Q2 2019 Earnings Call
If anyone should require assistance during the conference. Please press Star then the number zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Mr., Daniel Special Vice President of Investor Relations. Sir you may begin.
Thank you Jamie good morning, everyone and welcome to today's call.
Joining me. This morning are Mark Trudeau are CEO , Bryan reasons, our CFO and Dr., Steve Romano, our Chief Scientific officer.
Before we begin let me remind you of a few important details on the call you'll hear us make some forward looking statements and it's possible that actual results could be materially different from our stated expectations.
Please note we assume no obligation to update these forward looking statements, even if actual results or future expectations change materially.
We encourage you to refer to the cautionary statements contained in resi filings for a more in depth explanation of the inherent limitations of such forward looking statements.
We will also provide selected non-GAAP adjusted measures related to our financial performance.
A reconciliation of these adjusted measures to GAAP is available in our earnings release, which can be found on our website Mallinckrodt dot com.
We use our website as a channel to distribute important and time critical company information and you should look at the Investor Relations page of our website for this information.
As noted in our press release, unless otherwise specified all quarterly comparisons are to the recast comparable 2018 period and the net sales growth ranges will be discussing on a constant currency basis.
Given the recasting of the segments Ramin tease him and the performance in the first half of the year, we're updating full year guidance across each measure as noted in our press release, including raising the annual adjusted diluted earnings per share guidance range to eight hours and 40 cents to $8.70 per share.
With that let me turn the call over to Mark Mark.
Thanks, Dan we're very pleased to deliver another solid quarter building on our strong performance in Q1.
And resulting in a very good start to the year.
Once again performance was driven by consistent growth across our branded hospital products portfolio and by Amitiza.
Well the specialty generic segment delivered a second straight quarter of growth as well.
Bottom line performance was further enhanced by effective cost management, which resulted in robust cash flow generation and significant adjusted diluted EPS growth.
Our results were somewhat offset by a decline in x., our net sales as the product continues to navigate reimbursement challenges.
We're very pleased however to see an increasingly positive prescription growth trend for refractory rheumatoid arthritis patients driven by the very strong clinical trial results reported earlier this year.
While the external environment continues to be challenging for the company. We are very pleased with our operational performance thus far.
We remain intent on transforming our business into an innovation driven drug development and commercialization company focused on underserved patients with severe and critical conditions.
In particular, we look forward to resolving many of the uncertainties currently surrounding the business, including recent market pressures related to legacy issues as rapidly as possible.
We've already made great progress towards our transformational objectives.
Weve developed strong brands in the hospital critical care and audio means spaces.
Begun to establish technology growth platforms, with nitric oxide Sep and regenerative tissue products.
Created an increasingly robust development pipeline of early and late stage products.
And enhanced our differentiating commercial capabilities in patient service and customer care.
All while continuing to maintain strong cash flow generation.
We believe that leveraging these strengths along with the eventual resolution of external uncertainties should enable us to achieve our long term strategic goals and deliver on our promise to meet the needs of critically ill patients with conditions that often have limited therapeutic options.
We began the year by outlining the following four strategic priorities for 2019.
One maximizing the value of the diversified inline portfolio.
To advancing further data generation and the pipeline.
Three completing the specialty generics separation and for executing disciplined capital allocation with net debt reduction our primary focus.
Well be discussing these priorities throughout our prepared remarks, but let me first address our suspended plans for separation.
Our long standing goal remains to be an innovation driven biopharmaceutical company focused on improving outcomes for underserved patients with severe in critical condition.
However, based on current market conditions and developments, including increasing uncertainties created by the opioid litigation. The company is the spending for now its previously announced plans to spin off the specialty generics company.
We continue to actively consider a range of options intended to lead to the ultimate separation of the specialty generics business consistent with our previously stated strategy.
And we will provide updates to the market as appropriate.
Now, let's move to quarterly operational results, starting with our billion dollar hospital portfolio, which continues to be our largest and fastest growing platform and total net sales.
As we prepare for a number of anticipated product launches over the next several years, we see hospital products as the growth engine for the company longer term.
In the quarter, both I INOMAX and Therakos contributed high single digit growth.
With their acos results, driven largely by patient kit growth in the U.S.
Affirmative grew in the mid single digits based on strong demand with its route results affected in part by typical quarter to quarter order variability.
We expect to firm up performance to be robust for the balance of the year.
Looking more deeply at IMAX growth continues to be driven by sustained consistent demand and long term contract renewals fueled by the products differentiated total service model.
While we would expect to see some volatility in the market if potential competition enters we continue to believe that IMAX has a number of potential long term growth opportunities.
These include the anticipated second half 2020 launch of the next generation evolved device if approved.
And additional potential label enhancements that Steve will describe later.
Well overall hospital products growth for the quarter was on the low end of the typical range largely due to order timing. We expect the combined hospital portfolio will deliver high single digit growth for the full year.
Turning to XR before discussing near term performance, it's important to understand our long term vision and objectives for this key product.
We continue to believe XR provides an important therapeutic option for patients with a range of challenging immunologic conditions, who are often refractory to other treatments.
We are well into our multi year investment into the brand designed to fully modernized the data product presentation and patient access dynamics.
Armed with the IRA clinical trial data and the label enhancements around product composition. We are now able to provide payors and providers with what we believed to be even more relevant and contemporary information to guide prescribing an access considerations for appropriate patients, including product dosing and duration.
Over the next 12 to 18 months, our modernization activities are expected to give us a much clearer view on the long term growth prospects for this brand.
Steve will go into a bit more detail on these activities in a moment.
In the near term as a result of pressures leading to reimbursement challenges as well as the uncertainty around CMS reimbursement in Medicaid.
We expect to have further clarity on by the end of August .
We expect act our results to be weaker in the second half of the year and full year sales are unlikely to exceed $1 billion.
Looking briefly at the specialty generic segment the business delivered growth for the second quarter in a row, largely driven by specialty generics products performance.
This growth was exceptional in light of the difficult comparison to the prior year.
We expect this segment to see sustained growth in the back half for the <unk>.
On the capital allocation front, while we're most focused on our commitment to reducing debt and very happy with that progress to date.
Where it makes strategic sense, we will continue to selectively explore other uses for our substantial liquidity.
As illustrated by our recent license and collaboration agreement with Silence Therapeutics.
Well, it's Steven Bryan will cover those topics in detail shortly.
In summary, we've had a strong first half of the year, we're especially pleased with the operational performance of the hospital products Amitiza and the specialty generics business and with the data generation progress for XR.
We're excited by the possibility of near term assets like stratigraphic terlipressin as well as other pipeline advancements we are making.
With that I'll now ask Steve to provide a more detailed update on a number of key activities were executing on across our development portfolio, Steve. Thanks Mark.
I'd like to take a few moments to reflect on the progress Weve made regarding our greater than half billion dollar investment in exlar since taking ownership.
As you'll recall a substantial portion was dedicated to the initiation of a multi year data generation strategy that included three key components.
Health economic and outcomes research.
Preclinical investigations and clinical trials.
We're now over halfway through execution on that plan and made significant progress.
We generated over three dozen H. Youre studies research presentations in manuscripts, highlighting the value of backdoor, including demonstrating healthcare system cost offsets across multiple indications.
We have conducted a tremendous amount of work to better characterize the makeup of this complex naturally derived product.
And have investigated the mechanism of action in multiple in vitro and in vivo preclinical models.
Our research is evidence the affinity backdoors, an agonist for all 5 million. According receptors and has demonstrated potential direct effects on specific immune components.
These data taken together suggest immunomodulatory effects beyond known immune suppression, the latter binds to ready Genesis.
We've also completed preclinical studies of act or in relevant animal models for key promoted conditions, including M.S. uveitis in the frantic syndrome.
And have begun to demonstrate differential effects and some experiments versus corticosteroids.
And we have initiated completed are about to begin a totaled nine clinical studies, the majority of which are randomized controlled programs.
Regarding the clinical trials, we've already reported on the robust efficacy results associated with Acthar treatment in some of the most challenging to treat patients with persistently active Laurie.
And I presented positive findings from our large enlist relapse registry for which we expect a full results in the coming months.
Additionally, we look forward to completing a large lupus trial and hope to have its results by early 2020.
And continue to execute studies in M.S. circa doses you be itis NFS, yes.
Completion of one or more of these could occur as early as next year.
Lastly occur tightest trial is slated to begin later this year all in all we feel terrific progress on the execution of our sizable investment strategy.
Based in part on the successful efforts just detailed earlier this year, we achieved an important us label change regarding the characterization of this complex product.
Moreover, we recently submitted a substantial package of preclinical evidence supporting refinements to the mechanism of action section of label.
Which we hope to have approved by year end.
All the efforts further demonstrate the differential effect the back door versus a CTG alone and corticosteroids.
Turning to other important and growing inline brands, we're expanding our R&D investments to optimize the value of both INOMAX and therakos.
Notably, we're making great progress completing the development of evolve our next generation delivery device front of Max.
This is designed to truly represent a step change in the delivery of nitric oxide in the hospital setting.
It remains on track for submission and potential approval in 2020.
And our premature infant registry in patients with persistent pulmonary hypertension.
Which is now well beyond its halfway enrollment mark is expected to contribute substantially to the understanding of the utility of IMAX in one of the most fragile patient populations.
Last week lastly, we just completed a meeting with the FDA, where we discuss the potential data package to support a pediatric cardiovascular indication for IMAX in the U.S.
Relying on completed clinical trial data and supported by real World evidence.
These are just a few opportunities we have considered to leverage our nitric oxide platform.
Similarly, we are expanding our efforts with the Therakos platform.
Having just initiated a multi year research and development collaboration with transmute and are currently evaluating potential indications such as scleroderma and antibody mediated kidney rejection.
I look forward to discussing these opportunities one specific plans are finalized.
Turning to the development pipeline, we are preparing for a number of important near term catalyst.
Both pivotal trials of Terlipressin in patients with HRS type, one and stratagraft in pieces with deep partial thickness Burns are nearing their last patient last visit milestones, which when achieved will trigger database lock and release of topline results.
We anticipate having these data sets in the next few months.
We'll also have the primary publication Stratagraft. These would be clinical trial results in treating deep partial thickness Burns, which is scheduled to be published in burns. The official journal the International Society for burn injuries in the coming weeks.
We were also delighted to be working to finalize agreements with the FDA. During a planned meeting this month for the phase three IB registration program for NN case, six 105 in APAC in some velocity.
And we are waiting the dosing ending of our first patient in the phase two oral trial for MKS 61 of six.
These efforts represent important progress in the programs for both our Ivy an oral formulations of L. Warner things and lassitude.
Regarding bts to 70 known by the generic name aggravated ex based on its breakthrough regulatory status. We have had ongoing productive discussions with the FDA and remain steadfast in pursuing our objective of clarifying it past the submission.
Data from the completed pivotal registration trial. In addition to other aggravated next clinical data were presented earlier this summer and important research meeting on the new pick type C in Tucson.
As one would imagine researchers families and most importantly patients are all eagerly awaiting clarification of next steps.
With regard to stance a person, while we did determine a potential clinical and regulatory path forward.
In light of having more valuable portfolio investment opportunities, we are discontinuing development of this asset.
The rest of our pipeline portfolio is advancing and we'll provide updates as those assets of those assets as appropriate.
Finally, we were delighted to announce our collaboration with silence therapeutics, a leading R&D technology platform.
Company last month.
Silence his expertise in this exciting promising area of research and development will allow us to pursue potential treatments for conditions associated with the dysregulation of the complement system.
The initial focus is on optimizing the cdthree targeted small interfering arnie that can be that we can advance to the clinic over the next two years or so.
And prioritizing disease targets for development.
We also have the option to expand these activities are target to other complement components.
We're off to an enthusiastic start and I'm happy to also be joining their board of directors.
With that let me turn it over to Brian who will take us through the financials Brian .
Thanks, Steve and good morning, everyone in the second quarter of 2019 reported adjusted diluted earnings per share of $2.53, an increase of 17% over the prior year.
Driven by both operational performance of the hospital products, Amitiza, and especially generics segment and non operational benefits associated with our capital allocation strategy is focused on reducing debt and interest expense.
Net sales for the quarter were 823 million relatively flat to the prior year.
Specialty brand segment net sales were 628 million with the hospital products collectively generating $291 million net sales growing 6% over the prior period and acts are contributing net sales of 266 million.
I don't know Max delivered 140 million in net sales a 7% increase affirming contributed $91 million in net sales up 6% and Derek has provided $61 million in net sales a 9% increase.
Amitiza generated net sales of 52 million in the quarter up 8% and we still expect this business to be near 200 million net sales for the year.
The specialty generic segment reported 196 million in net sales in the quarter, a 1% increase continuing to benefit from share recapture.
Now, let me share some details on operational measures for the quarter.
Total company adjusted gross profit as a percentage of net sales was 73.4%.
Adjusted SDMA as a percentage of net sales for the total company was down slightly at 25.3% compared to 26.1%, reflecting operational efficiencies, including benefits from restructuring and acquisition synergies offset by increased opioid related legal spend.
Overall company R&D expense as a percentage of net sales was 9.7% compared to 11.2%, which on a percentage basis is weighted more heavily towards the specialty brands segment.
We project, both absolute R&D spending and R&D spending as a percentage of net sales to increase as we progress our pipeline and data generation in the second half of 2019.
Turning to liquidity, we generate an incredibly strong operating cash flows in the third quarter of $303 million with free cash flow of 265.
We're well ahead of our projections for 2019 with respect to free cash flow generation, having delivered 300 million in free cash flow in the first six months of the year.
Lastly, we continue to be very pleased with our ability to execute on our debt reduction goals collectively since the beginning of the year, we've been able to capture nearly 100 million in debt discount by utilizing our free cash flow to repurchase fixed rate debt.
We are mindful of the maturity we have coming due in April 2020, and are evaluating potential alternatives to address this maturity.
Our net debt at the end of June was $5.35 billion, a reduction of 458 million in net debt since the beginning of the year, which notably is our lowest level of net debt since 2015.
And our net debt leverage has also materially lower to 3.9 times at the end of June .
Debt reduction will continue to be our primary capital allocation focus in 2019.
Now, let me turn the call back to Dan who will take us into Q Annette.
Thanks, Brian .
I'd like to remind each of you to please limit yourself to a single question with a brief follow up as needed.
Feel free to put yourself back in queue afterwards, and work to get through as many questions as possible with that operator may we please have the first question.
Certainly beforehand, I would like to remind our listeners that if you'd like to queue up to ask a question. Please hit Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. You may do so by pressing the pound key our first question comes from Elliot Wilbur with Raymond James Your line is now open.
Good morning. This is Lucas Lee on for Elliot Wilbur.
I have a question related to XR.
I was wondering if you had the opportunity to evaluate the potential impact on X. Our trends. If currently proposed changes to Medicare part D. Such as shifting 20% of catastrophic coverage directly to pharma were to occur. Thank you.
Yes. Thanks, Lucas obviously, we are evaluating a whole range of potential proposals to changes to the healthcare system.
The one you referred to is just one of many that have either come to the four.
Already or others are expected to certainly be proposed throughout the next several months and probably through the like in Loxa cycle and beyond.
In general, we would say that anything that.
Enables patients to have better access.
Two.
Two products such as X R.
That can treat some pretty challenging conditions, whereby those patients have relatively few options is likely to be a net positive.
It's really difficult to speculate though on what if any changes may be made to the Medicare part D system or any other.
Aspect to the U.S. health care system, but in general if some of the recent proposals again that live limitation.
Proposed to limit patient out of pocket pocket expenses.
And potentially then afford patients greater access to important products like Acthar, we would think would be a net positive to the business overall.
Great. Thanks. Thanks, Lucas next question please.
Thank you and our next question comes from Louise Chen with Cantor Fitzgerald. Your line is now open.
Yes, thanks for taking our questions. This is Sudan Logan Nathan in for Luis. So first question. We have is in regard to the hospital portfolio, where the primary driving factor sport near term and then as you look forward and then.
Yes, and how do you expect growth in that category going forward and then the primary headwinds that could be expected negative negatively impact that and then secondly in regards to the suspension of the spin out there or the option.
For sale of that business or what's.
Is there any timeline on how that will be.
And the next.
12 to 18 months.
Yes, thanks for those questions. So with regard to our hospital portfolio portfolio as you might imagine were continued to be quite pleased with the performance of that business.
The business has been performing collectively in the high single digit growth range, and we would anticipate that that trajectory is likely to continue for the balance of the year primary driving factors in that business are.
Simply demand, it's really demand across the three main products.
A firm of INOMAX and Therakos.
On the affirmative side, it's a screener utilization as a analgesic and managing pain associated with surgery.
As an alternative to traditional ways of managing pain, particularly opioids.
With regards to INOMAX its underlying demand for the use of nitric oxide, particularly for.
Infants at risk in the near Q.
And on Therakos, its underlying patient kit demand, which is utilization of the product for its main indications of CTCL in the us.
And other uses of Sep outside of the U.S. So the primary drivers collectively are all demand demand driven and volume driven.
With regards to primary headwinds of course with affirmative, we haven't known loss of exclusivity, which is likely to occur.
At the end of 2020 on December of 2020 into 2021 and with regards to INOMAX again, we have a an appeal pending regarding our intellectual property around that particular product offering.
Sure property is considerable some of that intellectual property has been challenged.
And we are appealing that challenge and we would expect to have resolution of that.
Any time, but certainly you know it could progress even a bit longer. So those are the primary headwinds, but we continue to be very pleased with our hospital business and importantly, we have a number of products in our pipeline, both near and longer term that specifically address that hospital business Hospital business today is greater than $1 billion growing in the high single digits.
And as we said in our prepared comments, we would expect that business to be the long term growth engine for the company overall.
Your second question around spend suspension recognize that that's what we're announcing today is that we're suspending the spin of our strategic intent is to separate these two businesses and separate them sooner than later.
So at the moment, we're considering a whole range of options, which would include not only spend but sale and all the other things that we've discussed over the last couple of years, we're revisiting all of those options to ensure that we move rapidly towards the separation, we're simply suspending the spin at this time given the fact that market conditions are not favorable to to move forward with that transaction at this time.
Great. Thanks next question please.
Thank you and our next question comes from Jason Gerberry with Bank of America. Your line is now open.
Hi, This is a shiny verma on for Jason Gerberry. So just had a question about actors are related to the update that on.
The uncertainty just trying to understand is that related to Medicaid. So far has the reimbursement uncertainty intensified and can you provide more color on what is happening on the most on trying to make is it getting worse in terms of price at all and just a follow up on that is that is not uncommon that aspect to the CMS dispute on the ACA Medicaid pricing I think you mentioned something out on August timeline. So that's the caveat for that.
Yes, So let me take all of these and kind of unpack them first of all the.
Discussion dispute at the moment with CMS regarding Medicaid best price or Medicaid base price.
Is separate from the underlying XR trends.
With regards to that discussion with CMS.
The most recent event was we did have a trial or sorry, a hearing in front of a in front of a judge on Friday.
As we mentioned in our prepared comments, we would expect to have greater clarity on the outcome of that hearing.
Sometime by the end of this month and we would hope that we have ultimate resolution of the matter certainly sooner than later and we would hope that that would happen prior to the end of the year.
But again this is a separate issue if you will to exit our underlying.
Performance trends.
So on the good side.
We're very pleased with what we see.
The response to the X., our clinical trial data around refractory IRA patients.
We are seeing significant prescription vote prescription trend volume uptick specifically in that particular category and that's consistent with what we've seen historically when new clinical data is presented in to the market, we typically see a corresponding.
Increase in prescription volume supported by that clinical data and recognize that this clinical data is the strongest and rose most robust piece of clinical data that we've been able to produce at this point.
Demonstrating a primary and secondary measures.
Significant differentiation from placebo and.
Many of the measures. So again very strong data an important information for both prescribers and payers because it speaks specifically to the.
Patient identification of the specific type of refractory are a patient and gives information on dose and duration.
In a very contemporary and large studies. So again, we're seeing very positive impact already on that clinical data, which was revealed earlier this year.
The pressure that we're seeing is in the reimbursement area and the reimbursement area comes in two ways, we have both new and returning patients and we mentioned.
Overtime that we are having pressure on both of those sides of the business.
And it speaks to just in general much more scrutiny and pressure on specialty pharmaceutical products by payers and we're seeing pressure downward pressure on both our new and returning patients.
And that issue is separate and independent of what's going on with CMS collectively, though as we look at the uncertainty around CMS and we look at some of the reimbursement pressures that we're seeing near term that's one of the reasons why.
We guided today that we expect that acthar sales in the back half of the year going to be weaker than the first half and that we're unlikely to exceed $1 billion.
In that sales for full year 2019 long term, however, and you heard us Steve's comments, we have a number of clinical trials that are set to read out we have a new device.
A new presentation in a prefilled syringe.
Self injector that we're developing and we would anticipate that over the next 12 to 18 months as the data reads out.
As we potentially get yet another label enhancement.
And if approved we have the Prefilled syringe self injector will have a much clearer view of the long term.
Perspective for Acthar once all of this information is in the marketplace. So.
And that we continue to be very optimistic about the long term prospects for XR short term, we're experiencing a significant amount of reimbursement pressure, which led to our change in guidance today.
Thanks Ash next question please.
Thank you and our next question comes from Greg Fraser with Suntrust. Your line is now open.
Thank you, it's Greg Fraser on Gregg Gilbert.
Ananda sorry couple of follow ups on the refractory our indication can you comment on the coverage that you have now and how you expect the new data.
That coverage and when that could happen.
And then just a quick follow up on.
On the Medicaid issue, if you were to lease the case.
What can you do.
Operationally to offset the impact from higher Medicaid rebates.
Yes, so with regards to our a coverage recognize that acts are for virtually all indications on label is what we call prior authorization. So.
Specific coverage, if you will for for Acthar in IRA.
Is really focused around that pathway in other words.
Physicians.
Typically need to demonstrate through a prior authorization process that a patient has tried and failed multiple therapies before coming to XR. That's no different there is no change there.
What we have seen initially is that while we are getting very good.
Response at the prescriber level.
To this this data which is what we see typically when we present new clinical data.
The change in reimbursement pathway at the payer level takes considerably more time, what we are very pleased about is that we are having some initial very positive conversations with payers.
Looking at this data specifically to determine if there are alternative reimbursement pathways that potentially could make it a bit easier to get X. Our reimbursement specifically for these refractory patients and that's very promising but it's at its early stages.
So again Thats why we don't believe yet that the positive impact of this clinical data.
It is not yet showing up in the in that sales and we would anticipate that that would take some time.
So thats in general how do we think about that but with regards to CMS first of all.
If for some reason the.
The judgment goes against US certainly we have other legal recourse because we think our case here is very strong.
In that we acted.
Exactly appropriately in the way that we should have as instructed by CMS.
Historically in applying the what they call the base state.
So theres certainly legal.
Offsets if we.
Choose to go that route in the event that.
Things were negative for us in the first round.
But importantly.
Regardless of the outcome of CMS.
We certainly continue to look at acts as a long term investment with significant amounts of clinical data and new presentations coming our way in the near term I think you've seen us be very very good stewards of our cost basis, including in this quarter and we have significant opportunities to offset any downsides that we might experience in the near term.
For something that would be an additional pressure on XR, whether it's from prescription trends or any outcome from CMS.
Okay, great thank evidenced in our.
Our guidance, where we are.
Beat and raised on the bottom line. So there are levers all throughout the TNL to Ted to manage that.
Great. Thanks next question please.
Our next question comes from Annabel Samimy with Stifel. Your line is now open.
Hi, Thanks for taking my question and sorry to belabor this point on MSR.
But I'm just curious so you do have a number of additional studies that are ongoing fracs are.
All right. It was very very well designed controlled so it seems like it was a much more robust studies to what extent are.
Future studies that you're doing as robust as in our A., which are the ones that you're specifically prioritizing as important must have.
And Ah.
You know I guess to what extent will that drive future payer discussions.
And acceptance and then following from that there's clearly still development.
I guess.
The additional acts are not I'm, sorry, but corvettes, sorry presentations like either whether it's synthetic or are not and.
They're likely going to take some kind of.
Pricing.
The strategy to enter the market do you have any further thoughts on on some of the potential competitive entrants there. Thanks.
Now let me let me start by a couple of framing comments I'll ask Steve to comment specifically on on study design.
So.
Keep in mind that.
We have got about demonstrating and modernizing the clinical data set for acthar across a number of key indications. We spoke specifically selected those indications because we believe those represent amongst the wide range of opportunities on the Acthar label, the best value for the marketplace, where we can show the greatest degree of differentiation and certainly the acts are refractory patient or sorry the.
Ray refractory patient is one of those it's why we are so very pleased that data was just so strong.
We believe that.
That indication alone is one where longer term.
With the appropriate reimbursement pathways, we could could drive growth for X X are almost exclusively recognize there are a lot of.
Refractory IRA patients out there.
And our current patient penetration of that indication is in the low single digit range. So theres plenty of volume upside just from our area alone.
But if you look at a couple of the other key trials, where there's clearly unmet need.
And an opportunity for XR to demonstrate with with even more contemporary data.
A very compelling value proposition.
I think we can point to the lupus trial.
Which is upcoming which Steve can speak to and also sarcoidosis two areas, where there are relatively few options for some very sick patients. We're acts are currently is has a label and having more contemporary controlled data would certainly give us an opportunity to have a attractive discussions with payers on reimbursement pathways for those two particular indication so with that let me ask Steve to comment a little bit on the design and then I'll come back to the competition question.
Yes, no I'm happy to and Mark really did answer the gave you the key components of the answer here, but I'll just remind you what we did recall most of the indicators connect all the indications obviously, we've moved on our indications are already in the label. So the challenge we had when we designed the program was we really weren't bringing a new product with a new indication to the marketplace. We needed to fill in gaps if you will in evidence and contemporize the datasets for for physicians and payers. Currently so what we looked at really were some of the most clinically relevant questions to answer and design the trials to answer those questions. So the designs are actually varied between that the conditions and they are really based on what relevant questions. Do you want to answer. So for instance, with the refractory population of patients with rheumatoid arthritis, we designed that so we could answer key questions around dosage.
Duration of therapy expectation for response, and whether or not that effect would be durable. So we designed what was called what was referred to as a blinded withdrawal study. We did the same thing with Fscs with sarcoidosis and lupus, we designed more traditional trial designs, which are our parallel group placebo controlled trials for both sarcoidosis and lupus those are probably the two most exciting opportunities we have in the nearer term. The lupus trial will complete by year end early 2020, some very much looking forward to sharing those results when they come out that's a notoriously difficult condition to to show or demonstrate effect in and of course for us with Akhbar, we're always targeting some of the most difficult patients to treat the more refractory populations, but if that is positive that will be very very meaningful and similarly sarcoidosis. Other trials are designed a little differently, but all all target relevant clinical issues that need to be resolved now might just remind everyone that when the FDA.
We updated the XR label in 2010.
It was updated on the basis of available data to support the indication set so.
The label itself is modernized to 2010.
And in that initial 2010 update if you will.
And subsequent additions of the infantile spasms indication.
The clinical data that supports both infantile spasms and M.S.
Has been contemporary in the in the label ever since that time now we have the IRA data that's been updated.
And so we have three indications that have modern clinical.
Either placebo or active controlled data.
And the additional indications that we just described.
We would anticipate if successful will continue to enhance the modernize dataset frac there.
With regards to possible competition.
Again, there are a number of.
Competitors to all of Acthar indications today as we all know act theres typically use.
For refractory patients as a.
Third or fourth line agent and so.
There exists today, just a range of competition for access for patients.
I believe that what you're referring to as additional potential competition in the corticotropin space.
Our XR has been the only product that has been continuously available in that particular class.
There are a number of.
Potential competitors looking to do a number of number of novel approaches to the market.
And those that are near term appeared to be focused primarily.
On.
A different set of products that are primarily used as diagnostic agents as opposed to therapeutics.
That's a pretty big difference and then the other approach that we are aware of is to try to.
Recreate old dormant and da's, which again.
As we've stated many times previously.
And it appears to be bearing out is that that's just a very complex.
And long road to potential approval any of these things could get approved at any point in time. According to the <unk> with the way the companies have described their regulatory pathway.
But at this point, we continue to believe that the opportunities for XR.
Our driven primarily by the data generation activities that we have.
And the.
The introduction of a modernized.
Patient friendly self injector, prefilled syringe, which we anticipate.
That we could have in the market by late 2020 or late 2001.
The combination of the data plus the new presentation allows us to think very differently about how we package.
And and promote.
And partner and contract around Acthar, because it gives us a lot of ranges of things that we can do very differently than we do today, where the single presentation is a is a multi dose vial.
So again its that combination of the data plus the prefilled syringe that we think give us tremendous flexibility to think quite differently about patient access pathways in the future.
Great. Thanks next question please.
Thank you. Our next question comes from Chris Schott with JP Morgan. Your line is now open.
Good morning, Catarina on for Chris. Thank you for taking my questions.
My first one is can you share some thoughts on how you're thinking about opioid exposure, particularly in light of some of the settlement out of Oklahoma and some of the G data with team and how does that factor into your decision not to spend on the generics business and then the second one I have is just given some of these acts are controversies reemerging do you see a need to further diversify the business or you're comfortable with your existing pipeline and if so kind of what kind of assets are you looking for both in terms of size and therapeutic area. Thank you.
Thanks.
Right. So first question around opioid exposure.
First of all the Oklahoma case as you know we were not named in that case that case seem to be focused much more on the.
Promotion of branded opioids and again.
Mallinckrodt has historically for a number of years.
Been primarily a generics manufacturer.
Supplying FDA approved products according to the guidance.
To supply the market.
As requested by prescribing physicians so.
Any impact of the Oklahoma case is really not necessarily relevant two aspects of the mallinckrodt generics business.
However, the M.D.L. case in Ohio has certainly encompassed a whole variety of defendants, including distributors generic manufacturers and promoters of branded products and so that environment has taken a decidedly negative turn.
Over just the past couple of weeks and the uncertainty around that opioid litigation as we said in our prepared comments has certainly led to our decision to spend to suspend for now.
The the spin plans the separation plans for the specialty generics business.
It does not however change our long term objective to separate the brand's business from the generics business and as we said today, we're looking at a whole range of options.
To effectuate that long term strategic objective.
With regards to diversification of the business.
Our objective is primarily to develop a branded.
Innovation, driven drug development and commercialization business and Weve been remarkably successful in establishing a couple of the elements that create that type of business. We think about it in three stages. Our first stage was to develop a set of commercial brands with sustainability that also brought us commercial capabilities.
And that brought us access our afirma of INOMAX and Therakos.
Our second stage was to create development capability and create a an increasing ROE increasingly robust set of late and early stage development assets. Many of those we brought in through licensing or acquisition from the outside so effectively what we're doing now is advancing technology that we didnt necessarily develop for discover but we think we can bring those products to market and put them right into the commercial infrastructure that we've developed and the third aspect is what we're just starting to enter now and that's to think more broadly and more long term about the creation of technology platforms, and while we have technology platforms, such as nitric oxide DCP and regenerative skin tissue products in our current portfolio today, and we're enhancing and developing those you've heard some of that from Steve earlier.
Those platforms give us interesting opportunities, but are probably not broad enough to fully develop a set of organically grown products and that's one of the reasons why we engaged with.
With silence.
In order to bring their technology into our portfolio and from that technology. We think we can develop.
Even more products longer term, we will continue to be opportunistic as well and looking to enhance our development portfolio and our inline portfolio through our significant cash flow generation capabilities and while our capital allocation strategy continues to be primarily focused on net debt reduction again weve been phenomenally successful in doing that.
We're clearly also going to be opportunistic if attractive assets are available because we want to build depth and breadth, particularly in our development portfolio.
But we also want to make sure that we have a well diversified set of offerings.
That can take advantage of the commercial capabilities that we have.
Thanks, you Catarina next question please.
Thank you and our next question comes from Derek Gary Nachman with BMO capital markets. Your line is now open.
Hi, good morning.
With XR given all the overhangs with that franchise I know, you're still trying to modernize it in a bunch of different ways, but is there a point you would consider scaling back your investments behind it and maybe milk it more for cash and pay down debt even more aggressively.
And then for the hospital business.
I'm not sure if you addressed this but just on IMAX how is the contracting Ben how much visibility do you have for the next couple of years and maybe just talk to the next Gen Evolv platform and how much that's going to help.
Sustain it thank you.
Yes, great. Thanks, Gary so.
On XR I think as we've been very clear.
Really the next 18 12 to 18 months shall we say, we'll really have a view.
As to what acts are is and the potential for that products because at that point, we'll have.
Really.
Completed the majority of our clinical trials.
And we will have a hopefully the.
The self injector on the market.
If at that point.
The data is as positive as the IRA data then.
We believe that we have a very compelling proposition for the market going forward.
And a lot of flexibility to think differently about how we provide greater access to what should be potentially an expanded patient population.
With modern data that specifically helps payers address identification of those patients as well as appropriate dose and duration. So the XR story here will be really told in the next 12 to 18 months.
In between now and then.
You know.
Some of the positive trends that we're seeing on prescribing give us good comfort that.
If this data is positive there's a pretty attractive future for the product.
Again, if for some reason things don't play out in the way that we would expect then of course.
You'd be looking at a different type of asset and you'd be resourcing. It appropriately, but it's really the story will really be told as I said in the next 12 to 18 months.
With regards to INOMAX and contracting as we mentioned in the prepared comments, we're seeing very good underlying demand for the product, which is really driving its growth part of that is being fueled by.
The contracting and commercial model that we have that is all focused around the.
The total service model that has proved to be very appealing.
Two the majority if not almost all of our key customers.
And we continue to exercise that commercial model, we've been quite successful in continuing to sign up a customers on contracts, both short and long term.
And we continue to articulate the volume of that business that's in multiyear contract.
In our public queues and case and so I would encourage you all to look at that to see you know.
The amount of that business, that's already determined through multiyear contracts.
With regards to evolve the way we think about it is there are a number of potential competing technologies that are being developed in the market today clearly the nitric oxide market has become quite attractive to a number of potential competitors.
And the majority of those competitors, if not all of them seem to be really focused on the delivery of the gas.
And then reality the way, we think about the business. It's the delivery of the service of which gas as a part of it.
And so the Evolv platform is much more about evolving the delivery of the service and less about the delivery of the gas and the reason for it is evolved technology changes the game, we believe quite a bit it significantly reduces the reliance on traditional bulky cylinders of gas.
It dramatically enhances.
The.
The the.
It actually reduces the potential for human error.
It also potentially becomes much more portable.
And there are four creates more utilization potentially in hospital markets. So we just think it's a completely complete technology shift that would move the market in a completely different direction again with the focus being on the delivery of the total service model in a much more effective way.
And as Weve shown some of the prototypes to some of our customers. They typically get pretty excited about that so we have.
A lot of a lot of promise we think is a.
Associated with evolve, we look forward to being able to introduce it to the market if approved in kind of the late 20 early 21 timeframe.
And again, we think it has the potential.
To be a long term growth opportunity for INOMAX. In addition to some of the potential enhanced label activities that were working on.
For example that Steve articulated around.
Pediatric cardiovascular surgery applications, where we see that the driving growth in Japan.
As well as some of the other data generation activities. We are doing for example around around the use of the product in premium. So again, we think that INOMAX overtime.
Even if the competition is introduced there might be some short term volatility in IMAX growth, but we think there are multiple set of potential.
Growth opportunities for the product longer term.
Thanks, Gary Thanks, guys. Thank you.
Thank you and our next question comes from Anthony Petrone with Jefferies. Your line is now open.
Thanks, maybe.
Two on opioid Jen.
One on just the pipeline just on the generic side I mean, how much of the sort of activity in the <unk> and the deal market sort of reflected that opinion, just thinking Pfizer mylan there as opposed to just unknowns around opioids and as we look ahead is there any way to estimate reserves on the upcoming NGL.
The follow up would just be any updates on terlipressin, just where that asset sets and what are the next steps for terlipressin. Thanks.
Yes, so just quickly Anthony.
The deal activity elements, certainly are less of a factor.
In our decision to suspend for now that the separation activities and its simply much more around the unknowns associated with the litigation, which as I said in the last even just a couple of weeks of decidedly turned negative. So again, we had always said that our plans to separate would be in some in some part dependent on market conditions. We believe at the moment market conditions are not favorable.
To effect, a separation via spin, but again I can't reiterate enough how important it is that our long term objective is to separate these two businesses. They operate very separately now have been for the last several years and we'll continue to do so going forward.
In terms around any types of reserves.
There are no reserves established at this point.
There was only litigation risk litigation liability and I think that's that's pretty important to understand.
With regards to next steps on Terlipressin.
Maybe I'll ask Steve to just comment on where we are with the the study and then I can talk a little bit about our preparations for the commercial launch.
Yes, so as I mentioned in my comments, we're very excited because two of our lead phase programs Terlipressin and Stratagraft are actually completing so these are the pivotal phase three trials, which if positive will lead to submission and hopeful approvals for both of these products in 2020. So we are within three months of sharing the data for both Terlipressin Stratagraft, So very near term catalyst as I mentioned.
For two very important hospital products targeting critical conditions.
On the commercial launch preparations as you might imagine are well underway.
Both of these products Stratagraft and Terlipressin will largely be in the hands of our existing sales team Thats currently selling affirmative.
And we'll go into that model and recognize that probably a year or so ago, we started to.
Position that sales team and target them in a way.
That was appropriately sized and appropriately targeted for the introduction of these new products and so.
We're we're in very good shape in terms of the launch preparations on the commercial side.
With those with those two products recognize what we've said historically as we would anticipate that at peak.
The combination of peak sales.
Between Terlipressin Stratagraft is likely to exceed what we expect peak year sales for affirmative alone would be so again.
These two products are designed to slot into our existing sales team.
And really.
Represents an offset to the known loss of exclusive loss of exclusivity that we're likely experience with affirmative starting in 2021.
Great Thanks for coming coming to the bottom half of the hour, we'll try to get another couple of questions and please.
Thank you. Our next question comes from David Amsellem Piper Jaffray. Your line is now open.
Thanks, So regarding the generics business I mean, you talked previously.
Do you believe there is visibility into the sustainability of EBITDA, there and particularly regarding the.
The opioid segment I just wanted to get some insight into your thought process there.
Why you think that could be sustainable business. That's number one and then number two.
Is it safe to say that.
A span can't happen unless.
You actually have a settlement on the liabilities on the litigation.
In place and ultimately that's the driving force behind.
The decision to park this for now thanks.
Yes, let me take the second question first and I'll come back to your first question David.
So just to be clear, we could affect a spin today, if we chose to.
There is nothing holding us from from not doing the spin other than we believe it's not the right time to do the spin which is why we're suspending it for now.
And also simultaneously considering other alternatives that again would be in the best interest of stakeholders across the board. So the you know.
The.
<unk> ability to spin is certainly well within our control again, we just don't think the timing is right.
With regards to the generics business again, if you look at the value proposition for the business you have to think about it in the near term and the long term.
One is that after an extended period of contraction of both the market and this particular business. We indicated earlier in the year that we expected the business to regrow.
We gave gross guidance and as you see we've now put two quarters in a row together that demonstrate that growth and we expect the specialty generics business will continue to be growing through the balance of the year.
You see that in the in the segment guidance that we gave today and recognize that all those the segment guidance numbers are the same.
We've removed amitiza from that business.
And Amitiza was contributing some growth to that so the generics business is actually even stronger.
Than we originally projected at the beginning of the year.
That's based primarily on share recapture of the base business.
And there's a kind of a misunderstanding I think about what actually is in this business recognize that.
The opioid piece of it whether it's in the finished dose or the <unk> side of it.
It is still probably on the range of a third or so.
Certainly well below 50% of the of the total business.
The rest of the business is comprised of a whole range of ipi products, a whole range of controlled substances that are not opioid pain related their addiction treatment and.
80, HD treatments and other things and so what we're actually seeing as a recapture of share across the entire business.
But near term, we would expect that share recapture to be driving the growth of generics business, but long term, we had been continuing to invest in this business both in the manufacturing capabilities and the pipeline.
And we would expect mid term, there's probably some opportunities for contract manufacturing growth in this business.
And longer term, our emphasis on primarily non controlled substance difficult to manufacture generics non opioid.
And the A's.
Is it is what's likely to drive the growth of this business 234 years from now so again, it's a multi tiered story near term driven simply by share recapture of the base business across the board.
Mid terms say contract manufacturing opportunities and long term, primarily non opioid and da is coming out of the the development pipeline.
Thanks, David I think with that were obviously a little over time, so I want to thank everybody obviously for joining us today as a reminder, a replay of the call will be available on our website later today and I will be around obviously throughout the day to answer any follow up questions. You may have thanks, everyone have a nice day.
Ladies and gentlemen, thank you for your participation on today's conference. This does concludes your program you may all disconnect everyone have a great day.