Q4 2019 Earnings Call
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Actually I hand, the call over to Dana Special. Please go ahead.
Thank you Michelle good morning, everyone I'd like to thank you all for joining US today joining me on the call. This morning are Mark no. Our CEO, Brian reasons, our CFO and Mark TCR, Chief legal officer will be available during Q1, I provide clarity where possible on the announcements today.
In addition to our traditional earnings announcement, we have also shared significant developments with respect to the Ocurred litigation and addressing our near term debt maturities. We strongly encourage you to read the filings. This morning in their entirety as we've thought thoughtfully prepared these materials and our remarks today to provide information in the markets.
Before I turn the corner 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 the cautionary statements contained in resi 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 or financial performance. A reconciliation of these non-GAAP measures is included in our earnings release, which can be found our website mallinckrodt dot com.
These are website as a channel to distribute important in time critical company information and you should look to the Investor Relations page of our website for this information.
Lastly, you'll note that we did not provide formal guidance for 2020 at this point, which is which has been our general practice as we begin began fiscal year, while we're not providing specific guidance due to the complexities of the settlement financing and the act our CMS matter, you'll hear us make some comments regarding specific products, which to help you modeled the business for 2020 in general.
Total net sales for 2020 are expected to be in line with president consensus. However, we expect performance across the products to be weaker on a year over year basis in the first half of the year.
Rebounding in the back half of the year, obviously, there are a number of moving pieces. So we'll keep you updated as we go with that let me turn the call to our CEO Mark to Mark.
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're taking to address these.
Over the past year, there have been three major uncertainties facing our business opioid litigation near term debt maturities and the actor CMS matter.
Earlier today, we announced important updates that if implemented will help resolve two of these uncertainties opioids and near term debt maturities.
They bring us to continue our focus on delivering value for patients and other key stakeholders and achieving our long term vision of becoming an innovation driven biopharmaceutical company focused on improving outcomes for underserved patients with severe and critical conditions.
With respect to the opioid litigation. This morning, we announced that Weve reached an agreement in principle on the terms about global settlement of all opioid related claims against the company I repeat this morning, we announced that we have reached an agreement in principle on the terms of a global.
Settlement of all opioid related claims against the company.
The agreement in principle was reached with the court appointed plaintiffs Executive committee, representing the interest of thousands of plaintiffs in the opioid multi district litigation and is supported by a broad based group of 47 state and U.S. territory attorneys general.
[noise] to complete the proposed settlement [noise].
The company will continue to engage with the plaintiffs group to finalize the details and satisfy the terms of the agreement.
Following that the specialty generics business and all related entities with voluntarily filed petitions for bankruptcy under chapter 11 in the coming months.
Very importantly, our parent company.
Now on crowd plc, and our specialty brands related subsidiaries would not filed for chapter 11 as part of this settlement.
Repeat Mallinckrodt plc, and the specialty brands would not filed for chapter 11 as part of the settlement.
Again under the proposed settlement only specialty generics would filed chapter 11.
As far as the timeline here, we anticipate the specialty generics business filing will occur in late Q1 early Q2 and post emergence the business will be a fully operational indirect wholly owned subsidiary of Mallinckrodt plc.
Once the contemplated chapter 11 process is complete the company will continue to evaluate strategic options for the specialty generics business.
Throughout all of this we will remain focused on ensuring that both businesses continued to deliver value to patients and other stakeholders, who rely on us.
[noise] the proposed settlement costs for creating a trust, which among other things will contribute to abatement measures to offset the expense of providing support to communities impacted by opioid abuse.
We expect that the court supervised process will provide a fair orderly efficient and legally binding mechanism to resolve all opioid related claims against the company.
As part of that process, it's expected that Mallinckrodt plc, and all non filing subsidiaries would receive the benefit of a channeling injunction that would provide for the release of appreciate opioid related claims that have been or could have been asserted against mallinckrodt plc or it's up.
City or is related to specialty generics manufacture and sale of opioids prior to the time of the specialty generics chapter 11 plan becomes effective.
When considering the interests of all stakeholders, including our investors patients customers suppliers and employees. We determined. This resolution is the best approach for creating certainty and for preserving value.
The proposed settlement is also an important step forward that we believe is financially manageable and removes a significant uncertainty related to our business.
Will better enable us to move forward with our strategic plans and drive shareholder value.
Importantly, we fully expect that all of our businesses will continue operating normally throughout this process.
We will continue to manufacture and supply products and invest in R&D to drive innovative therapies for all currently serve patient groups, including underserved patients with severe and critical conditions.
We remain committed to doing what is best for patients customers employees and other stakeholders, who rely on us.
The same time.
Continuing to execute on our strategic priorities, including advancing our pipeline maximizing the value of our diversified inline portfolio and reducing debt as part of our disciplined capital allocation strategy.
As a condition of this proposed settlement and to address the second of these key uncertainties. Today, we also announced certain refinancing activities that are aimed at addressing our near term debt maturities I'll have Brian talk you through the financial details of the agreement in principle and the specific refinancing Act.
Given these in a few moments.
In summary, our goal has been to address these uncertainties and we're pleased today to be taking these important steps forward.
Now turning to our 2019 results we feel that operationally. This has been a successful year for the company in the face of significant distraction.
Importantly, we've executed well against the strategic priorities, we outlined at the beginning of the year, which included one maximizing the value of the diversified inline portfolio.
To advancing the pipeline.
Three executing disciplined capital allocation with net debt reduction as our primary focus [noise].
And lastly, completing the specialty generics separation, which of course, we were not able to execute due to the opioid uncertainties.
Regarding our inline portfolio the business performed well in 2019 in spite of everything going on we achieve strong adjusted EPS performance throughout the year consistently ahead of consensus including in the fourth quarter, which was driven largely by strong net sales and our focus on ongoing efforts.
DNA reductions.
With respect to the pipeline, we had significant milestones throughout the year, including the positive phase for rheumatoid arthritis trial for Acthar gel and to positive phase three trial Readouts for Terlipressin Stratagraft.
As we move through 2020, we will continue our focus on progressing the pipeline, including expected filings for Terlipressin stratagraft in the coming months and the completion of key clinical study results and data read outs across the portfolio.
We'll continue to provide you with updates throughout the year as we move forward.
From a capital allocation perspective, we've been quite successful at reducing net debt with the reduction of nearly $1.2 billion in the year.
Brian will discuss this in more detail.
These three priorities we executed on in 2019 will continue to be significant for us as we proceed in 2020.
Focusing a little more on the specific product performance as anticipated the hospital products rebounded significantly from the third quarter with particular strength in affirming.
As we communicated that in our last call. This product does see order variability, which we expect to continue as we approach loss of exclusivity.
While XR continued its year over year decline seed in the third quarter. It performed largely inline with our expectations for the back half of 2019.
We expect continued softness for acthar in the first half the year much as we've seen in the last few quarters as we continue to navigate a challenging payer environment.
We also weighed ruling on the CMS manner.
Turning to IMAX product continued to deliver mid single digit growth.
However, as we begin 2020, we are starting to see a bit more of an impact from competition.
We expect IMAX to be impacted in 2020 by this additional competitive pressure.
I believe it's likely that sales will decline in the low double digits for the year prior to the launch of our next generation device evolve in 2021.
There are coast has continued to post strong high single digit growth due to continuing capture of new patients for CTCL in the U.S. as well as ongoing growth in Europe.
Specialty generics segment delivered yet again, another quarter of growth and remains a strong diversified business.
Let me turn the call over to Brian to walk through the financial details of the agreement in principle refinancing update and additional details of our fourth quarter performance Brian.
Thanks, Mark and good morning, everyone before getting into the details of our earning results I'll start the proposed settlement and the refinancing update.
On the terms of post settlement Mallinckrodt and its subsidiaries would pay 300 million upon specialty generics emergence from chapter 11, and 1.3 billion in structured payments over eight years.
The 1.3 billion Instructure payments would include 200 million payable on the first and second year anniversary, especially generics emergence from the court supervised process.
And 150 million payable on the third through eight year anniversaries.
On specialty generics emergence from the contemplated chapter 11 process. We'd also issued warrants to the trust exercisable at $3.15 per share to purchase ordinary shares back and cry.
These warrants would 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 companies.
It should be noted is there a number of important conditions to the proposed settlement, including among other things gains the support of additional plants constituencies resolving other claims against the company on fast factory terms and addressing near term maturities.
With respect to the near term maturities condition, the company's entered into a support agreement with certain of the existing term lenders as well as certain of the existing note holders that it's affected would provide for a new 800 million dollar term loan to among other things address the April 2020 maturities.
And amend our credit agreement has outlined in the filings this morning.
The company is also entered into an exchange agreement whereby certain senior note holders would exchange their 2022 notes and under certain circumstances, a portion of their 5.6 to 520 23 nodes for new 10% second lien notes due in 2025.
These refinancing activities are subject to a number 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 2019 reported adjusted diluted EPS $2.40 with net sales of $805 million, especially brand segment net sales were $611 million, especially generics segment reported net sales of 194 million.
Ours.
For fiscal 2019, adjusted diluted EPS was $8 in 88 cents with net sales a $3.16 billion.
The decline in net sales for the fourth quarter and year are primarily attributable to act, our jal and partially offset by strength in the hospital products, especially generics segment.
For the specialty brands segment in the fourth quarter Act, our Zhao net sales were $233 million a 17.8% decrease.
Nomex delivered 144 million net sales growth of 3.8%.
Permit contributed $112 million net sales an increase of 28.2%.
Eric has delivered net sales of $63 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% 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 EPS DNA as a percentage of net sales for the total company was 23.8% down from 25.4% due to our ongoing focus on X gene any reductions.
Overall company R&D expense as a percentage 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 repurchase at a discount early in the year the company reduced net debt I one point.
One $8 billion in 2019 and ended the year with net debt off $4.63 billion.
Our covenant calculated adjusted EBITDA was $1.353 billion for for 2019 fiscal year, which resulted in net debt leverage at December 2019, 3.4 times, a full time reduction in the last 12 months.
You can find this calculation our website as of this morning.
With that I'll now turn the call over to Mark Mark Thanks, Brian.
If obviously shared a lot of important updates in detail this morning.
Well, 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 one maximizing the value of our inline portfolio, which includes continuing to operate the business well in spite of continued payer pressure on XR and navigating competition from X.
To advancing the pipeline, including submission of the end D.A. and be outlay for Terlipressin, and Stratagraft, respectively, and successfully launching both products as well as further developing our next generation platforms for iron Amex and XR.
Three executing disciplined capital allocation with the primary focus continuing to be net debt reduction.
This will build on our 2019 accomplishments and the refinancing activities announced today.
And lastly for completing the opioid settlement, including finalizing all necessary conditions on the settlement agreement in principle and moving the specialty generics business effectively and efficiently through the chapter 11 process.
As you've seen from us throughout this period of uncertainty we strive for transparency and we will continue to provide updates on the opioid developments business performance and execution against our strategic priorities as we move throughout the year.
Now turn the call back to Dan to take us into Q money.
Thanks, Mark just a couple of administrative thing shared before moving to Q. When I first please recognize given the complexity in fluidity of the opioid situation announced today, maybe limited in what information. We can provide during Q1 day, we have our chief legal officer, Mark Casey on to help address questions you may have.
The second item I wanted to highlight as we were 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 that needed feel free to put yourself back comes through afterwards, when work to get to as many questions. We can with that operator and we please have the first question.
As a reminder to ask a question you will need to press star one and your telephone.
Our your question first about Keith.
Our first question comes from Elliot Wilbur Raymond James Your line is open.
Thanks, Good morning.
I want to answer the question on the generally junction I presume that it's your belief that this will effectively resolved.
All known.
Claims as well as any potential future claims that may emerge with respect to payers individuals unions. It said, but I just want to confirm that it's your belief that it would secondly resolve.
That that potential bucket of claims as well and then as a follow up question. How do you now think about the spec gx business and the opioid component.
In it obviously this settlement would resolve.
Any any claims for past action or behavior, but this seems to be a class of products, where every five to 10 years. There's some new round of litigation commenced against companies operating in the space and that's still financially and important part of the business. So how do you just think about that product category as a as a component of that.
Segment going forward. Thanks.
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'll come back to how we think about the long term strategic options for the generics business Park.
Thanks, Mark Yes, you should expect that a channeling injunction if issued would resolve all the claims against Mallinckrodt plc, and when I say all claims.
Claims that that Havent asserted or could have been asserted prior to the emergence of spec gx from the chapter 11 process.
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 something that's clearly understood. Let's recognize that a big portion of this business is actually active pharmaceutical ingredients.
The biggest chunk of that being.
Hi for acetaminophen.
And then the generics the oral dose part of the generics business is again, a fairly well diversified business that is focused in controlled substances.
But not just opioids are opioids associated with pain.
Also has a addiction treatment business embedded within there, there's an IDH di business as well and we're very pleased.
That this specialty generics business has continued to perform very well and as you saw it 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.
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 number of strategic opportunities for the business will continue to evaluate those as we move through the chapter 11 process and we'll continue to update the market.
The appropriate time. Meanwhile, we will continue to own and operate this business throughout the throughout the chapter 11 process.
Thanks for the question Elliot next question. Please.
Our next question comes from Annabel Some Mimi of Stifel. Your line is open.
Hi, Thanks for taking my questions.
So.
A couple of quick questions first on the launch I understand.
The timing of the emergence of specialty generics out of chapter 11 bankruptcy.
And what are the requirements for them to do so in the second is.
Then.
This hamper any of your other operational activities clearly going to have.
On the verge of launching a couple of products next year.
What kind of launch you launched expense you.
Expect to have through 2020.
And have any of those had to be revisited with.
He is this arrangement, Dave you've made today. Thanks.
Great. Thanks for the questions Annabel once again im going to ask Mark Casey the comment a bit on the the chapter 11 process and how it impacts the spec gx business.
And then I'll come back and speak about our our launch plants.
So thank you had about the timing of the emerges from chapter 11 is fairly well dictated by how we enter the chapter 11 process. There are various flavors of chapter 11, you know, including.
Yes, prepackaged or pre arranged and the more support we get for our plan going into the process to quicker we can come out and so right now, it's it's not clear which flavor will use.
But we anticipate the process would would take several months of up to a potentially a year.
And the.
The critical factor is when the court approves the plan to restructure and that would happen.
Sometime towards the end the process.
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 three programs for both of these products delivered such a strong results, which we reported.
In 2019.
We're also excited not only to file these products, but have the opportunity to launch them.
And these products will largely be launched within our existing infrastructure. So keep in mind, we have a extensive capability in the hospital products. These two products both of them would actually fits squarely in our existing hospital products commercial infrastructure with regard.
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.
Bottom line, though is that the activities regarding the specs gx business and what we're going to do and 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 spec gx going in and out of China.
After 11.
Great. Thanks, Annabel next question please.
Our next question comes from Gregg Gilbert of Suntrust. Your line is open.
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 ring fence these potentially very significant.
Liabilities, 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.
And what's the pushback been from those three agee's or others that have not agree to this and then secondly on the CMS matter do you have any insights at all about the timeline, where the process there that the market doesn't have and put the outcome of that matter affect anything that you announced today. Thank you.
Yes, so so Greg again, I'm going to ask Mark to comment on your first question. You know that involves the legal situation around spec gx I'll come back and speak up a little bit on the XR CMS better.
So thanks, Craig and the answer is yes, they the chapter 11 bankruptcy or restructuring process is a well known well tested vehicle for doing just that and that is to manage.
Otherwise unmanageable liabilities for company. So it does it does truly ring fence of those issues.
And with regards to the XR CMS better 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 on the matters at hand, we don't have any if any other further insights at this time.
Greg maybe just to clarify you made reference to 47 parties onboard them and Thats, an effective to the state agencies and territory agee's as well not simply the states, which I think is what's your reference was so just for clarity.
Thanks next question please.
Our next question comes from Gary Nachman of BMO capital markets. Your line is open.
Hi, good morning.
Uhhuh directional sales guidance for 2020 could you break that down between brands in generics and perhaps give some color on XR, specifically, how we should think of that product versus consensus.
And then could you provide any directional guidance for EBITDA in 2020 now with all the debt refinance activities were isn't that leverage expected to go how much higher.
3.4 times that you hit at at year end. Thank you.
So Gary let me ask Brian to address your questions around directional guidance and then I'll come back can you give a little bit more color on XR.
And so Gary right right now, we decided just to give directional guidance because of kind of.
Fluidity of both the settlement and the and the refinancing.
So I would say.
Yes, if you go back and look at some a dan's comments.
On on the first half the year.
It is going to be a little bit weaker, but overall for the full year, we'd expect.
To be used to be right around where current consensus as we certainly appreciate the question question. Gary We're just not at a point, obviously to be able to provide more from guidance on what we provided this morning on the call. So we'll obviously keep you updated as the year progresses, and we have better clarity as things start to narrow.
At this point, that's that's what you've got.
Yeah, and with regards to color on Acthar, Gary There is maybe three or four things I'd like to highlight one or the performance in the fourth quarter was largely in line with our expectations.
Secondly, we're actually quite pleased with the.
Positive response that we've seen to the XR phase four.
Our a data in refractory patients.
Particularly with rheumatology prescribers.
However.
There, we still are experiencing payer pressures and you know the payers or particular focus on the duration and classification of patients.
As a new which.
Puts administrative hurdles.
General and administrative hurdles and moving patients from prescription to to reimbursement.
And we expect those kinda 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 four programs that.
Are going to continue to complete and read out throughout 20 and 21.
Second thing is we plan to introduce a new.
Acts are self injector sometime in 2021.
And the third thing is that we're looking very carefully at the current commercial model for XR and were in advanced talks with a number of different payers to consider pilots in 2020 potentially as early as the first half of 2024 X. our subscription model.
So which could significantly change the way, we think about our commercial model for XR thinking its modeled somewhat after the success that we've seen with within a mix. So again, 2021st half payer pressures are likely to persist on X our longer term Stabilizations drew.
And by the three things that I just mentioned.
And then I guess on that.
On the net debt leverage we're not going to give you guidance on that but Tom.
The the proposed refinancing will be largely.
Neutral to the quantum debt.
Next question please.
Okay.
Our next question comes from Chris Schott of JP Morgan Chase Your line is open.
Great. Thanks, very much for the questions maybe just to on the settlement sorry to ask just seems like the core issue here.
First let me turn clear just in terms the settlement, we're announcing today, how does the supply to.
The counties do you broaden sign off for the company's on this and I guess, what still needs to be done at that level. It seems like the state agencies are generally onboard here.
And then my second question was was about this channeling injunction, it's not a structure I've had much experience with what do you need to do were show when you go into the courts to get that injunction in place to make sure that this is really going to ring fence that entity and the business kind of eventually kind of percolate up to that the parent level. Thanks. So much.
Mark wouldn't you go ahead those are both legal question.
Yes, so so with respect to the city's towns in counties, we have gotten.
Hi level of commitment from that the plaintiffs Executive Committee and as we've said Thats a court appointed.
Negotiating committee on that it was appointed in the MTL and.
So they they're set forth too.
Watch out for the interest of the of the.
Of the entire plaintiffs group.
There is still more work to be done.
Individually or I should say it at the state I'm, sorry at the city level.
But that that group has.
Expressed overwhelming support for the for the transaction and then channeling injunction. Its oh there is 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.
It's a vehicle its its use often a two to provide the protections for a non filing entity that's related to a filing entity and I would encourage you to speak with your own legal counsel on that.
Thanks, Chris next question please.
Our next question comes from Anthony Petrone of Jefferies. Your line is open.
Hi, Thanks, a minute 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 so technically I guess, it's not finalized slashed binding.
So what's the probability that this is actual the actually the final agreement and the terms are going to be said 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 does 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.
So with respect to the terms disclose today you should look at this terms that term sheet as you would any other transaction.
This sets forced the intent of the parties to enter into negotiate a final agreement based on those terms or the devil being the details to get that over the finish line, but there is no intent to 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 and I can't give you a hard date on that.
And with respect to New York.
New York was a an active member of the negotiating group and we believe that they are in favor of the financial terms of of the transaction and Moreover, we're really encouraged by the overwhelming support we've gotten from the AG community across the states into territories.
Great. Thanks, Anthony next question please.
Our next question comes from David Amsellem of Piper Sandler Your line is open.
So if I'm not mistaken you alluded to potentially evaluating strategic alternatives down the road from the specialty business. So in that vein, what's your thoughts on.
You know the scalability actors are and the role of racks are.
In the organization on maybe asking it another way is that something that you think you can do to transform the specialty business are you conceptually extricate yourself.
From your reliance on XR. Thanks.
Yes, thanks, David So look weve.
Continued to invest heavily in XR.
Continued to modernize the brand than that applies.
Both enhancements to the label for example that we've already made to further differentiate the product from a C.T.H. and from steroids and we were really pleased last year to make those changes to the label.
We've invested in greater than half a billion dollars in research and development and other activities to modernize the brand. We're very pleased obviously with the fact, the clinical data from the rheumatoid arthritis trial was so positive and positive response is that we're getting.
From rheumatology prescribers around that data, it's also enabling us to have a different level of discussions with payers, which potentially could lead to this subscription model, which could be a dramatic shift.
In the way, we actually deliver.
XR to the market from a commercial perspective, and we've got a whole series of additional data read outs and study completions planned for the next couple of years.
And then finally, we've spent a lot of time focusing on enhancing the patient experience for XR.
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 that I think we demonstrated that very clearly for example.
With the with the phase for trial. So our view is that we're going to have a real clear view of where acts are fits in the.
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 acts are plays an important role in that long term vision, obviously, we're going to continue to develop our pipe.
Line were quite thrilled about.
The potential to file and subsequently launched two new products.
This year.
So overall, we think we're progressing very well on our strategic objectives and actor will have an important role in that going forward.
Thanks for the question next question please.
Our next question comes from Jason Gerberry Bank of America. Your line is open.
Hey, guys. Good morning, and thanks for taking my question.
I guess can you comment on spec gx.
Cash generation profile I think before when there was the spin contemplated something like a 20% margin was disclose but I think that was inclusive of amitiza, which I'm not sure. If that's going to go with respect gx and what I'm trying to understand here as well spec gx.
On the entirety of be deferred cash payments or with the guarantee of Mallinckrodt plc or the payouts occur from both entities and then when the.
Company filed for chapter 11, well the 1.6 billion liability go to the books of spec Gx as.
Entities. So just if you can clarify just wondering how we should be thinking about valuing the brand co on a go forward basis.
So maybe I'll start by addressing the 1.6.
Billion dollar liability over a period of years I mean, I think it's best to view this as a corporate liability liability for the entirety of the business.
This will not be.
No segregated to one specific section of the business. It is a liability of Mallinckrodt plc.
Yes, Brian maybe you can comment a little bit on some of the cash flow questions that were teed up here, yes sure and.
In my prepared comments side I went through kind of the cash flows.
Gx.
It initially won't be able to fund all the all the payment of the settlement.
And wallets wallets and the chapter 11 process that will have advisor fees and things like that to cover.
But I want to out of the.
Chapter 11 process.
I think that will go back to.
Yes, roughly the same cash flows that we previously disclosed.
If you if you go back over time, when we were looking at spending this business earlier. This year earlier 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 rough order of magnitude you can kind of you said, it's a bit of a proxy.
Yes, it's not precise and and shouldn't be shouldn't be viewed to be guidance, but that's that's a general frame.
And is the Amitiza royalty included in that.
That's no that was 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 spend and then and then we obviously abandon the spend so it has nothing to do with the the generics business.
And then Thats, an asset that would be outside the chapter 11 filing that's correct Scott. Thank you.
Thanks, Jason next question please.
Our next question comes from Rishi correct of Barclays. Your line is open.
Hi, Thanks for taking my questions first congratulations I think this is a great job in a good sign that.
At the plant just want to keep company solvent and push them into a chapter 11, so great job on settling this first and clearly you have overwhelming support from the attorney generals.
What are the bottlenecks with the other states that do not saying I do not seen New York on there. So I just want to make sure that where the case coming up on March 20, as you'll get the injunction Doug just stay out of the case.
And then I have a 41.
It did you want to take that when I think we talked about New York, but maybe just a clarification there would be helpful.
Yes, so look that why the other states haven't signed on is a better question asked them directly.
Don't necessarily have visibility into their reasoning again with respect to New York. They were part of the negotiating group for the pipe side, and we believe that they're supportive of the financial terms of of the transaction.
Okay, and then so as Dennis said this 1.3 billion out to the 300 million as a corporate liability so unsecured bond with an eight year 10 or no interest payments I assume this is obviously a positive sign for in terms of a runway.
Meaning renal rate through all your maturities and then going into 2028, how should we think about you know you generate a significant amount of cash has anything changed strategically for you know that this is out of the way it.
I understand this is an agreement in principle, but what changes and clearly you have a long runway to address all you maturities, but what changes going forward.
Well I think couple of things that we outlined today in terms of.
Our strategic priorities and I would say that archery strategic priority is largely remain the same and those are that.
We want to maximize our inline portfolio and we've talked quite a bit about investments that we're making and products like XR and I INOMAX, we see thera COSA as continuing to deliver very solid growth and is 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're going to continue developing our pipeline and we've 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 focusing on underserved patients with severe at 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 with of which is will be entering into a phase three program for a product that today has a number have been case six 105.
But that product is specifically for.
The other hepatic conditions and consistent with the again, our strategic objective of focusing on underserve patients with severe and critical conditions.
Longer term you know again Weve also been focusing on executing a very disciplined capital allocation strategy and while we've taken significant steps are 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 de lever the balance sheet, but also we want to enhance our our portfolio.
Either from a development perspective or from a inline perspective, and we'll look for opportunities to do that consistent with our strategic objectives of focusing on these underserved patients.
Thanks for your next question please.
Our next question comes from German of Goldman Sachs. Your line is open.
Great. Thanks for taking my questions guys I just wanted to see if you could help us think through some of the the key free cash flow drivers for 2020.
As I 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 as 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 a 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 a you know numbers you could help us think about there. Thank you.
So Frank Frank maybe just to clarify because you you made reference to EBITDA comments, so our on guidance.
We provided guidance on net sales not not explicitly on EBITDA. So charted out for the purposes I wanted to share that.
Brian Go ahead, yes, and I would say one other clarification is the the initial 200 million.
Well 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 acts are right.
Depending on the outcome as CMS.
Yes, we've lost so we'll continue to manage.
She is an expense. So so we do expect the business Ted overall continue to generate significant cash flows.
Great and then I guess.
Good more specifically just on the advisory and legal costs you guys had some some of those expenses that you incurred last year is there any way to kind of think about what it would be for for 2020.
No not really at this point I mean, I think there's there's so much uncertainty obviously with what we have going on to be able to quantify those explicitly so.
Well, we'll certainly keep you apprised try to be as transparent as we have somewhere over the last handful quarters now and we'll do that throughout the year.
Okay. Thanks, so much.
Thanks for the question next question please.
Our next question comes from Patrick to show a Bamberg capital Your line is open.
Thanks. Good morning, My question is actually an IMAX.
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.
Your 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 launch will help stem is decline.
Yes, Thanks, Patrick a couple of things about IMAX first of all we're very pleased with the performance that we saw in 2019. This is a product that over the years has continued to deliver consistent mid single digit growth and that was certainly the case in 2019.
Long term, we continue to believe that IMAX is likely to be the market leader and certainly Oh, we're anticipating the upcoming launch of the next generation platform, which we call evolve than we would expect that in 2021. We think this is likely to really changed the game in terms of.
Delivering value to patients because.
This new device would reduce the requirement to fuel today, so that have to manage large cylinders and it also significantly enhances the.
Potential for human error, so we think portability.
On the reduction of the potential for human error is a significant advantage of the new platform and really would be the next step and.
We believe our market leadership.
We're 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've said publicly is in any given year.
About two thirds or so of our businesses 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 to based on what we've seen so far to really change.
Long term, we think the stabilization of the brand.
It's 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 the.
The reduction potential reduction in human error could enable us to put it into to more places than than the current IMAX 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 from market expansion there as well we would see though 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 why we described the fact that we expect the brand this year to be down in the low double digit range for 2020.
Thanks for the question Patrick next question. Please.
Our next question comes from Anthony Petrone of Jefferies. Your line is open.
Just a quick follow up on on timing if the if we still have a timing element to this you know I'm just wondering what the risk is around tripping up the April 2020 maturity. Thanks.
Just to clarify Anthony and timing with regards to which.
Timing in order to transition from an agreement in principle to a finalized binding agreement, which I think would.
Then suggest do you think could formerly going to chapter 11, you need chapter 11 before you could secure the tone term loan.
No we would we would secure the term loan and move forward with that.
Yes before the April 2020.
Maturities.
That's great okay. Thanks.
Thanks, Anthony next question please.
Our next question comes from whom or Fad of Evercore. Your line is open.
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 am reading it and I read it because your debt is secured.
But on the flip side I noticed there's a specific provisions, suggesting it's 50% of the proceeds remaining after compliance with that in the case of a sales. 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 with you and 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're going to give us any update on whether negotiating classes also onboard with the plaintiff executive committee, which seems to be onboard. Thank you so much and congratulations.
Yes.
Brian and Dan maybe you guys can comment on that the seniority of the debt and then Mark again, we'll just come back to the question around New York just to put a final point on it.
I think when you look at this $1.6 billion liability for US we believe that this would fall behind our existing debt debt stack.
As far as the specific qualifying language that you provided about how a potential sale proceeds would be handled in a situation where at some point into future we would sell that business.
Effectively that Thats, a negotiated terms as part of as part of.
The agreement in principle, and so that would generally govern how those proceeds are all told we used if that would be a path that we would ultimately go down quarterly it provides us some flexibility.
Maybe just 1.1 question you headroom are about can we assume the sale of Gx will happen.
We can assume at this point is that we will continue to own and operate the business.
Throughout the chapter 11 process 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 hover 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.
Yes, so they're there does not appear to be a prospect today of pushing out to New York trial of course, that's that's up to the judge it seems a day.
That said, we should understand that Mallinckrodt plc 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.
Oh, thanks for the questions. Thanks to your from your next question. Please.
Our next question comes from reselling rack of Barclays. Your line is open.
Hi, Thanks for taking my follow up one I want to go for money emerges suspect Gx I think you said that it may be more than a year before you make that 300 million dollar payment should we anticipate one year two years before emerges because obviously that plays into free cash and then second in terms of the exchange are you providing to the 20 twos I want it to from one that is available to all.
22 holders and then also in the in the press release, it says new 10%.
Secondly notes as part of the exchange, whereas in the.
8-K documents it says.
Conditions are set up on new secured notes less than or equal to 9% second liens. Due April 2025. So I wanted to confirm is at 9% or 10% in terms of they knew exchange notes.
Mark do you want to speak to the timing question and then Brian maybe the details on some of the notes if you would.
Sure with respect to that the timing the process in total should take some something just shy of our year plus or minus if you will and the amount of time spent in the chapter 11 process again is dictated by what level support we have going in so we can either have more time before we enter in a shorter time in.
Or a shorter time to file in a longer time in but but ultimately it should take somewhere.
Right around a year to complete a process and your your first question was the availability of the exchange it will be.
Exchange will be available to all holders we have.
Agreements with key holders for supported that as of now.
And then and there will be exchange for second lien odd 10%.
Thank you.
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 our website later today and I'll be available throughout the day to answer any follow up questions. You may have you just way to reach will be via email, thanks, everyone and having I stay.
This does include the program you may now disconnect.
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