Mallinckrodt (MNK) Q2 2019 Earnings Call Transcript

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Mallinckrodt (NYSE: MNK)
Q2 2019 Earnings Call
Aug 06, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks

• Questions and Answers

• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2019 Mallinckrodt earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Speciale, vice president of investor relations.

Sir, you may begin.

Dan Speciale -- Vice President of Investor Relations

Thank you, Jimmy. Good morning, everyone, and welcome to today's call. Joining this morning are Mark Trudeau, our CEO; Bryan Reasons, our CFO; and Dr. Steve Romano, our chief scientific officer.

Before we begin, let me remind you of a few important details. On the call, 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, we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. We encourage you to refer to the cautionary statements contained in our SEC filings for 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 adjusted measures to GAAP is available 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 press release, unless otherwise specified, all quarterly comparisons are to the recast comparable 2018 period, and the net sales growth ranges we'll be discussing are on a constant-currency basis.

Given the recasting of the segments for AMITIZA and the performance of the first half of the year, we are updating full-year guidance across each measure as noted in our press release, including raising the annual adjusted diluted earnings per share guidance range to $8.40 to $8.70 per share. With that, let me turn the call over to Mark. Mark?

Mark Trudeau -- Chief Executive Officer

Thanks, Dan. We're very pleased to deliver another solid quarter building on our strong performance in Q1 and resulting in a very good start to the year. Once again, performance was driven by consistent growth across our branded hospital products portfolio and by AMITIZA, while the specialty generics segment delivered a second straight quarter of growth as well. Bottom-line performance was further enhanced by effective cost management, which resulted in robust cash flow generation and significant adjusted diluted EPS growth.

Our results were somewhat offset by a decline in Acthar net sales as the product continues to navigate reimbursement challenges. We're very pleased, however, to see an increasingly positive prescription growth trend for refractory rheumatoid arthritis patients driven by the very strong clinical trial results reported earlier this year. While the external environment continues to be challenging for the company, we are very pleased with our operational performance thus far. We remain intent on transforming our business into an innovation-driven drug development and commercialization company focused on underserved patients with severe and critical conditions.

In particular, we look forward to resolving many of the uncertainties currently surrounding the business, including recent market pressures related to legacy issues as rapidly as possible. We've already made great progress toward our transformational objectives. We've developed strong brands in the hospital critical care and autoimmune spaces, began to establish technology growth platforms with nitric oxide, ECP and regenerative tissue products, created an increasingly robust development pipeline of early and late-stage products and enhanced our differentiating commercial capabilities in patient service and customer care, all while continuing to maintain strong cash flow generation. We believe that leveraging these strengths, along with the eventual resolution of external uncertainties, should enable us to achieve our long-term strategic goals and deliver on our promise to meet the needs of critically ill patients with conditions that often have limited therapeutic options.

We began the year by outlining the following four strategic priorities for 2019: one, maximizing the value of the diversified in-line portfolio; two, advancing further data generation in the pipeline; three, completing the specialty generics separation; and four, executing disciplined capital allocation, with net debt reduction our primary focus. We'll be discussing these priorities throughout our prepared remarks, but let me first address our suspended plans for separation. Our long-standing goal remains to be an innovation-driven biopharmaceutical company focused on improving outcomes for underserved patients with severe and critical conditions. However, based on current market conditions and developments, including increasing uncertainties created by the opioid litigation, the company is suspending for now its previously announced plans to spin off the specialty generics company.

We continue to actively consider a range of options intended to lead to the ultimate separation of the specialty generics business, consistent with our previously stated strategy, and we will provide updates to the market as appropriate. Now let's move to quarterly operational results, starting with our $1 billion hospital portfolio, which continues to be our largest and fastest-growing platform in total net sales. As we prepare for a number of anticipated product launches over the next several years, we see hospital products as the growth engine for the company longer term. In the quarter, both INOMAX and Therakos contributed high single-digit growth, with Therakos results driven largely by patient kit growth in the U.S.

OFIRMEV grew in the mid-single digits based on strong demand, with its results affected in part by typical quarter-to-quarter order variability. We expect OFIRMEV performance to be robust for the balance of the year. Looking more deeply at INOMAX. Growth continues to be driven by sustained consistent demand and long-term contract renewals fueled by the product's differentiated total service model.

While we would expect to see some volatility in the market if potential competition enters, we continue to believe that INOMAX has a number of potential long-term growth opportunities. These include the anticipated second-half 2020 launch of the next-generation EVOLVE device, if approved, and additional potential label enhancements that Steve will describe later. While overall hospital products growth for the quarter was on the low end of the typical range largely due to order timing, we expect the combined hospital portfolio will deliver high single-digit growth for the full year. Turning to Acthar.

Before discussing near-term performance, it's important to understand our long-term vision and objectives for this key product. We continue to believe Acthar provides an important therapeutic option for patients with a range of challenging immunologic conditions who are often refractory to other treatments. We are well into our multiyear investment into the brand designed to fully modernize the data, product presentation and patient access dynamics. Armed with the RA clinical trial data and the label enhancements around product composition, we are now able to provide payers and providers with what we believe to be even more relevant and contemporary information to guide prescribing and access considerations for appropriate patients, including product dosing and duration.

Over the next 12 to 18 months, our modernization activities are expected to give us a much clearer view on the long-term growth prospects for this brand. Steve will go into a bit more detail on these activities in a moment. In the near term, as a result of pressures leading to reimbursement challenges, as well as the uncertainty around CMS reimbursement and Medicaid that we expect to have regulatory clarity on by the end of August, we expect Acthar results to be weaker in the second half of the year and full-year sales are unlikely to exceed $1 billion. Looking briefly at the specialty generics segment.

The business delivered growth for the second quarter in a row largely driven by specialty generics products performance. This growth was exceptional in light of the difficult comparisons to the prior year. We expect this segment to see sustained growth in the back half of the year. On the capital allocation front, while we're most focus on our commitment to reducing debt and very happy with that progress to date, where it makes strategic sense, we will continue to selectively explore other uses for our substantial liquidity as illustrated by our recent license and collaboration agreement with Silence Therapeutics.

Both Steve and Bryan will cover those topics in detail shortly. In summary, we've had a strong first half of the year. We're especially pleased with the operational performance of the hospital products, AMITIZA and the specialty generics business and with the data generation progress for Acthar. We're excited by the possibility of near-term assets like StrataGraft and terlipressin, as well as other pipeline advancements we're making.

With that, I'll now ask Steve to provide a more detailed update on a number of key activities we're executing on across our development portfolio. Steve?

Steve Romano -- Chief Scientific Officer

Thanks, Mark. I'd like to take a few moments to reflect on the progress we've made regarding our greater than $0.5 billion investment in Acthar since taking ownership. As you'll recall, a substantial portion was dedicated to the initiation of a multiyear data generation strategy that included three key components: health economic and outcomes research, preclinical investigations and clinical trials. We're now over halfway through execution on that plan and made significant progress.

We generated over three dozen HEOR strategies, research presentations and manuscripts highlighting the value of Acthar, including demonstrating healthcare system cost offsets across multiple indications. We've conducted a tremendous amount of work to better characterize the makeup of this complex natural drug product and have investigated the mechanism of action in multiple in vitro and in vivo preclinical models. Our research is evidence to the affinity of Acthar's antagonist for all five melanocortin receptors and has demonstrated potential direct effects on specific immune components. These data taken together suggest immunomodulatory effects beyond known immunosuppression, the latter via a steroidogenesis.

We've also completed preclinical studies of Acthar in relevant animal models for key promoted conditions, including MS, uveitis and nephrotic syndrome. And it began to demonstrate differential effects in some experiments versus corticosteroids. And we have initiated, completed or about to begin a total of nine clinical studies, the majority of which are randomized controlled programs. Regarding the clinical trials, we've already reported on the robust efficacy results associated with Acthar treatment in some of the most challenging to treat patients with persistently active RA.

And that presented positive finds from our large MS relapse registry for which we expect to have full results in the coming months. Additionally, we look forward to completing a large Lupus trial and hope to have its results by early 2020 and continue to execute studies in MS, sarcoidosis, uveitis and FSGS. Completion of one or more of these could occur as early as next year. Lastly, a keratitis trial is slated to begin later this year.

All in all, we've showed terrific progress on the execution of our sizable investment strategy. Based in part on the successful efforts just detailed, earlier this year, we achieved an important U.S. label change regarding the characterization of this complex product. Moreover, we recently submitted a substantial package of preclinical evidence supporting refinements to the mechanism of action section of the label, which we hope to have approved by year end.

All the efforts further demonstrate the differential effect of Acthar versus ACTH alone and corticosteroids. Turning to other important and growing in-line brands. We're expanding our R&D investments to optimize the value of both INOMAX and Therakos. Notably, we're making great progress completing the development of EVOLVE, our next-generation delivery device for INOMAX.

This is designed to truly represent a step change in the delivery of nitric oxide in the hospital setting. It remains on track for submission and potential approval in 2020. And our premature infant registry in patients with persistent pulmonary hypertension, which is now well beyond its halfway enrollment mark, is expected to contribute substantially to the understanding of utility of INOMAX in one of the most fragile of patient populations. Last week, we just completed a meeting with the FDA, where we discussed a potential data package to support a pediatric cardiovascular indication for INOMAX in the U.S.

relying on completed clinical trial data and supported by real-world evidence. These are just a few opportunities we have considered to leverage our nitric oxide platform. Similarly, we're expanding our efforts with the Therakos platform having just initiated a multiyear research and development collaboration with Transimmune and are currently evaluating potential indications such as scleroderma and antibody mediated kidney rejection. I look forward to discussing these opportunities once specific plans are finalized.

Turning to the development pipeline. We are preparing for a number of important near-term catalysts. Both pivotal trials of terlipressin in patients with HRS Type 1 and StrataGraft in patients with deep partial thickness burns are nearing their last patient last-visit milestones, which when achieved will trigger database lock and release the top-line results. We anticipate having these data sets in the next few months.

We'll also have the primary publication of the StrataGraft Phase 1b clinical trial results in treating deep partial thickness burns, which are scheduled to be published in Burns, the official journal of the International Society for Burn Injuries, in the coming weeks. We are also delighted to be working to finalize agreements with the FDA during a plan meeting this month for the Phase 3/4 registration program for MNK-6105 in hepatic encephalopathy. And we're awaiting the dosing and [Inaudible] of our first patient in the Phase 2 oral trial for MNK-6106. These efforts represent important progress in the programs for both our IV and oral formulations of l-ornithine phenylacetate.

Regarding VTS-270, known by the generic name adrabetadex, based on its breakthrough regulatory status, we have had ongoing productive discussions with the FDA and remain steadfast in pursuing our objective of clarifying a path to submission. Data from the completed pivotal registration trial, in addition to other adrabetadex clinical data, were presented earlier this summer in an important research meeting on Niemann-Pick Type C in Tucson. As one would imagine, the researchers, families and most importantly, patients are all eagerly awaiting clarification of next steps. With regard to stannsoporfin.

While we did determine a potential clinical and regulatory path forward, in light of having more valuable portfolio investment opportunities, we are discontinuing development of this asset. The rest of our pipeline portfolio is advancing, and we'll provide updates as those assets -- of those assets as appropriate. Finally, we were delighted to announce our collaboration with Silence Therapeutics, a leading RNA technology platform company last month. Silence's expertise in this exciting and promising area of research and development will allow us to pursue potential treatments for conditions associated with the dysregulation of the complement system.

The initial focus is on optimizing the C3 targeted small interfering RNA that can be -- that we can advance to the clinic over the next two years or so and prioritizing disease targets for development. We also have the option to expand these activities to target two other complement components. We're off to an enthusiastic start, and I'm happy to also be joining their board of directors. With that, let me turn it over to Bryan, who will take us through the financials.

Bryan?

Bryan Reasons -- Chief Financial Officer

Thanks, Steve, and good morning, everyone. In the second quarter of 2019, we reported adjusted diluted earnings per share of $2.53, an increase of 17% over the prior year, driven by both operational performance of the hospital products, AMITIZA and the specialty generics segment and nonoperational benefits associated with our capital allocation strategy that focused on reducing debt and interest expense. Net sales for the quarter were $823 million, relatively flat to the prior year. Specialty brands segment net sales were $628 million, with the hospital products collectively generating $291 million in net sales, growing 6% over the prior period, and Acthar contributing net sales of $266 million.

INOMAX delivered $140 million in net sales, a 7% increase; OFIRMEV contributed $91 million in net sales, up 6%; and Therakos provided $61 million in net sales, a 9% increase. AMITIZA generated net sales of $52 million in the quarter, up 8%, and we still expect this business to be near $200 million in net sales for the year. The specialty generics segment reported $196 million in net sales in the quarter, a 1% increase, continuing to benefit from share recapture. Now let me share some details on operation measures for the quarter.

Total company adjusted gross profit as a percentage of net sales was 73.4%. Adjusted SG&A as a percentage of net sales for the total company was down slightly at 25.3%, compared to 26.1%, reflecting operational efficiencies, including benefits from restructuring and acquisition synergies offset by increased opioid-related legal spend. Overall company R&D expense as a percentage of net sales was 9.7%, compared to 11.2%, which, on a percentage basis, is weighted more heavily toward the specialty brands segment. We project both absolute R&D spending and R&D spending as a percentage of net sales to increase as we progress our pipeline and data generation in the second half of 2019.

Turning to liquidity. We generated an incredibly strong operating cash flow in the third quarter of $303 million, with free cash flow of $265 million. We're well ahead of our projection for 2019 with respect to free cash flow generation, having delivered $300 million in free cash flow in the first six months of the year. Lastly, we continue to be very pleased with our ability to execute on our debt reduction goals.

Collectively, since the beginning of the year, we've been able to capture nearly $100 million in debt discount by utilizing our free cash flow to repurchase fixed-rate debt. We are mindful of the maturity we have coming due in April 2020 and are evaluating potential alternatives to address this maturity. Our net debt at the end of June was $5.35 billion, a reduction of $458 million in net debt since the beginning of the year, which notably is our lowest level of net debt since 2015. And our net debt leverage is also materially lower to 3.9 times at the end of June.

Debt reduction will continue to be our primary capital allocation focus in 2019. Now let me turn the call back to Dan, who will take us into Q&A.

Dan Speciale -- Vice President of Investor Relations

Thanks, Bryan. [Operator instructions] With that operator, may we please have the first question?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Elliot Wilbur from Raymond James. Your line is now open.

Lucas Lee -- Raymond James -- Analyst

Good morning. This is Lucas Lee on for Elliot Wilbur. I have a question related to Acthar. I was wondering if you had the opportunity to evaluate the potential impact on Acthar trends if currently proposed changes to Medicare Part D such as shifting 20% of catastrophic coverage directly to pharma were to occur.

Mark Trudeau -- Chief Executive Officer

Yes. Thanks, Lucas. Obviously, we are evaluating a whole range of potential proposals to changes to the healthcare system. The one year referred to is just one of many that have either come to the fore already or others are expected to certainly be proposed throughout the next several months and probably through the like -- in next cycle and beyond.

In general, we would say that anything that enables patients to have better access to products such as Acthar that can treat some pretty challenging conditions whereby those patients have relatively few options is likely to be a net positive. It's really difficult to speculate though what, if any, changes may be made to the Medicare Part D system or any other aspect of the U.S. healthcare system. But in general, some of the [Inaudible] and proposals again that limit patient -- proposed to limit patient out-of-pocket expenses and potentially then afford patients greater access to important products like Acthar we would think would be net positive to the business overall.

Dan Speciale -- Vice President of Investor Relations

Great. Thanks, Lucas. Next question please.

Lucas Lee -- Raymond James -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Louise Chen with Cantor Fitzgerald. Your line is now open.

Sudan Loganathan -- Cantor Fitzgerald -- Analyst

Yes. Thanks for taking our questions. This is Sudan Loganathan on for Louise. So first question we have is in regards to the hospital portfolio, what are the primary driving factors for it near term? And then as you look forward and then -- how do you expect growth in that category going forward? And then the primary headwinds that could be expected to negatively impact that.

And then kind of secondly in regards to suspension of the spinout, is there the option for sale of that business? Or what's the -- is there any time line on how that will be assessed in the next 12 to 18 months?

Mark Trudeau -- Chief Executive Officer

Yes. Thanks for those questions. So with regards to our hospital portfolio, as you might imagine, we continue to be quite pleased with the performance of that business. The business has been performing collectively in the high single-digit growth range, and we would anticipate that the trajectory is likely to continue for the balance of the year.

Primary driving factors in that business are simply demand. It's really demand across the three main products: OFIRMEV, INOMAX and Therakos. On the OFIRMEV side, its greater utilization as an analgesic and managing pain associated with surgery, as an alternative to traditional ways of managing pain, particularly opioids. With regards to INOMAX, it's underlying demand for the use of nitric oxide particularly for infants at risk in the NICU.

And on Therakos, it's underlying patient kit demand, which is utilization of the product for its main indications of CTCL in the U.S. and other uses of ECP outside of the U.S. So the primary drivers collectively are all demand-driven and volume-driven.With regards to primary headwinds, of course, with OFIRMEV, we have a known loss of exclusivity, which is likely to occur at the end of 2020, December of 2020 into 2021. And with regards to INOMAX, again, we have an appeal pending regarding our intellectual property around that particular product offering.

Intellectual property is considerable. Some of that intellectual property has been challenged, and we're appealing that challenge. And we would expect to have resolution of that any time, but certainly it could progress even a bit longer. So those are the primary headwinds, but we continue to be very pleased with our hospital business.

And importantly, we have a number of products in our pipeline, both near and longer term, that specifically address that hospital business. Hospital business today is greater than $1 billion growing in the high single digits. And as we've said in our prepared comments, we would expect that business to be the long-term growth engine for the company overall. Your second question around spin suspension.

Recognize that, that's what we're announcing today is that we're suspending the spin. Our strategic intent is to separate these two businesses and separate them sooner than later. So at the moment, we're considering a whole range of options which would include not only spin but sale and all the other things that we've discussed over the last couple of years. We're revisiting all of those options to ensure that we move rapidly toward the separation.

We're simply suspending the spin at this time, given the fact that market conditions are not favorable to move forward with that transaction at this time.

Dan Speciale -- Vice President of Investor Relations

Great. Thanks. Next question please.

Operator

Thank you. And our next question comes from Jason Gerberry with Bank of America.

Ashwani Verma -- Bank of America Merrill Lynch -- Analyst

This is Ashwani Verma on for Jason Gerberry. So just had a question about Acthar related to the update around the uncertainty. Just trying to understand is that related to the Medicaid stuff. Or has the reimbursement uncertainty intensified? And can you provide more color on what is happening on the reimbursement trend like is it getting worse in terms of prior auth? And just to follow up on that is where is Mallinckrodt with respect to the CMS dispute on the Acthar Medicaid pricing? I think you mentioned something around August time lines so that will tell you we have full time.

Mark Trudeau -- Chief Executive Officer

Yes. So let me take all of these and kind of unpack them. First of all, the discussion and dispute at the moment with CMS regarding Medicaid best price -- or Medicaid base price is separate from the underlying Acthar trends. With regards to that discussion with CMS, the most recent event was we did have a trial -- or sorry, a hearing in front of a judge on Friday.

As we mentioned in our prepared comments, we would expect to have greater clarity on the outcome of that hearing sometime by the end of this month. And we would hope that we have ultimate resolution of the matter certainly sooner than later. And we would hope that would happen prior to the end of the year. But again, this is a separate issue, if you will, to Acthar underlying performance trends.

So on the good side, we're very pleased with what we see, the response to the Acthar clinical trial data around refractory RA patients. We are seeing significant prescription trend volume uptick specifically in that particular category, and that's consistent with what we've seen historically when new clinical data is presented into the market. We typically see a corresponding increase in prescription volumes supported by that clinical data. And recognize that this clinical data is the strongest and most robust piece of clinical data that we've been able to produce at this point, demonstrating on primary and secondary measures, significant differentiation from placebo on many of the measures.

So again, very strong data and important information for both prescribers and payers because it speaks specifically to the patient identification, the specific type of refractory RA patient and gives information on dose and duration in a very contemporary and large study. So again, we're seeing very positive impact already on that clinical data, which was revealed earlier this year. The pressure that we're seeing is in the reimbursement area. And the reimbursement area comes in two ways.

We have both new and returning patients. And we mentioned over time that we're having pressure on both of those sides of the business. And it speaks to just in general much more scrutiny and pressure on specialty pharmaceutical products by payers. And we're seeing pressure -- downward pressure on both our new and returning patients.

And that issue is separate and independent of what's going on with CMS. Collectively though, as we look at the uncertainty around CMS and we look at some of the reimbursement pressures that we're seeing near term, that's one of the reasons why we guided today that we expect that Acthar sales in the back half of the year are going to be weaker than the first half and that we're unlikely to exceed $1 billion in net sales for full-year 2019. Long term, however, and you heard Steve's comments, we have a number of clinical trials we're set to read out. We have a new device, a new presentation in a prefilled syringe self-injector that we are developing.

And we would anticipate that over the next 12 to 18 months, as the data reads out, as we potentially get yet another label enhancement and if approved, we have the prefilled syringe self-injector, we'll have a much clearer view of the long-term perspective for Acthar once all this information is in the marketplace. So on that, we continue to be very optimistic about the long-term prospects for Acthar. Short term, we're experiencing a significant amount of reimbursement pressure, which led to our change in guidance today.

Dan Speciale -- Vice President of Investor Relations

Thanks, Ashwani. Next question, please.

Operator

Thank you. And our next question comes from Greg Fraser with SunTrust. Your line is now open.

Greg Fraser -- SunTrust Robinson Humphrey -- Analyst

Thank you. It's Greg Fraser on for Gregg Gilbert. On Acthar, a couple of follow-up. On the refractory RA indications, can you comment on the covers that you have now and how you expect the new data to influence that coverage and when that could happen? And then just a quick follow-up on the Medicaid issue.

If you were to lose the case, what can you do operationally to offset the impact from higher Medicaid rebates?

Mark Trudeau -- Chief Executive Officer

Yes. So with regards to RA coverage, recognize that Acthar for virtually all indications on label is what we call prior authorization. So specific coverage, if you will, for Acthar in RA is really focused around that pathway. In other words, physicians typically need to demonstrate through a prior authorization process that a patient has tried and failed on multiple therapies before coming to Acthar.

That's no different. There's no change there. What we have seen initially is that while we're getting very good response at the prescriber level to this data, which is what we see typically when we present new clinical data, the change in reimbursement pathway at the payer level takes considerably more time. What we are very pleased about is that we're having some initial, very positive conversations with payers looking at this data specifically to determine if there are alternative reimbursement pathways that potentially could make it a bit easier to get Acthar reimbursement specifically for these refractory patients.

And that's very promising, but it's at its early stages. So again, that's why we don't believe yet that the positive impact of this clinical data is not yet showing up in net sales. We would anticipate that, that would take some time. So that's in general how we think about that.

But with regards to CMS, first of all, if, for some reason, the judgment goes against us, certainly, we have other legal recourse because we think our case here is very strong in that we acted exactly appropriately in the way that we should have as instructed by CMS historically in applying what they call the base date AMP. So there are certainly legal offsets if we choose to go that route in the event that things were negative for us in the first round. But importantly, regardless of the outcome of CMS, we certainly continue to look at Acthar as a long-term investment with significant amounts of clinical data and new presentations coming our way. In the near term, I think you've seen us be very, very good stewards of our cost basis, including in this quarter.

And we have significant opportunities to offset any downsides that we might experience in the near term for something that would be additional pressure on Acthar, whether it's from prescription trends or any outcome from CMS.

Greg Fraser -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you.

Bryan Reasons -- Chief Financial Officer

It's evident in our guidance where we bid and raised on the bottom line. So there are leverage all throughout the P&L to manage that.

Dan Speciale -- Vice President of Investor Relations

Great. Thanks. Next question, please.

Operator

Our next question comes from Annabel Samimy with Stifel. Your line is now open.

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Hi. Thanks for taking my question, and sorry to belabor this point on Acthar. But I'm just curious, so you do have a number of additional studies that are ongoing for Acthar. RA was very, very well designed, controlled.

So it seems like it was a much more robust study. To what extent are the future studies that you're doing as robust as in RA? Which other ones that you're specifically prioritizing as important must haves? And I guess to what extent will that drive future payer discussions and acceptance? And then following from that, there's clearly still development of I guess additional Acthar -- or not Acthar but corticosteroid presentation I guess or whether it's synthetic or not. And they're likely going to take some kind of pricing strategy to enter the market. Do you have any further thoughts on some of the potential competitive entrants there?

Mark Trudeau -- Chief Executive Officer

Yes. Let me start by a couple of framing comments. I'll ask Steve to comment specifically on study design. So keep in mind that we have gone about demonstrating and modernizing the clinical data set for Acthar across a number of key indications.

We've specifically selected those indications because we believe those represent among the wide range of opportunities on the Acthar label, the best value for the marketplace where we can show the greatest degree of differentiation. And certainly, the Acthar refractory patient -- sorry, the RA refractory patient is one of those. So we are so very pleased with the data just so strong. We believe that, that indication alone is one where longer term, with the appropriate reimbursement pathways, we could drive growth for Acthar almost exclusively, recognize there are a lot of refractory RA patients out there and our current patient penetration of that indication is in the low single-digit range.

So there's plenty of volume upside just from RA alone. But if you look at a couple of the other key trials where there's clearly unmet need and an opportunity for Acthar to demonstrate with even more contemporary data a very compelling value proposition. I think we can point to the lupus trial, which is upcoming that Steve can speak to, and also sarcoidosis, two areas where there are relatively few options for some very sick patients where Acthar currently has a label. And having a more contemporary controlled data would certainly give us an opportunity to have attractive discussions with payers on reimbursement pathways for those two particular indications.

So with that, let me ask Steve to comment a little bit on the design, and then I'll come back to the competition question.

Steve Romano -- Chief Scientific Officer

Yes. No, happy to. And Mark really did answer -- gave you the key components of the answer here. But I'll just remind you, what we did -- recall most of the indications, in fact, all of the indications obviously we promote on are indications that are already in the label.

So the challenge we have when we designed the program was we really -- we weren't bringing a new product with a new indication to the marketplace. We needed to fill in gaps, if you will, in evidence and contemporize the data sets for physicians and payers currently. So what that really were some of the most clinically relevant questions to answer and design the trials to answer those questions. So the designs are actually varied between the conditions, and they're really based on what relevant questions do you want to answer.

So for instance, with the refractory population of patients with rheumatoid arthritis, we designed that so we could answer key questions around dosage, duration of therapy, expectation for response and whether or not that effect would be durable. So we designed what was called -- what was referred to do as blinded withdrawal study. We did the same thing with FSGS. With sarcoidosis and lupus, we designed a more traditional trial designs, which are parallel group placebo-controlled trials for both sarcoidosis and lupus.

Those are probably the two most exciting opportunities we have in the near term. The lupus trial will complete by year end, early 2020s, I'm very much looking forward to sharing those results when they come out. That's a notoriously difficult condition to show or demonstrate effect in. And of course for us, with Acthar, we're always targeting some of the most difficult patients to treat, the more refractory population.

But if that is positive, that would be very, very meaningful, and similarly sarcoidosis. Other trials are designed a little differently, but all target relevant clinical issues that need to be resolved.

Mark Trudeau -- Chief Executive Officer

Yes. Let me just remind everyone that when the FDA updated Acthar label in 2010, it was updated on the basis of available data to support the indication set. So the label itself is modernized 2010. And in that initial 2010 update, if you will, and subsequent additions of the infantile spasms indication, the clinical data that supports both infantile spasms and MS has been contemporary in the label ever since that time.

Now we have the RA data that's been updated. And so we have three indications that have modern clinical, either placebo or active controlled data. And the additional indications that we just described, we would anticipate if successful will continue to enhance the modernized data set for Acthar. With regards to possible competition, again, there are a number of competitors to all of Acthar's indications today.

As we all know, Acthar is typically used for refractory patients as a third- or a fourth-line agent. And so there exist today just a range of competition for Acthar patients. I believe that what you're referring to as additional potential competition in the corticotropin space where Acthar has been the only product that has been continuously available in that particular class, there are a number of potential competitors looking to do a number of novel approaches to the market. And those that are near term appear to be focused primarily on a different set of products that are primarily used as diagnostic agents as opposed to therapeutics.

That's a pretty big difference. And then the other approach that we're aware of is to try to recreate all dormant NDAs, which again as we've stated many times previously and appears to be bearing out, is that that's just a very complex and long road to potential approval. Any of these things could get approved at any point in time according to the way the company has described their regulatory pathway. But at this point, we continue to believe that the opportunities for Acthar are driven primarily by the data-generation activities that we have and the introduction of a modernized patient-friendly self-injector prefilled syringe, which we anticipate that we could have in the market by late 2020 or late '21.

The combination of the data plus the new presentation allows us to think very differently about how we package and promote and partner and contract around Acthar because it gives us a lot of ranges of things that we can do very differently than we do today where the single presentation is a multi-dose vial. So again, it's that combination of the data plus the prefilled syringe that we think gives us tremendous flexibility to think quite differently about patient access pathways in the future.

Dan Speciale -- Vice President of Investor Relations

Great. Thanks. Next question, please.

Operator

Thank you. Our next question comes from Chris Schott with J.P. Morgan. Your line is now open.

Ekaterina Knyazkova -- J.P. Morgan -- Analyst

Good morning. This is Ekaterina on for Chris. And my first one is can you share some thoughts on how you're thinking about opioid exposure particularly in light some of the settlements out of Oklahoma and some of the DA deal that we've seen? And how does that factor into your decision not to spend generics business? And then the second one I have is just given some of these Acthar controversies reemerging, do you see a need to further diversify the business or you're comfortable with your existing pipeline? And if so, what kind of assets are looking for both in terms of size and therapeutic area?

Mark Trudeau -- Chief Executive Officer

Yes. So first question around opioid exposure. First of all, the Oklahoma case as you know we were not named in that case. That case seemed to be focused much more on the promotion of branded opioids.

And again, Mallinckrodt has historically, for a number of years, been primarily a generics manufacturer, supplying FDA-approved products according to DEA guidance to supply the market as requested by prescribing physicians. So any impact of the Oklahoma case is really not necessarily relevant to aspects of the Mallinckrodt generics business. However, the MDL case in Ohio has certainly encompassed a whole variety of defendants, including distributors, generic manufacturers and promoters of branded products. And so that environment has taken a decidedly negative turn over just the past couple of weeks.

And the uncertainty around that opioid litigation, as we said in our prepared comments, has certainly led to our decision to spend -- to suspend for now the spin plans, the separation plans for the specialty generics business. It does not, however, change our long-term objective to separate the brand's business from the generics business. And as we said today, we're looking at the whole range of options to effectuate that long-term strategic objective. With regards to diversification of the business, our objective is primarily to develop a branded innovation-driven drug development and commercialization business.

And we've been remarkably successful in establishing a couple of the elements that create that type of business. We think about it in three stages. Our first stage was to develop a set of commercial brands with sustainability that also brought us commercial capabilities, and that brought us Acthar, OFIRMEV, INOMAX and Therakos. Our second stage was to create development capability and create an increasingly robust set of late- and early stage development assets.

Many of those we brought in through licensing are acquisition from the outside. So effectively, what we're doing now is advancing technology that we didn't necessarily developed or discover. But we think we can bring those products to market and put them right into the commercial infrastructure that we've developed. And the third aspect is what we're just starting to enter now, and that's to think more broadly and more long term about the creation of technology platforms.

And while we have technology platform such as nitric oxide, ECP and regenerative skin tissue products in our current portfolio today and we're enhancing and developing those, you heard some of that from Steve earlier, both platforms give us interesting opportunities but are probably not broad enough to fully develop a set of organically grown products. And that's one of the reasons why we engage with Silence in order to bring their technology into our portfolio. And from that technology, we think we can develop even more products longer term. We will continue to be opportunistic as well in looking to enhance our development portfolio and our in-line portfolio through our significant cash flow generation capabilities.

And while our capital allocation strategy continues to be primarily focused on net debt reduction, again, we've been phenomenally successful in doing that. We're clearly also going to be opportunistic if attractive assets are available because we want to build depth and breadth particularly in our development portfolio. But we also want to make sure that we have a well-diversified set of offerings that can take advantage of the commercial capabilities that we have.

Dan Speciale -- Vice President of Investor Relations

Thanks, Ekaterina. Next question please.

Operator

Thank you. And our next question comes from Gary Nachman with BMO Capital Markets. Your line is now open.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi. Good morning. With Acthar, given all the overhangs of that franchise, I know you're still trying to modernize it in a bunch of different ways. But is there a point you would consider scaling back your investments behind it and maybe milk it more for cash and pay down debt even more aggressively? And then for the hospital business, I'm not sure if you addressed this, but just on INOMAX, how has the contracting been? How much visibility do you have for the next couple of years? And maybe just talk to the next-gen EVOLVE platform and how much that's going to help sustain it?

Mark Trudeau -- Chief Executive Officer

Yes. Great. Thanks, Gary. So on Acthar, I think as we've been very clear, really the next 18, 12 to 18 months shall we say, we'll really have a view as to what Acthar is and the potential for that product because at that point, we'll have really completed the majority of our clinical trials, and we will have hopefully the self-injector on the market.

If at that point the data is as positive as the RA data, then we believe that we have a very compelling proposition for the market going forward and a lot of flexibility to think differently about how we provide greater access to what should be potentially an expanded patient population with modern data that specifically helps payers address identification of those patients, as well as appropriate dose and duration. So the Acthar story here will be really told in the next 12 to 18 months. In between now and then, some of the positive trends that we're seeing on prescribing give us good comfort that if this data is positive, there's a pretty attractive future for the product. Again, if, for some reason, things don't play out in the way that we would expect, then of course you'd be looking in a different type of asset and you'd be resourcing it appropriately.

But it's really -- the story will really be told as I said in the next 12 to 18 months. With regards to INOMAX and contracting, as we mentioned in the prepared comments, we're seeing very good underlying demand for the product, which is really driving its growth. Part of that is being fueled by the contracting and commercial model that we have that's all focused around the total service model. That has proved to be very appealing to the majority, if not almost all, of our key customers.

And we continue to exercise that commercial model. We've been quite successful in continuing to sign up customers on contracts, both short and long term. And we continue to articulate the volume of that business that's in multiyear contract in our public Qs and Ks. And so I would encourage you all to look at that to see the amount of that business that's already determined through multiyear contracts.

With regards to EVOLVE, the way we think about it is there are a number of potential competing technologies that are being developed in the market today. Clearly, the nitric oxide market has become quite attractive to a number of potential competitors. And the majority of those competitors, if not all of them, seem to be really focused on the delivery of gas. And in reality, the way we think about the business, it's the delivery of the service, of which gas is a part of it.

And so the EVOLVE platform is much more about evolving the delivery of the service and less about the delivery of the gas. And the reason for it is EVOLVE technology changes the game we believe quite a bit. It significantly reduces the reliance on traditional bulky cylinders of gas. It dramatically enhances the -- or it actually reduces the potential for human error.

It also potentially becomes much more portable and therefore creates more utilization potentially in hospital markets. So we just think it's a complete technology shift that would move the market in a completely different direction, again with the focus being on the delivery of the total service model in a much more effective way. And as we've shown some of the prototypes to some of our customers, they typically get pretty excited about that. So we have a lot of promise we think is associated with EVOLVE.

We look forward to being able to introduce it to the market if approved in kind of the late '20, early '21 time frame. And again, we think it has the potential to be a long-term growth opportunity for INOMAX in addition to some of the potential enhanced label activities that we're working on, for example, that Steve articulated around pediatric cardiovascular surgery applications where we see that driving growth in Japan, as well as some of the other data-generation activities we're doing, for example, on around the use of the product and premiums. Again, we think that INOMAX over time, even of competition is introduced, there might be some short-term volatility in INOMAX's growth. But we think there are multiple set of potential growth opportunities for the product longer term.

Dan Speciale -- Vice President of Investor Relations

Thanks Gary. Next question, please.

Gary Nachman -- BMO Capital Markets -- Analyst

Thanks.

Operator

Thank you. And our next question comes from Anthony Petrone with Jefferies. Your line is now open.

Anthony Petrone -- Jefferies -- Analyst

Thanks. Maybe two on opioids and one on just the pipeline. Just on the generics side, I mean how much of the sort of activity in the deal market sort of reflected that opinion? Just thinking of Pfizer and Mylan there as opposed to just unknowns around opioid. And as we look ahead, is there any way to estimate reserves on the upcoming MDL? The file would be just be any updates on terlipressin, just where that asset sits and what are the next step for terlipressin?

Mark Trudeau -- Chief Executive Officer

Yes. So just quickly, Anthony, the deal activity elements certainly are less of a factor in our decision to suspend for now the separation activities. And it's simply much more around the unknowns associated with the litigation, which as I said in the last even just couple of weeks have decidedly turned negative. So again, we had always said that our plan is to separate would be in some part dependent on market conditions.

We believe at the moment, market conditions are not favorable to affect a separation via spin. Again, I can't reiterate enough how important it is that our long-term objective is to separate these two businesses. They operate very separately now, have been for the last several years, and we'll continue to do so going forward. In terms around any types of reserves, there are no reserves established at this point.

There's only litigation risk, litigation liability, and I think that's pretty important to understand. With regards to next steps on terlipressin, maybe I'll ask Steve to just comment on where we are with the study, and then I can talk a little bit about our preparations for the commercial launch.

Steve Romano -- Chief Scientific Officer

Yes. So as I mentioned in my comments, we're very excited because two of our late-phase programs, terlipressin and StrataGraft, are actually completing. So these are the pivotal Phase 3 trials which if positive will lead to submissions and hopeful approvals for both of these products in 2020. So we are within three months of sharing the data for both terlipressin and StrataGraft.

So very near-term catalysts as I mentioned for two very important hospital products target critical conditions.

Mark Trudeau -- Chief Executive Officer

And the commercial launch preparations as you might imagine are well under way. Both of these products, StrataGraft and terlipressin, will largely be in the hands of our existing sales team that's currently selling OFIRMEV and will go into that model. And recognize that probably a year or so ago, we started to position that sales team and target them in a way that was appropriately sized and appropriately targeted for the introduction of these new products. And so we're in very good shape in terms of the launch preparations on the commercial side with those two products.

Recognize what we've said historically is we would anticipate that at peak, the combination of peak sales between terlipressin and StrataGraft is likely to exceed what we expect peak year sales for OFIRMEV alone would be. So again, these two products are designed to slot into our existing sales team and really represents an offset to the known loss of exclusivity that we'll likely experience with OFIRMEV starting in 2021.

Dan Speciale -- Vice President of Investor Relations

Great. Thanks. Coming to the bottom half of the hour, we'll try to get another couple of questions then, please.

Operator

Thank you. Our next question comes from David Amsellem with Piper Jaffray. Your line is now open.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. So regarding the generics business, I mean you talked previously how you believe there is visibility into sustainability of EBITDA there and particularly regarding the opioid segment. I just wanted to get some insight into your thought process there and why you think that could be sustainable business. That's number one.

And then number two, is it safe to say that a spin can't happen unless you actually have a settlement on the liabilities on the litigation in place, and ultimately that's the driving force behind the decision to park this for now? Thanks.

Mark Trudeau -- Chief Executive Officer

Yes. Let me take the second question first, and I'll come back your first question, David. So just to be clear, we could affect the spin today if we chose to. There is nothing holding us from not doing the spin other than we believe it's not the right time to do the spin, which is why we're suspending it for now.

And also simultaneously, considering other alternatives, that again would be in the best interest of stakeholders across the board. So the ability to spin is certainly well within our control. Again, we just don't think the timing is right. With regards to the generics business, and if you look at the value proposition for the business, you have to think about it in the near term and the long term.

One is that after an extended period of contraction of both the market and this particular business, we indicated earlier in the year that we expected the business to regrow. We gave growth guidance. And as you see, we've now put two quarters in a row together that demonstrate that growth, and we expect the specialty generics business will continue to be growing through the balance of the year. You see that in the segment guidance that we gave today.

And recognize that all those -- the segment guidance numbers are the same. We've removed AMITIZA from that business and AMITIZA was contributing some growth to that. So the generics business is actually even stronger than we originally projected at the beginning of the year. That's based primarily on share recapture of the base business.

And there's kind of a misunderstanding I think about what actually in is in this business. Recognize that the opioid piece of it, whether it's in the finished dose or the API side of it, is still probably on the range of a third or so, certainly well below 50% of the total business. The rest of the business is comprised of a whole range of API products, a whole range of controlled substances that are not opioid-pain related that are addiction treatment and ADHD treatments and other things. And so what we're actually seeing is a recapture of share across the entire business.

But near term, we would expect that share recapture to be driving the growth of generics business. But long term, we had been continuing to invest in this business, both in the manufacturing capabilities and the pipeline. And we would expect midterm, there's probably some opportunities for contract manufacturing growth in this business. And longer term, our emphasis on primarily non-controlled substance, difficult-to-manufacture generics, non-opioid ANDAs is what's likely to drive the growth of this business two, three, four years from now.

So again, it's a multi-tiered story, near term driven simply by share recapture of the base business across the board, midterm say contract manufacturing opportunities and long term primarily non-opioid ANDAs coming out of the development pipeline.

Dan Speciale -- Vice President of Investor Relations

Thanks, David. I think with that, we're obviously a little bit overtime. So I want to thank everybody, obviously, for joining us today. As a reminder, replay of the call will be available on our website later today.

And I'll be around obviously throughout the day to answer any follow-up questions you may have. Thanks, everyone. Have a nice day.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Dan Speciale -- Vice President of Investor Relations

Mark Trudeau -- Chief Executive Officer

Steve Romano -- Chief Scientific Officer

Bryan Reasons -- Chief Financial Officer

Lucas Lee -- Raymond James -- Analyst

Sudan Loganathan -- Cantor Fitzgerald -- Analyst

Ashwani Verma -- Bank of America Merrill Lynch -- Analyst

Greg Fraser -- SunTrust Robinson Humphrey -- Analyst

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Ekaterina Knyazkova -- J.P. Morgan -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

Anthony Petrone -- Jefferies -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

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