Mallinckrodt’s (MNK) Management Presents at Morgan Stanley Global Healthcare Conference


Mallinckrodt (NYSE:MNK)

Morgan Stanley Global Healthcare Conference

September 12, 2017 03:30 PM ET

Executives

Matt Harbaugh – CFO

Steve Romano – CSO

Cole Lannum – IR

Analysts

David Risinger – Morgan Stanley

David Risinger

Time to get started. The delay was that Cole was socializing. I think he knows more people here than me. But welcome to the Mallinckrodt session. I just need to refer you to disclaimers at www.morganstanley.com/researchdisclosures. So, we have three executives with the company who are here with us. So that’s Matt Harbaugh who is the CFO. That’s Steve Romano, who is the Chief Scientific Officer and Cole Lannum who is the Head of Strategy and Investor Relations. So appreciate you being here.

Question-and-Answer Session

Q – David Risinger

I thought it would be great for you to start Matt with framing the vision for Mallinckrodt, how you’ve evolved the company and the go forward strategy.

Matt Harbaugh

Right. So — and thank you for having us before we get started. So Mallinckrodt has now been a publicly traded company over four years and we really have charted a course really oriented towards specialty brands. For those of you that may have not been as close to it as those of us on the stage, we’ve done over $11 billion in acquisitions, building out our specialty brands business and we’ve also divested some of the non-core assets, which are our legacy imaging business. We’ve done about 1.2 billion in divestitures over time and where we see the company going, I’d say there are two tracks that I would focus you on. The first is the continued realization of the future of the specialty brands business.

Many of you know that generics industry is going through some real challenges and our business is enduring those challenges as well and so that business is on decline this year, was on decline last year and so defacto is, we’re building our revenue in our specialty brands business, our specialty generics business will become a smaller component of our total. If you go back to the last quarter, it was about the 75-25 rule, spec brands versus spec generics. And so that would be one area and you’ll see continued focus from a business development perspective in the specialty brands business and it’s really focused on two areas.

It would be focused on products that are in the marketplace where we feel that there’s an opportunity for us to accelerate the execution or we have an overlap where we can get some synergy out and I would say the InfaCare acquisition we announced a couple of days ago or excuse me a couple of weeks ago fits squarely in that. It’s a perfect fit for our critical care business within the hospital space. And then I would say, the other area you’ll see further productivity ultimately is going to be in our development pipeline and so we’ve got a number of products that Dr. Romano would be more than happy to go over with you, whether it be Terlipressin or StrataGraft or even InfaCare because we still need to get that product approved, but we hope to launch it in the back half of next year.

So we’re going to continue to be aggressive. We’re very fortunate in that our businesses do generate strong cash and we’ve been able to facilitate business development while at the same time, paying down some of our debt and at the same time being able to buy back the company because the share price has been under significant pressure for some time now. So we’ve been able to do all of that, but we do have a bit of a bias towards continuing to build out the future and our long term goal is to have no one product be greater than a third of our operating income. So I hope that sets the stage, David.

David Risinger

Great. Okay. And so you mentioned charting a course in specialty brands. There was a rumor a few months ago on the press that you were considering potentially exiting generics. Could you talk about the opportunity to consider something like that and reinvest more in brands, reinvest in growth drivers?

Matt Harbaugh

Yes. So we run the company on an ROIC basis and so we’re very financially oriented. And so anything in the portfolio that offers us a significant value, we will certainly look at it and a good example of that is about a year before, we went public, we bought a product called Gablofen, which was our intrathecal business and at the time, we paid 92 million upfront for that. It generated positive operating income the entire time we had it. We felt that generic competition may be coming in the coming years and we had an outside offer for well over $200 million. And so we announced that transaction earlier this year, because from an ROIC perspective, it made all the sense in the world. So that’s kind of how we think about it. As it relates to specialty generics, we did not acknowledge that. That was a Bloomberg article that came out in April, May and there’s always speculation going on out there in the marketplace.

David Risinger

Okay. All right. And Steve, maybe you could provide a framework for how you’ve grown and transitioned the R&D engine at Mallinckrodt?

Steve Romano

Yeah. We’ve actually done quite a bit. I’ve been here now just over two years. We expanded our capabilities, so what we wanted to do was at least first leverage the legacy capabilities in the research group in Mallinckrodt. They were largely in the area of analytics, synthetic chemistry, formulations work, biology and in-vitro and in vivo both. So we had those capabilities in place, but we wanted to move into a late phase development organization as well as a medical organization. So over the last two years, we’ve built out our development organization, our clinical developments.

We had the capabilities of actually prosecuting any program, either within or which we acquire in the development stage, whether it’s in phase 1 through phase 3. We’ve also expanded our medical affairs group, so we have a large field based organization that helps with our objectives for our brands, both commercially obviously and from a medical and scientific standpoint and we’ve built out a Health Economics and Outcomes Research Group because many of the products that we bring in, we feel, have been undervalued in one way of generating data, relatively quickly established a value proposition for those particular products is through the execution of Health Economics and Outcomes Research.

So we’ve done a really nice job there. Our approach is to acquire and invest. So one of the things we want to do, whether we acquire products that are already commercially available or whether we acquire development stage pipeline assets or technologies that will allow us to progress organically, we want to be able to invest in those. So in every case, when we bought an external product in, whether it was Acthar on our ARD side or whether it was INOMAX, Therakos, OFIRMEV, the hemostasis products and now Stannsoporfin through InfaCare acquisition, we look to find opportunities, not just to develop those products, but to expand the labels and generate new indications. Acthar for instance is an older drug.

We’ve invested a fair amount — actually close to a quarter of $1 billion of ownership of the product the last several years, some of that in manufacturing, but much of that in clinical as well, started about half a dozen clinical trials to support a more contemporary evidence basis for the use of the product in key indications. And we’ve done the same thing with many of the other therapeutic areas, excuse me, many of the other products that we brought in. One of the things we have done though is begun to pivot and spend a little more time looking at pipeline opportunities. So we have a bias I think towards accretive deals that we can invest in and expand the use of, but we also have a tolerance that I think is growing and even an interest in expanding our pipeline. So last year, we bought a company called Stratatech. They’re a regenerative medicine company.

They have a fascinating cell line for recapitulation of skin. We think it’s going to make a tremendous change in the lives of patients with burns, with moderate to severe burns and that has entered into Phase 3 for deep partial thickness. We also just started the full thickness study in Phase 2. We’ve got Terlipressin, which is a vasopressin analogue. This came along with the acquisition of INOMAX through Ikaria, but was really undervalued and we progressed that to a Phase in a condition called hepatorenal syndrome type 1, a severe critical condition where the kidneys fail in the context of cirrhosis or liver failure and the mortality here is substantial.

If you don’t reverse that condition or if you don’t get the patient a transplant, a liver transplant, they’re unfortunately going to potentially die from their condition. We are also advancing our melanocortin receptor agonist for the treatment of Duchenne Muscular Dystrophy. That program is MNK-1411 and we’ve just moved that into Phase 2. And as I mentioned, we just acquired InfaCare. That deal will close soon. We’re very excited about that because we’re already dealing with newborns now in the NICU with INOMAX and we have the opportunity to bring the first pharmacological therapy to bear on the treatment of patients with jaundice and severe hyperbilirubinemia. So we’ve built the capabilities out. We’re expanding our investments, both in line as well as targeting — in an expansion of both our hospital and ARD business pipeline assets.

Matt Harbaugh

One of the things I would add David is we’ve also built out our device engineering capability in Ireland. We’ve built a production facility there. That went public back, I want to say in April or so. And so as it relates to INOMAX and Therakos and if we were to buy other drug device type combos, we also have built some infrastructure there and for someone like myself that’s been with the company for 10 years, I really think the external world just doesn’t really fully appreciate just the transformation that Steve in particular has brought to the organization and that’s part of one of the reasons why we want to do this Investor Day here in early October is to really showcase and feature the talent that we’ve been able to bring into the organization.

And finally, I would say we have set up our headquarters from a brands perspective in Bedminster, New Jersey recently and the access to talent has been phenomenal for us. So we think that’s a good move, both in the short to mid and the long term and that presence there is very significant and the ability to hire has been far easier in those technical areas in New Jersey than what we would have seen in St. Louis historically.

David Risinger

That’s very helpful. And Cole, could you tell us a little bit more about what to expect on the fourth?

Cole Lannum

I don’t want to give everything away. I need to make sure everyone has an incentive to be there, but the way we do Investor Days, it’s such that the first part is going to be formatted as a scientific session, where you really need to be there to get it. So it will allow people to delve into the science with Dr. Romano and other members of the senior management team and R&D personnel with various poster sessions and in-depth views of the clinical trials, where we are at this point as well as being able to ask questions about the things that we’ve gotten out of those trials so far, why we’re targeting those specific disease states, et cetera.

And then second parts of the day, which will be webcast, so you can experience even if you don’t come, will be a much more traditional Investor Day where we’ll talk a little bit about the business, but then again going to a broader discussion on some of the scientific background of each of our pipeline products and I think we’ll give you more visibility there than what you’ve seen to date on all of those products.

David Risinger

Okay. That’s very helpful. And so Steve, maybe you can talk a little bit more about Terlipressin, the market opportunity, the potential timing that you mentioned, a potential interim, so more color on that would be helpful.

Steve Romano

Yeah. Sure. So again, I mentioned it’s for Hepatorenal syndrome type 1. That’s a very rapid progression of kidney failure in light of sclerosis. That population because there’s also something called Hepatorenal syndrome type 2, which is a slower progression of kidney failure that is not quite as critical, but certainly can progress to a clinical stage. We’re targeting our indication on the former. There is about probably anywhere between 15,000, maybe 20,000 patients here in the United States that would get treated for that particular condition.

If you look at expansion potentially in to Hepatorenal syndrome type 2, it by demographics, is probably closer to 50,000. So we’re really targeting that 15,000, 20,000 patient segment of the disease. The Phase 3 study was started last July, Phase 3 studies in this condition can be a little challenging. We’re doing the largest trial that’s ever been done in Hepatorenal syndrome. This is a randomized controlled trial, two to one randomization, for every two patients, they get drug, one gets placebo, it’s a 300 patient trial.

We’re progressing actually faster than planned so we’re very happy that we’ve been able to do that. I think it says a lot about the need here, just so that you know Terlipressin is standard of care outside the United States for treatment of this condition and it’s not available in the US. And you’ve got the standard of care in the international guidelines and it’s not accessible to US physicians. So there’s a lot of interest, the investigators are engaged and hopefully we’ll be able to execute those trials quickly as possible. Our intent is to complete the trial by 19, file later that year for a approval in 2020.

David Risinger

And the potential interim.

Steve Romano

Say again, sorry.

David Risinger

Potential interim.

Steve Romano

Yes. There is a interim analysis, by the way, we had a spot, so we had an agreement with the agency around the protocol, the details of the protocol, it did include an allowance for an interim analysis at 150 patients. So halfway through, we’re able to take a look. Now, keep in mind, the hurdle to overcome to stop a study for efficacy is very high. The agency and based on scientific principle and design, they don’t want you to stop a study for a false positive, so they have to feel very confident that the data is actually indicating a benefit against standard of care in this case along with placebo. So, there’s a relatively low probability, but there is a possibility. And that would happen by the way by mid-18.

So it could potentially again relatively low probability, but it could potentially allow for the speeding up of the submission bias as much as a year, but our plans are for launching 2020. And by the way, I think some of the programs that we’re progressing now in the pipeline in the hospital business are really targeting the gap that we were going to have, we know OFIRMEV is going to go off patent in 2021 and we wanted to be able to target some pipeline programs to replace that business in the hospital. So Stratatech falls into that space, Terlipressin falls into that space, InfaCare product that we just brought in or will bring in perform to that space as well.

David Risinger

Got it. And could you talk a little bit about Stannsoporfin?

Steve Romano

Yeah. So Stannsoporfin is a injectable product. It’s a heme oxygenase inhibitor, will be the first pharmacological treatment for the condition for the treatment of severe bilirubinemia. These are patients, infants, 35 weeks gestation and beyond who are born with jaundice, so high levels of hyperbilirubinemia in the — bilirubin in their blood. High levels of bilirubin can rarely lead to neurotoxicity across the blood brain barrier because it’s unconjugated but lipids of these infants are not yet fully mature, so they can’t conjugate the product, excuse me, bilirubin. So it can pass blood brain barricade into the brain and causes neurotoxic effects. In severe cases, it can cause a condition called [indiscernible] which has very severe neurological complications associated with it, but unfortunately our life longer can even lead to death.

So just to put context around this, a majority of infants born even at full term will have some degree of what we call physiological jaundice, so an elevated bilirubin. Those patients aren’t typically treated. There’s a portion of that 60% — there’s a portion of that, about 20% to 25% that will get treated and there’s a portion of those for whom this product will likely be indicated because of the severity of the bilirubin and the rapidity on which it’s rising. So the pediatricians are keeping a very close eye on these patients. If they see an elevation in bilirubin and they see it rising relatively quickly over the course of hours, they’ll want to intervene rapidly.

Typically, they’ll use phototherapy for that particular condition, phototherapy takes several days in many cases to get the bilirubin levels down low, not everybody will respond to phototherapy. Some patients leave the hospital. We think they’re well treated. They have to come back because of elevations and persistence of bilirubin for treatment and so we feel that there’s a really nice opportunity here for a single dose injectable, which has an effect on the production of bilirubin which is unique that will last for about 6 to 8 days. So essentially, it will take that newborn — the majority of newborns through to the period at which they were at risk and removed that potential risk.

Matt Harbaugh

The only thing I would add from a commercial perspective David is we, as I mentioned earlier, we hope to launch this in the back half of ’18. We’ll see as we go through the approval process and to what Steve was talking about earlier around trying to find medications around OFIRMEV and some of the challenges that we may see there, it’s likely going to be a bit of a slow launch because it’s in the hospital space and we are going to have to transition kind of the way we’ve been doing it in quotations for many, many years with these patients. So it’s going to take some time to get the product aimed at the right target population and to build the revenue base, but we’re pretty excited about it because of what it does for patients and the opportunity it provides long term for Mallinckrodt.

Steve Romano

Yeah. And we’ll also begin generating additional data in gestational agents and so 35 weeks and below, because that’s an important population, the majority of whom do have some degree of joints because of the lack of maturity of the liver.

David Risinger

That’s very helpful. Maybe we can transition to Acthar and it would be helpful for you Matt talk about the unchanged growth targets for mid-single digit to low double digit revenue growth drivers ahead, just to bring us up to the current?

Matt Harbaugh

Sure. So as you know, David, we’ve had Acthar for about three years now, probably a little over and we feel it’s been a great acquisition for us despite some of the controversy that goes on around it. I think Mark mentioned recently that we’ve generated over $3 billion in net sales on the product during that period at really good margins and we’ve done a lot on the science side as Steve mentioned as well. And so our guidance has been very consistent with the product. We said — we thought it would grow in the mid-single to low double digit shortly after acquisition. And if you actually look at the product, we’ve been very consistent with that every single quarter with the exception of two and I guess fortuitously for those of us that are data driven in the room, one was below and one was above.

So if you take the blended average, we’re striking it right in the middle. And so it was interesting to us in the last quarter on Acthar where some of the folks on the call said, are you disappointed or how should we react to the 7% growth we posted and frankly we’re looking in the room at each other saying, the mid-single to low double, one shipment is significant to this product. And so whenever we’re landing in that zone, we feel pretty good that we’re meeting our commitments with little surprises.

I think the other thing that the Investor Day allows us the opportunity to do is really to itemize the significant investment, shows some of the health economic outcomes data, all the data generation. I think the other issue that came out of the earnings call David was the fact that last year for Acthar, we were driving the lion’s share of the returns in the growth on volume and as we looked at the first half of ’17, we acknowledge that price was the driver and that as we got into the back half of the year, but it would be a mix of price and volume for fiscal year ’17 and it’ll be modest volume growth, but we hope to get that advent if you will in the back half of the year.

And so I would just also say, we’ve been able to sign nearly 60% of commercial covered lives in this country. We also announced earlier this year that we were able to sign an agreement with a closed loop system and so we’ve continued the trend of dialoguing with all these sophisticated organizations as far as making sure they understand the science and the opportunity that Acthar has for those patients that are greatest in need.

And so the other thing I would highlight is as we have taken a few price increases on Acthar since ownership, but all of them have been well below our pricing pledge, which is that we will not raise price on any one of our specialty brands greater than 10% in any fiscal calendar year. And so the three price increases we’ve taken have fallen well below that. The first price increase was 5.5, the second was 2 and then the final one earlier this year was 6.9, of which we realized about two thirds of that. So we were kind of surprised and people were surprised when we went through our first half and quarterly results that people were surprised that we did get a bit of a price for Acthar because obviously we had been very transparent as to what we had done earlier in the year.

David Risinger

That’s very helpful. And obviously management doesn’t fear competition to Acthar, the market seems to fear competition, so what do you think that the market is confused about and what does the market under appreciate about corticotrophin complexity.

Matt Harbaugh

Would you like to start, Steve?

Steve Romano

Yeah. I mean, first of all, I think there is a substantial role for third, fourth line, even last line therapies in patients who have exhausted the current armamentarium. That’s really where Acthar generally fits. So the data in fact that we’re generating in each of the major conditions for which we are already labelled is to generally get it in that toughest to treat population of patients who have been through multiple other therapies. By the way, this applies to everything but infantile spasms, where it’s a first line treatment and a standard of care really, it’s not the gold standard in those infants and young children. But to generate data in that population of patients who have exhausted corticosteroids or are not responding corticosteroids who are not responding to other immunomodulators, immunesuppressors and have very little option available.

So for instance, we’re doing FSGS trial in patients who have failed those first line therapies, whether they be steroids or calcineurin inhibitors. In lupus, we’re doing our second trial following positive and compelling pilot data that we had in patients who are already — who continue on moderate dose steroids, many of whom are also on other immunomodulators, but still have very high levels of disease activity. So essentially, they’re not in a state in which you’re targeting for clinical improvement. So I think there is a need for these products. We certainly feel like since we’re really committing a lot to generating new data and modernizing or contemporizing the dataset for Acthar that we’ll be in a much better place when another corticotrophin comes to the market.

To tell you the truth, I mean that, the fact that others are pursuing corticotrophin tells you that there is probably others that are seeing the need here as well for something beyond steroids. I think there is confusion that Acthar is often cast as an expensive steroid. It’s not a steroid, it has ACTH analogues which are distinct from steroids, doesn’t act on glucocorticoid receptors. It acts on melanocortin receptors. One component of the effect is through steroid agenesis, which is through activation of melanocortin receptor type 2 in adrenal cortex.

There are four other melanocortin receptors spread across the body that probably have relevance in many of these other conditions. So the onus is on us to generate the data. We’re doing pre-clinical work. We’re doing health economics outcomes. Research data, we’re generating clinical trial data to build a more contemporary dataset, but bottom line is people are coming, wanting to bring in new products here because there is an opportunity here. Granted it’s an older drug, so again the onus is on us to generate this, but I think we’re making a substantial commitment to generating that data.

Matt Harbaugh

And I would say, turning from a financial viewpoint David, Steve alluded to it earlier, but I’ll be clear. I mean we are investing in an [indiscernible] in Acthar to modernize the infrastructure around it. Our R&D investment is very material and growing as we look forward into our strategic plan. If you think about how we think about the sustainability of the cash flows of the product, we have had a number of legal settlements. We resolved a number of pension issues earlier this year. That was a little under 100 — couple of hundred million dollars that we spent in the first quarter alone and people were saying, oh my gosh, they’re not generating cash and I’m like just read our public disclosures, we’re de-risking the balance sheet with some of these settlements and I think once you saw just the amount of cash that we generated in the second quarter, despite paying down debt, despite more share repurchases and very significant order of magnitude, we feel like the cash generating capabilities of this business is incredibly strong and we’re taking advantage of that by de-risking the balance sheet, both by paying down debt, by settling legacy issues.

I mean you know this, you can slow down legal settlements if you choose to, but if you’ve got the cash, it’s usually in your best interest to settle the issue to stop the legal bills and to move on. And so those are real tangible signs that you can see as to how we’re thinking about the underlying cash flow of the business and we wouldn’t be reinvesting if we didn’t believe strongly in the long-term opportunity that Acthar presents to us. Keep in mind, the patient penetration here is still below 10%. So we’ve got a large patient population that we can go after and that’s why getting that volume growth is important.

David Risinger

And that’s great. And maybe we can transition to INOMAX and you could just update us on the patent situation there and what’s next?

Matt Harbaugh

Sure. So — and in the interest of time, I know we’re running over a little bit. We do, —

David Risinger

Oh, I didn’t realize. We’re over. Okay. So we can keep that brief.

Matt Harbaugh

I think Mark did an excellent job with what went in the public domain last week. So I would just encourage people to go and listen to what he talked about. The only thing I would highlight in the interest of time is we do believe we have executive protection, we’ve got a phenomenal customer care team and a service model that’s going to be hard to replicate and rest assured we will pursue all the legal opportunities we have. We were a bit surprised by how that played out, but we’re not laying down. We’ve got lots of work to do.

David Risinger

Excellent. Thanks so much. We’ll see you on the fourth.

Matt Harbaugh

Thank you.

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Mallinckrodt’s (MNK) Management Presents at Morgan Stanley Global Healthcare Conference

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