Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Mallinckrodt third quarter 2018 earnings Conference call.
At this time, all participants are to listen only mode. After the speakers presentation. We will there will be a question and answer session ask a question. During this session you'll need to press star one on your telephone.
Please be advised that today's conference is being recorded if you're acquiring any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today Mr. Daniel Special things you. Please go ahead Sir.
Thank you Scott Good morning, everyone and welcome todays call joining me this morning and work through our CEO , Brian reasons, our CFO and Dr., Stephen amount or Chief Scientific officer.
Before I begin let me remind you few important details.
Because you'll hear us make some forward looking statements it's possible that actual results could be materially different from our stated expectations.
No we assume no obligation to update these forward looking statements even at the actual results or future expectations change materially.
We encourage you to referred the cautionary statements container I see filings for a more in depth explanation of the inherent limitations of such forward looking statements.
We will also provide selected non-GAAP adjusted measures are weighted or financial performance.
Conciliation. These adjusted measures to GAAP, it's available earnings release, which can be part of web site Mallinckrodt Dot com.
We use our website as a channel to distribute important I'm critical company information and you should look at Investor Relations page about website for this information.
As noted in the press release, unless otherwise specified all quarterly comparisons or the recast comparable 2018 period and that sales growth range, just little bit discussing or a constant currency basis.
The guidance perspective, we're raising the low end of our adjusted diluted earnings per share guidance range to eat dollars and 50 cents does we now expect the full year 2019, adjusted diluted EPS to be 8050 cents to eight hours and 70 cents.
With that let me turn the corner to Mark Mark. Thanks, Dan Good morning, everyone I'll start off with some business highlights, including including positive trends in the business and an update on uncertainties that we continue to address.
We'll take you through the latest advancements in our R&D pipeline by Brian who will provide you with third quarter financial highlights.
Finally, well open it up for some Q today.
I have never solid financial quarter, and we continue to be pleased with the financial strength and cash flow capability ever business, resulting in raising for the third consecutive quarter, our EPS guidance this year.
In addition, I remain focused on driving the transformation of the business and operating efficiently and effectively.
Before I get into the corners jokes.
Hi, Mike I want to touch base on where we are not efforts to address the uncertainties driven by the ongoing opioid litigation.
Resolution of the CMS matter and our near term debt maturities.
Our goal was 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're in active discussions.
Domestic 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 on net debt reduction.
This morning, we launched a private exchange offer for our unsecured notes, which Brian will comment on later on our call.
Finally on the CMS front I can't tell me to wait for were language could comment on time.
Developed a range of strategies to address any potential impact of that really.
In short, we're very aggressively and diligently working to address these matters and attempt to would not be associated uncertainty.
I think the business.
We remain focused on our four strategic pillars laid out at the beginning of the year one advancing the pipeline.
Putting this best pretty generic separation three maximizing the value of the diversified inline quick for portfolio and for executing disciplined capital allocation within that that 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 that advancements we see across our portfolio.
We took a significant step forward in the recent pivotal phase three topline read outs associated with Terlipressin Stratagraft.
We compare that to bleed that the separation the brands and generics businesses, which are distinct independently operated is the best way to maximize the value of both.
I remain optimistic in our efforts to ultimately separate these businesses and I pools that genetics has continued to show a return to growth as evidenced by the last three quarters.
Turning to our in wind portfolio, we're encouraged by what appears to be trends emerging in certain key brands, including a growing volume axe out of jail are a prescriptions. Following the compelling phase four data presented earlier this year as well its continued demand for our total care approach for IMAX.
Based on what the pellet trends, we believe the performance of both the hospital portfolio and act fire well be within our previously communicated ranges for the full year.
Despite this potentially promising trend in new patient demand in certain therapeutic areas, including all right. That's our continues to face reimbursement pressures as parents charms longer duration prescriptions in certain indications.
We continue to bleed the ongoing modernization strategy should allow us to stabilize and potentially improve the reimbursement landscape for acthar gel.
We're beginning to see that's potentially play out in a recent interactions with payers since the availability of the base for already data for the product.
The focus of our approach with payers is to ensure a clear identification of the appropriate acthar gel patient dose in duration of treatment and understands a budget certainty for commercial payers.
Our approach is to work the budget impact for payers to an annual subscription model similar to what exists for IMAX.
This could allow patients and health care providers, a career pathway for reimbursement for the product.
Additionally, 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 accelerated we're currently includes Houston lupus patients, we believe that the phase for trial Readouts expected in the coming month, if successful could provide further information for appropriate patients, including dosage and duration.
You can suffer from me, but unfortunately have very few options to treat this extreme debilitating disease.
Acthar gel remains an important product for the company and the patients that we serve we expected the story of back there Joe will be determined that the next year or so as we have weighed further clinical data in programs like Lucas.
It's in soccer doses, while working towards the next generation presentation of the product with a self injector device.
Looking at I had a Max we continued to see strong demand for IMAX is total care offering as measured by growth in the volume of nitric oxide deliberate pace inspire customers.
We're not at an all time high amount of business, that's coming from multi year agreements trying to Max as customers continue to see the value and the total care model.
Although more utilization came from that to your unlimited use kind tracks. We saw that this high consumption rate did not directly translate to higher net sales.
Expect us 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 cytomx.
Hi them access a history of providing lifesaving therapy to the most fragile patients in the mid Q.
As well as excellent customer experience that meets the confidence the positive usage of the product.
We don't expect that could change based on our continued investment in the product.
The ball device under development as well with potential label expansion.
Next on Afirma, we saw a decrease in net sales during the quarter as a result of certain guideline changes from hospitals favoring oral versus Ivy acetaminophen and certain procedures and does the result of quarter to quarter or variability.
Prior to this quarter. This product has experienced consistent strong growth over a number of consecutive quarters and we believe this performance man proof in the fourth quarter.
Darcos is performance in the quarter was driven primarily by growth in CTCL patients in the U.S. our efforts to expand the appropriate use of telcos for this important indication area as a result, but let's 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, we'll see in high single digit growth for the full year.
Finally from a teams that work 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 and net sales for the year.
Moving into next year, we'll likely see decline in that sales due to Japanese biannual pricing reduction and continued increasing competition in the U.S.
[noise] overall in the brand inside 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 apiay products, even while dealing with some slight disruption due to the suspension of our spinoff plans and changes in the management structure.
We expect the specialty generics segment will likely perform toward 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 the majority of the pipeline opportunities coming from non opioid generic products.
[laughter] before I turn the call over to stand there are three things I'd like to reiterate thing.
First we were working aggressively and diligently to address near term overhangs and remove uncertainty.
Second we are executing against clear strategic pillars and are pleased with the underlying strength and good cash generation of our business.
Finally, our transformation continues and its driven by strong R&D capabilities that are delivering a pipeline of innovative and critical therapies across various stages of development.
With that let me turn the call Robert It seemed to provide some more details on our pipeline and data generation efforts, Steve. Thank you Mark this year, it's been a successful year for science and technology technology organization.
For the last quarter, we have achieved critical milestones for two of our late phase development programs in August we reported topline results for our pivotal phase three confirm trial.
Entering the efficacy of Terlipressin in the treatment of how to real syndrome type one.
And in September reported topline results for our pivotal phase three trial, demonstrating the benefit of Stratagraft regenerative skin tissue in patients with deep partial thickness burns.
Having established our development organizationally several years ago to support the company's transition to an innovation driven biopharmaceutical company.
Achieving two positive phase three program read outs is a testament to the organizations fundamental capabilities.
In addition to the bar key development milestones. We also demonstrated continued progress on the execution of our act or evidence generation efforts reporting positive results for multiple sclerosis registry and the machine or Akhbar fees Fortune retired as pilot study in October .
I'd like now summarize the data from our recently completed development programs.
Let's first discuss Terlipressin as a reminder, HRS one is a life threatening rare in acute disease characterized by complications of advanced liver disease that lead to kidney failure.
HRS one has a very poor prognosis with the median survival time of less than two weeks in greater than 80% mortality within three months.
At present, there were no approved drug therapies for each risk one in the U.S. or Canada.
HRS one is estimated to effect between 30 and 40000 patients in the United States annually.
The confirmed clinical study evaluating the efficacy and safety of Terlipressin in 300 adults with HRS type one.
The study met its primary endpoint verified HRS, one reversal with a P value of 0.01 to.
Importantly, verified HRS one reversal includes three clinically relevant components.
Renal function improvement.
I've dialysis and short term survival.
We went 78 of the Afghan in early 2020 wells were very excited about the opportunity to present. These findings at the upcoming American Association for the study liver diseases.
Denver 11th 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 autograph for certain ones.
Water graph is considered to be the standard of care by many for deep partial thickness thermal burns.
Such gains 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 Theater. Most later this year.
As Autographing involves a surgical harvest even healthy scan from an uninjured site on the patient and transporting the skin graft to the injury patients were left with two women's requiring care.
Patients, who received an autograph makes groups pain, itching, scoring and impaired function at the donor site.
The pivotal phase three trial evaluate the efficacy and safety in the single application Stratagraft in the treatment deep partial thickness thermal burns.
Each study participants served as his or her own control.
Results show that a significantly smaller area burn wounds treated with stratagraft tissue required only grafting by three months compared to the area burdens treated exclusively with autograph.
With a P value of 0.0001.
Additionally results show that the proportion stratagraft treatments and achieve durable wound closure at three months.
Ceded the predefine threshold for statistical significance.
Based on positive phase three data, we plan to submit a deal any for stratagraft tissue to the FDA in the first half the 20 twond.
We also plan to submit these data for presentation at the American Burn Association spring meeting in 2020.
Regarding the actor in this registry was designed to assess characteristics in patients receiving acthar gel for M.S. exacerbations.
Data showed that patients treated with Acthar gel reported significant improvements in symptoms associated with them as exacerbations, a two months from baseline as measured by the Emmis impacts scale primary measured study.
Importantly, the response was sustained at six months.
Physicians also reported an improvement in physical symptoms in 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 three trial of and then case six when all five now working sell acetate, but that you're going to patients with advanced liver disease suffering from a panic and stuff a lot.
Given the complexity of the disease, we think that it's important to putting the time to gain confidence in our ability to find alignment with the regulatory agency for phase three trial. Once we decided to seek further align it with the FDA through utilization of the special protocol assessment our spot procedure.
So this may add several months the timeline just trial start it should provide greater confidence in our ability to execute a program aligned with the FDA guidance.
[noise] regarding Outbidded ex formerly referred to as Bts to 70 in being developed to treat the ultra rare in your degenerative condition, meaning picks disease type one.
We also are generating additional analyses on him on all available databases.
These analyses are in part of response interactions with the FDA as we continue to seek a viable path to an end the submission.
Turning to further developments within line brands, we continue to advance our efforts to complete the development of evolve our next generation IMAX delivery device.
As well as our new act or self delivery injector.
Oh 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 you, but accent their co CCP 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 a license to their C complement preclinical assets SL and 500 with options to license up to two other complement targeted assets based on their Arnie I technology platform.
We also have been progressing our work in the collaboration with transmute, including the generation of new preclinical data, allowing us to gain greater clarity on the specific mechanisms underlying the benefit of therakos CCP across various conditions.
In summary, significant progress has been need across our portfolio over the past quarter end year.
Looking forward to major milestones and catalysts over the next two quarters.
We will be presenting the food dataset for the Terlipressin confirm trial at a ASIL D. The liver meeting in November on November 11th.
In the first half of 2020, we also plan Submittal Terlipressin MD and Stratagraft BLE as well as have topline results for the act part these four lupus trial.
Finally, certain key post hoc aggravated next analyses, maybe a bit billable by first quarter 2020 that will inform further discussions with the FDA.
I'll now turn it over to Brian to discuss financials Brian .
Thanks, Steve Good morning, everyone in the third quarter 2019 reported adjusted diluted earnings per share at $2.07 with net sales of $744 million.
The brand segment net sales were $580 million with the hospital products collectively generating $284 million in that sale and acts are contributing that sale a $230 million.
IMAX delivered 137 million in net sales growth of 3% affirmative contributed $86 million in net sales a decrease of 1% and Democrats provided 61 million net sales an increase of 3%.
Lastly, amitiza generate netscout, a $53 million in the quarter, an increase of 9%.
Especially generics segment reported $163 million in net sales in the quarter, increasing 2% as we continued to benefit from share recapture across the portfolio of products.
Now, let me share some details on operational measures for the core.
Total company adjusted gross profit as a percentage of net sales were 71.7% decrease of 120 basis points driven by the changes in product mix and in particular XR.
Adjusted SGN as a percentage of net sales for the total company was down significantly at 24.5% as compared to 25.7% has route as a result of our ongoing as unit cost containment.
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 related to our collaboration with silence therapeutics.
Turning to liquidity, our operating cash flow as the quarter for $67 million, bringing the year to date operating cash flows to $534 million in year to date free cash flows a $425 million.
Third quarter cash flows were achieved despite legal expenses in certain working capital changes from a key customer and especially generics segment as well certain onetime payments, including the silence therapeutics upfront payment and the legacy Questcor DLJ 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 and which holders have an opportunity to exchange their holdings into new second. Please go ahead with longer mature.
Ladies.
Details of these exchange offers can be found in our press release issued earlier today.
As exchange offers are currently open we're unable to comment further on this call.
Net debt at the ended the quarter was $5.3 billion, having men reduced by nearly $1.1 billion. Since the end of the first quarter 2018, following the Campo acquisition lastly, our net debt leverage maybe slightly higher in the third quarter four times as published on our.
Website today.
Now, let me turn call back to Dan will take us through Q anyway.
Thanks, Brian I'd like to remind each of you to please limit yourself to a single question with a brief follow because needed feel free to put yourself back in queue. Afterwards, when we work to get through as many questions as possible with that operator movie. Please the first question.
Our first question comes from Chris Schott with JP Morgan Your line is now.
Great. Thanks very much for the question. My question was on XR 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're focused on data monetization and we have further read outs of that data will hopefully will ultimately stabilized the business, but it sounds like Scott take some time in the meantime, you're seeing for.
The pressure on 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 build to start to stabilize this business with the data you already have on hand, thanks very much.
Yeah. Thanks, Chris So with regards to X. I 2020, even though we're not giving guidance at the moment I think you had 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.
As a challenging when to predict at this point for two reasons.
One is that.
We're very pleased with the fact that at the access clinical data is now starting to read outs. So positively obviously the IRA data was very very positive and that's clearly had an impact.
Prescribers that we can see prescriptions for hematologists for refractory patients are definitely trending up.
It's also enabling us to have a different level of dialog with our payers.
And of course, we have several additional new datasets that are likely to read out.
In addition, CMS.
Registry, which was also positive, but clearly the lupus trial readout is eminent 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 XR trends are likely to go and it's going to be based on the outcome of the.
Obviously, we're very encouraged by the first couple of studies reading out so positively and again with those other studies also read out positively we think thats likely to have a positive impact on prescribing.
The other thing loaded today, though is we're looking quite good.
Differently at reimbursement going forward.
Engaging with payers now around a different type of model.
For XR prescriptions, and reimbursement and that's something potentially similar to what we do with IMAX, where for most of our large customers. We have what's called a subscription model whereby it gives payers the 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 Panamax and importantly, but we want to do is with the combination of the data, which facilitates these discussions and potentially a new way of.
Of capturing reimbursement that we would first stabilize yes. So.
Reimbursement and revenue.
On longer term if all of these things are positive then would be well positioned for growth. In addition to that of course, we have the self injector fracs are 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 way.
As to explore reimbursement. So in summary, we ended the stories 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.
We would will continue to feel more positive as we get more data read outs for the product and keep therapeutic areas.
Thanks, Chris Operator next question please.
Our next question comes from Gary Nachman with BMO capital markets. Your line is now open.
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 to enough, Ohio NGL bids.
Fine yet.
You know 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 the how you envision the next three months sort of playing out if possible. Thank you.
Thanks, Kate so with regards to XR strategy and with CMS decision.
I would say that the outcome of the CMS decision really has a marginal impact on our longer term strategy for AG.
I'm currently 50 decision and goes on favorably 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 frac size tide significantly to the date.
I read outs.
And our engagement with payers around our reimbursement model that I just discussed.
And those two things are in combination.
The data and the discussions on innovative contracting models go hand in hand.
I would again see the investment model for X.
And with strategy for the product 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.
The state of New York, which is in the March April timeframe of 2020.
Track to 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.
As to resolve these 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 on the track one settlement in Ohio at least opened up a potential pathway.
For that.
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.
Achieved that bad 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 a ground yet to cover there's a lot of uncertainty.
We.
Look to continuing to engage in negotiations and try to resolve this thing.
Again get come to a global resolution.
We hope in a relatively short time.
But.
Again, there's a lot more that needs to to be negotiated before we come to that that outcome.
Great. Thank you.
Thanks, Gary next question please.
Our next question comes from Jason Gerberry with Bank of America. Your line is open.
Hi, This is ash from on for Jason. So question is on older litigation any color that you can provide and why.
Relatively higher settlement.
To settle the Ohio, MD Ocotlan cases, given the small brand business should the Mrs think about this number as reflecting the display Danny just still.
Thanks Art genetics has though.
Yes, so I don't think you should necessarily read anything specifically.
Into the size of the settlement in the track when cases.
With regards to the old ultimate path towards a global resolution as we've clearly seen they've done a range of settlements.
Amongst companies.
And ours was kind of towards the low end of that but again I think the route through here is probably a minimal at best.
Our objective was to settle those cases or to provide us appropriate time.
To be able to come to a global resolution.
We continue to pursue that.
And hopefully we can get that resolved, but again as I said earlier.
It's about still to be negotiated.
We determined that the company has a range of options and we'll consider all of those options as we as we negotiate this this this forward.
Hi, Thanks Asher.
Next question please.
Our next question comes from Greg Gilbert with Suntrust. Your line is now open.
I was hoping you could comment a little more on XR in the quarter and how much of the decline was tied to price versus volume and on IMAX. Mark can you give us a sense of what portion of the business at this point us in these multiyear contracts and whether pricing is locked in there regardless of the competitive landscape or any way can kind of.
At the different pieces of that business for us by contract type would be helpful. Thanks.
Sure So with regards to add Theres performance in the quarter.
Was virtually all volume price was really neither here nor there.
Yeah.
And again I think whats important is that.
Segment earlier in the year based on a range of uncertainties around back so that the product was likely to be down more in the second half than it was in the first.
We continue to believe that Thats the case.
But as we've said in the quarter in the prepared remarks, we don't think that XR is full year revenue theres any change to that from our perspective.
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 our eight patients with Rheumatologists, we've seen that historically when when new data is presented but we typically give the.
Corresponding positive response and prescribing given the strength of the are a data we've seen that now in rheumatology.
But of course the.
The payer responses much slower and that's why we're not yet seeing any direct impact yet that increase prescribing translating through to sales.
And get our brochures, but that will take some time and as I articulated earlier a lot depends on the continued data readouts and.
Depending on how those play out it does help us with our negotiations with with payers.
With regards to IMAX.
Again, we've moved typically described that.
And we'll give them put an on time and then there's about two thirds or so of the business that's under some form of the contract.
And that's a range of both multiyear contracts.
As well as a single year contracts.
And again, you can get a good sense of the type of business. That's in that two years like proportional business just by looking at our at Ares.
At our public public filings, but in general the way those multiyear contracts work.
As they are for somewhere in the range of you know three years or so they typically typically a customer's going to sign up a contract for what we call an unlimited use type of an application, which again is the subscription model thats 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 that there's that much more than I can say about at this point.
Great. Thanks next question please.
Your next question comes from Anthony.
With Jefferies Your line South.
No I apologies.
Was on mute.
Apologies for that just just two questions for me one on XR and one on the.
The announcement of the exchange offer on notes the on X or maybe just within the indications I know that the categories when pressure, 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 data strategy. So in particular as is our a 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.
So Anthony let me take the the XR question I'll turn it to Brian to discuss the exchange so.
As mentioned in our prepared remarks, where the pressure for XR has come rolling 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 psychosis or in the product syndrome.
And in this case.
Payers typically are asking patients.
Tim essentially re qualify as new patients every 30 days in some cases.
Which again is pretty challenging just from an administrative burden perspective.
I think what the data clearly shows at least from from interpretation of the experts.
Like most are a products in order to determine whether or not a patient is actually going into <unk>.
I have benefit from Exxon and again these are the highly refractory patients who still have active disease, despite being a multiple additional already therapies.
Typically it takes about 90 days or so.
Let's 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 running going into.
To to have additional benefit with additional therapy beyond that but that's where a payers have really pressured the product is and trying to restrict the prescriptions to mature over the course of therapy, which really does not appear to be in the best interest to patients and that's part of the discussion we come out have with payers.
Irene data now to <unk> to support that.
So again as we look at acts are going forward. That's why these data read outs are so important because we're able to discuss with payers and prescribers.
The appropriate patient, what's the appropriate dose some duration for axa, that's likely to resolved in the greatest benefit for patients. So let me now I'll pass it onto branding to talk about the exchanged exchange transaction. Thanks Mark.
Like I said in my prepared comments were really clearly did to comment further than what I, what I said.
Yeah, 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 decks that stack offering to exchange the unsecured notes into second lien net.
No longer maturities pushing everything out to 2025.
But there's a lot of detail around.
Around the exchange in the SEC filings sure. Thanks next question. Please thank you.
Our next question comes from David and Jhelum with Piper Jaffray. Your line open.
Thanks, So apologize if I missed your commentary on the generics business.
But I wanted to get a sense from me Mark how you're thinking about longer term.
Sustainability here, you've talked about share recapture.
And that's not lost on me, but as he is.
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 piece, but the non opioid piece and then secondly, secondly to that.
What are you doing to cultivate.
An actual anda pipeline here. So if you can help into that that would also be helpful. Thank you.
Thanks, David So maybe just a couple of things to clarify.
This is actually a very heterogeneous business.
Opioid products are actually a minority of the business, maybe about 30%, maybe a third or so.
Much of the business is actually.
Hi business, particularly acetaminophen, but it also includes things like 80, HD treatments, which are controlled substances addiction treatment.
As well as a number a member of other products in the portfolio.
And the long term viability in this business, we actually think is quite strong for a couple of reasons, one well, we're experiencing some share recapture today across the portfolio.
Longer term, we believe there are probably two primary vectors for growth for this business. One is this is a when factoring business at its core.
We currently do do contract manufacturer and we believe the opportunities to expand that contract manufacturing business over time.
But secondly, this business actually has a pipeline, which we've been developing for quite some time.
Part of the value proposition for the spring.
It was to articulate that pipeline.
In greater detail and as we look forward that pipeline will start to mature and a couple of years and the majority of products in the pipeline our non opioid pain products. We've already won a boost a couple of products out of the pipeline.
Those have been mostly in a controlled substance area space, but longer term most of the pipeline and most of the growth then coming from that pipeline will be the result of non opioid pain products.
Great. Thanks next question please.
Your next question comes from Elliot Wilbur with Raymond James Your line is open.
Good morning does this look actually on for Elliot I have a.
Two questions on IMAX has to praxair launch impact at the sales at all and.
Correct, there is focused largely on new customers or current customers.
Yes so.
Based on what we observe it doesn't appear to actually that Praxair has launched what we.
It does appear there has been maybe doing some some test marketing them in a few select accounts.
But that's probably not as they haven't done any type of day.
A national launch at this point.
In terms of what they ultimate if they ultimately I'm sure 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.
There are going to where you would expect they may go which as well that customers are keep in mind Praxairs I.
Industrial.
Gas company for the most part in both supply hospitals with a with medical gas as so that appears to be at least that whether initially moving.
A couple of things are important to understand we believed that the I'm index business is quite sticky.
I think is quite sticky based on the fact that we have a total care model.
That is highly valued by customers.
Particular largest customers.
A very interested in the total care offering that we provide which really.
Samples us to service those accounts in total.
And ensure that you know anytime a baby need dynamics were there.
With the product.
Even in the case, where we'd have to swap out within four hours.
We really are focused on ensuring that Nick user completely covered when it comes to tie in a mix.
Whatever competition does occur if and when it does the Korean or Viana brand to brand basis. This is not a generic offering that praxair.
Offering would be a separate brand requiring completely separate offering to what we offer.
Keep in mind longer term, we believe that.
Developing and moving to our involve platform gives us an opportunity, but I don't want to put a significantly superior technology into the market, but because of.
All right the greater simplicity that potential reduction for human error. The portability of that particular lateral we believe there's likely to be potentially significant.
Brian or sorry, a market expansion opportunities.
All of these results while in the near term if competition does kind and we may see some bumpiness.
In the in the dynamic sales longer term, we believe that for all the reasons I. Just described this is likely to be a very sticky business for us.
Thanks Lucas next question please.
Our next question comes from Patrick Tertio Bamber capital your line shopping.
Thanks. Good morning. My question is on CMS arbitration Im 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 outbursts, what dollar amounts possible or probable and what's fun.
We do upfront or what or could it be paid out over a number of quarters or years.
Yes, so with regards to CMS are moving speak to the timing or ask Brian to comment a little bit on on some of the other questions that you held Patrick.
With regards to timing look at this point, it's in the hands to the federal dress Federal judge.
Ruling could come any time or it could come by the under the new or it could stretch into the first quarter or could be longer typically these cases settle sooner than later.
But you know to try to speculate.
Specific timing of this particular room is difficult at this point.
Got 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 we've.
Put together.
A series of 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 only going to comment on that other stuff. Thanks Mark.
As far as the exposure, we previously disclosed that and we and we will update that disclosure in our our 10-K to this afternoon.
Essentially that the worst case would be if we had to reset base your HAMP and that would essentially wipe out Medicaid revenue back to 2013, we estimate retroactively that'd be about $600 million going forward, we disclosed that we think.
That's about 10% of the X. our business, so roughly 100 million prospectively, so that would be the kind of the worst case scenario.
That's how I guess, how would be paid I mean that that I think is unclear right. I mean, I think it's safe to say that there's a high likelihood.
Good.
The ruling came out in a worst case scenario, we would most likely appeal that and then exactly how the.
The bond would work for that is unclear but.
So I guess the how it would be paid is still.
Unclear until we see the rolling Yep added we've done up we've got will obviously a lot of looking at this and I think that to bryan's point or they get that theres a bit of uncertainty as to what that payment would ultimately look like and certainly fair to assume in their rented it was the worst case, we would look to limit the immediate out of pocket expensive that through an appeal through through some sort of up a stay requests.
His first day, but at this point, we're just uncertain as to what it's going to look like.
Okay next question. Please thanks.
<unk> expense.
Our next question comes from Jake appears with Wellstar. Your line is open.
Hey, Good morning, I was wondering if you could just comment on I think OFIRMEV was a decline this quarter or below our expectations. I know you called out some order variability, but how should we think about the weakness this quarter and out of the read through for a fourth quarter.
Yes for a read through the fourth quarter I wouldn't read through anything again, that's why we reiterated that will 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 it for Afirma, specifically there is some quarter to quarter variability that goes on here.
One of things we are soon though is some accounts.
Looking to replace some of the Afirma views with oral acetaminophen.
We've seen that previously and.
I think you know the product in many ways has been such a a success.
Helping physicians manage pain associated with surgery that many times the growth of the product.
As when where and pharmacists may try to targeted.
For 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'll have great confidence that ER that.
Afirma is going to see growth again in the fourth quarter.
Great. Okay, and then just a follow up on CMS.
Based on the uncertainty on what it could be the just wanted to confirm that you haven't reserve anything for for that suit.
That's right we've not reserved anything that's been consistent for the last couple of quarters now since we follow them, obviously, we wait the ruling so.
Thanks, Jay next question please.
Our next question comes from Annabel Samimy with Stifel. Your line is open.
Hi, Thanks.
Taking the question I'm just back on IMAX for a minute.
You mentioned that.
It was effective.
Your contracts and.
The unlimited.
Nations.
Thanks, This is going to normalize in the fourth quarter.
What are the pushes and pulls the there that would.
The allowance recover in the fourth quarter.
Then separately you are going be filing from stratagraft within months now.
Can you outline broadly summary, your go to market strategies. There can you talk.
Capital and investment in sales, it's going be required these launches. Thanks.
Yeah. Thanks, Annabel so yeah with regards to IMAX human we we have a real good idea of how the product mix.
Comes in and.
It's.
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.
Mix, sometimes doesn't come exactly when a quarter or the way, we would expect it and that's important because different customers.
Have different contracting arrangements, so and that can translate into two slightly different revenue in a quarter.
And what we're actually what we actually signed with third quarter was more of our business more of our volume coming about a multiyear contracts, which is actually a good thing for the long term.
Versus what we would have expected that some of the sort of 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 Ryanodex and third quarter, just a bit a little but 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 it gun why we have very good confidence that the business on the portfolio is going to mean that high single digit range for the for the full year.
Speaking.
Charlie and stratigraphic Thats, it's great to talk about these products because we're quite excited about them, we think that these fit very well.
With our our mission and that is to focus on under sort of patients since we don't critical conditions in both of these products.
Go right to that mission in in a critical care space, particularly in hospitals on the case with Stratagraft burn centers.
Our general overall strategy for these products as the investment that we have in the hospital today.
Both with regards to access and and support.
Direct.
Selling support is already in place for the most part what the affirmative team as well as the iPhone index and.
Coast teams. So we really think we have the infested infrastructure late in the will of course be some launch expenses that we can look forward to in 2020, that's a very good thing.
We've also been quite clear that we believe that.
Long term pickier sales for the combination of these two products truly plus stratagraft.
At peak should exceed the peak your sales estimates that we have for Afirma of so in general the investment will be limited in 2020, primarily to launch expenses with relatively minimal additional fixed expense on the infrastructure side.
Great. Thanks Annabel.
Next question please.
Next question comes from ratio pair act with Barclays. Your line.
Hi, I just had two questions first on avatar or the issues that you're facing with actavis as a step through some prior authorization is similar to what you saw a few years ago and is it with the same hardware and I don't know if you heard given an exposure to that particular to the payer that you're dealing with today in terms of the youre constraints on acthar in the second in terms of.
The exchange I know you said that you saw the documents, but in terms of exchange you have 600 million a cash on your balance sheet as of today, you probably will add another two 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 billion three to 1 billion eight should be if we were just to subtract 100% participation or so that billion. One from that number is that your pro forma secure capacity and can that all be first lien or do the new exchange documents limited the amount of first lien debt you could issue going forward.
So I'll take the XR.
Question, what I'll ask Brian to comment on the exchange again.
With regards to Echo reimbursement again, we're seeing similar trends from those that initially started to arise back and I think the third quarter of 2017 on where they started primarily with a large a large payer, but now they really extended.
Across the payer network with the again this is focused primarily on.
Longer duration.
Prescriptions, being shorten and and patients having to requalify as as I mean.
No patients every time with significant.
Incremental administrative burden.
What's different now versus what was in 2017 dismantling having a much more robust data set that actually supports in key indications like refractory are a.
The fact that it makes a lot more clinical sites.
Once a physician has determined that a patient can benefit from acts are two actually keep that patients on therapy much longer than 30 days at least 90 days again based on the data that we're now able to discuss with payers and prescribers and potentially there's additional benefit that can accrue by keeping.
In these patients on therapy.
For six months, so again Thats, a big difference burn we had two years ago and that's why we think the discussions that we're having with payers narrower taking on a different Turner.
And another reason rival believe it's the right time to come forward with a more innovative.
Value based contracting model such as the subscription model, which can provide benefit for the patients but also some some.
Certainty.
For the payer budget holders and again were intrigued by the initial conversations that we're having that payers. It's early days, but.
But we think the combination of the data in this type of innovative contracting model.
Could change the landscape overtime with regards to act our reimbursement.
Okay. Thanks Mark.
Again, I'd love to talk about the exchange really beyond what we've already said I can't can't really comment.
Certainly can't comment on pro forma secured capacity as well so I'd really encourage.
For you guys to dig into the to the SEC filings, which has lots of details around the exchange.
Hi, Thanks ratio.
Looks like we're coming to the bottom half of the hour. We think we've got time for maybe one more question.
My last question comes from EMEA video with STB Leerink. Your line is open.
Hi, thanks for bringing back onto the Q maybe.
Maybe just a quick two follow ups since none of my questions the onsite.
You talked about the subscription models floor at our.
Well, which calendar here would you be negotiating for some type of structure not that song if some of that to be successful.
And the dots to be sounds inject a full or act. Our can you talk about how you think that this could potentially help stabilize.
The volume slot.
Thank you.
Yes, certainly so with regards to subscription model, our intent would be to.
Consider a a range of indications again, particularly those that are supported with the data. We know today that refractory IRA is supported by the data.
And again, that's what's opened up these discussions as things like lupus.
Let us start sarcoidosis start to play out.
Discussions and negotiations around a subscription model could include those but I would say it's early at this point, it's a concept, it's clearly gotten the attention of payers, but.
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 cellphones that to what we're quite excited about this product one because when this presentation one because it effectively takes the acts a multi dose viral which today includes five doses of XR.
And requires patience to to draw.
A dose from the bio and inject themselves.
To essentially a unit dose with a self injection, let's just much more patient friendly.
It's actually.
Lets more conducive to doing innovative contracting around some of these longer duration.
Our piece so effectively you could have two very different acts hours.
One of them, a multi dose vial, which would be almost exclusively for use in pediatric infantile spasms patient population, where you have to dose by weight and therefore, you need a multi dose file and virtually all the other adult indications could be packaged and.
And contracted around a unit dose self injector it can see tremendous amount of flexibility to investigate.
And negotiate value based contracting models.
The other thing that were improved by is there's an opportunity for this presentation to be much more efficient whenever you have a multi dose vial inherently there's probably some waste associated with it.
And this will enable us we believe particularly with regards to the prescription model to effectively eliminate some of the waste that occurs with the with the multi dose five so we think it opens up a whole range of pricing packaging contracting.
Patient friendly dosing.
In a row that that that we were limited by with the multi dose vial all those things in conjunction with some really strong data like we see in our own in some of these other indications could enable us to drive longer term volume base growth, which is where our focus is.
Thanks, I mean I'd like to thank everyone for joining us. This morning, just as a final reminder, reported a call will be available on our website later today and also be available throughout the day to answer your follow up questions. You may have I would I say thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.