On February 25, 2020 Mallinckrodt plc (NYSE: MNK), a global biopharmaceutical company, reported results for the three months and fiscal year ended Dec. 27, 2019 (Press release, Mallinckrodt, FEB 25, 2020, View Source [SID1234554767]). Unless otherwise noted, the three months and fiscal year comparisons are to the prior year comparable period ended Dec. 28, 2018.

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Net sales were $804.9 million in the quarter with diluted loss per share of $13.76, primarily driven by $1.643 billion in expense associated with the agreement in principle pertaining to a global opioid resolution, partially offset by a $377.4 million gain on debt extinguishment. Adjusted diluted EPS was $2.40 versus $2.18, an increase of 10.1%.

"We are pleased with the operating strength of the business as we finished 2019," said Mark Trudeau, President and Chief Executive Officer of Mallinckrodt. "Our hospital products had an exceptional fourth quarter, as we anticipated, and the Specialty Generics segment finished the year strong, marking its fourth consecutive quarter of growth. Acthar Gel performed largely in line with our expectations given a challenging payer environment. We remain focused on executing our long-term strategy for this product by generating clinically meaningful data and exploring opportunities to drive greater access for patients. At the same time, we continue to advance our pipeline, including preparing for approval submissions for terlipressin and StrataGraft in the coming months."

Trudeau continued, "Over the past year, it has been one of our top priorities to remove three uncertainties impacting our business – opioid litigation, near-term debt maturities and the Acthar CMS1 matter. We are pleased that we now have what we believe to be a clear path forward for resolving two of those: reaching an agreement in principle on the terms of a comprehensive global opioid resolution, and taking steps to strengthen our capital structure by addressing near term maturities. While managing these uncertainties, we remain focused on achieving our long-term vision of becoming an innovation-driven biopharmaceutical company focused on improving outcomes for underserved patients with severe and critical conditions."

COMPANY FINANCIAL RESULTS

Fourth Quarter 2019 Results
Gross profit was $373.1 million with gross profit as a percentage of net sales of 46.4%, compared with 43.5%, driven by inventory step-up expense in the prior period and product mix. Adjusted gross profit was $575.9 million, compared with $608.0 million, with adjusted gross profit as a percentage of net sales of 71.5%, compared with 72.8%, driven primarily by product mix.

Selling, general and administrative (SG&A) expenses were $169.2 million or 21.0% of net sales, as compared to $239.6 million, or 28.7%, driven primarily by legal settlement expenses in the prior period and the change in the fair value of contingent consideration. Adjusted SG&A expenses were $191.6 million or 23.8% of net sales, compared with $212.2 million or 25.4%. Adjusted SG&A expenses decreased due to ongoing focused efforts on SG&A reductions.

Research and development expenses were $81.4 million or 10.1% of net sales, as compared to $100.4 million or 12.0%, due to the completion of certain development programs.

As a result of the agreement in principle for a global opioid resolution, the company recorded a $1.643 billion expense attributed to the anticipated structured cash payments under the settlement agreement and the anticipated warrants to purchase ordinary shares at $3.15 per share representing approximately 19.99% of the company’s fully diluted outstanding shares, including after giving effect to the exercise of the warrants.

The company recorded $274.5 million in non-recurring impairments in the quarter, related to its VTS-270 in-process research and development intangible asset; as compared to $3.891 billion in the prior year, which was primarily attributed to the goodwill impairment.

Interest expense was $77.2 million as compared to $90.1 million, a reduction of 14.3%, driven by our continued focus on deleveraging.

Income tax benefit was $327.7 million, for an effective tax rate of 22.0%. The adjusted effective tax rate was 15.5%.

Fiscal Year 2019 Results
Net sales were $3.163 billion, compared with $3.216 billion. The decrease was primarily attributed to Acthar Gel (repository corticotropin injection), partially offset by strength in the hospital products, AMITIZA (lubiprostone) and the Specialty Generics segment.

On a GAAP2 basis, net loss was $996.5 million, compared with $3.607 billion, with diluted loss per share of $11.88 compared to $42.94, both periods impacted by significant one-time items with the opioid agreement in principle liability in 2019 and the goodwill impairment in 2018.

Adjusted net income was $747.5 million, compared with $682.2 million. Adjusted diluted EPS was $8.88 compared with $8.01, an increase of 10.9%.

BUSINESS SEGMENT RESULTS

Specialty Brands Segment
Net sales for the segment in the fourth quarter 2019 were $611.4 million.

Acthar Gel net sales were $232.6 million, a 17.8% decrease, primarily driven by continued reimbursement challenges impacting new and returning patients and continued payer scrutiny on overall specialty pharmaceutical spending.

INOMAX (nitric oxide) gas, for inhalation net sales were $143.8 million, an increase of 3.7%, or 3.8% on a constant-currency basis, driven by strong customer demand for INOmax, partially offset by increased competition in the market.

OFIRMEV (acetaminophen) injection net sales were $111.8 million, an increase of 28.2%, primarily due to significant quarter-to-quarter order variability that is expected to continue until loss of exclusivity.

Therakos immunology platform net sales were $63.3 million, an increase of 11.1%, or 11.3% on a constant-currency basis, primarily due to the capture of new patients, and the conversion to the Cellex device.

AMITIZA net sales were $50.9 million, down 21.2% due to lower royalties in the U.S. due to an increasingly competitive landscape.
Specialty Generics Segment
The segment reported fourth quarter net sales in 2019 of $193.5 million, an increase of 6.0%.

LIQUIDITY
Cash provided by operating activities in the fourth quarter was $208.8 million, with free cash flow of $184.5 million. For the year, operating cash flow was $742.9 million and free cash flow $609.9 million.

The cash balance at the end of the year was $790.9 million, and the revolving credit facility was fully drawn. During the fourth quarter, the company executed a debt exchange offer, which reduced total debt by $383.2 million. With this exchange offer, cash generated from operations, and debt repurchased at a discount earlier in the year, the company reduced net debt by $1.176 billion in 2019, and ended the year with net debt of $4.632 billion.

In conjunction with announcing the agreement in principle for a global opioid resolution, the company also announced that it has entered into certain agreements relating to potential financing and debt exchange transactions, which if implemented, will address near-term debt maturities of the company.

CONFERENCE CALL AND WEBCAST
Mallinckrodt will hold a conference call today at 8:30 a.m. U.S. Eastern Time. This call can be accessed in three ways:

At the Mallinckrodt website: http://www.mallinckrodt.com/investors.
By telephone: For both listen-only participants and those who wish to take part in the question-and-answer portion of the call, the telephone dial-in number in the U.S. is (877) 359-9508. For participants outside the U.S., the dial-in number is (224) 357-2393. Callers will need to provide the Conference ID of 4168459.
Through an audio replay: A replay of the call will be available beginning at 11:30 a.m. Eastern Time on Tuesday, Feb. 25, 2020, and ending at 11:30 a.m. Eastern Time on Tuesday, March 10, 2020. Dial-in numbers for U.S.-based participants are (855) 859-2056 or (800) 585-8367. Participants outside the U.S. should use the replay dial-in number of (404) 537-3406. All callers will be required to provide the Conference ID of 4168459.