, it just seems like the core issue here. First, I just want to make sure I’m clear. Just in terms of the settlement we’re announcing today, how does this apply to the counties? Do you broad sign-off for the counties on this? And I guess what still needs to be done at that level, it seems like the State AGs are generally onboard here? And then my second question was about this channeling injunction. It's not a structure I’ve had much experience with. What do you need to do or show when you going into courts to get that injunction in place to make sure that this is really going to ring fence that entity and the business some kind of -- eventually kind of percolate up to the parent level? Thanks so much.

Mark Trudeau: Mark, why don’t you go ahead? Those are both legal questions.

Mark Casey: Yes. So with respect to the cities, towns and counties, we’ve gotten a high level of commitment from the plaintiffs executive committee. And as we’ve said, that’s a court appointed negotiating committee that was appointed in the MDL. And so they are set forth to watch up for the interests of the entire plaintiffs group. There is still more work to be done individually or I should say at the state -- I’m sorry, at the city level. But that group has expressed overwhelming support for the transaction. And on channeling injunction, it's a complex legal matter. I don't think it's appropriate to get into the description here. I'd encourage you to speak with your legal counsel. It's -- again, it's a vehicle. It's often to provide the protections for a non-filing entity that's related to a filing entity. And I would encourage you to just speak with your legal counsel on that.

Daniel Speciale: Thanks, Chris. Next question, please.

Operator: Our next question comes from Anthony Petrone of Jefferies. Your line is open.

Anthony Petrone: Hi. Thanks. I’m going to stick with the settlement announcement today. Just two quick ones here. One would be the press release states it's an agreement in principle. So technically I guess it's not finalized/binding. So what’s the probability that this is actual the -- actually the final agreement and the terms are going to be set similar to what you’ve released in the press release? And maybe just timing on when this actually becomes binding? And then the second quick one is that that New York State is now one of the 47 signatories here. So I’m just wondering what is the timing on the New York State AG case, and how does this play into what you’ve presented here around the agreement in principle? Thanks.

Mark Trudeau: So with respect to the terms disclosed today, you should look at this terms in the term sheet as you would any other transaction. This sets forth the intent of the parties to enter into, negotiate a final agreement based on those terms. The devil will be in the details to get over the finish line, but there's no intent to retrade on any of those terms. Timing will be dictated by all the parties getting together and being able to get to a final agreement. I can't give you a hard date on that. And with respect to New York, New York was an active member of the negotiating group and we believe that they are in favor of the financial terms of the transaction. And moreover, we're really encouraged by the overwhelming support we’ve got from the AG community across the states and the territories.

Daniel Speciale: Great. Thanks, Anthony. Next question, please.

Operator: Our next question comes from David Amsellem of Piper Sandler. Your line is open.

David Amsellem: So, if I’m not mistaken, you alluded to potentially evaluating strategic alternatives down the road for the specialty business. So in that vein, what are your thoughts on the scalability of Acthar and the role of Acthar in the organization, or maybe asking it another way, is there something that you think you can do to transform the specialty business, so you can essentially extricate yourself from your reliance on Acthar? Thanks.

Mark Trudeau: Yes. Thanks, David. So, look, we continue to invest heavily in Acthar, continue to modernize the brand and that applies both enhancements to the label. For example, that we've already made to further differentiate the product from ACTH and from steroids, and we were really pleased last year to make those changes to the label. We've invested greater than $0.5 billion in research and development and other activities to modernize the brand. We're very pleased, obviously, with the fact that the clinical data from the rheumatoid arthritis trial was so positive, and positive responses that we're getting from our rheumatology prescribers around that data, it's also enabling us to have a different level of discussions with payers, which potentially could lead to the subscription model, which could be a dramatic shift in the way we actually deliver Acthar to the market from a commercial perspective. And we've got a whole series of additional data readouts and study completions plan for the next couple of years. And then finally, we've spent a lot of time focusing on enhancing the patient experience for Acthar with the development of the self injector. We believe that all of these things really modernize the brand and it's clear that the product has a role in patients that have refractory disease. And I think we demonstrated that very clearly, for example, with the Phase 4 trial. So our view is that we are going to have a real clear view of where Acthar fits in the long-term strategic plans for the business. Our long-term strategic objective is to be an innovation driven biopharmaceutical company that’s focused on underserved patients with severe and critical conditions. And we think Acthar plays an important role in that long-term vision. Obviously, we’re going to continue to develop our pipeline, we're quite thrilled about the potential to file and subsequently launch two new products this year. So overall, we think we're progressing very well on our strategic objectives, and Acthar will have an important role in that going forward.

Daniel Speciale: Thanks for the question. Next question, please.

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

Jason Gerberry: Hey, guys. Good morning and thanks for taking my questions. I guess, can you comment on SpecGx cash generation profile? I think before, when there was the spin contemplated, something like a 20% op margin was disclosed, but I think that was inclusive of AMITIZA, which I’m not sure if that’s going to go with SpecGx. And what I’m trying to understand here is, will SpecGx fund the entirety of these deferred cash payments or with the guarantee of Mallinckrodt plc, or will the payouts occur from both entities? And then when the company files for Chapter 11, will the $1.6 billion liability go to the books of SpecGx as a legal entity? So just if you can clarify, just wondering how we should be thinking about valuing the Brand Co on a go forward basis?

Daniel Speciale: So maybe I will start by addressing the $1.6 billion liability over a period of years. And I think it's best to view this as a corporate liability, liability for the entirety of the business. This will not be segregated to one specific section of the business. It is a liability of Mallinckrodt plc.

Mark Trudeau: And Bryan maybe you can comment a little bit on some of the cash flow questions that were teed up here.

Bryan Reasons: Yes, sure. And in my prepared comments I went through kind of the cash flows. So SpecGx, it initially won't be a able to fund all the payments of the settlement. And while it's in the Chapter 11 process, it will have adviser fees and things like that to cover. But once out of the Chapter 11 process, I think that will go back to roughly the same cash flow as we previously disclosed.

Daniel Speciale: And I think if you go back over time, when we were looking at spending this business earlier this year, earlier in 2019, we talked about an EBITDA profile that was in the order of magnitude of around $150 million to $200 million. So rough order of magnitude you can kind of use that as a bit of a proxy. Obviously, it's not precise and it shouldn’t be viewed to be guidance, but that’s a general frame.

Jason Gerberry: And is the AMITIZA royalty included in that?

Bryan Reasons: That’s …

Mark Trudeau: No, that was a specific product that was going to be included as part of the spin-off. But ultimately we decided to pull that out as part of the spin and then we obviously abandoned the spin. So it is nothing to do with the generic business at present.

Bryan Reasons: And that’s an asset that would be outside of the Chapter 11 filing.

Daniel Speciale: That’s correct.

Jason Gerberry: Got it. Thank you.

Daniel Speciale: Thanks, Jason. Next question, please.

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

Rishi Parekh: How are you doing? Thanks for taking my questions. First, congratulations. I think this is a great job and a good sign that the plaintiffs want to keep the company solvent and not push them into Chapter 11. So great job on settling this. First, clearly, you have overwhelming support from the attorney generals. What are the bottlenecks of the other states that did not send? I did not see New York on this. So I just want to make sure that with the case coming up on March 20, you will get the injunction to stay out of the case? And then I’ve a follow-up.

Mark Trudeau: Mark, did you want to take that one? I think we’ve talked about New York, but maybe just a clarification there would be helpful.

Mark Casey: Yes. So, look, why the other states haven't signed on is a better question to ask them directly. We don't necessarily have visibility into the reasoning. Again, with respect to New York, they were part of the negotiating group for the plaintiff side. And we believe that they are supportive of the financial terms of the transaction.

Rishi Parekh: Okay. And then, so as Dan has said, this $1.3 billion out of the $300 million is a corporate liability. So unsecured bond with an eight year tenor, no interest payments, I assume, this is obviously a positive sign for in terms of a runway meaning, right through all your maturities and then going into 2028. How should we think about, you generate a significant amount of cash, is anything changed strategically for you now that this is out of the way? And I understand this is an agreement in principle, but what changes and clearly you have a long runway to address all your maturities, but what change is going forward?

Mark Trudeau: Well, I think couple of things that we outlined today in terms of our strategic priorities. And I would say that, our strategic priorities largely remain the same and those are that we want to maximize our in-line portfolio. And we’ve talked quite a bit about investments that we're making in products like Acthar and INOmax. We see Therakos as continuing to deliver very solid growth and its clearly an opportunity for us to further invest in that product to enhance growth and access to even more patients, both in the U.S as well as in Europe. Obviously, we are going to continue developing our pipeline and we spent a lot of time talking about the near-term opportunities with terlipressin and StrataGraft. We think these are two excellent products that fit squarely within our objective of focusing on underserved patients with severe critical conditions, and represent significant innovation for some really challenged patient groups. And then, of course, we’ve got other development programs, the most notable which is will be entering into a Phase 3 program for a product that today has a number, MNK6105, but that product is specifically for other hepatic conditions and consistent with again our strategic objective of focusing on underserved patients with severe and critical conditions. Longer-term, again, we’ve also been focusing on executing a very disciplined capital allocation strategy. And while we've taken significant steps, or in the process of taking significant steps to address, for example, our near-term maturities, we’ve been very effective with our cash flow in reducing net debt. We did that to the tune of almost $1.2 billion last year. We would continue to use our capital to look to delever the balance sheet, but also we want to enhance our portfolio either from a development perspective or from a -- an in-line perspective and we look for opportunities to do that consistent with our strategic objectives of focusing on these underserved patients.

Daniel Speciale: Thanks, Rishi. Next question, please.

Operator: Our next question comes from Frank Jarman of Goldman Sachs. Your line is open.

Frank Jarman: Great. Thanks for taking my questions, guys. I just wanted to see if you could help think through some of the key free cash flow drivers for 2020. As I’ve sort of see it, in 2019 you guys did $600 million of free cash flow. On the call today, you acknowledged EBITDA should be in the same context, this consensus, which is down around $150 million or so year-over-year. You have the $200 million of opioid settlement contributions presumably, and then we could see interest in advisory and legal costs possibly little higher and then we're waiting on the CMS decision. Is there anything else that you guys think I'm missing in terms of key free cash flow drivers for 2020? And is there any sort of numbers you could help us think about there? Thank you.

Bryan Reasons: So, Frank, maybe just to clarify, because you made reference to EBITDA comments, specifically on guidance. We provided guidance on net sales, not explicitly on EBITDA. So just for clarity purposes I wanted to share that.

Mark Trudeau: Frank, go ahead.

Daniel Speciale: And I would say, one other clarification is the initial $200 million would be upon emergence. So, sorry, $300 million that you mentioned. So I don’t know that, that would necessarily be in 2020. And so we said that there could be pressure on Acthar, right, depending on the outcome of CMS. But we’ve also will continue to manage SG&A expense. So we do expect the business to overall continue to generate significant cash flows.

Frank Jarman: Great. And then, I guess …

Mark Trudeau: Go ahead.

Frank Jarman: … more specifically just on the advisory and legal costs, you guys had some of those expenses that you incurred last year. Is there any way to kind of think about what it would be for 2020?

Daniel Speciale: Not really at this point. I mean, I think there's so much uncertainty obviously with what we’ve going on to be able to quantify those explicitly. So we will certainly keep you apprised, try to be as transparent as we have similar over the last handful of quarters now, and we will do that throughout the year.

Frank Jarman: Okay. Thanks so much.

Daniel Speciale: Thanks for the question. Next question, please.

Operator: Our next question comes from Patrick Trucchio of Berenberg Capital. Your line is open.

Patrick Trucchio: Thanks. Good morning. My question is actually on INOmax. Just regarding the competitive pressure there that you talked about. Can you discuss the proportion of the business that’s under long-term contracts versus short-term contracts and whether we should expect the declines to accelerate in the second half and in 2021? And then secondly, can you remind us when the new device is expected to launch? And then what gives you confidence that, that launch will help stem these declines?

Mark Trudeau: Yes. Thanks, Patrick. Couple of things about INOmax. First of all, we're very pleased with the performance that we saw in 2019. This is a product that over the years is continuing to deliver consistent mid single-digit growth and that was certainly the case in 2019. Long-term, we continue to believe that INOmax is likely to be the market leader and certainly we're anticipating the upcoming launch of the next-generation platform, which we call EVOLVE and we would expect that in 2021. We think this is likely to really change the game in terms of delivering value to patients, because this new device would reduce the requirement, if you will, today, to have to manage large cylinders and it also significantly enhances the potential for human error. So we think portability and the reduction of the potential for human error is a significant advantage of the new platform and really would be the next step in, we believe, our market leadership. We are very pleased that our customers continue to renew long-term contracts around historical levels, consistent with what we've seen historically. I think what we said publicly is that any given year, about two thirds or so of our business is under some form of a contract. We typically haven't given the split between long-term and single year contracts and we wouldn't necessarily expect that -- based on what we've seen so far to really change. Long-term, we think the stabilization of the brand is really based around three things. Certainly it's the movement to the EVOLVE platform. We think overall all three of these things are likely to lead to what we call market expansion. Certainly the EVOLVE piece, the portability of it and the reduction -- potential reduction in human error could enable us to put it into to more places than the current INOmax platform is today. We do have the potential for some label enhancements, which could include, for example, labeling for pediatric cardiovascular surgery. And geographically with the EVOLVE platform, we may have some opportunities for market expansion there as well. We would see all three of those things as being opportunities to expand the market and lead to stabilization of the brand. In the near-term, we do expect to see some pressure on both share as well as price and that is what -- that's what we describe the fact that we expect the brand this year to be down in the low double-digit range for 2020.

Daniel Speciale: Thanks for the question, Patrick. Next question, please.

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

Anthony Petrone: Just a quick follow-up on timing. if the -- if we still have a timing element to this, I’m just wondering what the risk is around tripping of the April 2020 maturity? Thanks.

Mark Trudeau: Just to clarify, Anthony, timing with regards to which?

Anthony Petrone: Timing in order to transition from an agreement in principle to a finalized binding agreement, which I think would then suggest you then could formally go into Chapter 11. You need Chapter 11 before you could secure the term loan.

Mark Trudeau: No, we would secure the term loan and move forward with that before the April 2020 maturities.

Daniel Speciale: That’s correct.

Anthony Petrone: Okay. Thanks.

Daniel Speciale: Thanks, Anthony. Next question, please.

Operator: Our next question comes from Umer Raffat of Evercore. Your line is open.

Umer Raffat: Hi. Thanks so much for accommodating me. I wanted to focus on whether the debt is senior to opioid payments or not. That's how I'm reading it. And I read it because your debt is secured, but on the flipside I noticed there's a specific provision suggesting its 50% of the proceeds remaining after compliance with debt in the case of a sale. So should we just assume a sale of generics will happen and that from the proceeds, from that sale debt is more senior to the opioid payment. That's one. I did notice New York is not a party. Do you expect that trial to get pushed out? And finally if you could give us any update on whether negotiating class is also on board with the plaintiff executive committee which seems to be on board? Thank you so much and congratulations.

Mark Trudeau: Yes. So Bryan and Dan, maybe you guys can comment on the seniority of the debt. And then, Mark, again will just come back to the question around New York just to put a final point on it.

Daniel Speciale: So I think when you look at this $1.6 billion liability for us, we believe that this would fall behind our existing debt stack. As far as the specific qualifying language that you provided about how potential sale proceeds would be handled in a situation where at some point in the future we'd sell that business, effectively, that's a negotiated term as part of the agreement in principle. And so that would generally govern how those proceeds are ultimately used if that would be a path that we'd ultimately go down. Clearly, it provides us some flexibility.

Mark Trudeau: Maybe just one point on the question you had Umer about can we assume the sale of Gx will happen? What we can assume that this point is that we will continue to own and operate the business throughout the Chapter 11 process. We will then be evaluating a whole range of strategic options to potentially separate the generics business post emergence from Chapter 11 of which sale could be one of a whole range of options that we could consider. And then, Mark, maybe just come back to the legal point around New York one more time.

Mark Casey: Yes. So there does not appear to be a prospect today of pushing out the New York trial. Of course, that’s up to the judge at the end of the day. That said, you should understand that Mallinckrodt plc, the publicly traded parent has already been dismissed from the New York case. The generics business remains a defendant in the case. And we are in, what I would say constructive discussions with New York to address that.

Daniel Speciale: Umer, thanks for the questions. Nice to hear from you. Next question, please.

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

Rishi Parekh: Hi. Thanks for taking my follow-ups. One, I want to confirm on the emergence of SpecGx. I think you said that it may be more than a year before you made that $300 million payment. Should we anticipate one year, two years before emergence, because obviously that plays into free cash? And then second, in terms of the exchange that you’re providing to the 22s, I want to confirm one that is available to all 22 holders. And then also in the press release it says new 10% second lien note as part of the exchange, whereas in the 8-K documents, it says the conditions are set upon new secured notes, less than or equal to 9%. Second lien's due April 2025. So I want to confirm is it 9% to 10% in terms of the new exchange notes?

Mark Trudeau: Mark, do you want to speak to the timing question? And then, Bryan, maybe the details on some of the notes, if you would?

Mark Casey: Sure. With respect to the timing, the process in total should take some -- something just shy of a year plus or minus, if you will. And the amount of time spent in the Chapter 11 process, again, is dictated by what level of support we have going in. So we could either have more time before we enter in a shorter time in, or a shorter time to file and a longer time in, but ultimately it should take somewhere right around a year to complete the process.

Bryan Reasons: And your first question was the availability of the exchange, it will be -- the exchange will be available to all holders. We’ve agreements with key holders for support of that as of now. And there will be exchange for second lien 10% notes.

Rishi Parekh: Thank you.

Daniel Speciale: That’s correct. I want to thank everybody for joining us today and thank you for your continued interest in Mallinckrodt. As a reminder, a replay of the call will be available on the website later today and I will be available throughout the day to answer any follow-up questions you may have. The easiest way to reach me will be via e-mail. Thanks, everyone and have a nice day.

Operator: This does conclude the program. You may now disconnect.