On November 5, 2019 Mallinckrodt plc (NYSE: MNK), a global biopharmaceutical company, reported results for the three months ended September 27, 2019 (Press release, Mallinckrodt, NOV 5, 2019, View Source [SID1234550377]). Unless otherwise noted, the quarter comparisons are to the recast prior year comparable three months ended September 28, 2018.

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Net sales were $743.7 million in the quarter with diluted loss per share from continuing operations of $0.01 compared with income per share of $1.34. Adjusted diluted EPS were $2.07 versus $2.25, a decrease of 8.0%.

"We continue to be very pleased with the underlying financial strength and cash flow generation capability of our business, resulting in the third consecutive increase to our EPS guidance this year," said Mark Trudeau, President and Chief Executive Officer of Mallinckrodt. "In addition, we are particularly pleased with the ongoing progress of our research and development activities, including successful Phase 3 study results for StrataGraft and terlipressin, data generation for Acthar in rheumatoid arthritis and multiple sclerosis, and our collaboration with Silence Therapeutics in RNAi technology."

Trudeau continued, "We remain focused on strengthening our balance sheet through debt reduction and we also are working to resolve near term uncertainties in our business, particularly opioid litigation and the separation of our Specialty Generics segment."

COMPANY FINANCIAL RESULTS
Gross profit was $324.3 million with gross profit as a percentage of net sales of 43.6%, compared with 45.8%, driven by increased amortization expense and product mix. Adjusted gross profit was $533.2 million, compared with $583.0 million, with adjusted gross profit as a percentage of net sales of 71.7%, compared with 72.9%, driven primarily by product mix.

Selling, general and administrative (SG&A) expenses were $205.7 million or 27.7% of net sales, as compared to $193.4 million, or 24.2%, driven primarily by legal settlement expenses and separation costs, while partially offset by a reduction in the fair value of contingent consideration due to market conditions. Adjusted SG&A expenses were $182.0 million or 24.5% of net sales, compared with $205.2 million or 25.7%. Adjusted SG&A expenses decreased due to focused efforts of ongoing on SG&A reductions.

Research and development expenses were $103.1 million or 13.9% of net sales, as compared to $86.1 million or 10.8%, due primarily to the $20.0 million up-front payment for our collaboration with Silence Therapeutics in RNAi technology platform for complement-mediated diseases.

Interest expense was $77.6 million as compared to $93.6 million, a reduction of 17.1%, driven by our continued focus on deleveraging.

Income tax benefit was $27.6 million, for an effective tax rate of 96.8%. The adjusted effective tax rate was 18.3%.

Nine-Month Fiscal 2019 Results
Net sales were $2,357.6 million, compared with $2,380.7 million. The decrease is primarily attributed to Acthar Gel (repository corticotropin injection), partially offset by strength in the hospital products and AMITIZA (lubiprostone).

On a GAAP1 basis, net income was $160.6 million compared with $111.4 million. Diluted EPS were $1.91 compared to $1.31.

Adjusted net income was $551.9 million, compared with $511.0 million. Adjusted diluted EPS were $6.55 compared with $6.00.

BUSINESS SEGMENT RESULTS

Specialty Brands Segment
Net sales for the segment in the third quarter 2019 were $580.4 million.

Acthar Gel net sales were $229.8 million, a 20.8% decrease, driven primarily 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 $136.8 million, up 2.7% driven by more significant utilization in multi-year, unlimited use contracts, while strong customer demand for the product continues.
OFIRMEV (acetaminophen) injection net sales were $86.1 million, a decrease of 1.1%, due to lower demand and typical quarter-to-quarter order variability.
Therakos immunology platform net sales were $60.9 million, an increase of 1.5%, or 3.3% on a constant-currency basis, primarily on growth in the U.S. in Cutaneous T-Cell Lymphoma.
AMITZA net sales were $52.6 million, up 9.1% due to continued strong utilization in Japan, partially offset by an increasingly more competitive landscape in the U.S.
Specialty Generics Segment
The segment reported third quarter net sales in 2019 of $163.3 million, an increase of 2.1%, driven by share recapture across the business, somewhat offset in the quarter by the suspension of the spin-off.

LIQUIDITY
Cash provided by operating activities in the third quarter was $66.7 million, with free cash flow of $35.6 million, which was impacted by working capital changes from a particular customer in the Specialty Generics segment as well as the $15.4 million payment related to a legacy legal matter settlement. For the year to date, operating cash flow has been $534.1 million and free cash flow $425.4 million.

During the quarter, the company drew the remaining $495.0 million on its revolving credit facility, and used its cash to retire its $200.0 million remaining balance on the accounts receivable securitization program and repurchase $72.9 million face value of debt at a discount. As of today’s earnings announcement, the current cash balance is approximately $600.0 million.

2019 FINANCIAL GUIDANCE UPDATE
Mallinckrodt is raising guidance for the 2019 fiscal year by increasing the lower end of its adjusted diluted EPS guidance range by $0.10 on the strength of the earnings results today. The revised 2019 fiscal year adjusted diluted EPS guidance range is $8.50 to $8.70.

CONFERENCE CALL AND WEBCAST
Mallinckrodt will hold a conference call on Tuesday, Nov. 5, 2019, beginning 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 6080969.
Through an audio replay: A replay of the call will be available beginning at 11:30 a.m. Eastern Time on Tuesday, Nov. 5, 2019, and ending at 11:59 p.m. Eastern Time on Tuesday, Nov. 19, 2019. 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 6080969.