Mallinckrodt - Q2 2024

Transcript

Operator (participant)

Good day, and thank you for standing by, and welcome to Mallinckrodt Q2 2024 earnings announcement. At this time, all participants are on listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Derek Belz, Vice President of Investor Relations. Please go ahead.

Derek Belz (VP of Investor Relations)

Thank you, operator, and welcome everyone. With me this morning are Mallinckrodt's CEO, Siggi Olafsson, and CFO, Bryan Reasons. Before we begin, let me remind you that we will make forward-looking statements on this call, 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 of new information or if 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 select non-GAAP adjusted measures related to our financial performance on this call. 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 to the investor relations page of our website for this information. As noted in our earnings release, our second quarter ended on June 28, 2024, and the comparative periods we'll be discussing this morning are the predecessor quarter ended June 30, 2023, and the sixth month ended June 30, 2023. Additionally, unless otherwise specified, the net sales percentage change we discussed will be on a constant currency basis. With that, I will now turn the call over to Siggi. Siggi?

Siggi Olafsson (CEO)

Thanks, Derek, and good morning, everyone. It's great to be with you today. We thought it was appropriate to hold a call this quarter, given the Therakos transaction we announced yesterday. Our recent launch of Self Ject and the significant progress we are making as we continue to strengthen our business and deliver on our strategic priorities. I'm happy to report that we delivered a meaningful Net Sales growth and Adjusted EBITDA growth in the second quarter. Our performance in the first half of the year reflect a strong execution from our team as we continue to stabilize the base business and positioned Mallinckrodt for steady growth. As a result of our ongoing momentum, I'm pleased that we are raising our full-year 2024 Net Sales guidance by approximately 5% and Adjusted EBITDA guidance by over 10% at the midpoints.

Turning to our business segments, I'll start with Specialty Generics, which achieved the sixth consecutive quarter of double-digit net sales growth. Our sustained momentum underscores Mallinckrodt's track record as a reliable and consistent producer of high-quality products. We are one of the only large-scale domestic, vertically integrated manufacturers of high-quality generic medicines and active pharmaceutical ingredients or APIs. This differentiates us in terms of both quality and consistency of supply in the marketplace that is challenged by both, as well as quota uncertainties. Even though we more than doubled our net sales from ADHD products on a year-over-year basis, the market continues to experience shortages of these important medicines. So we are investing this year to add capacity to our API production and expand our manufacturing capabilities for the finished dose products. We expect these investments will help to increase access to these important ADHD therapies in 2025.

Of course, we remain committed to the responsible manufacturing of controlled substances and the continuous improvement of our already robust compliance programs. Each of these factors give us confidence in our ability to sustain growth in this business for the rest of the year and for the foreseeable future. Let me now talk about the specialty brand segment, where Acthar Gel has been a success story this year. We delivered the growth for the second quarter in a row, driven by a solid demand and positive prescriber momentum in the category. Acthar remains an important product in Mallinckrodt's portfolio, both because of its high clinical value to patients and its favorable position with prescribers. We believe the improvement we have seen this year reflects the continued need and appreciation for Acthar. We are also proud to share that Mallinckrodt recently launched Acthar Gel SelfCare.

This is our new single-dose injector device. It provides patients a convenient and easy way to administer Acthar when managing challenging chronic and acute inflammatory and autoimmune conditions. This launch demonstrates our continued investment to enhance the Acthar brand for patients, and we believe SelfJect will drive continuity of care, differentiation, and further category growth. Moving to Terlivaz, the first and only FDA-approved therapy to improve kidney function in adults with hepatorenal syndrome type one, or HRS, with a rapid reduction of kidney function. We continue to focus on our launch and expanded adoption of Terlivaz as a preferred first-line treatment of HRS patients in need through patient identification and physician education. While uptake has been somewhat slower than anticipated, we continue to be excited about the importance of this therapy for patients in need.

We have increased our team of dedicated sales representatives to 45, who are working closely with hepatologists, nephrologists, and intensivists to raise awareness and adoption of Terlivaz. We have also secured formulary inclusion at more than 230 hospitals to date, which will facilitate access and reimbursement for this important therapy. With INOMAX, we initiated the pilot rollout of our INOMAX Evolve DS delivery system in hospitals in first quarter. As a reminder, Evolve is our next-generation delivery system for INOMAX, intended to help to meet the evolving needs of neonatal intensive care units. We progressed our rollout during the second quarter, and we look forward to the commercial rollout planned for the current quarter. While our INOMAX DSIR Plus has continued to face competition from alternative nitric oxide products, INOMAX Evolve is being well received with a positive feedback from our pilot hospitals.

We believe Evolve will strengthen our competitive position and increase customer satisfaction and loyalty. Therakos performed well in the second quarter, meeting our expectation of mid-single-digit growth. Our team continued advancing our ongoing initiatives to expand the label and enter new geographies. Most recently, we achieved an important milestone in June when the EU approved a CE certificate for Therakos. While on the subject of Therakos, yesterday, we were pleased to announce that we have entered into a definite agreement to sell the Therakos business to CVC Capital Partners for a purchase price of $925 million, subject to a customary adjustment. CVC also made a binding commitment to acquire the shares of Therakos SAS, the company operating the Therakos business in France. The binding agreement with CVC in relation to the shares of that business will become effective after the satisfaction of local information requirements.

We intend to use the proceeds to eliminate more than 50% of Mallinckrodt's net debt. This will meaningfully advance our strategic priority to further optimize our capital structure. This transaction is also a positive outcome for the Therakos business and the patients, providers, and healthcare partners it serves. CVC is a leading investment firm with deep expertise in healthcare. Under CVC's ownership, the Therakos business is expected to benefit from additional investment in research, development, indication expansion, and geographic expansion. Key employees who work on Therakos will join CVC and continue supporting the product and its stakeholders. Looking ahead, we expect the transaction to close in the fourth quarter of this year, subject to regulatory approvals and other customary closing conditions. We are very proud of what we have achieved with Therakos, and we are confident that it will continue to thrive under the CVC's ownership.

With that, I'll turn the call over to Bryan to discuss our financial performance and update full year outlook in more detail.

Bryan Reasons (CFO)

Thank you, Siggi. Mallinckrodt's total net sales in the second quarter of 2024 were $514 million, as compared to $475 million in the second quarter of 2023, an increase of 8.4%. For the first half of the year, total net sales were $982 million, up 9.2% compared to last year. Net loss for the second quarter was $43 million, as compared to net loss of $748 million in the prior year period, an improvement of 94.2%. For the first half of the year, net loss was $109 million, as compared to $997 million in the first half of 2023.

Adjusted EBITDA in the second quarter of 2024 was $174 million, as compared to $144 million in the prior year period. This 20.8% increase was driven by continued strength in the Specialty Generics segment, as well as continued stabilization in Acthar Gel and growth in Therakos, partially offset by the impact of INOMAX competition. For the first half of the year, adjusted EBITDA was $319 million, up 19.2%. The Specialty Brands segment reported net sales of $275 million in the second quarter of 2024, as compared to $280 million.

This reflects a decrease of 2% on a reported basis and 1.9% on a constant currency basis, primarily due to continued competition from alternative nitric oxide products on INOMAX, partially offset by continued demand stabilization for Acthar Gel, the launch of Terlivaz, and the continued strength of Therakos. Acthar Gel net sales were $118 million, as compared to $117 million in the prior year. As Siggi mentioned, we are pleased with the positive prescriber momentum in the category and the persistent demand stabilization. We now expect Acthar to grow in the low to mid-single digits in 2024. In our critical care products, INOMAX generated net sales of $66 million, a decline of 13.7% compared to the prior year period.

Terlivaz generated net sales of $5 million, an increase of 55.9%. Therakos generated net sales of $67 million, an increase of 7%. The Specialty Generics segment recorded net sales of $240 million, as compared to $195 million in the prior year. This 23% growth was due to rising demand for our finished dose products, as the market continued to experience constraints and shortages. With respect to operating metrics for the quarter, adjusted gross profit as a percentage of sales was 65.2%, as compared to 62.8% in the second quarter of 2023.

Adjusted SG&A as a percentage of net sales was 25.9%, as compared to 26.5% in the prior year, reflecting the company's balanced approach on investing in our launches and cost containment measures. R&D as a percentage of net sales was 5.6%, as compared to 6% in the prior year. Turning to our balance sheet, we ended the quarter with cash and cash equivalents of $291 million, up from $253.6 million at the end of the first quarter. This reflects the growth in our adjusted EBITDA and strong cash conversion. We ended the quarter with outstanding total principal debt of $1.64 billion and outstanding net debt of $1.35 billion.

As Siggi mentioned, we expect to reduce net debt by more than 50% in connection with the Therakos business divestiture, anticipated to occur in the fourth quarter of this year. We are pleased to be raising our full year 2024 guidance. We now expect total net sales of between $1.9 billion and $2 billion, reflecting an increase of 5.4% at the midpoint. We expect to generate adjusted EBITDA of between $585 million and $615, $615 million, reflecting an 11.1% increase at the midpoint. I'll now hand the call back to Siggi for some closing remarks.

Siggi Olafsson (CEO)

Thank you, Brian. Mallinckrodt had a strong first half of the year as we executed on our strategic priorities and achieved important milestones. We are delivering on the plan we laid out last year, and I'm confident that we are poised to continue building on this momentum through the rest of the year and into the future. With that, we'll open up the call for questions if we have any. Justin?

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by. We'll compile a Q&A roster, and we ask that you limit yourself to one question and one follow-up. Again, that's one question and one follow-up. One moment for questions. I am showing no further questions. I would now like to turn the call back over to Derek Belz for closing remarks.

Derek Belz (VP of Investor Relations)

Thank you, Justin, and thank you all again for joining us today. We look forward to engaging with you in the coming days and weeks ahead. If you have any questions, the best way to get ahold of us is via email, and I'll work back to get, to get to you as soon as possible. Thanks again, and have a great day.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.