Q1 2020 Earnings Call
Please note we assume no obligation to update these forward looking statements, even if actual results or future expectations changed materially <unk>.
We encourage you to refer to the cautionary statements can contained in our SEC filings for more in depth explanation of the inherent limitations of such forward looking statements.
We will also provide selected non-GAAP adjusted measures reconciliation of these non-GAAP. Adjusted measures are included in our earnings release, which can be found in our website Mallinckrodt dotcom, we use our website as a channel for sure but important and time critical company information and you should look at the Investor relation page of our website for this information.
Under press release, unless otherwise specified all quarterly comparisons are the comfortable 2019 period and then at sales growth ranges, we will be discussing on a constant currency basis.
I would also like to note that we're conducting today's earnings call participants a different locations given the coping 19 pandemic.
We ask you please bear with us if there any technical issues or handoffs and take a little longer than usual.
Turning to todays agenda, Mark will start with an update on the business in an overview of the quarter.
Including Malhotra sponsored a cobot 19 pandemic and the status of our opioid and Acthar gel litigations.
He will then provide an update on our science and technology activities and Brian will walk through our financial results for the quarter.
As Mark talks about the President Cobot 19 pandemic will attempt to provide you some directional thoughts in relation to how the pandemic is expected to impact our business in our products in the coming quarters.
However, we recognize this is an incredibly fluid situation and will largely be driven by the timing of restriction easing any changes in business practices are behaviors follow independently.
We will continue to monitor the situation very closely and provide further updates as necessary.
In light of the pandemic, we're not providing formal guidance [laughter].
With that let me turn the call over to Mark Mark.
Thank you Dan and good morning, everyone and thanks for joining us I Hope you and your loved ones are things fail safe and healthy.
I'd like to start this morning by saying our thoughts are with all of those dealing with cobot 19.
We're grateful for all the first responders health care professionals at a social workers, who have been out on the front line. During this health crisis.
I'd also like take a moment to thank our employees around the globe for their resiliency and continued commitment to serving our patience and customers.
The ability to adapt and continue working as a team while practicing social distancing has been instrumental and maintaining business continuity over the past two months.
Cobot 19 is affected nearly all aspects of how we work and live as individuals as a company and across communities around the world.
It's top of mind for everyone. So I'll begin with an overview of how mallinckrodt has and continues to respond to this pandemic.
First we focused on keeping our employees safe, while ensuring the patience. We serve have continued access to medicines and therapies.
I'm pleased to share that to date, we've continued to manufacture supply and deliver our products largely without interruption.
Further well, we're seeing some delays in our clinical studies, we continue to make progress on important programs like MK six one on five as well as franchise modernization initiatives such as Acthar gel self injector, an IMAX involved.
Importantly, we continue to see engagement from the F.D.A. and I'm looking forward to potential approvals for Terlipressin Stratagraft later this year.
Our mission is to improve health outcomes by developing and bringing to market therapies for severe and critical conditions and covered 19 also presents us with unique opportunities to support healthcare workers and our industry overall in the fight against this pandemic.
I'd like to share a few examples of how our efforts over the past few weeks have evolved.
[noise] first we instituted a weve program that provides our medically trained employees with paid time off to volunteer to treat or care for patients with Covance 19.
Second we donated personal protective equipment ventilators, another surprised health care providers and organizations.
Third we transition part of our production to manufacture and donate hand, sanitizers to centralize emergency management operations in key states, where we are located.
And finally, we partnered with advocacy groups to help mitigate the impact of the pandemic on patients.
In addition, with respect to scientific research and potential therapies were collaborating with health care authorities in Canada, and the U.S. to provide access to medications to help treat severe cold at 19 patients on ventilators and are providing funding and other materials to hospitals conducting investigator initiated.
Research to help find effective treatment options.
I will talk more about the shortly.
We understand the impact this pandemic is having on families patients our society in our industry and we're committed to continuing to do what we can to help.
As we move forward protecting our employees and meeting patient needs will remain key priorities.
Looking ahead, we do not currently anticipate any significant covert 19 related manufacturing or supply chain disruptions.
We're continuing to evaluate the supply chain across our portfolio and assess opportunities to refine our processes and procedures going forward. So that we are most appropriately aligned to the new normal we find ourselves then.
Now turning to the outstanding legal issues facing the business and our near term debt maturities.
In February we reached an agreement in principle for a global resolution to our opioid litigation.
Since that time Weve remained focused on moving forward with the proposed settlement, including gaining additional plaintiff support and addressing our near term debt maturities.
We made important progress on those fronts, notably we receive support for the proposed settlement from New York State and we were able to address our 2020 debt maturity, partially through a private exchange and the rest with cash on hand.
In addition, there were two recent legal developments relating to our ongoing dispute with CMS regarding acthar gel.
First on March 3rd 2020, the U.S. Attorney's office in Massachusetts intervened in a lawsuit filed against the company alleging violations of the false claims act relating to the method, we used to calculate Medicaid drug rebates for Acthar gel.
Due to the pending action on the same underlying issue in the district Court in Washington, DC and with the agreement of the government that action has been delayed until July 2020 at which time our answer to the government's complaint will be do.
Second on March 16th we received a disappointing and we believe an incorrect decision from the district Court in Washington, DC in our lawsuit against the agency.
Netsuite, we had asked the court to block CMS from changing its position on the correct Medicaid rebate calculation for Acthar gel and that applying that change retroactively.
Surprisingly the court refused to do so despite the fact that CMS confirmed twice in writing that the Acthar gel Medicaid Baystate Amp change was correct.
The ruling against the company if allowed to stand would result in a liability of about $640 million for retroactive rebates and an annual loss of future Acthar gel Medicaid revenue of roughly $100 million.
We strongly disagree with the court's decision and falling a careful analysis of the decision. We believed the court misinterpreted the underlying statute and failed to address key arguments about the government obligations under administrative law.
As such we've asked the court to reconsider its own decision and issue a state to prevent the government from requiring a change in Acthar gel is Medicaid rebate calculation until we've exhausted our appeal rights.
If the court should deny either of these request the company will be allowed as a matter of right to appeal to the U.S. Court of appeals for the DC circuit.
Due to the significant negative impact to the company of this ruling we would fully expect immediately to file such an appeal if necessary.
In terms of timing the government has agreed not to require a change in acthar gel is Medicaid rebate calculation until at least the middle of May and the court has indicated that it intends to rule in the same month.
While we vehemently disagree with the CMS decision and the false claims allegation.
And intend to defend ourselves vigorously, we're left with no choice, but to consider all options to resolve outstanding issues related to opioids and Acthar gel.
We're working with the opioid plaintiffs and various other parties in these matters with the hope of resolving them in a reasonable manner. These discussions are ongoing.
[laughter] now turning to our first quarter. Despite the unique challenges created by covert 19, we continued to execute on our strategic priorities, which include maximizing the value of the diversified inline portfolio and advancing our pipeline.
We expect that to covert 19 pandemic will have a significant impact our business due to the combination of stay at home orders reduction of elective surgeries and a drop in overall patient procedures.
We expect an impact predominantly in the performance of Acthar gel their acos and affirmative as these products are the most sensitive to the restrictions.
As the country begins to open up over the next few months, we should be able to get a clear estimate on both the trajectory and timing of the recovery for the business.
While we started the quarter strong our performance began to be affected by covert 19 toward the end of March primarily as a result of significant declines in patient demand and procedure volumes, including the widespread elimination of electric surgeries due to stay at home orders.
We are actively implementing new ways of interacting with our healthcare provider customers and early indications show that they are receptive to different ways being educated about the appropriate use of our products.
While we are confident that business and promotion will recover as the impact of covert 19 subsides like everyone else. We don't know how long this will last.
We expect we will continue to feel the impact of this in the second quarter at least.
Turning to the pipeline, we made important progress in the last few months, bringing us closer to the potential approval of two key products later this year Terlipressin and Stratagraft regenerative tissue.
For Acthar gel despite legal issues, we remain committed to patients by continuing to focus on executing the modernization strategy for the brand, including the Acthar gel self injector the customer subscription model and data generation advancements, which we believe will stabilize and potentially improve the reimbursement landscape.
For the product.
While demand for Acthar gel currently is being affected by reduced patient visits due to cope with 19, we were encouraged to see positive trends a new patient starts before the stay at home orders were instituted.
Looking at I INOMAX, we're seeing an increase in consumption due mainly to its use as a treatment for critical Kobin 19 patients. We're currently it is being used in more than 200 hospitals recovered 19, which is approximately a quarter of our customer base.
However, most of the incremental utilization is coming from our unlimited use type contracts. So this is not translated into a meaningful impact on net sales.
We remain committed to the IMAX total care model, which we believe is a differentiating factor between our product and potential competitors and has served us well as we partner with hospitals to best serve patience during the pandemic.
As we move forward, we remain focused on doing everything we can to assist institutions and health care providers as they treat patients in need.
[noise] for Afirma have we expect that the downturn in elective surgeries due to public health orders and institutions being focused on responding to the coven 19 pandemic will impact product performance.
We're working closely with our customers to ensure that institutions are well equipped to treat their patients as these trends are expected to normalize over time.
For Therakos, specifically, we expect that net sales in the second quarter could be down by roughly $20 million to $30 million from the first quarter as a direct result of reductions in procedures during the pandemic.
We continue to be pleased with the overall performance of the specialty generics business. Despite a now resolved short term disruption in the manufacturing of acetaminophen, which was unrelated to covert 19.
We believe that this business is poised for long term growth benefiting from our us based manufacturing and vertical integration.
We expect the segment to be stable or even show slight sequential growth as the year progresses.
Please report that we recently received confirmation that the contents of that submission met the requirements are the previously issued complete response letter.
As anticipated arm Univision confirmed <unk> for Advisory Committee meeting, which we expect Volcker this summer.
Also in March we initiate a rolling submission of a B.L.A. for Stratagraft regenerative skin tissue for patients would deep partial thickness thermal burns we expect to complete this file and then in coming weeks, yet she's going to be substantial development and regulatory milestones demonstrates both the maturing capabilities of our science technology organization as well as or deep commit.
<unk> needs of patients with severe and critical conditions.
Too bad N. were also leveraging our extensive understanding of inhaled nitric oxide physiology, two identified millions of exploring the potential effective item acts and patients suffering from advanced lung complications associated with cold in 19.
Several weeks ago in partnership with no for terrorists, we received Clarence when health, Canada it'd be get a pilot trial hide those inhale nitric oxide for coping 19 infection and associated one complications.
Including evaluation of a potential direct anti viral effect of item X. gas.
<unk> automatically when I started when we expect the first patient enrollment begin in the coming weeks.
We also recently announced were supporting investigator initiated multinational clinical trial that will be conducted by Massachusetts General hospital to assess the effectiveness of buying them x. or and held nitric oxide in patients with acute respiratory distress syndrome, you to go over 19.
Finally, as a pandemic progressive we were evaluating the opportunity to collect information through retrospective medical chart reviews.
Would allow us to gather more immediate real world evidence about how inhaled nitric oxide is being used currently in hospitals settings to manage these complex and challenging patients.
In terms of our work with hospitals and health health systems to support the needs of covert 19 patients a respiratory therapist, who were child support item x. use for the management of persistent pulmonary hypertension and newborns have also made themselves available on request to ensure the safety use of the I.B.M.X. platform in any setting.
In addition, our customer care center continues to respond around the clock to provider inquiries during this difficult time.
Our top priority. During this pandemic is to protect the health and safety of our employees patients and customers.
With this in mind in the context of the Kobe 19 pandemic, we temporarily paused enrollment in a handful of ongoing akhbar for face for clinical trials out of an abundance of caution.
Our teams are continually in touch with our contract research organization partners and clinical investigators and we'll be prepared to reopen those trials to new enrollments as soon as it is safe to do so.
Cobra 19 was also delayed the start of several more trials, though we continue to progress administrative and started up activities. So that we are well positioned once the situation improves.
Notably will continue to prepare putting initiation of our global phase three trial of M.M.K. six one o. five l. or nothing phenylacetate for the treatment patients with advanced liver disease suffering from attack <unk>.
You will recall do the complexity of this condition the challenges of conduct any single large pivotal registration trial, we saw the alignment with the F.D.A. through utilization of special protocol assessment procedures and I'm working closely with them to finalize study requirements. We continue to anticipate the started this important trial later this year.
Turning to any inline brands, we continue to advance our efforts to complete the development of evolve our next generation item X. delivery device as well as our New Act our jails self injector, both programs, which we expect to be in a position of launching 2021.
We've also finalize plans to expand the available billotti of our Therakos easy platform to Japan.
The resubmission about chronic graft versus host disease application scheduled in the coming weeks.
Finally, you may have seen our press release issued yesterday morning regarding our successful completion of the item X. premature infant registry.
Demonstrating the treatment effect observed in the premature population was similar to that demonstrate in term and near term infants.
This analysis was conducted on the plans 75 per cent in from data and essentially allows us to end the trial much earlier than anticipated.
Lastly, we are progressing a number of hours early research and development collaboration, including those with silence therapeutics and transmission.
Regarding silence their objectionable recall, we obtained a license to a see through my compliment preclinical asset with options to license up to two additional compliment targeted assets based on silences proprietary are in a high technology platform.
Work is progressing to optimize the c. three compound as well as finalize a selection of the two additional targets, which will be confirmed this quarter.
And we've been progressing work, but tried immune including the generation of non pre clinical data, which will allow us to gain greater clarity regarding the specific mechanism underlined the benefit of their coast across various conditions.
In summary significant progress is made this year in spite of the Kobe 19 pandemic and it's associated interruptions.
Major catalyst in the coming quarters for our science and technology organization include the completion of the Rolling Stratagraft B.L.A. the anticipated F.D.A. Advisory Committee for Terlipressin. The <unk> Portola press in in September and initiation of our phase three trial for him in case six one on fun.
I'll I'll turn over to Brian to discuss the financials Brian.
Thank you, Steve and good morning, everyone in the first quarter 2020 reported adjusted to it earnings per share $1.64 with net sales of $666 million.
The specially brand segment that sales were $491 million.
Third gel contributed net sales of $168 million. The quarterly crime is primarily driven by continued reimbursement challenges impacting new and returning patients and continued pair scrutiny on overall specially pharmaceutical spending in addition to cope in 19 impact later in the corner.
The company navigate t. ongoing C.M.S. dispute.
Revenue from act our job Medicaid sales will continue to be recognized and any potential impact of a negative outcome. In this matter is not reflected in the financial results.
I do Max delivered 142 million and net sales a decrease the 6% driven by competition on inhaled nitric oxide, which is a bit slower than anticipated.
Affirmative Conservative 75 million a net sales a decrease the 22% due to significant quarter to quarter order variability and reduction in an elective surgeries due to public health orders and institutions focused on responding to cope with 19 pandemic.
<unk> provided 64 million in net sales a modest increase of 3%, which was impacted as the quarter progress due to cope with 19, including stayed home directories impacting patients ability to receive treatment.
Lastly, amitiza generated net sales of $41 million to decrease in the quarter was due to increased competition in the U.S. and the biennial price reduction in Japan.
Especially generic segment net sales in the quarter or $175 million, a decrease of 6% primarily driven by now resolved short term disruption in the manufacturing of a pad, which was unrelated to cope with 19.
Trying to operational matters for the quarter total company adjusted gross profit as a percentage of net sales with 72.2% compared with 71.6% due primarily to product.
[noise] adjusted S.G.N.A. as a percentage of met sales for the total company was 28.1% as compared to 26.7%.
With the ratio impacted by the decline in that sells well adjusted S.G. inexpensive actually declined do do our continued focus on cost containment reduction.
Overall company aren't the expense as a percentage of net debt was 11.6% compared to 10.8%.
The adjusts effected tax rate was 10% and the first quarter, which has decreased from 2019 levels, primarily due to the interest bearing deferred tax obligations being fully satisfied in 2019 and mass no tax payments recurring and 2020.
We expect that 2021 adjusted tasks fence or more closely reflect the 12.5% Irish statutory tax rate.
Turning to liquidity cash provided by operating activities in the first quarter was $54 million with free cash flow $34 million.
In terms are near term maturities as Mark mentioned, we recently completed a 490 495 million dollar private data exchange with certain holders of our April 2020 nodes.
Effectively extending the maturity of the exchange notes to 2025, but we didn't need to use 120 million in cash to pay off the remainder of the 2020 maturity following the exchange.
Our current cash balance is an access $700 million.
Lastly, our net debt at the end of the quarter was $4.6 billion and our net debt <unk> leverage moved slightly higher and lower adjusted either die to 3.6 times.
We remain committed to reducing net debt throughout 2020.
I'll have to call back to Mark for final remarks before your questions Mark.
Right before we open the Florida, Q. and a let me conclude by emphasizing a couple of main points.
First we believe our team is that an excellent job adapting to the new normal of covert 19. This is a very challenging time, but they are rising to the occasion and we've been able to maintain business continuity with minimal disruption.
Second as a result of the situation we've had to modify our business approach. While we're confident that are operations will recover as the impact of coven 19, subsides, we don't know how long this'll take we expect me will continue to feel the impact of this at least through the second quarter.
Third we're continuing to execute our strategic priorities and made important progress advancing got a pipeline during the first quarter.
These efforts are moving as rapidly as possible given the current circumstances.
Fourth we resolved are near term debt maturities this quarter and finally in the context of the company's overall risks and liabilities specifically relating to opioids. An act are Joe we will continue to evaluate all available options to deal with these matters that let me turn the call back to Dan who will take us and acuity death.
I'd like to remind each of you to please limit yourself to a single question with the pre follow up if needed feel free to put yourself back and you afterwards, I will work to get through as many questions as possible with that Brady what what struck you all day and maybe maybe because of the first question.
Certainly your first question comes from the line <unk>.
Hi, guys. Thanks for taking my questions.
Let us see related to that Hoguet situation. So you mentioned that from.
Just because elective surgeries you're down.
I would assume that in this environment.
So hospitals would be using.
Receivers and I'm, just surprised that you're not say anything to offset that said you could provide any kind of clarification highly P.C.N.N. also with regard to <unk> situation.
To what extent it so they contribute I think you mention it wasn't that much but what would you expected applies to have been had there not been this from Cove and and all the studies that you're doing right now with regard to premature infants and Cove and to what extent with that is I can provide.
Some protective mechanism going forward. Thanks.
Thanks, Annabel I can take both of these and Brian may want to add some color as well <unk> first with regard to affirm of keep in mind that affirmative is driven largely by patient volume patients coming in for a whole range of surgeries one of things that we can clearly see is that overall patient.
Volumes are down visits to hospitals appear to be down as well and certainly elective surgeries of have largely been eliminated in in in many hospital environments.
Hospitals in the last couple of months clearly have pivoted to treating coven 19, patience and so all of these factors together really conspire to drive the use of of affirmative down and certainly see them enough in would be used to treat fevers, but recognize that I.V. acetaminophen, which is affirmative is.
Typically used it a whole variety of surgical processes and if in fact patient visits or utilization of those surgeries are down you should expect that utilization of affirmative is going to be down as well.
Let me turn to the question or an item X.. So again I go back to what we had described in our last earnings call that we expected that item X. should decline, where we would expect <unk> to decline in the low double digits as a result of competition.
Course in the first quarter, we use a single digit decline, which was the effect, we believe of less competitive impact than we expected and offset somewhat by the additional utilization or consumption of nitric oxide.
In in part maybe mainly due to the utilization for coven 19 patients.
So I think what we're saying here is predominantly the impact is because of less competitive activity or less competitive response, because the added consumption for us as I said in the prepared remarks, you really don't see that translating into a net sales impact because much of the use much of the.
Additional consumption appears to be coming through our larger customers, which are typically an unlimited use contracts. So we're actually quite pleased with what we see with item X. performance and I think.
It also seeing as during this particular crisis this pandemic.
Real value of the item X. total Claire total care platform is a real differentiator between are are offering it any other competitive offerings because of the degree of flexibility that we afford to customers and the fact that the customer service aspect of the total care platform is really something that were.
Fighting our customers to be relying on during this unusual time.
Can I just off the follow up on the premature infants to what extent as I can.
Help you you know maintain that that that position the market really.
Competitor.
Well, we're certainly pleased to have the the data or the study that we had been conducting show such dramatically positive response that we were able to to stop the study early certainly today, we know that item access used in a <unk> a variety of of.
Of incense at a whole range of.
Whole range of of ages I think this provides additional data and support of the utilization that we see certainly it should help the overall consumption because because it provides additional evidence to the extent to which it'll drive consumption incrementally in the market still.
Remains to be seen but we see it as a a significant positive funny item x. platform.
Great. Thanks Antebellum next question please.
Yeah.
Your next question comes from the line.
With.
<unk>.
Hi, Good morning, guys on the C.M.S. retroactive liability of 640 million. What's the earliest that you were potentially have to pay that out and will you be able to do that with cast on hand.
Remind us one of the next big debt maturities going forward.
And then also just are you considering the vesting any asset there what about any major restructuring initiatives near term save costs and try and generate more cash going forward given the headlines in the business.
Okay.
Yeah. Thanks scary. So when we just give some overall kind of feminist Brian to address a number of your questions.
Recognize that that our business is a very strong cash flow generator and I think that applies to both the branded business and the generics business and we continue to see that despite pressures on the business I think we've also been very good stewards.
Of our cost management and you you saw that even in the quarter as we are reduced a S.G.N.A. expenses in in absolute terms. So we do have a lot of flexibility and will continue to look to optimize cash flow.
But again I would continued to look at Mallinckrodt is a very solid cash flow generating business certainly in combination between the generic send the brand that business by and you may want to comment on some of the specific questions that that thanks, Mark I'll talk about the debt maturities. The the next maturities earned 20.
22 March of 2022 him 600 million dollar bonds do in March and then we also.
How about revolver coming do about 900 million, so about 1.5 million and March of 2022.
I I think you're yeah as far as the retroactive Sam asked the potential of that.
Yeah right now we have about 700 million of cash on the balance sheet and you know near near term, we'd look to continue to build liquidity in front of these uncertainties. So obviously right now it covered 19 and the kind of macro environment.
And the capital markets been being very ball tile will continue to build liquidity from operations, so that potentially if needed we could utilize balance sheet liquidity to.
<unk>, if if the time comes to satisfy the retroactive C.M.S. liability.
Yeah.
Maybe just a couple of other comments on the on the C.M.S. issue that I go back to the are prepared comments and recognize that well we vehemently disagree with the decision that the the judge has taken we we've obviously asked the government for a stay which they've granted we need.
Need to really resolve the situation because we frankly, we just think the the judgment is an air and so we need and we are <unk>.
Exhausting all of the range of of options that we have around this particular topic.
In terms of the specifics as I said in the prepared comments. These stays extended at least through the middle of May we would be looking to.
Extend that stay until this issue is fully resolved, which we don't think it is by any measure and so at this point I would say that until these challenges and and and legal issues around the C.M.S. decision are resolved, it's very difficult to say how when.
Or if will be.
Addressing this particular a call on cash.
Yeah, maybe.
The concept of of the Divestures a restructuring.
Thank you.
Yeah. So yeah look we're we're.
Always looking to maximize value the assets so yeah.
If there's if there's an opportunity to divest nonstrategic assets.
At at at favorable terms, Yeah, we we would look to do that.
Yeah as far as restructuring activities I mean, I think Gary to that to that point I mean, we we we certainly recognize you know we've got a product that's obviously going to be going you know a generic later this year with affirmative in in the pressure that that's going to create from from a top line perspective, and so you know we we have historically over the last few years and looking at our cost structure and will continue to do that.
Coming for.
X. question. Please.
Your next question comes in the line.
With Piper.
[noise] think so I'm the opioid settlement can you just remind us how the X.R. liabilities situation may or may not impact the settlements in remind us what you in the plaintiffs had.
Contemplated regarding potential liability outcomes and is there and negotiate renegotiation process that is underway given what transpired with acts are that's that's number one and the number two as it relates to our.
Can you talk about the extent to which commercial pairs are are now even more emboldened to be even more restrictive on the product given what's transpired or is it your view that you know the pressure up from commercial pairs was already pretty significant and you know we shouldn't really see incremental.
Impact how should we think about that thanks.
Thanks, They let me take the actor question. The second one that you had first and then I'm going to ask Brian the comment a little bit what we had contemplated in the <unk> settlement specifically.
First of all with with X.R. and payers, what I think we're very pleased with the progress that we've made around data generation to date course, we've been publishing new data company sponsored in an investigator initiated now for several quarters that I think in particular, the most significant the data.
Data that we've reported on today has been very positive results, but we saw in the X.R.R.A. trial. That's certainly got me attention of a of many pairs and that's enabled us to have different level of negotiation and we referred in prior earnings calls to the fact that we've been exploring a subset.
Corruption type model for acts are which has gotten some traction with some pairs and.
As a result of the the coven 19 disruption there's been a little delay in our negotiations there, but we still have a lot of optimism that that approach based on the on the data is going to be helpful. You're absolutely right. There's been significant prayer pressure and we've been experiencing that for now and number of.
Quarters, whether that pay of pressure increases or not it's already quite high and so we're we're we're dealing with that but what we are finding is that our data generation efforts are having some positive impact and as we said in the prepared comments, we're actually quite pleased with what we saw before.
Workover 19, with the initiation of new patient starts with acts are so our objective is to do everything that we can to stabilize and potentially improve the reimbursement landscape racks are we do think that's going to take some time, but certainly the clinical data that we've been generating it's been very helpful. In the discussions.
Let me ask pry into a comment a little bit about the opioid settlement and what we contemplated around the the C.M.S. decision. There. Thanks, Thanks, Mark So as part of the agreement in principle.
Okay plaintiff's, we we can't we contemplated 300 million and the modeling and and then that's been disclosed.
And the agreement wise, if it if it if it did differ materially from that.
That that we would yeah.
Open and and start discussions around around that item. Yeah. We we did a great that want wants the C.M.S. decision did come out that the company and take the time to focus on taking care of the 2020 maturity since they are right upon us.
And yeah now, we we focused on that and took care of that so you know now we're well well rain gauge but.
And not going to going to any details around this discussions right now.
Yeah I might just said there were very very pleased that we were able to come to a a proposed settlement with the plaintiffs than the fact that we got additional support for that I think is also very helpful towards ultimately resolving the.
The L.P.I. litigation is Brian indicated these two are the the C.M.S. issue any litigation are somewhat connected.
And that's why in the prepared segments. We send look we need to take all this into account and evaluate what's the best path forward for the company.
Believed that we came up with you know an effective and elegant solution that was widely supported by 48 state and territorial A. Jeez and again and we now need to take into account the additional complexity of the X.R.G.L.C.M.S. issue, which is why my comments earlier.
About pursuing our options there and understanding how best to resolve that.
It is a quite important next.
To put that together with the proposed settlement that we currently have on the table for old appealing litigation.
Great. Thanks next question please.
Your next question comes.
<unk>.
Jefferies.
Oh, great. Thank you hope a real estate unhealthy given the current conditions just a quick.
To follow up questions on.
One on just the update or.
Specialty Jeanette stand just just given that the market conditions, maybe just a quick fall air.
That silly potential, let's say next 12 18 months as as.
The various prostitute continue on the gold will be excellent they'll be one.
<unk> or maybe just a little bit color on where the actual pressure isn't some condition.
He's a little bit still doing well or is that pressure.
Or a was doing well maybe just don't date, there and then maybe other conditions were seen most of the pressure.
In the last one on for a minute would be you know what attend what amount of the business in terms of the elective procedure push out do you expect to recapture thanks.
Yeah. So the number of questions I'll try to to cut capture all of them and buy it if you've had additional color. Please feel to jump in here. So first of all let's talk about specialty genetics I think a as we've described now for quite some time, we believe that over time. These businesses are moving.
In in different strategic directions, but of course, given the opium in litigation settlement and the process that we had proposed there to put the specially generics business through a surgical as we describe it Ah chapter 11 process.
Upon reemergence, we would then have the a range of options to consider on how to manage the generics business going forward. As you can say this is a very strong business. It's got a well diversified portfolio. It's got a nice pipeline generates a lot of cash at a provide certain.
Only a fair bit of stability during a period and like we're experiencing with covert 19, we think largely based on the fact that it's a U.S. base supply in manufacturing chain and we think that's a that's a benefit.
If we do go through that a surgical chapter 11 process, that's going to take some time and it's clearly going to make sense for us to continue to operate that business before during and after you know the surgical chapter 11 process would occur at some point down the road. We would then consider a whole range of option.
Ends as to how best to maximize value for the total enterprise as well as both elements the generics business and the branded busy so I would say that's some time off as we go through the process that I just described.
But I moved out to X. are so actually I think in general where we've seen pressure and we've seen this pressure consistently is on many of the indications that typically require longer longer prescriptions and those are typically indications like our.
And lupus Nephrotic syndrome. These are are typically patients that require a a longer duration of therapy longer than than 30 days and we're continuing to see that pressure. However, as we've also seen that when we introduce new clinical data.
That does enable us to have a positive impact on a prescription <unk> prescribing and the IRA data is directly correlated with an increase in prescriptions coming from from coming from prescribers, primarily rheumatologists, but it hasn't translated yet into is a significant really.
Taxation of the payer based restrictions were payers tend to either classify patients as new every 30 days or they restrict the duration of of acts are treatment to a a shorter period and again, that's why we're so intent and focused on negotiating with.
Payers with the support of the data to to look at things like a subscription model because we actually think that's the right thing for patients.
In terms of affirmative as far as the amount of recapture it's really tough to determine I think that the elective surgery piece of it as part of it certainly, but it's the overall patient volume and the number of surgeries that are being done that drives drives affirmative usage.
If everything goes back to normal you would expect the affirmative business to to rebound Accordingly, I think what's very difficult for any of US to project right. Now is what is the new normal look like after we emerge from this this covert 19 pandemic is that it prior levels is that at some other level until we have.
Better idea of what that trajectory and ultimate destination, maybe it's very difficult to to project. The degree of from every capture we do expect that a significant amount of the downturn in affirmative, we'll come back and it will be driven specifically by how fast.
What degree a patient procedures come back on line.
Great. Thanks next question please.
Okay.
Your next question comes from.
With.
The.
Hi, the money.
My question.
No not me more on the stand impact.
See.
<unk>.
Do you call in 19, you know I kind of want it <unk>, yeah, especially what type of thing.
I expect.
Especially.
<unk>.
Hmm you indicated that.
I think you know continually from <unk> would you not technically continued beyond that.
<unk>.
<unk>.
Should be you know should be.
It is dependent on resolving.
Yeah, or I used to be engaging.
Negotiating different times. Thank you.
Thanks.
Yeah. So let's talk about acts are impact to covert 19 again going back to the prepared comments as we said.
Cross our portfolio the products that are most sensitive to the restrictions that had been put in place or X.R. affirmative in therakos and again. The case of acts are very similar to what we just talked about with affirmative and that is that if patients don't have where are restricted in their ability.
To to go see the physician the number of new prescriptions the number of of.
Of patients that come through the X.R. funnel, if you will is going to be reduced.
And we certainly started to see that impact towards the end of the first quarter will you see it in the second quarter and that's why we believe that the impact is at least going to be in the second quarter.
Trying to parse out at this point the difference between pair restrictions and and.
And and patient volume, it's probably driven incrementally more by patient volume at this point because as we.
Discussed in one of our prior earnings call. We did expect to acts are to be down in 2020. As a result of increase pair pair restrictions and cove. It is that now on top of that I think you saw some of the impact to that in the first quarter.
With regards to you know a third quarter in fourth quarter, well again, I think right now it's very difficult to project that because it's unclear when if and how at at what rate the restrictions get get.
Loosened.
And patient volume start to come back and so we're going to probably start to see that in the second quarter and we'll have a much better view of what it's gonna be like in the third and fourth quarter barring a second wave of Cove. It to see what you know how fast this is going to come back and so that's why we're only suggesting at this point.
It's definitely going to impact the second quarter, we can already see that it may impact the third and fourth quarter, but it's a little too early to tell.
On your last question regarding opioid and C.M.S. discussions.
Yeah as I described earlier well not directly related they are linked and so it's going to be quite important for us to solve the totality of this challenge which includes both the X.R.C.M.S. issue and the L.P. litigation, we think we have a very.
Potentially elegant solution to the L.P. litigation, we now have to factor in.
The challenge is on the on the X.R.C.M.S. side, and we're working both elements there again, but what we were very pleased to see though is that we have had additional support from state Agee's particular in New York State for the proposed settlement that we had with with the rest of the A.G.S.
Thanks, I mean next question please.
Your next question comes from the line, Greg Gilbert <unk>.
Thank you could you quantify V.A. Pap issue in the quarter Secondly, Mark can you talk about the actor subscription model and what portion the business goes that way now and why not rip the band it often make that happen all at once I imagine that's a multifaceted answer, but and lastly for Steve Romano.
Nitric oxide when can we get data from the Canadian study from the mass General study.
And also at what dose do the data support.
The antiviral activity when would that expected to be kicked them based on your review of prior literature or experience. Thank you.
[laughter], so I'll take the first two L.S.D. become that I'm. The third one in terms of the a pap issue again. This was an unruly covert unrelated issue. It was simply an internal process issue that we had to deal with a absent that the generics performance probably would've been much close.
Sort of flat and again, you know as we look forward.
Into coming quarters as I again mentioned the prepared comments, we actually see this business is quite stable and potentially showing some sequential growth over the next couple of a quarter. So real pleased with the generics performance, particularly during during this challenging period.
<unk> subscription model you know today, we don't have any payers under a specific subscription model.
And you know we we have had a number of very interesting conversations that have progressed to contract discussions with several pairs. We would anticipate and we would have anticipated had coven 19 at it intervened that we would be having.
At least a couple of these already out in the marketplace.
You know, we do think that this makes a lot of sense for patients that makes sense for the company and we think it makes sense for the customers.
However, like any of these things if you're changing the commercial model typically people are going to experiment and stick their towing the water before they go in you know completely so our objective is to get a couple of these out into the market for people to experience them and see how they can be successful.
We're falling in many ways. The same process that we did with I.M.X. and that's turned out to be a very successful model for our customers. We would expect and hope that if we do something similar with acts are an increasing number of customers will see that as positive, but like anything that's knew it takes time for people to adopt it and see.
How it works relative to what they've done historically, maybe may want to comment on the item X. information, yeah, and actually make a few comments just remind folks are approach to generating data on item X. for coping 19 patients is really three prong.
So when the first things obviously, we're doing is is with new overturning we already had an agreement with no over terrorism. This expands let agreement to look at hide those you know in the range of 860 parts per million of nitric oxide given repeatedly through a throughout the day. So that's looking at what we expect from.
Earlier pre clinical data, which suggests high concentrations locally delivered could be effective as an anti viral as having a into vital effect. So we are we are looking at that with M.G.H. mass General hospital, we're looking at moderate to severe orange patients. So these are patients with acute respiratory distress syndrome, it's associated with coping nine.
Team and we're looking there at the motto some near too severe ranging more typically provided concentrations of nitric oxide.
We're also going to take a look at a real world evidence since the since the the item X. product is out there in the marketplace in his mark referred <unk> over 200.
Minerals that we know of for this syndication, we actually have an opportunity to collect information more rapidly because in the two prior studies, it's gonna take months, if not longer to collect that data all that we assume given the circumstances or the pandemics pandemic. It should be captured in in a more speedy manner than many other clinical trials, but still we.
Expect that to come.
Months from now so we <unk>, we can extract from a chart reviews, we should be able to having a matter of once but a relatively robust data sets. So those are the three that's sort of a three prong approach that we've we've had with ourselves and with our partners.
Thanks right next question please.
Your next question comes from the line.
With J.P. Morgan.
Oh, great. Thanks, very much for the questions just to hear first on gross margins.
Hold up fairly well, despite what I would've thought with some adverse mix with the <unk> erosion. So I guess is this kind of 72% rate a decent leveled think about for the company on a go forward basis and then my second question was as we look ahead to the Stratagraft and Terlipressin launches what is your ability to put resources into those assets and.
And and just more generally how're you kind of balancing against preserving margins in cash flow versus near term investment given some of the challenge is you're facing elsewhere in the in the portfolio. Thank you.
Yeah. Thanks, Chris Let me take your second question first L.S., Brian and the comment about the the gross margin. So we believe that truly and and stratagraft represent real innovations that are going to benefit are are specific.
As a strategic patient focus that severe and critical patience that you know that are dealing with some pretty challenging conditions. So strategically. These these products fall squarely within our our our primary focus.
Recognize that both of these are primarily hospital based products.
And the current infrastructure that we have within our hospital team is designed to to put these products right into that to that infrastructure. So in terms of incremental structural investment it's modest from from that perspective and again much of the the same.
Infrastructure and teams that support affirmative today as we lose exclusivity towards the end of this year those those folks will turn out to promoting terlipressin and stratagraft.
In terms of Resourcing. These these new product launches. These are critical to our future and so we're gonna resource. These appropriately we would expect.
We will see incremental promotional spend against these that would just be normal lost launch expenses, and we're well resourced to be able to do that.
Again, we think these two products together should at their peak in combination exceed the peak your sales of of of affirmative in so we're in a very good position there [noise].
You heard from Steve It does appear from a regulatory standpoint that these continue to progress unexpected pathways and we could have a a potential approval for terlipressin as early as September.
But we're contemplating right now is you know as as we look at the evolution of the marketplace and start to try to project, what the new normal might be as the as the country re emerges from from the covert 19 pandemic.
Approach or any companies approach may have to be modified somewhat for launching new products and we're evaluating those options today, but in terms of being able to resources.
We're in a very very good position to be able to do that and would expect these things to be a very high priority for us towards the end of the year and certainly going forward.
And on on the gross margins, Yeah, you're right I I think the teams done a good job controlling overall costs of manufacturing.
The the gross margins are are dropping quite a dead by a by product mix.
In in Corners, where act starts a little stronger see the gross margin pop up a little bit.
Yeah, I think we're not going again guidance right now just because a lot is going to be driven by how long the the pandemic goes on and what the new normal once we come out of it looks like but.
I am kind Norma.
Operating times, Yeah, I think 70 twos a good.
A good gross margin, you know give or take quarter to quarter <unk> appoint either direction.
Yeah, I think maybe the one thing I'd highlight too is you also have a phone as dropping as well and that sales and in some regards you have a bit of a push in a pool with with X.R. and affirmative. So as a result of that you're going to Susan ervin flow and and perhaps that that influenced the 72% that we printed this quarter.
Next question for you will try to get maybe one or two more questions.
Next question comes from the line.
Raymond James.
Good morning. This this Lucas Leon Elliott.
So cash flow from operation appear to be weaker than prior four quarters.
Lost the reason behind a weakness and how do you expect this playing out in the remainder of 2020.
And regarding the two products that.
Could be potentially long approve this year will you be in a position to immediately launched them upon the approval. Thank you.
Yeah I'm the launch products, we we would be in a position to immediately launch those and promote those and that that would be our intent.
Again, I gave a some additional comments on how we think about those two products, but just to reiterate we think they present significant innovation they address patience with severe and critical conditions that have a significant unmet need and we see these is clearly strategic opportunities for the company much in line with our mission to focus.
Severe and critical patients. So these are two very important products for us and we want a resource those appropriately get those into the market you know as quickly as possible for the benefit of patients.
On on the cashless from operations your part part of it is yeah. The the first quarters always a little weaker and the fourth quarter is usually our our strongest corner from from cash was yeah. We did we did have a little more volatility and kind of the timing of some payment.
In receipt, so yeah look at our our working capital on the balance sheet, you can see that that that moved that kind of caused a little bit of sequential volatility in operating cash flows.
Yeah. The one other thing at highway there too is obviously, we've got a number of legal matters that are ongoing and so as a result of that you know what consultancy span and legal spend obviously those things are are certainly ticking higher than maybe where they would historically be as well.
Maybe we'll we'll do want one last question. Please.
And your final question does.
<unk>.
[noise] Hi, good morning, guys. So first question.
Oh I was trying to get a little better sits there can you talk maybe just broadly about that in terms of yeah, maybe it's like what were the trends of revenue. The first two months versus the last month.
Or maybe you could talk about in terms of you know what proportion of of that revenue as associated with.
Active versus non elected orientation.
Versus outpatient it any color you can give us there.
So we can dive a little deeper on her own would be appreciated and then the fog question would be just on the costs side.
You know again.
You guys held up cause pretty well given the dynamics in the corridor.
Just wanted to see if you could talk to us a little bit about.
You know on a cog side on the S.G.N.A. side.
What proportion of those do you have some discretion over in terms of decisions you can make any event that we do see some more significant revenue reductions and Q2 and thereafter.
Okay.
Certainly.
You know dollar number that you can share that would be appreciated to thank you.
Yeah. So I'll take the affirmative question to ask probably on a comment on the on the costs question. It's again going back to affirmative we touched on us a little bit earlier, we believe that the majority of the affirmative shortfall enforced in the first quarter.
Was the result of reduced patient volumes and based on what we're anticipating seeing for the second quarter. We would expect that affirmative is going to be under significant pressure again, we would expect just like the impact.
On affirmative was relatively rapid we saw a pretty direct correlation between the drop and patient volumes and and sales.
That if the market returns to more normalized levels, we would expect to see a similar kind of steep rebound. The question is when does that happen what's the what's the trajectory.
And to what level and it's going to be I think largely dependent on.
Largely dependent on how things do return to a new normal and what that new normal looks like there is also likely to be and we didn't experience a little bit of that in the first quarter some quarter to quarter variations given the fact that this product is coming closer to lots of exclusivity, which we would anticipate in the in the.
Fourth quarter, you do see some customers changing their orders again, that's not something we have a lot of visibility too in terms of the rationale for that but that does tend to happen with products that are coming closer to loss of exclusivity. So it's those two factors, but it's.
Gently driven by the decline in in patient volumes.
So again I would expect the second quarter is going to be pretty challenging for affirmative third and fourth quarter remained to be seen based on how the how the country and patient volume's recover recover from the pandemic, maybe <unk>, our Mark maybe one thing I'd add to that too I mean, I think it's really important to know that you know q. Q4 was incredibly strong for that product and that we're very.
We've seen over the last few quarters has been pretty significant and I think this is something that we should expect to see as we move towards that now we event. Later this year I think it just so happens that the the cobin pandemic kind of heightened some of that in in this quarter and so as a result of that I mean, we expected that there was going to be some degradation and that product on a sequential basis and even year over year.
Notwithstanding the the covert impact so I think it's just important maybe to keep that as a frame of reference when you're looking at this at this number.
Maybe Brian you went ahead huh.
Yeah, I mean, yeah, <unk>, leading into this year, we needed affirmative had now are we.
We we have some top line pressure yeah. We we also had planned to move toward a separation of the the generics business. So all these things. We you know had plans underway looking at the the cost structure in the way we operate so yeah, we we.
You have.
Flexibility and and and to to reduce S.G.N.A.N. cogs to a certain extent.
And and continually look at that and I think if you look historically, we've shown the ability to you know manage the middle harping down a a very responsible way, so and and we expect to be able to continue to manage the middle of the pan out that way.
Great. Thanks, Thanks for the question and appreciate everybody bearing with us for a little bit overtime. So I'd like to thank you all for joining us this morning.
Mind or a replay of the call will be available later today on our website and I'll be available throughout the day to answer any follow up questions. You may have a hope everyone is doing well and appreciate you guys joining us be well.
Just.
Thank you for your participation.
<unk>.
[music].