Mallinckrodt plc (AMEX:MNK) Q4 2022 Earnings Call Transcript

Mallinckrodt plc (AMEX:MNK) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day, and thank you for standing by. Welcome to the Mallinckrodt Q4 2022 Earnings Announcement. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Speciale, Chief Investor Relations Officer. Please go ahead.

Daniel Speciale: Thanks Tanya. And I would like to welcome everybody to today’s call. With me this morning are CEO, Siggi Olafsson; and Bryan Reasons, our CFO. Siggi will start with an overview of the business performance and Bryan will take you through the financials. Before we begin, let me remind you that you’ll hear us make some forward-looking statements, and it’s possible that actual results could be materially different from our stated expectations. Please note, these forward-looking statements are made as of today and we assume no obligation to update them, even in the event a new information or actual results or future expectations change materially. We encourage you to refer to the cautionary statements contained in our SEC 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 non-GAAP measures is included in our earnings release, which can be found on our website, mallinckrodt.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 the earnings release, our fourth quarter ended on December 30th, 2022 and the comparative period we’ll be discussing this morning is the predecessor quarter ended December 31st, 2021. As a result of the application of Fresh Start Accounting, the company’s GAAP financial statements for the periods prior to June 16th, 2022, the date of our emergence, are not comparable to those periods subsequent to June 16th, 2022.

Further, the results in the quarter compare a normal 13-week period to a 14-week period in 2021. While the exact quantification of the impact of the extra selling week in 2021 is extremely difficult to determine, we believe it reduced reported quarterly net sales growth rates of the company as a whole by approximately six to nine percentage points. The numbers we will discuss in this morning make no adjustment for that comparison and are presented on a constant currency basis unless otherwise noted. For the quarter, Mallinckrodt reported a GAAP net loss of $250 million and a net loss of $911 million for the 2022 fiscal year. After adjusting for specified items, our non-GAAP adjusted EBITDA was $176 million for the quarter and $675 million for the fiscal year 2022.

With that, I’ll turn the call over to Siggi. Siggi?

Sigurdur Olafsson: Thanks Dan. Good morning everyone. I’m pleased to be with you today to discuss our successful quarter for Mallinckrodt and share some color on what is ahead for our company. I’ll start by briefly touching on few key highlights about our full year performance. We executed well and I’m incredibly proud of how we finished the year, exceeding our EBITDA guidance and achieving the high end of net sales guidance for the year. Bryan will provide a further color on the financial results as well as guidance for 2023 later in the call, but I wanted to kick things off with these positive results as they tie directly back to our strategic initiatives. As you may recall, we have been focused on executing our three near-term strategic priorities, strengthening the balance sheet, stabilizing our portfolio, and making the right investments in our pipeline.

We are beginning to see evidence of solid execution of these initiatives in the full year results. We achieved net sales at the high end of our guidance range, reflecting our team’s efforts to stabilize the portfolio and EBITDA exceeding our guidance range as we continue to focus on discipline cost controls and making thoughtful investments in our pipeline. We also saw a slight increase in cash in hand during the fourth quarter and believe our liquidity will allow us to continue making important investments in the business. For our portfolio, we made a solid progress in the launch of Terlivaz, and we continue to see a strong engagement from clinical community on the role of Terlivaz in treating and reversing hepatorenal syndrome, including discussion of terlipressin in a 2023 review article from the New England Journal of Medicine.

Early clinical consensus appears to align with published clinical guidelines, which recommended the use of Terlivaz as a first line therapy for appropriate patients. We also recently welcomed Dr. Peter Richardson as Chief Scientific Officer to oversee efforts to advance our pipeline and round out our executive committee. Peter brings 30-plus years of research and development experience under proven record of executing clinical programs and advancing profit development pipeline to Mallinckrodt. We are fortunate to have him on Board. We made good progress throughout the year in achieving other key objectives, including putting in place a full management team, adding industry leaders to the Board as independent directors, and working to reinvigorate our company’s culture.

2023 is a pivotal year for the company, and we stand ready to navigate the opportunities and the challenges we have ahead of us. I am pleased with our efforts today and I have a great confidence in Mallinckrodt’s long-term ability to drive value for stakeholders. Now, let’s do a deeper dive in — on the performance across the business segments during the fourth quarter, beginning with Specialty Brands. First up is Acthar Gel, which we believe is showing an early sign of stabilization. We were pleased to see the overall market for Acthar growth slightly in 2022. We are also encouraged by the stabilization in patient demand and continue to work with payers to ensure appropriate access for patients that need this therapy. With our continued commitment to the product, Acthar remains a top choice for prescribers and we are continuing to work closely with them to make this therapy available to as many appropriate patients as possible.

That said, there is a competition in the market, which is expected to continue to have an impact on performance in 2023, where we anticipate the product revenue will decline by roughly 10% from 2022. As mentioned, last quarter development of our Acthar next generation delivery device has been completed, but we do not anticipate a launch in 2023. We continue to work towards a resolution of a regulatory matter involving one of our partners not specific to our device. We remain optimistic about the important role the device will play in our portfolio if approved, an easier and more patient-friendly version of Acthar Gel for single unit doses. We’ll continue to update you on any developments on the resolution of the third-party matter as the year progresses.

I’m excited to share our progress with Terlivaz this quarter. In September of last year, Terlivaz became the first and only FDA approved therapy to improve kidney function in adults with HRS with rapid reduction in kidney function, a devastating condition with a high mortality rate. Since approval, we have been working hard to engage with hospitals to gain formulary inclusion of Terlivaz and we have made a good progress in a short amount of time since approval. As we indicated last quarter, while this process takes time, we have gained formulary approval in vast majority of those hospitals that have reviewed the product. What’s more, there are over a hundred additional reviews scheduled in the coming months. The significant enthusiasm we have hearing from the key opinion leaders, community combined with the products, inclusion in treatment guidelines, will be key to gaining formulary assets.

We expect to have more to share in the coming quarters and remain very optimistic about the future of this product. Looking at INOmax, this product continues to be a market leader backed by our best-in-class INOmax total care service offering. While we continue to face competition that is expected to persist in 2023, we expect to continue to be the market leader in nitric oxide for this critically ill patients. Our top focus here is our plant launch of INOmax EVOLVE, the next generation delivery system of INOmax. If approved, we remain on trust to launch this year and we are excited to bring this product to market. With enhanced auto automation and streamlined design, we expect INOmax EVOLVE to provide a meaningful advancement in the delivery of our product to help improve clinician experiences.

We have seen a strong level of interest for this new option to come to market, and are looking forward to adding it to our offering liner later this year. Moving to Therakos. This is the world’s only fully integrated and validated a ECP system to enhance a patient’s ability to find disease. It represents a platform technology that we believe are the opportunities for geographic expansion and potential label expansion over time. We have historically seen this product as a consistent mid to high single digit grower, and we were pleased to see a sequential growth for Therakos in 2022, as we navigated the impact of stem cell transplantation due to the pandemic. We believe we are entering 2023 on a positive note with a clear pathway to returning this product to its historical growth trajectory.

For StrataGraft, our stake has been well below expectation to date. Despite this, we still believe this innovative treatment option for adults with deep heart health fitness burns has an important place for patients and doctors and provides a significant improvement to autography. We are continuing our conversation with burn surgeons and physicians to drive adoptions as well as working on the improved pathways for reimbursement. Turning to Amitiza. Our focus remains squarely on the Japanese market. The Mallinckrodt expects exclusivity into 2026 and strong utilization trends continue. We’ll continue to see annual price reduction in the Japan market until loss of exclusivity, but we expect this product to generate a good cash flow in the years ahead.

As a reminder, at the beginning of the year, the U.S. market became fully generalized with multiple launches. As we stated in the prior quarter, this will result in a roughly $75 million reduction in Amitiza royalties for 2023. Now let’s turn to our Specialty Generics sector. Specialty Generics continued its strong performance and has proven to be an important part of the Mallinckrodt business. We expected this to — we expect this to continue into 2023. As we discussed in our previous earnings call, we anticipated that our scheduled acetaminophen APAP production shutdown in fourth quarter would impact the performance of the product family in the quarter. But we have seen improvement in outputs from recent upgrades as it’s returned to full operation.

For the remainder of the portfolio, we have been pleased by the performance of the finished dosage products, which help to offset the APAP shutdown and the extra selling week in the prior year. Bigger picture, our Specialty Generics business continue to benefit from a well-deserved reputation for producing high quality generic medicines and active pharmaceutical ingredients. We are the only manufacturer of APAP in the U.S. and we made important investments in our U.S. manufacturing capabilities. These upgrades will benefit us over long-term as the ability to offer customers a stable supply becomes more important than ever. Our efforts in Specialty Generics have set us up for what we believe to be a strong 2023. We believe this business will stabilize in 2023 and has the potential to grow due to the consistency of supply and quality.

We closed out 2022 with a strong performance in the fourth quarter, and we are confident that we are well-positioned as we kick off 2023, which will be an important year for Mallinckrodt. We have some real opportunities ahead. Namely continued investment in the launches of early launch of StrataGraft to support their future and looking to gain approval and launch the next generation INOmax EVOLVE product. At the same time, we are prepared to face challenges this year as on, including the loss of royalty due to generate competition in the U.S. for Amitiza and Acthar competition. While there are some clear challenges to the business, I believe we are taking the right steps to mitigate these operational impacts, and we are seeing encouraging sign across both business segments.

We expect Therakos to return to growth this year and believe our strong performance in Specialty Generics will continue. The medical community’s enthusiasm around Terlivaz exceeds our initial expectation, and we are excited to drive this launch forward as 2023 progresses. With that, I’ll turn the call over to Bryan.

Bryan Reasons: Thank you, Siggi. I’ll begin by walking through our results for the fourth quarter and fiscal year in more detail before turning to our expectations and guidance for 2023. Mallinckrodt’s total net sales in the fourth quarter of 2022 were $489 million as compared to $597 million in the fourth quarter of 2021, a decrease of 18% on a constant currency basis. Our Specialty Brand segment reported net sales of $321 million as compared to $397 million, a decrease of 19% primarily due to the impacted competition, reduced utilization of certain products due to the continued impact of the pandemic, continued scrutiny on overall specialty pharmaceutical spending, and the impact of the extra selling week in the prior year.

During the quarter, Acthar Gel contributed $141 million in net sales and our critical care products INOmax generated $80 million in net sales due to the continued impact of competition in the market. We look forward to bringing the next generation device to market, which we believe will further differentiate our product from offering from competition. Therakos had $62 million in net sales and as Siggi mentioned, we expect this product to return to normal growth in 2023. Amitiza net sales were $34 million as we experienced continued pressure in the U.S. from an authorized generic introduced last year. As a reminder, we still expect to lose roughly $75 million in U.S. net sales in 2023 due to the loss of the U.S. endo as the market fully converts to a generic marketplace with multiple entries.

Turning to our Specialty Generics segment, we reported quarterly net sales of $169 million as compared to $200 million last year, a 16% decrease primarily due to a decline in the APAC business, which was impacted by the scheduled maintenance shutdown of our facility during the fourth quarter, and by the extra selling week in the prior year. The company’s net loss for the fourth quarter was $250 million as compared to the net loss of $204 million. Diluted loss per share for the fourth quarter was $18.94, with adjusted EPS of $4.07. Mallinckrodt’s adjusted EBITDA was $176 million in the quarter as compared to $232 million. This reflects a decrease of 24%, primarily due to lower net sales and growth in investments associated with launches of Terlivaz and StrataGraft, partially offset by reductions in SG&A and R&D expense as a result of the company’s initiatives to improve its overall cost structure and the favorable impact from foreign currency.

With respect to operating metrics in the quarter, adjusted gross profit as a percentage of net sales was 64% driven by mix. Adjusted SG&A as a percentage of net sales was 25.2% reflecting our investment in launches of Terlivaz and StrataGraft, offset by continued savings from cost containment measures, organizational changes and favorable FX rates, and R&D as a percentage of net sales was 6.1%. The company ended the quarter with roughly $610 million of liquidity, as we maintained cash and cash equivalents of $410 million and an undrawn account receivable credit facility up to $200 million. Total principle debt outstanding at the end of the fourth quarter was $3.534 billion with net debt of $3.125 billion. Mallinckrodt repurchase $48 million principle amount of its second lean notes due in 2025 and 2029 below par capturing $21 million of discount during the year.

Now let me transition to recap of Mallinckrodt’s full year 2022 performance. Mallinckrodt reported full year net sales of $1.914 billion, and adjusted EBITDA of $675 million. This reflects the meaningful strides we’ve already made to strengthen our company. To echo Siggi comments, we are incredibly proud of how we finished the year. With that in mind, I’d like to give some context on the 2023 guidance shared in our earnings release this morning. As we’ve mentioned before, we anticipate the next 12 to 18 months to be the trough for the company from an adjusted EBITDA and operating cash flow perspective, as both of these are expected to decline in 2023. We anticipated reductions are due primarily to the loss of Amitiza U.S. royalty stream, expected Acthar decline of roughly 10% from 2022, and investment in launches of Terlivaz and StrataGraft, and the planned launch of INOmax EVOLVE.

Our guidance for 2023 includes total net sales of between $1.7 billion and $1.82 billion, and adjusted EBITDA of between $510 million and $560 million. Overall, I’m pleased with the execution of the business in the quarter as we progress into 2023, we remain acutely focused on our upcoming debt maturities and continuing our effort to improve the balance sheet. I’ll now hand the call back to Siggi for some closing remarks. Siggi?

Sigurdur Olafsson: Thank you, Bryan. I’m extremely proud of the teams here at Mallinckrodt. They made a tremendous push in 2022 following our emergence to build a stronger company and positioned Mallinckrodt for the future, all while continuing to deliver high quality therapies to critically ill patients. I know we have more work ahead of us, but I am grateful for their efforts. We are all eager to continue the work — to continue the work under and take aggressive action to stabilize the business. I remain confident in all that we can achieve together and the important benefit we can continue to bring to our patients. So, with that, we’ll now open up the call for Q&A.

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Q&A Session

Rishi Parekh: Morning. Thanks for taking my questions. Sorry, I joined late, so I apologize if you already addressed some of questions. One on Therakos. You expect to return to growth this year. Can you walk us through the drivers behind this growth? Is it mostly on label, but are you also — what are you baking in for the off-label growth? And then can you just give us some context around pricing for this product?

Sigurdur Olafsson: Yeah. So, Rishi, thanks for the question. Let me start on why we see the growth. So, first of all, we saw our sequential growth in 2022, so fourth quarter came out better than the first three quarters. So, we saw that. The main reason we see is the off-label use in graft versus host disease a result of stem cell transplantation. As we have mentioned before on our call, the stem cell transplantation went down during COVID. We saw that with every wave of COVID, there was less stem cell transplantation. And that impacted per Therakos approximately six to nine months later. And we saw that in the numbers, so with now — we saw that in fourth quarter, we started to rebound on the volume, and that’s why we are confident in the growth that we expect to see in 2023. So, maybe on the pricing, Bryan.

Bryan Reasons: Yeah. Not to get in the specific pricing, but overall, this historically has been a fairly stable brand.

Rishi Parekh: Okay. And then the CARES Act money, and again, I apologize if you already mentioned this. I think you’re expecting to receive about $140 million. One, is there a timing as to when you expect to actually receive it? And then what do you plan on doing with this cash?

Bryan Reasons: Yeah. That’s — I think you had just asked about our CARES Act refund. Yeah. That has gone through all the audits and everything that’s required, and we expect that to come in at any point. So.

Daniel Speciale: Yeah. Rishi, what I’d add to that too is this is a current receivable on our balance sheet and has been for the last two quarters at this point. And so, obviously, hopefully, we received this in relatively short order. Obviously, we are working with the government through that process. Getting the audit completed was a significant step, and we believe it’s just a matter of time before it’s received.

Rishi Parekh: If I could squeeze two more in. One, can you just remind me or reiterate what your launch costs were for StrataGraft and Terlivaz?

Bryan Reasons: Yeah. We haven’t given specifics, but if you look at our financials, you can see that last year, probably close to $50 million.

Rishi Parekh: $50 million. Okay.

Daniel Speciale: Yeah. And I think as we move into 2023, obviously, Rishi, I mean, we’re full launch on Terlivaz point and certainly want to make sure that we invest appropriately in that to be able to get that off of the ground and launched appropriately. So, fair to assume as our level of investment will increase now that we’re in the first full year launch.

Rishi Parekh: And then this year is supposed to be your trough year in EBITDA as you’ve communicated today and your past call as well. But can you just help us or at least walk us through how we should think about the jump off from this trough number? Are you expecting double-digit EBITDA gains in the following year? Or is it going to be — is the growth going to be more gradual as your two single products, Terlivaz and StrataGraft ramp up and as those costs come down, like how should we think about the jump off from your trough EBITDA going forward? Is it — and then long-term, when you think about EBITDA, do you expect to see are you maxing it out at a valuation of a seven handle in EBITDA, eight handle? What do you think EBITDA is going to go when you start to think about the ramp-up in all these — in your two main drugs or two new drugs, sorry?