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Mallinckrodt (MNK) Q1 2019 Earnings Call Transcript

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MNK earnings call for the period ending March 31, 2019.

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Mallinckrodt (MNK)
Q1 2019 Earnings Call
May. 07, 2019, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the Q1 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, operator. Good morning, everyone, and welcome to today's call. Joining me 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 on our earnings release, which can be found on our website, 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 range we will be discussing are on constant-currency basis.

This morning, we're very pleased to raise 2019 total company guidance for adjusted diluted earnings per share now at the range of $8.30 to $8.60 per share. Please refer to the earnings release for comprehensive changes to guidance. With that, let me turn the call over to Mark. Mark?

Mark Trudeau -- Chief Executive Officer

Thanks, Dan. We're pleased to have started 2019 with continued strong operational execution, achieving robust top and bottom-line growth and resulting in significant cash generation as we continue to transform our company. The hospital portfolio continued its positive momentum. And as anticipated, we saw the return to growth reported for the specialty generics products.

We're also very pleased with the overall progression of our pipeline and data generation efforts as highlighted in a number of recent announcements. We're particularly excited to share results from the Acthar Phase 4 rheumatoid arthritis clinical trial next month and look forward to the Phase 3 pivotal trial results for our StrataGraft and terlipressin investigational products later this year. As previously announced, our company's 2019 strategic priorities include: one, maximizing the value of the diversified in-line portfolio; two, advancing further data generation and the pipeline; three, completing the separation of the specialty generics business; and four, executing disciplined capital allocation with net debt reduction as a primary focus. Strong progress has already been made on each of these priorities in the quarter.

As a result, we're excited to be raising guidance today, and these results are reinforcing our confidence that 2019 is shaping up to be a strong year for the company. Before we discuss operational results for the quarter, it's important to take a moment to address allegations pertaining to a legacy legal matter that surfaced in the news last week. When acquiring a business, any ongoing legal matters that may be associated with it are typically inherited, and our 2014 acquisition of Questcor was no different. This and other legacy matters have been previously disclosed by both Questcor and Mallinckrodt, and we've continued to work diligently to resolve them.

The Department of Justice intervention action relates to complaints initially filed in 2012 and 2013 against Questcor, and the DOJ has been investigating since that time with full cooperation from the company as noted in our SEC filings. These complaints alleged improprieties relating to Questcor's sales and marketing activities, as well as its interactions with charitable foundations. While we disagree strongly with the substance of the complaints, we've been in discussion to resolve the sales and marketing claims for several months. As previously noted, we believe ongoing negotiation should yield resolution that is reasonable and manageable for both parties.

We previously reserved for the anticipated settlement of the sales and marketing claims, which we hope to finalize in the near term. And because the complaints and subsequent investigation relate to legacy practices, we do not believe there will be any material impact to future results. Returning to quarterly operational results. Let's start with our billion-dollar hospital portfolio.

This continues to be our largest and fastest-growing platform in total net sales and is clearly our major long-term growth engine as we prepare for a number of anticipated product launches over the next several years. Ofirmev demonstrated double-digit growth in the quarter on strong volume, capturing ongoing benefit for market demand for non-opioid-based pain regimens. Both Inomax and Therakos contributed high single-digit growth, and Therakos results were driven by volume growth, both in the U.S. in cutaneous T-cell lymphoma and internationally, including acute graft host disease.

Going more deeply into Inomax, growth continues to be driven by sustained consistent demand and contract renewals fueled by the product's differentiated total service model. Regardless of the potential for competition, we expect Inomax growth to continue going forward, particularly as we progress development of the next-generation Evolve device, which we estimate should launch in the second half of 2020, if approved. Overall, we expect the combined hospital portfolio in the high single-digit range for the full year. Moreover, we believe that nitric oxide and extracorporeal photophoresis, or ECP, are broader technology platforms that may offer further long-term growth potential.

We're exploring additional uses for these technologies, which Steve will discuss in a bit more detail later. Turning to Acthar. We continue to expect the product will be greater than $1 billion in net sales in 2019. Performance in the first quarter, typically our lowest, was driven primarily by the annual benefit reset process impacting returning patients, and we saw ongoing payer scrutiny on overall specialty pharmaceuticals spending.

The impact of these challenges is likely to persist at least through the first half of the year. We continue to believe 2019 will be a transitional period for the product with new clinical data sets emerging throughout the year, especially those for MS and RA. Historically, indication-specific volume growth has typically been correlated to positive data. In particular, we're excitedly looking forward to presenting the full Acthar RA data, including the randomized placebo-controlled portion of the study at upcoming medical meetings beginning in June.

Steve will provide more on the study in just a moment. Our additional data generation activities include ongoing clinical trials in lupus, sarcoidosis, uveitis and others that will play out over the next couple of years. These data sets, as well as recent label enhancements and the expected market introduction of a new self-injector in late 2020 all represent potential longer-term growth opportunities for this key product. In short, while we anticipate environmental pressures are likely to remain, we believe the robustness of the data being produced and the preponderance of evidence we're building should provide important information to prescribers and payers regarding dose and duration for appropriate refractory patients in key indications.

Looking at capital allocation and our separation plan. We're very happy with the progress we've made on these fronts over the past few quarters, and they both remain top priorities for us. Bryan will update on these topics shortly. In summary, we've had a strong start to the year.

We're especially pleased with the operational performance of hospital products and specialty generics and with the data generation and products enhancement progress for Acthar. We're particularly excited by the pipeline advancements we're making, including near-term assets, StrataGraft and terlipressin. With that, I'll now ask Steve to provide a more detailed update on some of the key activities we're pursuing across our portfolio. Steve?

Steve Romano -- Chief Scientific Officer -- Analyst

Thanks, Mark. I'm excited to report that we maintained our strong research and development momentum in the first quarter of 2019. As evidenced from the many data and pipeline announcements you've seen in recent months, our investments across the portfolio are bearing fruit. Turning to Acthar, we're pleased by the FDA's recent approval of a new product description detailing Acthar gel's unique composition, noting the agency's important recognition that the drug is more than simply ACTH.

We announced just last week that the blinded placebo-controlled part of the Phase 4 RA clinical study is complete. We're very excited about this substantial RA data set. As a reminder, we designed this trial to produce information that answers some of the most clinically relevant treatment questions. These include: defining the most appropriate patients likely to benefit, determining the optimal dosing strategy to achieve the primary treatment objectives and assessing the durability of effect in those patients who are responders.

We reported previously that robust response has been seen in some of the most challenging managed RA patients, patients demonstrating moderate to high disease activity levels even while being managed at standard of care, including oral and biologic DMARDs, as well as corticosteroids. Response rates in the first 50% of patients completing the part one 12-week open-label segment of the study were over 60% regarding the proportion achieved in low disease activity, and all key secondary endpoints performed consistently. This response is quite robust considering these are again tougher-to-treat patients. As we reported previously, the full open-label primary endpoint results were consistent with that same 50% data, and we're delighted to soon share the complete data from that portion of the study at UR next month.

Part two of the study, the randomized placebo-controlled withdrawal phase, has now also been completed. Those results, which we will discuss in full at a research presentation later this year, also succeeded in meeting the objective of demonstrating superiority to placebo on clinically important measures of outcome. It's worth reflecting on the Acthar strategy we initiated several years ago. That strategy, which includes more than $0.5 billion invested in the product to date, is now coming to fruition, including generating preclinical data, demonstrating the effect and distinctive mechanism of action of Acthar in relevant disease models, health economics and outcomes research data to support the value proposition for appropriate generally refractory patient populations and eight clinical trial studies, many designed specifically to tackle challenging treatment considerations.

We look forward to completing most, if not all, of the latter over the next 6 to 18 months, and we will continue to assess opportunities to expand the label based on our various activities. Let's now touch on our pipeline. You likely saw today's announcement that CPP's Phase 3 clinical trial of its CPP-1X/Sulindac in familial adenomatous polyposis patients did not meet its primary endpoint. While we do not plan to pursue development of this product further, we're hopeful there is useful information to be gleaned from the study by clinicians treating patients in this very challenging disease.

One of our most advanced late-phase internal programs is StrataGraft, our developmental regenerative skin tissue. We were thrilled to announce 100% enrollment milestone in our Phase 3 study for treatment of deep partial thickness burns, as well as the recent opening of our expanded StrataGraft production facility in Madison, Wisconsin. We project completion of this pivotal trial and a readout of top-line results later this year. The submission to the FDA's plan for early next year with launch anticipated, if approved, in the second half of 2020.

Terlipressin is another late-phase internal program. The Phase 3 trial for the treatment of hepatorenal syndrome type one is nearing enrollment completion, and we expect to report on top-line results later this year. Importantly, this pivotal trial is being conducted under the FDA special protocol assessment, giving us greater certainty as to the approvability of the drug. If the data are positive, we plan to submit the package to the FDA early next year, and product launch is expected, if approved, in the second half of 2020, an important development for patients suffering from this very critical condition.

Importantly, both of these late-stage products, if approved, will benefit from our significant experience and presence in the hospital space. Now let's turn to the exciting prospects we see with both nitric oxide and ECP, two very important technology and growth platforms. Recent evidence of these opportunities include the promising results from the proof-of-concept study of nitric oxide gas in ex-vivo lungs for transplant and the encouraging interim analysis of our observational registry of premature infants versus term and near-term neonates with pulmonary hypertension receiving inhaled nitric oxide. On the ECP side, healthcare providers have viewed our Transimmune collaborative agreements favorably and an indication we're moving ECP therapy forward.

Important Therakos data sets for our international markets have also been released in the past few months, including the interim analysis of our study in steroid refractory pediatric patients with acute graft versus host disease and the investigator-initiated research in lung transplant patients with bronchiolitis obliterans syndrome. Our other development program, both in-line and pipeline, are advancing as planned, and we'll be providing additional updates as those programs progress. We are particularly pleased that we're completing two Phase 3 programs and potentially initiating two additional studies in MNK-6105 and stannsoporfin over the next several quarters, a substantial accomplishment for our company. With that, let me turn it over to Bryan, who will take us through the financials.


Bryan Reasons -- Chief Financial Officer

Thank you, Steve. Good morning, everyone. In the first quarter of 2019, we reported diluted earnings per share of $1.83. After adjusting for specific items, our non-GAAP adjusted diluted earnings per share was $1.94, an increase of 20% over the prior year driven predominantly by the performance of our hospital products and specialty generics segment.

Net sales for the quarter were one -- $791 million, representing growth of 5%. The specialty brands segment net sales were $547 million with the hospital products collectively generating $309 million in net sales, growing 10% over the prior period, and Acthar contributed net sales of $224 million. Inomax delivered $151 million in net sales, an 8% increase, and Ofirmev continued to see strong growth and benefited from order timing with $96 million in net sales, up 17%, while Therakos provided $62 million in net sales, a 10% increase. Specialty generics segment reported $243 million in net sales in the quarter, an 18% increase, with Amitiza contributing net sales of $53 million.

Amitiza is expected to generate approximately $200 million in net sales in 2019. Segment return to growth is projected in the quarter largely driven by specialty generics product volume-based share recapture. The specialty generics pipeline is progressing toward long-term advances with nearly 20 products in development, and strategically planned approximately 70% of those are non-controlled substance molecules. Also of note, total branded market size, in which those developmental drugs will compete, is approximately $10 billion.

Activities for the planned separation are proceeding on schedule, including board and senior management recruiting, capital structure strategy and Form-10 filed in March. The business' strong results in the quarter drove an increase in full-year segment net sales guidance, and we continue to target separation in the second half of the year. Now let me share some details on operating measures for the quarter. Total company adjusted gross profit as a percentage of net sales was flat at 71.6%.

Our adjusted SG&A as a percentage of net sales was 26.7%, as compared to 27.5%, reflecting the SG&A benefits of acquisition synergies and restructuring, offset by increased legal expenses. Overall company R&D expense as a percentage of net sales was 10.8%, as compared to 10.9%, which on a percentage basis is weighted more heavily toward the specialty brands, both absolute R&D spending and R&D spending as a percent of net sales to increase as we progress our pipeline and data generation throughout 2019. Turning to liquidity, we experienced strong operating cash flows in the quarter of $155 million with free cash flows of $125 million. We've previously stated our expectations of free cash flow being higher 2019 than prior year, and we're actually ahead of schedule with our results to date.

Finally, we've continued to execute on our debt-reduction goals, having reduced debt by $264 million in the quarter, and we've continued to buy back net of discount. These activities have yielded a reduction in anticipated interest expense as you'll see in our adjusted guidance. Our debt reduction is ahead of plan and remain focused on achieving our reduction targets for net debt leverage and total debt reduction. Importantly, I'm happy to report that our net debt leverage decreased to 4.2 times in the quarter.

Now let me turn the call back to Dan, who'll take us into Q&A.

Dan Speciale -- Vice President of Investor Relations

Thank you, Bryan. [Operator instructions] With that, operator, let me please have the first question.

Questions & Answers:


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

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

This is Ekaterina on for Chris. Can you please elaborate a bit more what's driving the recovery for the generics business? Any thoughts on the sustainability of this growth going forward? And any upcoming launches that you would highlight?

Bryan Reasons -- Chief Financial Officer

It's Bryan. I'll take that. When we look at the growth, it's predominantly share recapture, and we do project that to continue. Also, longer term, like I said in my prepared statements, the business is working on almost 20 different projects and the -- with branded sales of close to $10 billion.

So we do see share recapture and a little bit of price stabilization and, longer term, some pipeline growth.

Mark Trudeau -- Chief Executive Officer

And if we go back to what we said last quarter, we were projecting that this business was likely to enter a growth phase after an extended period of both market contraction, as well as the business itself contracting over the last couple of years. This business has historically been quite cyclical, and we believe we're now entering a growth phase for the business. And we had projected and guided at the beginning of the year. We expect that this business was going to grow primarily based on the volume capture -- recapture that Bryan articulated in the 1% to 4% range.

As you see today, we actually upped that guidance to 2% to 5% based on the strong performance in the first quarter and the trends that we're seeing in this business going forward. So we feel quite good about the prospects for growth for this business as we look ahead.


Our next question comes from Greg Fraser with SunTrust.

Greg Fraser -- SunTrust Robinson Humphrey -- Analyst

This is Greg Fraser on for Greg Gilbert. On the spin process, when do you expect to test the debt markets? And how important another quarter of results for that business to the separation time line?

Bryan Reasons -- Chief Financial Officer

It's Bryan again. We are currently monitoring the debt markets and continue to do that so that we're fully aware and ready to act on it when it's most opportunistic. I do think another quarter showing stabilization and growth in that business is very helpful.

Mark Trudeau -- Chief Executive Officer

And as we've said, our plans are to separate this business in the second half of the year. And I think as you heard from our prepared comments, we're on track to achieve that, including, as Bryan discussed, going out to the debt markets at appropriate time. Again, we're very encouraged that this business is actually performing a bit better than we expected, and we're expecting it to return to growth. So it's great to be able to demonstrate that.

And we look forward to communicating the results of the upcoming quarters at the appropriate time.


Our next question comes from Jason Gerberry with Bank of America.

Unknown speaker

This is Chi on for Jason. On the opioid litigation, can you talk about the current legal expense associated with the litigation? And maybe it will be helpful if you can you provide a framework for thinking about the costs associated with litigating this matter, whether it's going to be reaching a settlement in near term or maybe -- or you think about it may drag on for years. And maybe a quick follow-up on Acthar. Can you give us a little bit of color on the magnitude of incremental Medicare Part D donut holes that you would expect for Acthar for the remainder of the year? Or has most of the expense already incurred in 1Q?

Mark Trudeau -- Chief Executive Officer

Yes. So maybe what I'll do is I'll frame a little bit around how we think about the opioid litigation, and then I'll take the Acthar question. And in between, I'll ask Bryan to comment a little bit on how we think about the cost going forward. So if we just look at the time frame here, we've really got a couple of things going on.

We've got a number of state cases that appear to be progressing. As you're probably aware, the claims were thrown out in a couple of cases, in Delaware and Connecticut specifically. We're seeing some other settlements or at least partial settlements progressing. There's an Oklahoma case that's coming up.

And clearly -- which we're not part of. And clearly, the state cases are progressing along their own time line with different claims. And then you have the MDL, which is likely coming in at the fourth quarter at some point. And again, the information and the estimates as to how this will play out will be largely shaped based on what we see happening from the state cases and the MDL.

And at this point, we're quite pleased actually to be able to present the appropriate cases from our side. We think that we've got a very strong case to defend certainly our actions. So we'll be able to see a lot more information coming over the next couple of quarters. Unfortunately, the state cases aren't necessarily good predictors of what may happen in the MDL, but we'll have a lot more information going forward.

Meanwhile, we continue to defend these cases, to support our position quite vigorously. And maybe I'll ask Bryan on to comment a little bit about how we think about the cost of that, and then I'll talk about Acthar in a minute.

Bryan Reasons -- Chief Financial Officer

Thanks, Mark. On the opioid litigation expense, we don't give specific guidance to that amount. But just a little color, it is included in our SG&A guidance. So that's part of our SG&A guidance.

If you look at kind of the year over year, like I said in my prepared comments, overall SG&A would've been down quite a bit if it wasn't for the offsetting opioid legal expenses.

Mark Trudeau -- Chief Executive Officer

So coming back to the Acthar question, which was specifically around Medicare Part D donut hole. The way I think about this is typically, in the first quarter for Acthar, you see -- it's typically our lowest quarter, which we believe has typically been associated with patients resetting their benefits, whether that's Medicare or private pay. Usually, there's some type of a benefit reset. And we've seen that virtually every quarter since we've owned Acthar, and I think that's been a historical pattern.

What we believe from an Acthar perspective going forward is that impact in the first quarter this year, which was a bit deeper than we've seen historically, the impact of that, we believe, is likely to persist at least through the first half of the year, possibly longer. But the bottom line is we still believe that Acthar is going to be greater than $1 billion in net sales in 2019. And importantly, rather than looking at it on a quarter-to-quarter basis, we believe that Acthar growth is going to be driven by the emergence of clinical data. That's why we're so excited about the RA data that we'll be presenting starting in June, as well as a number of other clinical data sets.

And our belief is that rather than one single piece of data making a step change in prescribing, what we believe is that it's likely to be a preponderance of data or a weight of evidence story, which, over the long term, assuming that we do have positive clinical data like we're seeing initially with some of our studies in MS and RA, that that preponderance of data is likely to drive growth opportunities over the long term, particularly as we start to introduce things like the new self-injector, which we anticipate would be on the market in 2020. So for us, Acthar is a longer-term story. Next couple of quarters, we expect they're going to be performing kind of in the same range that we saw in the first quarter with regards to year-over-year growth numbers. Keep in mind, last year, the second quarter was our strongest quarter.

And over time, again, we think it's the data that's going to drive growth. But importantly, the way to think about 2019 is just like in 2018, this -- we believe this product, again, is going to be in excess of $1 billion. So 2019 is really a transitional year for Acthar. We're going to see some quarter-to-quarter variability, great confidence in the greater than $1 billion and excited about the long-term growth prospects based on the data that we're going to be communicating.


Our next question comes from Patrick Trucchio with Berenberg Capital.

Patrick Trucchio -- Berenberg Capital -- Analyst

Can you tell us how much of the Acthar business is reimbursed through Medicare and why this proportion appears to have increased over the prior five years? And then just as a follow-up to that, would you anticipate any impact on Acthar from the proposed change us by HHS to the Medicare Part D rebates whereby these rebates would, at least in theory, be passed on directly to patients and reflected in what they pay at the pharmacy counter either in 2020 this would begin or 2021?

Mark Trudeau -- Chief Executive Officer

Yes. So I'll take the second half of your question first, then I'll come back to the first one, Patrick. We are certainly supportive of any changes to the U.S. healthcare system, which we provide better access to drugs for patients, and particularly the challenges that patients experience with their out-of-pocket expense.

And I think that's one of the things clearly that has impacted the current price debate. If the HHS does make changes to Medicare Part D or, for example, if things happen in the private pay market whereby patients have an opportunity to get greater access, we believe that's likely to have a positive net impact on Acthar and probably for the industry in general. So again, we support access to drugs that patients need based on what their payers and prescribers believe is appropriate for that particular patient. With regards to Acthar business reimbursed by Medicare, as we've said consistently, our Medicare -- the proportion of our business through Medicare is a bit higher than 50%.

It is typically increased over the last five years simply based on the mix of indications. So if you think about where Acthar used to be prescribed a number of years ago, it was primarily prescribed for neurologic indications, particular infantile spasms and exacerbations of multiple sclerosis, which typically trends toward younger patients. What we've seen more recently is a number of the other indications that Acthar has, which tend to skew more toward older patients, like rheumatoid arthritis or sarcoidosis or other critical diseases that afflict patients -- that afflict particularly highly refractory patients. We've seen Acthar growth in those particular indications, so our mix of business has changed quite a bit.

So now rheumatologic indications comprise a larger proportion of Acthar, which then turns to be skewed toward older patients, which tends to be reimbursed through Medicare. And again, we believe very strongly that the long-term volume-based growth for Acthar will be highly dependent on our ability to demonstrate clinical data that supports those highly refractory patients. That's again why we're so excited about the Acthar RA trial, which Steve just described a bit. This gives payers and prescribers a lot of information on appropriate patients, appropriate dose and appropriate duration so that those payers and prescribers, if they believe that Acthar can benefit those patients, have an understanding of where the best effect is going to be, how long and how to dose it.

We think that's important clinical information that's relevant for the business long term.


Our next question comes from Gary Nachman with BMO Capital Markets.

Gary Nachman -- BMO Capital Markets -- Analyst

On the hospital franchise, it was strong in 1Q across the board. So is there anything unusual in there worth calling out, like you mentioned the Ofirmev orders, or all those pretty good run rates going forward to think about? And then one other follow-up, just specifically on the Inomax contracts. How many of those do you have locked in for the next couple of years? And do you think that could potentially increase further in front of a potential Praxair launch? And are you giving up more economics in order to lock those contracts in?

Mark Trudeau -- Chief Executive Officer

Yes. Thanks a lot, Gary, for those questions. So yes, again, we're very excited about the continued strong growth of our combined hospital portfolio. As we said, we believe this is really the heart of the company and likely the longer-term growth engine for the business, based on the products that we have coming from our pipeline, which again largely go into this hospital sector, including both StrataGraft and terlipressin.

But if we look at the business, every one of the major products, Ofirmev, Inomax and Therakos, continue to perform very well. We anticipate that this business will continue to grow in the high single-digit range throughout 2019. And while Ofirmev was particularly strong in the quarter, we continue to see that as primarily volume-based. Sometimes, from quarter to quarter, we do see some timing of orders that might pump up or reduce overall growth in a given quarter, so we wouldn't necessarily look at the 16% or 17% that we post for Ofirmev throughout the course of 2019, but we again continue to see this hospital business performing quite well.

With regards to Inomax and contracts, again, we've been very transparent about the proportion of business that we have in multiyear contracts. I think last quarter, we reported north of $130 million or so. And typically, in any given year, as much as two-thirds or more of our business will be in some type of a contract, meaning not necessarily a multiyear contract, some type of a contract. And whether or not we have competition, our contracting strategy, certainly at this point, is not changing really at all.

If and when we do see competition for Inomax, we'll address our contracting strategy at that point as necessary. But again, we believe that we're actually going to be transforming this market significantly, starting in 2020, with the anticipated approval of the Evolve device, which really enables us to change the way nitric oxide is delivered in the hospital, getting away from large cylinders with a much more kind of user-friendly system. And again, we think that's likely to drive longer-term growth for Inomax. Again, as we said earlier, we think there are plenty of opportunities to potentially expand the label for Inomax and look at expanding the nitric oxide platform as a technology play longer term.

Thanks, Gary.


Our next question comes from David Amsellem with Piper Jaffray.

David Amsellem -- Piper Jaffray -- Analyst

So I just have a couple of questions on the generics business. So first, just a long-term question on the opioid business. But you've struck a note of confidence regarding the sustainability, if you will, of the opioid business. So the question here is what gives you confidence that this is a sustainable business.

And then just talk about some of the different moving parts that gives you confidence that that's a sustainable stream of cash flows over the long term. That's number one. And then secondly, I think you've alluded to complex generics in the past as an area of focus, and I'm wondering if you can elaborate on your thinking there. Is that sort of a function of having the BioVectra piece and your ability to potentially develop hormone and peptide products? And how are you thinking about leveraging that expertise?

Mark Trudeau -- Chief Executive Officer

Thanks, David. So maybe I'll just give you some perspective on the specialty generics and Amitiza segment because I think there's a misperception that that's, as you characterized it, an opioid business. Let's recognize that the majority of that business is actually not opioid. Certainly, only a small subsection of it, relatively small section of it is actually oral dose opioid-related pain products.

There are a number of controlled substances in that oral dose business, which include addiction treatment, which include treatments for ADHD, for example. There's a very big API business, as you know. Half of that API business is actually acetaminophen. So the oral dose pain opioid-related portion of this is just that, just a portion of it.

What we are seeing is that near-term growth for the business, as Bryan described, is driven by share recapture of some of our existing businesses, including oral dose opioids, but it also includes other parts of the portfolio. And longer term, again, as Bryan described, we believe that 70% or greater of the pipeline ANDA, as the past business has, are in non-opioid pain products. And so that's where the long-term growth prospects of this business are likely to reside. The BioVectra piece really doesn't come into play for that business in particular.

We have consistently invested in research and development of ANDA products in anticipation of the separation of this business. And again, our emphasis has been more on the complex generics that are consistent with the capabilities that that business has, to deal with complex products, whether they're in controlled substances or any other type of complex marketplace.


Our next question comes from Anthony Petrone with Jefferies. Your line is now open.

Anthony Petrone -- Jefferies -- Analyst

I think it sets up through two quick ones out there. One would just be on litigation reserves on opioids. Just how does that play out into the spin? What portion will be on spinco? What portion stays at the parent? And then maybe timing on the build-out of those reserves? And just on Acthar trends, just maybe an update on written prescriptions, the trends on the funnel upfront versus the fill rate and dropout rate. Is the impact still more on the latter?

Mark Trudeau -- Chief Executive Officer

Yes. Thank you. So with regards to litigation and reserves, I mean, we don't have specific reserves for litigation at this point, and we may never have. We or the spinco business may never have reserves.

It's really dependent on how these trials play out over time. And with regards to the risks and liabilities, again I think we've been very clear since we announced our intent to spin, is that risks and liabilities will follow the assets. So the risks and liabilities for the branded business will follow the brand, and the risks and liabilities for the generics business would also then go to spinco. And recognize that we have a risk, an opioid litigation.

We don't have a liability. So again, our view continues to be that as we separate those businesses, the assets and the risk and liabilities, as well as the opportunity should match each business. Moving to Acthar, what we're seeing is that a pretty good stabilization actually of the reimbursement, and that's very encouraging. So our reimbursement rates for both new and returning patients continues to be quite stable, and we're pleased about that.

Prescription volume, typically, again is going to be driven, as I've described before, by the emergence of new clinical data sets. Historically, virtually every time new data has been introduced to the market, we've seen a corresponding indication-specific impact on volume prescribing, and we would expect that to be the case going forward. And the reason why we keep coming back to the RA data is this will be the largest piece of data that we've yet communicated to the market. It'll be the first large-scale placebo-controlled trial.

And importantly, the RA opportunity for highly refractory patients, meaning those patients that still have active disease while still on a variety of different DMARD and corticotropins -- corticosteroids, sorry, is a pretty large opportunity. And we have single-digit patient penetration in that relatively large opportunity, so that combination of what we believe is going to be very important clinical data that speaks to dose and duration, relatively low patient penetration and a relatively large market opportunity, we think, based on history, that's likely to result in increased volume prescribing in that category, as well as any of the other indications that we're -- that we'll be communicating clinical data over the next several quarters.


Our next question comes from Ami Fadia with SVB Leerink. Your line is now open.

Ami Fadia -- SVB Leerink -- Analyst

I have follow-ups on two topics. Just as we think about kind of the next 12 months, do you anticipate growth in Acthar irrespective of the RA data? Or how should we think about some of the puts and takes as we think about heading into the next year? And with regards to Ofirmev, we know that there's a generic entry expected next year. How are you thinking about offsetting that headwind into next year?

Mark Trudeau -- Chief Executive Officer

Right. So taking the Acthar question first. Again, I think we continue to believe that 2019 is a transitional year for the product. And again, looking at it for a full year, I can't emphasize enough that our confidence in greater than $1 billion is consistent.

We do anticipate the next couple of quarters are likely to be in the same range of performance that we saw in the first quarter because the Acthar data sets really start playing out here starting in June. Longer term, we believe that it's not only the RA data, but it's the MS data, the sarcoidosis data, the lupus data, the uveitis data, the eight clinical trials that we're running. Again, if that data is positive, based on historical precedent, we would anticipate that volume-based growth is likely to follow. Again, we're at a transition point where we're just starting to introduce that data into the market.

I think we've also been pretty consistent to say if we don't have positive clinical data, in other words, we go zero for eight on clinical trials, that driving Acthar growth, over time, will be more challenged. But again, based on what we already see as positive data from the RA trial and the MS trial, we think that, like we know that we're not going to go zero for eight. So again, long-term view of Acthar is going to be based on the robustness of data. Growth will be based on the robustness of the data, and that data starts coming here in the middle of 2019.

With regards to Ofirmev, we will have exclusivity on this product throughout 2020 while -- so the exclusivity is at December of 2020. At this point, we've essentially exhausted any opportunities that we understand to extend the life of Ofirmev. It will likely to lose -- when we lose exclusivity, the revenue is likely to decline in 2021. However, that's why the timing of products like StrataGraft and terlipressin are so important because we are anticipating those products to be approved assuming that our Phase 3 programs are positive in 2020, essentially at the same time that Ofirmev would be losing exclusivity.

And again, longer term, we believe that the combination of those two products collectively is likely to exceed Ofirmev's peak-year sales. So peak-year sales for terlipressin plus StrataGraft, over time, are likely to exceed the peak-year sales for Ofirmev. Of course, we have other things in our pipeline that follow those two products. Those are just the first two.

But things like stannsoporfin, if we introduce that program and that's successful, would be in the hospital channel. MNK-6105 that Steve just referred to, we're planning to start that Phase 3 program this year, would also come through that hospital channel. So long term, we believe that the hospital channel not only will be a long-term growth engine for us, but we have a very robust pipeline that supports a very effective infrastructure that already exists. And keep in mind, both the Inomax and Therakos platforms, the technology that underlies those, the nitric oxide and ECP, we're making significant investments to look to enhance the labels for those products and to look at those as technology platforms that we can build around over time.

So again, the entire hospital portfolio, we think, has a very robust set of prospects over the long term.


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

Nick Rubino -- Stifel Financial Corp. -- Analyst

Good morning, everyone. This is Nick Rubino on for Annabel. So you've had a number of Phase 4 readouts for Acthar in several quarters to circle with payers to share the information. To what extent has data driven conversations with payers? And does it even resonate, given the dominance of Acthar's costs in the broader discussions? So what could be a reasonable reaction from payers after, say, the RA data? And then just a quick question on -- potentially an update on VTS-270 and if the FDA will consider long-term extension data.

Mark Trudeau -- Chief Executive Officer

So maybe I'll talk the first question, and ask Steve to comment on VTS-270. With regards to the Phase 4 readouts, as you might imagine, we have been communicating that information to payers as the data has emerged. Of course, at this point, we only have partial data sets to communicate with the payers. While they're intrigued by the information, of course, they want to see the full data set, as well as the placebo-controlled portion of the data, which again we're quite excited that both pieces are now completed.

And we'll have that information to share with the payers, and the information is quite positive. What is, I think, most intriguing to payers at this point is that this data set, particularly for RA, really speaks to three things that are important to them, what's the appropriate refractory patient, what is the appropriate dose and the appropriate duration for these highly refractory RA patients. Where we've had challenges with payers is because our label is currently vague on those three topics. Payers have a lot more flexibility, if you will, to shorten Acthar prescriptions.

And I think what we're particularly intrigued by is that it's -- what we've been able to demonstrate with this Acthar data is, like most RA therapies, typically the effect takes about three months or so to really play itself out. And the reason why this study is also intriguing is that the second half of the data really shows whatever incremental benefit you may get by extending the drug for an additional three months. And so that information, for the first time, will have a very robust placebo-controlled data set to share with payers to address those important clinical questions about appropriate patient, appropriate dose and appropriate duration. I do want to also emphasize that any single piece of data is unlikely to make significant changes immediately with either payers or prescribers.

But we believe it's the preponderance of data and the preponderance of evidence that's relevant to prescribers and payers that's likely to drive long-term growth prospects for Acthar. With that, maybe, Steve, you could talk about VTS.

Steve Romano -- Chief Scientific Officer -- Analyst

Yes. No, I'm happy to. So as you recall, we had a meeting with the FDA last August, and it was prior to unblinding of the registration trial for VTS-270. And in that meeting, they made it very clear that, in fact, the review of the product, if we reached that point, would be based on the totality of the data, all the data available.

And that meant not just the registration trial but a proof-of-concept trial that was done or sponsored through the NIH, as well as a fairly large EAP program, largely out of Roche or coordinated out of Roche. So the bottom line is we are looking at all that data. We have completed a substantial amount of post-hoc analyses to look at the data across all three data sets and actually are going to meet with the FDA in the very near term to talk about options moving forward. So I'll have more information for you certainly in the coming months.

Dan Speciale -- Vice President of Investor Relations

Great. It looks like we've got a couple more people in queue. I recognize there's a lot of earnings call this morning.


Our next question comes from Louise Chen with Cantor Fitzgerald. Your line is now open.

Louise Chen -- Cantor Fitzgerald -- Analyst

Hi. Thanks for taking my questions. So my first question is on the remainco after the spinout of the specialty generics and Amitiza business. How should we think about the capital structure, your R&D, SG&A spend? And is that EBITDA metric that you gave before still relevant? And then the second question I had was on your Evolve system.

How will the economics change for that product once you launch it? Will the contract still be relevant? Will they be renegotiated? Is it an accretive switch-out or just a extension to prevent competition from other players in the market?

Mark Trudeau -- Chief Executive Officer

Let me start with the Evolve question, Louise, then maybe I'll ask Bryan and Dan to comment a little bit about capital structure and some of our expense ratios, as well as EBITDA for remainco after the spin. So with regards to Evolve, we think this is really a transformational opportunity to really make a significant advance in the way nitric oxide therapy is delivered in the NICU. In particular, the systems today, whether it's ours or any other potential system, typically require a fairly large-scale cylinder that has to be wheeled around the hospital. Our offering includes the drug, which is in the cylinder, the device, as well as a comprehensive total service model, which we offer as one package.

The advantage of Evolve is to replace, really, the drug and device, which is the primary point of service. But our total service model would still be included with the Evolve device. What Evolve enables users to do is have something that's much more convenient, much more portable with a lot less likelihood of human error, because typically the existing systems require a fair amount of calibration and other things, which can introduce human error. Our current DSIR system is designed to minimize that.

There's significant amount of safety enhancements that have been put on to that device, but Evolve really helps reduce those things by increasing automation, ease of use and reducing the potential for human error. But the biggest advantage, frankly, is its portability. It can be easily moved around the hospital, almost like carrying a briefcase. So we think that's a significant advantage over our current system and any other technology that's likely out there.

So maybe I can pause there and ask Bryan to comment a little bit about the expense and EBITDA questions that Louise had.

Bryan Reasons -- Chief Financial Officer

Sure. Thanks, Mark. Thanks, Louise. Looking at the capital structure, I think we said in prior calls the goal post spin for remainco is to be between 3.5 and 4 times levered with -- since the announcement of total debt reduction of greater than $1 billion.

And we're -- like I said in my prepared statements, we are trending ahead of that, ahead of schedule on that goal. Post spin, yes, we're looking at the capital markets. And I would just say, right now, the strategy is to be opportunistic on paying down the more heavily discounted debt, but being mindful that we do have a tranche of debt due next April, so kind of just inside a year. And right now, with the strong cash flows, anticipated spin proceeds and current capacity, we're comfortable with the flexibility we have around the capital structure.

As far as some of -- what some of the measures would look like post spin, I think if you go back to some of the prior period reporting when the generics business was in discontinued operations, I think that's probably a good proxy on how to split the EBITDA and come up with some of your ratios. Certainly, I said in my prepared statements, R&D as a percent of sales on remainco will trend both on an absolute dollar value and the percentage of sales value, will go up as we drive some of the pipeline projects and other data generation. And then SG&A, yes, we've done a lot of initiatives to reduce SG&A, and that's been largely offset by some of the litigation expense, like I said. But we'll look to continue to reduce that as a percentage of sales post spin.

Mark Trudeau -- Chief Executive Officer

And just a couple of comments on that. The thing, I think, about remainco is we're essentially going to be a drug development and commercialization business that's focused specifically around hospital critical care and autoimmune diseases. And as such, we would look to have a set of spend ratios that's commensurate with that type of business. So as Bryan described, it's a pretty good proxy from what you saw when the specialty generics business was in discontinued operations.

R&D, as a percent of sales, will largely be driven by the R&D opportunities that we have. But as you see, we have a number of really robust programs that we believe need to be funded that are going to drive long-term growth. So we can anticipate low double digit to kind of mid-teens range for R&D spend, again, which would be commensurate with other types of drug development and commercialization companies at our stage. I do think, if you look historically, we've been very good stewards of cost management around SG&A.

We've typically been able to extract significant efficiencies out of our SG&A spend, and we would anticipate that going forward. So it gives you at least, I think, a framework for how we're thinking about it longer term.


Our next question comes from Rishi Parekh with Barclays. Your line is now open.

Rishi Parekh -- Barclays -- Analyst

Thanks for taking my question. I guess the first question is specifically on Acthar. You mentioned the payers' scrutiny on Acthar, which is not new and we've been aware of this for some time. But is there anything different in this go-around versus the prior periods that you may want to highlight? And then on the second part, I think you had said that you have previously reserved for the whistleblower lawsuit.

I was hoping that you could quantify what that reserve is and what stage are you in with the settlement negotiations.

Mark Trudeau -- Chief Executive Officer

Yes. So with regards to Acthar payer scrutiny, it's really nothing new and nothing really different this quarter other than just increased scrutiny, I think, on overall specialty pharmaceutical spending, which is not necessarily specific to Acthar. I think obviously the public debate around drug pricing, particularly specialty drug pricing, has continued to accelerate. And certainly, Acthar has been part of that discussion.

So haven't been really any major changes to formularies or anything like that. Again, first quarter is really just a typical quarter in that you see what we believe are resets of patient benefits, which typically leads to a weaker quarter. But I do want to emphasize, this quarter was weaker than we've seen historically, a little bit weaker. We do anticipate that weakness is likely to persist at least through the first half of the year as we rebuild new patients and returning patients.

And again, for us, the story is really 2019, $1 billion and the longer-term view being driven by data. And I can't emphasize that enough, which is why the timing of the Acthar RA data is quite important. With regards to reserves, obviously, we're not quantifying this at the moment other than to say any number that we would have here would be manageable and reasonable for both parties. You can look at our quarter-over-quarter reserves and you'll see there hasn't been much of a change.

So that's about as much as we can say about that, just recognizing that we're still in active negotiation. And our anticipation is that we're likely to be resolving this sooner than later. We'd like to put this behind us. I think the good news here is because this is a legacy matter, we don't believe that it extends on a go-forward basis.

Dan Speciale -- Vice President of Investor Relations

Great. Thanks, Rishi. I'd like to thank everyone for joining us again this morning. As a reminder, a replay of the call is going to be available on our website later today.

And I'll obviously be available throughout the day to answer any follow-up questions you guys may have. So I really appreciate everybody joining us. Thanks, again.


[Operator signoff]

Duration: 63 minutes

Call participants:

Dan Speciale -- Vice President of Investor Relations

Mark Trudeau -- Chief Executive Officer

Steve Romano -- Chief Scientific Officer -- Analyst

Bryan Reasons -- Chief Financial Officer

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

Greg Fraser -- SunTrust Robinson Humphrey -- Analyst

Unknown speaker

Patrick Trucchio -- Berenberg Capital -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Ami Fadia -- SVB Leerink -- Analyst

Nick Rubino -- Stifel Financial Corp. -- Analyst

Louise Chen -- Cantor Fitzgerald -- Analyst

Rishi Parekh -- Barclays -- Analyst

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