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Edited Transcript of MNK earnings conference call or presentation 4-Aug-15 12:30pm GMT

Q3 2015 Mallinckrodt Plc Earnings Call

Hazelwood Aug 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Mallinckrodt Plc earnings conference call or presentation Tuesday, August 4, 2015 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cole Lannum

Mallinckrodt plc - VP & Chief IR Officer

* Mark Trudeau

Mallinckrodt plc - President & CEO

* Matt Harbaugh

Mallinckrodt plc - SVP & CFO

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Conference Call Participants

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* Douglas Tsao

Barclays Capital - Analyst

* Chris Schott

JPMorgan - Analyst

* Marc Goodman

UBS Securities - Analyst

* Gregg Gilbert

Deutsche Bank - Analyst

* David Amsellem

Piper Jaffray - Analyst

* Gary Nachman

Goldman Sachs - Analyst

* David Risinger

Morgan Stanley - Analyst

* Swati Kumar

Guggenheim Securities - Analyst

* Anthony Petrone

Jefferies & Co. - Analyst

* Sumant Kulkarni

BofA Merrill Lynch - Analyst

* Derek Archila

Leerink Partners - Analyst

* Akiva Felt

Oppenheimer & Co. - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Mallinckrodt Pharmaceuticals third-quarter 2015 earnings conference call. (Operator Instructions). As a reminder this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Cole Lannum, Senior Vice President of Investor Relations. Sir, please begin.

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Cole Lannum, Mallinckrodt plc - VP & Chief IR Officer [2]

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Thank you, Howard, and good morning and welcome to today's call, everyone. Joining me are Mark Trudeau, President and Chief Executive Officer, and Matt Harbaugh, our Chief Financial Officer.

We will be making some brief introductory comments and then spend most of the time this morning answering your questions. On the call you will hear us making some forward-looking statements and it is possible that actual results could be materially different from our current expectations.

Please note that we assume no obligation to update the information contained in these forward-looking statements even if actual results or future expectations change materially. We ask you to please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.

We also provide some adjusted non-GAAP financial measures with respect to our performance today. A reconciliation of these adjusted measures to GAAP are detailed in our earnings release and its related financial tables which can be found on our website, www.Mallinckrodt.com.

For the fiscal third quarter we reported diluted GAAP earnings per share of $0.49. After adjusting for certain specified items our deleted non-GAAP adjusted earnings came in at $2.05 per share. Now I will turn it over to Mark who will go into more detail on the third-quarter results. Mark.

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Mark Trudeau, Mallinckrodt plc - President & CEO [3]

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Thanks, Cole, and thanks to all of you for joining us on today's call. As you have seen from our news of the past week, we continue to execute on our strategy here at Mallinckrodt and now I am happy to share with you the details of another solid quarter. Here are some key highlights of our performance and other recent activity.

In its first partial quarter in the Mallinckrodt portfolio, INOMAX contributed $82 million in net sales, consistent with its historical and expected long-term mid-single-digit growth rate. Net sales of OFIRMEV were $62 million for the quarter, an increase of 17% over prior year.

Despite a very tough year-over-year quarterly comparison, Acthar net sales for the quarter were $269 million, an all-time record for the brand driven by growth in pulmonology and rheumatology. We continue to focus on accelerating development and dissemination of clinical and pharmacoeconomic data for our key products, in particular for Acthar.

We are very pleased to note that the data from our Company-sponsored lupus trial will be presented at a major medical conference in September. This eight-week double-blind randomized placebo-controlled pilot study assessed the clinical efficacy of Acthar in patients with persistently active lupus despite moderate dose corticosteroids.

Also in the quarter Acthar studies on nine topics were published; more than a dozen studies have been accepted for presentation or publication throughout the next two quarters; and a number of additional studies were submitted for publication and are awaiting response. All this adds to the 20 already published or presented in the first two quarters.

Noting strategic transactions, as you saw on July 27, we announced the planned divestiture of our Contrast Media and Delivery Systems, or CMDS business, to Guerbert, a company we believe is ideally suited to maximize its value. With this announcement and other ongoing initiatives we continue to look to refine our portfolio and increase our focus on running a leaner, more efficient organization to reduce our overall cost structure to increase profitability.

We are pleased with our strategic progress, the results in the quarter and the overall performance of the business. Now let me give you a brief summary of our results.

In the fiscal third quarter Mallinckrodt posted net sales of $965 million with operational growth of 52% over the prior year quarter. Our adjusted gross profit as a percentage of net sales increased more than 18 percentage points from just under 53% to 71%. And adjusted diluted earnings per share were up more than 70% for the quarter with our diversified portfolio delivering solid overall results.

In Specialty Brands let's look first at our newest portfolio addition, INOMAX. We continue to be excited about the potential of this unique combination product and service offering to further diversify our operating income and help us continue to build our reach and impact in the important hospital growth platform.

This highly durable drug device product has a strong established presence in neonatal intensive care units and a 24/7 total care service package that delivers seamless uninterrupted support to clinicians treating fragile newborns.

The service platform and contracting options for INOMAX promote a high degree of customer intimacy while providing a level of predictability rarely seen in the specialty biopharmaceutical space and we anticipate historical mid-single-digit growth will continue.

We are also pleased that last week the US patent and trademark office affirmed the patentability of four INOMAX patents, denying Praxair's request for an administrative trial proceeding concerning these claims. We will continue to vigorously enforce the Company's intellectual property rights specific to INOMAX along with all of our other products.

Turning to Acthar. As we've previously discussed, we anticipated the third quarter would be challenging when compared to the prior year and our expectations were borne out. We have talked to you quite a bit about continued payer pressure on Acthar as Mallinckrodt, like the rest of the industry, is affected by the increasing focus on the cost of healthcare and drugs.

We don't expect this pressure to lessen anytime soon and indeed believe it may even increase with ongoing consolidation in the insurance sector. But we continue to work proactively with payers to improve understanding of the strong value Acthar brings to patients. And with the third quarter now behind us, we see a number of bright spots and are optimistic about Acthar looking forward.

As I mentioned earlier, we are focused on data generation and communication and our discussions with payers in particular have begun to gain some traction. Acthar was recently added to one of the dominant payers preferred drug lists and we've expanded our Specialty Pharmacy coverage and enlarged our field sales force in rheumatology and pulmonology to better serve patients.

Our comprehensive efforts to improve the efficiency of our internal prescription processing and distribution system are also beginning to take hold. We anticipate each of these levers will help us counterbalance external forces and provide favorable long-term impact.

With all of this, while we do expect to see improvement from this quarter's 4% reported growth over the next several quarters, we expect Acthar to grow at the low end of our long-term normalized expectations. With 19 approved indications we continue to believe Acthar is a highly durable asset and has substantial untapped potential.

Strengthening clinical and pharmacoeconomic arguments for use of the product will aid further penetration over time and we now feel comfortable with long-term growth rates in the mid-single to low-double-digits.

Now let's look at OFIRMEV. Here too we continue to focus on data generation around OFIRMEV's use, highlighting the clinical and economic benefits of the product as part of a multimodal pain management approach for surgical patients. We expect recognition of these benefits, including reduced use of IV opioids and faster recovery times, and the positive impact of these benefits on patients to drive long-term volume growth for the product.

As we said previously, we expected OFIRMEV volumes to decline after the price reset last May. And in our discussion last quarter we noted that unit volumes appeared to be reaching their trough and we expected that they would subsequently begin to gradually rebound.

We've now begun to see some positive movement in monthly trends and we're optimistic that our value story is gaining traction with the hospital community. And we believe this upward trajectory will enable us to reach and exceed historical OFIRMEV volume levels by the second half of fiscal 2016.

While there is still a long way to go we expect OFIRMEV's sales to grow in the mid-single-digits sequentially beginning in the first quarter of fiscal 2016. We continue to view the product as a highly durable asset with long-term net sales potential of at least $500 million annually.

Turning to Specialty Generics, as we fully expected, the exceptionally high growth rates we have seen over the last few quarters have now returned to much more normal levels. Net sales for the quarter were $308 million, down 5% operationally from the prior year.

These results were driven by several factors: the anniversary of our prior year pricing actions; competitive pressures in select categories; customer consolidation and continued methylphenidate ER erosion. We believe these results indicate a return to historical patterns for the Specialty Generics business and Matt will cover this a bit more in his section.

More specifically on Methylphenidate ER, as I'm sure most of you saw, on July 29 the US District Court in Maryland issued a ruling related to Mallinckrodt's suit against the FDA. While we were disappointed in the judge's ruling, we anticipated this was a possibility.

We intend to appeal the District Court decision to the US Court of Appeals for the fourth circuit. We also hope to continue to engage in further dialogue with the FDA on the matter.

Mallinckrodt's Methylphenidate ER products have met and continue to meet all quality and safety requirements and we will continue to make them available to physicians and their patients.

Touching on business development, our rich opportunity set provides us with a multitude of options to drive growth in our established platforms. We will continue to focus in areas that allow us to leverage our ability to manage complexity, maximize our commercial infrastructure and diversify our portfolio.

We are prepared to move quickly on assets where we believe we are the best owners and can apply our unique skills to drive growth and unlock additional value. Now let me turn the call over to Matt for some more detail on the quarter. Matt.

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Matt Harbaugh, Mallinckrodt plc - SVP & CFO [4]

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Thanks, Mark. And let me add my welcome to everyone on the call this morning. All of my comments on our results will refer to adjusted non-GAAP numbers excluding, among other things, the effect of foreign currency.

Notably though, as you saw in a press release today, we did incur significant negative pressure from currency impacting our third-quarter net sales by $25 million, roughly half of which came directly from the CMDS business that we are divesting.

For the fiscal 2015 third quarter Mallinckrodt net sales were $965 million versus $653 million, up 52% on an operational basis compared to the prior year quarter. Solid performance, primarily reflecting the additions of Acthar and INOMAX into our portfolio, Specialty Brands net sales were $446 million, up $361 million, largely due to the inclusion of Acthar.

In our Specialty Generics segment net sales were $308 million resulting in a decline in operational growth of 5% compared to the prior year. While we saw continued strength in hydrocodone resulting from the launch of new Schedule II products earlier in the fiscal year, this was more than offset by a decline in oxycodone as we anniversary the price resets taken last year and the continued decline of Methylphenidate ER net sales driven by the FDA's action last November changing the rating on our product from AB to BX.

In fiscal 2014 and 2015 Mallinckrodt saw outsized contributions from the Specialty Generics segment driven by thoughtful planning, strategic initiatives and solid growth in Methylphenidate ER, particularly in 2014. But as we have seen in the third-quarter results, and as we move into future quarters, we expect pricing to continue to normalize and be more competitive.

This will result in declines in net sales as compared to previous years which could run into double digits in any given quarter, especially with continued pressure on Methylphenidate ER.

We expect these tough annual quarter-on-quarter comparisons in Specialty Generics to continue until we have fully lapped this period of industry-wide market reset and then expect more normalized results from the segment going forward, albeit from the higher plateau that has been established.

For Global Medical Imaging net sales were $202 million, down 3% excluding the impact of changes in exchange rates as previously noted.

As Mark mentioned earlier, Mallinckrodt recently reached agreement to sell our Contrast Media and Delivery Systems business to Guerbert in a transaction by it at $270 million. Starting in fourth quarter fiscal 2015 we will report the CMDS business as a discontinued operation. So for your modeling purposes it is important to realize that it will no longer be reported in continuing operations after the quarter just ended.

We expect to close the transaction in the coming months subject to regulatory approvals and other customary closing conditions. Please also note that our nuclear imaging business is not a part of this transaction. We remain committed to meeting the needs of nuclear medicine patients globally.

Now turning back to the income statement, total Company adjusted gross profit was $685 million, up $340 million with adjusted gross profit as a percentage of net sales of 71% compared to 52.9% in the prior year quarter.

We have successfully driven our adjusted gross profit significantly higher in the past few years and we expect further upward movement over time as we continue to restructure cost of goods sold and diversify the portfolio.

Adjusted SG&A for the quarter was 28.2%, an improvement of 140 basis points from the adjusted number in the fiscal third quarter last year. Over the next several years we expect improvements in our adjusted SG&A as we continue to undertake a variety of initiatives across the business to increase efficiencies and reduce costs.

R&D spending in the quarter was $45 million, up modestly from the prior year period. We expect R&D spending to continue to remain at current levels in future quarters. This level of funding will still allow us to pursue significant investments in Acthar, OFIRMEV, INOMAX and our Specialty Generics business.

Net interest expense in the quarter was $72 million compared to $22 million due to debt incurred from recent acquisitions. As of last week our pro forma net debt leverage stood at 3.1.

Our adjusted of effective tax rate in the fiscal third quarter was 18% compared to 23.4% in the prior year quarter. For the fiscal 2015 third quarter adjusted diluted earnings per share were $2.05 compared to $1.20 per share.

Finally, the cash generation capability of our portfolio remains quite strong. And even after the divestiture of CMDS to Guerbert, we expect to exit the year with an annualized free cash flow generation run rate of approximately $1 billion. Now I will turn it over to Cole who will take us to Q&A.

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Cole Lannum, Mallinckrodt plc - VP & Chief IR Officer [5]

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Thanks, Matt. Before we start the Q&A session I want to remind you to please limit yourself to a single question with a brief follow-up if needed. I know it is a busy earnings morning for all of you and we are going to try to get through as many calls as we can. With that, operator, can we have the first question please?

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Questions and Answers

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Operator [1]

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Douglas Tsao, Barclays.

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Douglas Tsao, Barclays Capital - Analyst [2]

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Just I was hoping you could provide an update on the Specialty sales force in particular the promotion effort around XARTEMIS right now. Thank you.

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Mark Trudeau, Mallinckrodt plc - President & CEO [3]

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Yes, thanks, Doug. So as we mentioned I think a little bit earlier in the year, we had been evaluating the performance of XARTEMIS XR. And certainly as the Company has changed its focus to autoimmune rare diseases in the hospital sector, our emphasis on the office-based pain activities has certainly been less strategic.

And so, in light of that change in strategic direction, coupled with the performance of XARTEMIS XR, as of June we have discontinued promotion of XARTEMIS XR and we're considering a number of different strategic alternatives for that product.

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Douglas Tsao, Barclays Capital - Analyst [4]

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And does that apply for the hydrocodone product as well that was in development?

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Mark Trudeau, Mallinckrodt plc - President & CEO [5]

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Yes. So the product that you are referring to, Doug, is called MNK-155 and it is a combination product of hydrocodone and acetaminophen with similar technology to that of XARTEMIS XR.

And again, it would be focused on the office-based pain marketplace which, as I mentioned, is not really a strategic focus for us going forward. So both of those products we're considering a variety of different alternatives to maximize their value.

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Douglas Tsao, Barclays Capital - Analyst [6]

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Okay, great. Thank you.

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Operator [7]

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Chris Schott, JPMorgan.

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Chris Schott, JPMorgan - Analyst [8]

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Just a question with regards to Acthar and the growth going forward. Can you maybe just elaborate a little bit more on the incremental changes with that franchise that is driving growth to the low end of your range as we think about the next little bit here?

And just as a follow-on to that, could we just get some more clarity on when you believe we will be able to see sales accelerate off that low end of the Acthar growth range? Thanks very much.

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Mark Trudeau, Mallinckrodt plc - President & CEO [9]

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Yes, so first of all let me say that we are quite pleased with our performance for Acthar in the quarter, $269 million for the quarter, that is an all-time record quarter for the product. And we are pleased that we are continuing to be able to drive growth...


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