Mallinckrodt (MNK) Q1 2020 Earnings Call Transcript

Mallinckrodt (MNK)
Q1 2020 Earnings Call
May 05, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Mallinckrodt earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand conference over to your speaker today, Daniel Speciale. Thank you.

Please go ahead, sir.

Daniel Speciale -- Vice President of Investor Relations

Thank you, Brandy. Good morning, everyone, and welcome to our first-quarter 2020 earnings conference call. Joining me this morning are Mark Trudeau, CEO; Steven Romano, our chief scientific officer; and Bryan Reasons, our CFO. 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. And 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.

A reconciliation of these non-GAAP adjusted measures are included in our earnings release, which can be found on our website, mallinckrodt.com. We use our website as a channel to distribute important and time-critical company information, and you should look to the Investor Relations page of our website for this information. As under our press release, unless otherwise specified, all quarterly comparisons are to the comparable 2019 period and the [Inaudible] growth ranges we'll be discussing are on a constant currency basis. I would also like to note that we are conducting today's earnings call with participants in different locations given the COVID-19 pandemic.

We ask that you please bear with us if there are any technical issues or handoffs that take a little longer than usual. Turning to today's agenda. Mark will start with an update on the business and an overview of the quarter, including Mallinckrodt's response to the COVID-19 pandemic and the status of our opioid and Acthar Gel litigations. Steve will then provide an update on our science and technology activities, and Brian will walk through our financial results for the quarter.

As Mark talks about the present COVID-19 pandemic, we will attempt to provide you some directional thoughts in relation to how the pandemic is expected to impact our business and our products in the coming quarters. However, we recognize this is an incredibly fluid situation and will largely be driven by the timing of restriction easing and any changes in business practices or behaviors following the pandemic. We will continue to monitor the situation very closely and provide further updates as necessary. In light of the pandemic, we are not providing formal guidance at this time.

With that, let me turn the call over to Mark. Mark?

Mark Trudeau -- Chief Executive Officer

Thank you, Dan, and good morning, everyone, and thanks for joining us. I hope you and your loved ones are staying safe and healthy. I'd like to start this morning by saying our thoughts with all of those dealing with COVID-19. We're grateful for all the first responders, healthcare professionals and essential workers who have been out on the front lines during this health crisis.

I'd also like to take a moment to thank all our employees around the globe for their resiliency and continued commitment to serving our patients and customers. Their ability to adapt and continue working as a team, while practicing social distancing has been instrumental in maintaining business continuity over the past two months. COVID-19 has affected nearly all aspects of how we work and live. As individuals, as a company, and across communities around the world.

It's top of mind for everyone, so I'll begin with an overview of how Mallinckrodt has and continues to respond to this pandemic. First, we focused on keeping our employees safe while ensuring the patients we serve have continued access to medicines and therapies. And I'm pleased to share that to date, we've continued to manufacture, supply and deliver our products largely without interruption. Further, while we are seeing some delays in our clinical studies, we continue to make progress on important programs like MNK-6105 as well as franchise modernization initiatives such as Acthar Gel self-injector and INOmax EVOLVE.

Importantly, we continue to see engagement from the FDA and are looking forward to potential approvals for terlipressin and StrataGraft later this year. Our mission is to improve health outcomes by developing and bringing to market therapies for severe and critical conditions, and COVID-19 also presents us with unique opportunities to support healthcare workers in our industry overall in the fight against this pandemic. I'd like to share a few examples of how our efforts over the past few weeks have evolved. First, we instituted a leave program that provides our medically trained employees with paid time off to volunteer to treat or care for patients with COVID-19.

Second, we have donated personal protective equipment, ventilators, and other supplies to healthcare providers and organizations. Third, we transitioned part of our production to manufacture and donate hand sanitizers to centralized emergency management operations in the key states where we are located. And finally, we partnered with advocacy groups to help mitigate the impact of the pandemic on patients. In addition, with respect to scientific research and potential therapies, we're collaborating with healthcare authorities in Canada and the U.S.

to provide access to medications to help treat severe COVID-19 patients on ventilators and are providing funding and other materials to hospitals conducting investigator-initiated research to help find effective treatment options. I'll talk more about this shortly. We understand the great impact that this pandemic is having on families, patients, our society and our industry, and we're committed to continuing to do what we can to help. As we move forward, protecting our employees and meeting patient needs will remain key priorities.

Looking ahead, we do not currently anticipate any significant COVID-19-related manufacturing or supply chain disruptions. We're continuing to evaluate the supply chain across our portfolio and assess opportunities to refine our processes and procedures going forward so that we are most appropriately aligned to this new normal we find ourselves in. Now turning to the outstanding legal issues facing the business and our near-term debt maturities. In February, we reached an agreement in principle for a global resolution to our opioid litigation.

Since that time, we've remained focused on moving forward with the proposed settlement, including gaining some additional plaintiff support and addressing our near-term debt maturities. We made important progress on those fronts. Notably, we received support for the proposed settlement from New York state and we were able to address our 2020 debt maturity, partially through private exchange and the rest with cash on hand. In addition, there were two recent legal developments relating to our ongoing dispute with CMS regarding Acthar Gel.

First, on March 3, 2020, the U.S. Attorney's office in Massachusetts intervened in a lawsuit filed against the company, alleging violations of the False Claims Act relating to the method we use to calculate Medicaid drug rebates for Acthar Gel. Due to the pending action on the same underlying issue in the district court in Washington, D.C. and with the agreement of the government, that our action has been delayed until July 2020, at which time our answer to the government's complaint will be due.

Second, on March 16, we received a disappointing and, we believe, an incorrect decision from the district court in Washington, D.C. in our lawsuit against the Agency. In that suit, we had asked the court to block CMS from changing its position on the correct Medicaid rebate calculation for Acthar Gel and then applying that change retroactively. Surprisingly, the court refused to do so despite the fact that CMS confirmed twice in writing that the Acthar Gel Medicaid base date AMP change was correct.

The ruling against the company, if allowed to stand, would result in a liability of about $640 million for retroactive rebates and an annual loss of future Acthar Gel Medicaid revenue of roughly $100 million. We strongly disagree with the court's decision in following a careful analysis of the decision, we believe the court has misinterpreted the underlying statute and failed to address key arguments about the government's obligations under the administrative law. As such, we've asked the court to reconsider its own decision and issue a stay to prevent the government from requiring a change in Acthar Gel's Medicaid rebate calculation until we've exhausted our appeal rights. If the court should deny either of these requests, the company will be allowed as a matter of right to appeal to the U.S.

Court of Appeals for the DC circuit. Due to the significant negative impact to the company of this ruling, we would fully expect immediately to file such an appeal, if necessary. In terms of timing, the government has agreed not to require a change in Acthar Gel's Medicaid rebate calculation until at least the middle of May, and the court has indicated that it intends to rule in the same month. While we vehemently disagree with the CMS decision and the false claims allegation and also intend to defend ourselves vigorously, we're left with no choice but to consider all options to resolve outstanding issues related to opioids and Acthar Gel.

We're working with the opioid plaintiffs and various other parties in these matters with the hope of resolving them in a reasonable manner. These discussions are ongoing. Now turning to our first quarter. Despite the unique challenges created by COVID-19, we continued to execute on our strategic priorities, which include maximizing the value of the diversified in-line portfolio and advancing our pipeline.

We have expected the COVID-19 pandemic will have a significant impact on our business due to the combination of stay-at-home orders, reduction of elective surgeries and a drop in overall patient procedures. We expect that an impact predominantly in the performance of Acthar Gel, Therakos and OFIRMEV as these products are the most sensitive to the restrictions. As the country begins to open up over the next few months, we should be able to get a clearer estimate on both the trajectory and timing of the recovery for the business. While we started the quarter strong, our performance began to be affected by COVID-19 toward the end of March, primarily a result of significant declines in patient demand and procedure volumes, including the widespread elimination of elective surgeries due to stay- at-home orders.

We are actively implementing new ways of interacting with our healthcare provider customers, and early indications show that they are receptive to different ways of being educated about the appropriate use of our products. While we are confident that business and promotion will recover as the impact of COVID-19 subsides, like everyone else, we don't know how long this will last. We expect we will continue to feel the impact of this in the second quarter at least. Turning now to the pipeline, we made important progress in the last few months, bringing us closer to the potential approval of 2 key products later this year, terlipressin and StrataGraft regenerative tissue.

For Acthar Gel, despite legal issues, we remain committed to patients by continuing to focus on executing the modernization strategy for the brand, including the Acthar Gel self-injector, the customer subscription model and data generation advancements, which we believe will stabilize and potentially improve the reimbursement landscape for the product. While demand for Acthar Gel currently is also being impacted by reduced patient visits due to COVID-19, we were encouraged to see positive trends on new patient starts before the stay at home orders were instituted. Looking at INOmax, we're seeing some increase in consumption due mainly to its use as a treatment for critical COVID-19 patients, where currently it is being used in more than 200 hospitals for COVID-19, which is approximately a quarter of our customer base. However, most of the incremental utilization is coming from our unlimited use type contracts.

So this has not translated into a meaningful impact on net sales. We remain committed to the INOmax Total Care model, which we believe is a differentiating factor between our product and potential competitors and has served us well as we partner with the hospitals to best serve patients during the pandemic. As we move forward, we remain focused on doing everything we can to assist institutions and healthcare providers as they treat patients in need. For OFIRMEV, we expect that the downturn in elective surgeries due to public health orders and institutions being focused on responding to the COVID-19 pandemic will impact product performance.

We're working closely with our customers to ensure that institutions are well equipped to treat their patients as these trends are expected to normalize over time. For Therakos specifically, we expect that net sales in the second quarter could be down by roughly $20 million to $30 million from the first quarter as a direct result of these reductions in procedures during the pandemic. We continue to be pleased with the overall performance of the Specialty Generics business despite a now-resolved short-term disruption in the manufacturing of acetaminophen, which was unrelated to COVID-19. And we believe that this business is poised for long-term growth, benefiting from our U.S.-based manufacturing and vertical integration.

We expect this segment to be stable or even show some slight sequential growth as the year progresses. With that, let me turn it over to Steve to provide some more details on our pipeline and data-generation efforts. Steve?

Steven Romano -- Chief Scientific Officer

Thanks, Mark. As Mark mentioned, despite the unforeseen challenges of COVID-19, we achieved critical milestones for two of our late phase development programs during the quarter, terlipressin and StrataGraft regenerative skin tissue. In March, we completed the rolling submission of an NDA for the terlipressin for the treatment of patients with hepatorenal syndrome type 1. And I'm pleased to report that we recently received confirmation that the contents of that submission met the requirements of the previously issued complete response letter.

As anticipated, the review division confirmed the need for an advisory committee meeting, which we expect will occur this summer. Also in March, we initiated a rolling submission of a BLA for StrataGraft regenerative skin tissue for patients with deep partial-thickness thermal burns. We expect to complete this filing in the coming weeks. The achievement of these substantial development and regulatory milestones demonstrates both the maturing capabilities of science and technology in our organization as well as our deep commitment to meeting the unmet needs of patients with severe and critical conditions.

To that end, we are also leveraging our extensive understanding of inhaled nitric oxide physiology to identify means of exploring the potential effect of INOmax in patients suffering from advanced lung complications associated with COVID-19. Several weeks ago, in partnership with Novartis, we received clearance when health Canada to begin a pilot trial of high-dose inhaled nitric oxide for COVID-19 infection and associated lung complications. Including the evaluation of a potential direct antiviral effect of INOmax gas. We'll be using this -- INOmax will be used in the study, and that we expect the first patient enrollment to begin in the coming weeks.

We also recently announced we're supporting an investigator-initiated multinational clinical trial that will also be conducted by Massachusetts General Hospital to assess the effectiveness of INOmax or inhaled nitric oxide in patients with acute respiratory distress syndrome due to COVID-19. And finally, as the pandemic progresses, we are evaluating the opportunity to collect information through retrospective medical chart reviews. This will allow us to gather more immediate real-world evidence about how inhaled nitric oxide is being used currently in hospital settings to manage these complex and challenging patients. In terms of our work with hospitals and health systems to support the needs of COVID-19 patients, our respiratory therapists who routinely support INOmax use for the management of persistent pulmonary hypertension in newborns, have also made themselves available on request to ensure the safe use of the INOmax platform in any setting.

In addition, our customer care center now continues to respond around the clock to provider inquiries during this difficult time. Our top priority during this pandemic is to protect the health and safety of our employees, patients and customers. With this in mind and in the context of the COVID-19 pandemic, we temporarily paused enrollment in a handful of ongoing at Acthar 4 Phase IV clinical trials out of an abundance of caution. Our teams are continually in touch with our contract that research organization partners and clinical investigators, and we'll be prepared to reopen those trials to new enrollments as soon as it is safe to do so.

COVID-19 has also delayed the start of several new trials, though we continue to progress administrative and start-up activities so that we are well positioned once the situation improves. Notably, we have continued to prepare for the initiation of our global Phase III trial of MNK-6105, L-ornithine phenylacetate, for the treatment of these patients with advanced liver disease suffering from hepatic encephalopathy. You will recall due to the complexity of this condition and the challenges of conducting a single large pivotal registration trial, we sought some alignment with the FDA through utilization of the special protocol assessment procedure. And are working closely with them to finalize study requirements.

We continue to anticipate the start of this important trial later this year. Turning to the in-line brands. We continue to advance our efforts to complete the development of EVOLVE, our next-generation INOmax delivery device, as well as our new Acthar Gel self-injector, both programs, which we expect to be in a position to launch in 2021. We've also finalized plans to expand the availability of our Therakos ECP platform to Japan.

With the resubmission of our chronic graft-versus-host disease applications scheduled in the coming weeks. Finally, you may have seen in our press release issued yesterday morning regarding our successful completion of the INOmax premature infant registry, demonstrating that the treatment effect observed in the premature population was similar to that demonstrated in term and near-term infants. This analysis was conducted on the planned 75% interim data and essentially allows us to end the trial much earlier than anticipated. Lastly, we are progressing a number of our early research and development collaborations, including those with Silence Therapeutics and Transimmune.

Regarding Silence Therapeutics, you will recall, we obtained a license to a C3 complement preclinical asset with options to license up to two additional complement-targeted assets based on Silence's proprietary RNAi technology platform. Work is progressing to optimize this C3 compound as well as finalize the selection of the two additional targets, which will be confirmed this quarter. And we've been progressing work with Transimmune, including the generation of new preclinical data, which will allow us to gain greater clarity regarding the specific mechanism underlying the benefit of Therakos across some conditions. In summary, significant progress has been made this year in spite of the COVID-19 pandemic and its associated interruptions.

Major catalysts in the coming quarters for our science and technology organization include the completion of the rolling StrataGraft BLA, the anticipated FDA advisory committee for terlipressin, the PDUFA date for terlipressin in September and the initiation of our Phase III trial for MNK-6105. I'll now turn it over to Bryan to discuss the financials. Bryan?

Bryan Reasons -- Chief Financial Officer

Thank you, Steve, and good morning, everyone. In the first quarter of 2020, we reported adjusted diluted earnings per share of $1.64 with net sales of $666 million. The Specialty Brands segment net sales were $491 million. Acthar Gel contributed net sales of $168 million.

The quarterly decline was primarily driven by continued reimbursement challenges, impacting new and returning patients and continued payer scrutiny on overall specialty pharmaceutical spending in addition to COVID-19 impact later in the quarter. As the company navigates on the ongoing CMS dispute, revenue from Acthar Gel Medicaid sales will continue to be recognized and any potential impact of a negative outcome in this matter is not reflected in the financial results. INOmax delivered $142 million in net sales, a decrease of 6%, driven by competition on inhaled nitric oxide, which is a bit slower than anticipated. OFIRMEV contributed $75 million in net sales, a decrease of 22% due to significant quarter-to-quarter order variability and a reduction in elective surgeries due to public health orders and institutions focused on responding to the COVID-19 pandemic.

And Therakos provided $64 million in net sales, a modest increase of 3%, which was impacted as the quarter progressed due to COVID-19, including stay-at-home directives impacting patients' ability to receive treatment. Lastly, AMITIZA generated net sales of $41 million. The decrease in the quarter was due to increased competition in the U.S. and the biannual price reduction in Japan.

The Specialty Generics segment net sales in the quarter were $175 million, a decrease of 6%, and primarily driven by now resolved short-term disruption in the manufacturing of APAP, which was unrelated to COVID-19. Turning to operational measures for the quarter. Total company adjusted gross profit as a percentage of net sales was 72.2% compared with 71.6%, due primarily to product mix. Adjusted SG&A as a percentage of net sales for the total company was 28.1% as compared to 26.7%, with the ratio impacted by the decline in net sales, while adjusted SG&A expenses actually declined due to our continued focus on cost containment from reductions.

Overall, the company R&D expense as a percentage of net sales was 11.6% compared to 10.8%. The adjusted effective tax rate was 2% in the first quarter, which has decreased from 2019 levels, primarily due to the interest-bearing deferred tax obligations being fully satisfied in 2019, and thus, no tax payments recurring in 2020. We expect the 2021 adjusted tax expense will be more closely to the 12.5% Irish statutory tax rate. Turning to liquidity.

Cash provided by operating activities in the first quarter was $54 million, with free cash flow of $34 million. In terms of our near-term maturities, as Mark mentioned, we recently completed a $495 million private debt exchange with certain holders of our April 2020 notes, effectively extending the maturity of the exchange notes to 2025. But we did need to use $120 million in cash to pay off the remainder of the 2020 maturity following the exchange. Our current cash balance is in excess of $700 million.

Lastly, our net debt at the end of the quarter was $4.6 billion and our net debt leverage moved slightly higher on the lower adjusted EBITDA of 3.6 times. We remain committed to reducing net debt throughout 2020. I'll hand the call back to Mark for final remarks before your questions. Mark?

Mark Trudeau -- Chief Executive Officer

Thanks, Brian. Before we open the floor to Q&A, let me conclude by emphasizing a couple of main points. First, we believe our team has done an excellent job adapting to the new normal of COVID-19. This is a very challenging time, but they're rising to the occasion, and we've been able to maintain our business with minimal disruption.

Second, as a result of the situation, we've had to modify our business approach. While we're confident that our operations will recover as the impact of COVID-19 subsides, we don't know how long this will take. We expect we will continue to feel the impact of this at least through this second quarter. Third, we're continuing to execute on strategic priorities and made important progress advancing our pipeline during the first quarter.

These efforts are moving as rapidly as possible given the current circumstances. Fourth, we resolved our near-term debt maturities this quarter and finally, in the context of our company's overall risks and liabilities and specifically relating to opioids and Acthar Gel, we will continue to evaluate all available options to deal with these matters. So, now let me turn the call back to Dan, who will take us in the Q&A. Dan?

Daniel Speciale -- Vice President of Investor Relations

Thanks, Mark. [Operator instructions] With that, Brandy, let's start Q&A and maybe -- may we please have the first question?

Questions & Answers:

Operator

Certainly. Your first question comes from the line of Annabel Samimy with Stifel.

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Hi, guys. Thanks for taking my questions. I just had a few related to the COVID situation. So you mentioned that OFIRMEV reduced because elective surgeries were down.

I would assume that in this environment, hospitals would be using acetaminophen for fevers. And I'm surprised that you're not seeing any kind of offset there. So if you could provide any kind of clarification to how acetaminophen, also with regard to INOmax and the COVID situation, to what extent did COVID contribute? I think you mentioned it wasn't that much, but what would you expect the declines to have been had there not been some boost from COVID and all the studies that you're doing right now with regard to premature infants and COVID, to what extent was that? Is that going to provide you protective mechanisms going forward?

Mark Trudeau -- Chief Executive Officer

Thanks, Annabel. I can take both of these, and Brian may want to add some color as well. First, with regard to OFIRMEV. Keep in mind that OFIRMEV is driven largely by patient volume and patients coming in for a whole range of surgeries.

One of the things that we can clearly see the overall patient volumes are down, visits to hospitals appear to be down as well. And certainly, elective surgeries have have largely been eliminated in many hospital environments. And hospitals in the last couple of months clearly have pivoted to treating COVID-19 patients. And so all of these factors together really conspire to drive the use of OFIRMEV down.

And certainly, acetaminophen would be used to treat fevers, but recognize that in the IV acetaminophen, which is OFIRMEV, is typically used in a whole variety of surgical processes. And if, in fact, patient visits or utilization of those surgeries are down, you should expect that the utilization of OFIRMEV is going to be down as well. Let me turn to the question around INOmax. So again, I'll go back to what we had described in our last earnings call that we expected that INOmax should decline or we would expect INOmax to decline in the low double digits as a result of competition.

Of course, in the first quarter, we saw a single-digit decline, which was the effect, we believe, of less competitive impact than we expected and offset somewhat by the additional utilization or consumption of nitric oxide, in part, to maybe due to the utilization for COVID-19 patients. So I think what we're seeing here is predominantly the impact is because of less competitive activity or less competitive response because the added consumption for us, as I said in the prepared remarks, you really don't see that translating into a net sales impact because much of the use, much of the additional consumption appears to be coming through our larger customers, which are also typically on unlimited use contracts. So we're actually quite pleased with what we see with INOmax performance. And I think what we're also seeing is during this particular crisis, this pandemic, the real value of the INOmax Total Care platform is a real differentiator between our offering and any other competitive offerings because of some degree of flexibility that we afford to customers and the fact that the customer service aspect of the Total Care platform is really something that we're finding our customers to be relying on during this unusual time.

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Can I just also follow up on the premature infants? To what extent does that kind of help you maintain that position in the market relative to the competitors?

Mark Trudeau -- Chief Executive Officer

While we're certainly pleased to have the data or the study that we have been conducting show such dramatically positive response that we were able to stop this study early. Certainly, today, we know that INOmax is used in a variety of infants and a whole a whole range of ages. I think this provides additional data in support of the utilization that we see. Certainly, it should help the overall consumption because it provides additional evidence to the extent to which it will drive its consumption incrementally in the market still remains to be seen, but we see it as a significant positive from the INOmax platform.

Daniel Speciale -- Vice President of Investor Relations

Great. Thanks, Annabel. Next question, please.

Operator

Your next question comes from the line of Gary Nachman with BMO Capital Markets.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi. Good morning, guys. On the CMS retroactive liability that you said $640 million, what's the earliest that you would potentially have to pay that out and will you be able to do that with cash on hand? Remind us, when are the next big debt maturities going forward? And then also just -- are you considering divesting any assets and what about any major restructuring initiatives near-term to save cost and try to generate more cash going forward, given the headwinds in the business?

Daniel Speciale -- Vice President of Investor Relations

Thanks, Gary.

Mark Trudeau -- Chief Executive Officer

Yes. Thanks, Gary. So let me just give some overall comments. I'm going to ask Bryan address a number of your questions.

Recognize that our business is a very strong cash flow generator. And I think that applies to both the Branded business and the Generics business. And we also continue to see that despite pressures on the business. I think we've also been very good stewards of our cost management, and you saw that even in the quarter as we reduced SG&A expenses in absolute terms.

So we do have a lot of flexibility, and we'll continue to look to optimize cash flow. But again, we would continue to look at Mallinckrodt as a very solid cash flow generating business, certainly in combination between the Generics and the Branded business. Bryan, you may want to comment on the specific questions that Gary asked.

Bryan Reasons -- Chief Financial Officer

Thanks, Mark. I'll talk about the debt maturities. The next maturities are in 2022, March of 2022. We have $600 million bonds due in March.

Then we also have our revolver coming due of about $900 million. So about $1.5 million in March of 2022. I think you're -- as far as the retroactive CMS, the potential of that, right now, we have about $700 million of cash on the balance sheet. And near term, we'd look to continue to build liquidity in front of these uncertainties.

So obviously, we -- right now with COVID-19 and the kind of macro environment, in the capital markets being very volatile, we'll continue to build liquidity from operations so that potentially, if needed, we really could utilize balance sheet liquidity if the time comes to satisfy the retroactive CMS liability.

Mark Trudeau -- Chief Executive Officer

Maybe just a couple of comments on the CMS issue. Again, I go back to our prepared comments and recognize that, look, we vehemently disagree with our decision that the judge has taken. We've obviously asked the government for a stay, which they've granted. We need to really resolve the situation because we -- and frankly, we just think the judgment is an error.

And so we need -- and we are exhausting all of the range of options that we have around this particular topic. In terms of the specifics, as I said in the prepared comments, the stay is extended at least through the middle of May. We would be looking to extend that stay until this issue is finally resolved, which we don't think it is by any measure. And so at this point, I would say that until these challenges and legal issues around the CMS decision are resolved, it's very difficult to say how, when or if we'll be addressing this particular call on cash.

Daniel Speciale -- Vice President of Investor Relations

And, Bryan, maybe you can [Inaudible] the concept of the divestitures or restructuring?

Gary Nachman -- BMO Capital Markets -- Analyst

Yes, thank you.

Bryan Reasons -- Chief Financial Officer

Yes. Yes. So look, we're always looking to maximize value of the assets. So if there's an opportunity to divest nonstrategic assets at favorable terms, we would look to do that.

Daniel Speciale -- Vice President of Investor Relations

Yes, as far as the restructuring activities, I mean, I think, Gary, to that point, I mean we certainly recognize we've got a product that's obviously going to be going generic later of this year with OFIRMEV and the pressure that, that's going to create from a top line perspective. And so we have, historically, over the last few years, been looking at our cost structure, and we'll be continuing to do that in the coming quarters. Next question please.

Gary Nachman -- BMO Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from the line of David Amsellem with Piper Sandler.

David Amsellem -- Piper Sandler -- Analyst

Thanks. So on the opioid settlement, can you just remind us how the Acthar liability situation may or may not impact the settlement and remind us what you and some the plaintiffs had contemplated regarding potential liability outcomes? And is there a renegotiation process that is under way given what's transpired with Acthar? That's number one. And then number two, as it relates to Acthar, can you talk about the extent to which commercial payers are now that's even more emboldened to be even more restrictive on the product given what's transpired? Or is it your view that the pressure from commercial payers was already pretty significant and if we shouldn't really see incremental impact? How should we think about that? Thanks.

Mark Trudeau -- Chief Executive Officer

Thanks, David. Let me take the Acthar question. The second one that you had first, and then I'm going to ask Bryan to comment a little bit on what we had contemplated in the opioid settlement specifically. First of all, with Acthar and payers, one, I think we're very pleased with our progress that we've made around data generation to date.

Of course, we've been publishing new data, company-sponsored and investigator-initiated now for several quarters. And I think, in particular, the most significant data that we've reported on to date has been a very positive result we saw in the Acthar RA trial. That's certainly gotten the attention of many of the payers, and that's enabled us to have a different level of negotiation. And we referred in prior earnings calls to the fact that we've been exploring a subscription-type model for Acthar, which has gotten some traction with some payers.

And as a result of the COVID-19 disruption, there's been a little delay in our negotiations there. But we still have a lot of optimism that, that approach based on the data is going to be helpful. You're absolutely right. There's been significant payer pressure, and we've been experiencing that for now a number of quarters.

Whether that payer pressure increases or not, it's already quite high. And so we're dealing with that. And -- but what we are finding is that our data generation efforts are having some positive impact. And as we said in the prepared comments, we were actually quite pleased with we saw before COVID-19 with the initiation of new patient starts with Acthar.

So our objective is to do everything that we can to stabilize and potentially improve the reimbursement landscape for Acthar. We do think that's going to take some time. But certainly, the clinical data that we've been generating has been really helpful in the discussions. Let me ask Bryan to comment a little bit about the opioid settlement and what we contemplated around the the CMS decision there.

Bryan Reasons -- Chief Financial Officer

Thanks, Mark. So as part of the agreement in principle with the opioid plaintiffs, we contemplated $300 million in the modeling. And that's been disclosed. And this agreement was if it did differ materially from that, that we would reopen and start discussions around that item.

Yes, we did agree that once the CMS decision did come out that the company would like to take the time to focus on taking care of the 2020 maturity since they are right upon us. And then now we we focused on that and took care of that. So now we'll reengage. But I'm not going to go into any details around all those discussions right now.

Mark Trudeau -- Chief Executive Officer

Yes. I might just add that we're very pleased that we were able to come to a proposed settlement with the plaintiffs and the fact that we got some additional support for that, I think, is also very helpful toward ultimately resolving the opioid litigation, as Bryan indicated, these 2 are -- the CMS issue and the litigation are somewhat connected. And that's why in the prepared comments, we said, look, we need to take all this into account and evaluate what's our best path forward for the company. We believe that we came up with an effective and elegant solution that was widely supported by 48 state and territorial AGs.

And so again, we now need to take into account the additional complexity of the Acthar Gel CMS issue, which is why my comments earlier about pursuing our options there. So, understanding how best to resolve that is a quite important next step that we put that together with the proposed settlement that we currently have on the table for opioid litigation.

Daniel Speciale -- Vice President of Investor Relations

Great. Thanks. Next question please.

Operator

Your next question comes from the line of Anthony Petrone with Jefferies.

Anthony Petrone -- Jefferies -- Analyst

Great. Thank you. I hope everyone is staying healthy given the current conditions. Just a quick two follow-up questions on -- one on just the update for Specialty Generics' stand just given the market conditions, maybe just a quick follow-up there.

Is that still like potential, let's say, in the next 12 to 18 months as the various processes continue on the global opioid front, that would be one. In terms of Acthar, maybe just a little bit of color on where the actual pressure is in terms of your conditions, is lupus still doing well or is that pressured. RA was doing well, maybe just an update there. And then maybe other conditions where you're seeing most of the pressure and then the last one on OFIRMEV would be, what -- what amount of the business in terms of your elective procedure, push out do you expect to recapture?

Mark Trudeau -- Chief Executive Officer

Yes. So a number of questions. I'll try to capture all of them. And, Bryan, if you've got additional color, please feel to jump in here.

So first of all, let's talk about Specialty Generics. I think as we've described now for quite some time, we believe that over time, these businesses are moving in really different strategic directions, but of course, given the opioid litigation settlement and the process that we had proposed there to put the Specialty Generics business through a surgical, as we describe it, Chapter 11 process. Upon reemergence, we would then have a range of options to consider on how to manage the generics business going forward. As you can see, this is a very strong business.

It's got a well-diversified portfolio. It's got a nice pipeline, generates a lot of cash, and it provides certainly a fair bit of stability during a period like we're experiencing this with COVID-19, we think, largely based on the fact that it's a U.S.-based supply and manufacturing chain. And we think that's a benefit. If we do go through that Surgical Chapter 11 process, that's going to take some time, and it's clearly going to make sense for us to continue to operate that business before, during and after the Surgical Chapter 11 process would occur.

At some point, down the road, we would then consider a whole range of options as to how we can best maximize value for the total enterprise as well as both elements, the generics business and the branded business. So I would say that's some time off as we go through the process that I just described. So let me move now to Acthar. So Acthar, I think, in general, where we've seen pressure, and we've seen this pressure consistently is on many of the indications that typically require longer prescriptions.

And those are typically indications like RA and lupus, the nephrotic syndrome. These are typically patients that require a longer duration of therapy, longer than 30 days. And we're continuing to see that pressure. However, as we've also seen that when we introduce new clinical data, that does enable us to have a positive impact on prescribing, and the RA data is directly correlated with an increase in prescriptions coming from prescribers, primarily rheumatologists.

But it hasn't translated yet into a real significant relaxation of the payer-based restrictions where payers tend to either classify patients as new every 30 days or they restrict the duration of Acthar treatment to a shorter period. And again, that's why we're so intent and focused on negotiating with payers with the support of the data to look at things like a subscription model because we actually think that's the right thing for patients. In terms of OFIRMEV, as far as the amount of recapture, it's really tough to determine. I think that the elective surgery piece of it is part of it, certainly, but it's the overall patient volume and the number of surgeries that are being done which drives OFIRMEV usage.

If everything goes back to normal, you would expect the OFIRMEV business to rebound accordingly. I think what's very difficult for any of us to project right now is what does the new normal look like after we emerge from this COVID-19 pandemic is that at prior levels, is that at some other level. Until we have a better idea of what that trajectory and ultimate destination, maybe it's really difficult to project the degree of OFIRMEV recapture. We do expect that a significant amount of the downturn in OFIRMEV will come back, and it will be driven specifically by how fast and that's what -- to the degree of patient procedures come back online.

Daniel Speciale -- Vice President of Investor Relations

Great. Thanks. Next question please.

Anthony Petrone -- Jefferies -- Analyst

Thank you.

Operator

Your next question comes from Ami Fadia with SVB.

Ami Fadia -- SVB Leerink -- Analyst

Hi. Good morning. Thanks for taking my question. Can you elaborate a little bit more on the extent impact you're expecting to see on Acthar due to COVID-19.

And I kind of wanted to see, in addition to some of the continued payer pressure, what type of impact should we expect on Acthar, especially in the second quarter. And that -- you indicated that you expect some of these headwinds to continue from COVID-19, at least through second quarter, would you not expect them to continue beyond that? If you could sort of comment on that. And just with regards to the opioid litigation settlement resolution. so should we -- should we assume that it is dependent on resolving this CMS appeal or are you sort of reengaging with negotiating different terms? Thank you.

Daniel Speciale -- Vice President of Investor Relations

Thanks, Ami.

Mark Trudeau -- Chief Executive Officer

Yes. So let's talk about Acthar impact to COVID-19. Again, going back to the prepared comments, as we said, across our portfolio, the products that are the most sensitive to the restrictions that have been put in place are Acthar, OFIRMEV and Therakos. And again, the case of Acthar is very similar to what we've just talked about with OFIRMEV, and that is that if patients don't have or are restricted in their ability to go see their physician, the number of new prescriptions, the number of patients that come through the Acthar funnel, if you will, is going to be reduced.

And we certainly started to see that impact toward the end of the first quarter, we will see it in the second quarter. And that's why we believe that the impact is at least going to be in the second quarter. And so trying to parse out at this point, the difference between payer restrictions and patient volume, it's probably driven incrementally more by patient volume at this point. Because as we discussed in one of our prior earnings calls, we did expect Acthar to be down in 2020 as a result of increased payer restrictions.

And COVID is now on top of that. And I think you saw some of the impact of that in the first quarter. And with regards to third quarter in fourth quarter, well, again, I think right now, it's very difficult to project that because it's unclear when, if and how, and at what rate, the restrictions get loosened and patient volumes start to come back. And so we're going to probably start to see that in the second quarter, and we'll have a much better view of what it's going to be in the third and fourth quarter, barring a second wave of COVID to see what -- how fast this is going to come back.

And so that's why we're only suggesting at this point, it's definitely going to impact the second quarter. We can already see that. It may impact the third and fourth quarter, but it's a little too early to tell. And then on your last question regarding opioid and CMS discussions, yes, as I described earlier, while not directly related, they are linked.

And so it's going to be quite important for us to solve the totality of this challenge, which includes both the Acthar, CMS issue in the opioid litigation. We think we have a very potentially elegant solution to the opioid litigation. We now have to factor in the challenges on the Acthar, CMS side, and we're working both elements there. So, again -- but what we're very pleased to see, though, is that we have had additional support from state AGs, particularly in New York state for the proposed settlement that we had with the rest of the AGs.

Daniel Speciale -- Vice President of Investor Relations

Thanks, Ami. Next question please.

Operator

Your next question comes from the line of Gregg Gilbert with SunTrust.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Thank you. Could you quantify the APAP issue in the quarter? Secondly, Mark, can you talk about the Acthar subscription model and what portion of the business goes that way now? And why not rip the band-aid off and make that happen all at once? I imagine it's a multifaceted answer but -- and lastly for Steve Romano, on nitric oxide, when could we get data from the Canadian study from the mass general study? And also at what dose do the data support antiviral activity? When would that expected to be kicked in based on your review of prior literature or experience? Thank you.

Mark Trudeau -- Chief Executive Officer

So I'll take the first two. I'll ask Steve to comment on the third one. In terms of the APAP issue, again, this was a COVID-unrelated issue. It was simply an internal process issue that we had to deal with.

Absent that, the Generics performance probably would have been much closer to flat. And so again, as we look forward, in the coming quarters, as I again mentioned in the prepared comments, we actually see this business as quite stable and potentially showing some sequential growth over the next couple of quarters. So we're real pleased with the Generics performance, particularly during this challenging period. On the Acthar subscription model, today, we don't have any payers under a specific subscription model.

And we have had a number of very interesting conversations that have progressed to contract discussions with several payers. We would anticipate, and we would have really anticipated had COVID-19 not intervened, that we would be having at least a couple of these already out in the marketplace. We do think that this makes a lot of sense for patients. It makes sense for the company, and we think it makes sense for the customers.

However, like any of these things, if you're changing the commercial model, typically, people are going to experiment and stick their toe in the water before they go completely. So our objective is to get a couple of these out into the market for people to experience them and see how they can be successful. We're following, in many ways, the same process that we did with INOmax, and that's turned out to be a very successful model for our customers. We would expect and hope that if we do something that's similar with Acthar, an increasing number of customers will see that as positive.

But like anything that's new, it takes time for people to adopt it and see how it works relative to what they've done historically. And, Steven, you may want to comment on the INOmax information.

Steven Romano -- Chief Scientific Officer

Yes. And actually, I'll make a few comments. Just to remind folks, our approach to generating data on INOmax for COVID-19 patients is really three-pronged. So the first things, obviously, we're doing is with Novartis.

And we already had an agreement with Novartis. So this expands that agreement also look at high dose in the range of 80 to 160 parts per million of nitric oxide given repeatedly throughout the day. So that's looking at what we expect from earlier preclinical data, which suggests high concentrations locally delivered could be effective as an antiviral -- as having an antiviral effect. So we are looking at that.

With MGH, Mass General Hospital, we're looking at moderate to severe Ards patients. So these are patients with Acute Respiratory Distress Syndrome that's associated with COVID-19. And we're looking there at the moderate to severe range and more typically provided concentrations of nitric oxide. We're also going to take a look at real-world evidence.

So since the INOmax product is out there that's in the marketplace and as Mark referred, it is being used in over 200 hospitals that we know of for this indication, we actually have an opportunity to collect information more rapidly because in the two prior studies, it's going to take months, if not longer, to collect that data, although we assume, given the circumstances of the pandemic, it should be captured in a more speedy manner than in any other clinical trials. But still, we expect this to come months from now. So the real-world evidence we can extract from chart reviews we should be able to have in a matter of months, but a relatively robust data set. And so those are the -- and that's sort of the three-pronged approach that we've had with ourselves and with the partners.

Daniel Speciale -- Vice President of Investor Relations

Thanks, Gregg. Next question, please.

Operator

Your next question comes from the line of Chris Schott with JP Morgan.

Chris Schott -- J.P. Morgan -- Analyst

Great. Thanks very much for the questions. Just two here. First on the gross margins.

This held up fairly well despite what I would have thought was some adverse mix with the Acthar year-over-year version. So I guess, is this kind of 72% rate a decent level to think about for the company on a go-forward basis? And then my second question was as we look ahead to the StrataGraft and terlipressin launches, what is your ability to put resources into those assets? And just more generally, how are you kind of balancing, I guess, preserving margins and cash flow versus near-term investment, given some of the challenges you're facing elsewhere in the portfolio? Thank you.

Mark Trudeau -- Chief Executive Officer

Yes. Thanks, Chris. Let me take your second question first. I'll ask Bryan to comment about the gross margin.

So we believe that terli and StrataGraft represent real innovations that are going to benefit our specific strategic patient focus. And that's severe and critical patients that are dealing with some pretty challenging conditions. So strategically, these products fall squarely within our primary focus. We recognize that both of the primarily hospital-based products and the current infrastructure that we have within our hospital team is designed to put these products right into that infrastructure.

So in terms of incremental structural investment, it's modest from that perspective. And again, much of the same infrastructure and teams that support OFIRMEV today as we lose exclusivity toward the end of this year, those folks will turn now to promoting terlipressin and the StrataGraft. So, in terms of resourcing these new product launches, these are critical to our future. And so we're going to resource these appropriately.

We would expect that we will see incremental promotional spend against these that would just be normal launch expenses and we're well-resourced to be able to do that. Again, we think these two products together should, at their peak, in combination, exceed the peak year sales of OFIRMEV. And so we're in a very good position there. As you heard from Steve, it does appear from a regulatory standpoint that these continue to progress on expected pathways.

And we could have a potential approval for terlipressin as early as September. I think what we're also contemplating right now is as we look at the evolution of the marketplace and start to try to project what the new normal might be as the country reemerges from the COVID-19 pandemic, our approach or any company's approach may have to be modified somewhat from launching new products. We're evaluating those options today but in terms of being able to resource these, we're in a very, very good position to be able to do that and would expect these things to be a really high priority for us toward the end of the year and certainly going forward.

Bryan Reasons -- Chief Financial Officer

And on the gross margins, you're right. I think our team has done a good job controlling overall cost of manufacturing. The growth margins are driven quite a bit by product mix. And in quarters where Acthar is a little stronger, you'll see the gross margin pop up a little bit.

I think we're not going to give guidance right now just because a lot's going to be driven by how long the pandemic goes on and what the new normal, once we come out of it, looks like. But in kind of normal operating times, I think 72% is a good gross margin, give or take, quarter-to-quarter volatility, a point in either direction.

Daniel Speciale -- Vice President of Investor Relations

Yes. I think maybe the one thing I'd highlight, too, is that you also have OFIRMEV dropping as well in net sales and in some regards, you have a bit of a push and a pull with Acthar and OFIRMEV. So as a result of that, you're going to see some ebb and flow. And perhaps that influenced the 72% that we printed this quarter.

Next question please. We'll try to get maybe one or two more questions.

Operator

Your next question comes from the line of Elliot Wilbur with Raymond James.

Lucas Lee -- Raymond James -- Analyst

Good morning, guys. This is Lucas Lee on for Elliott. So cash flow from operation appear to be weaker than prior four quarters. What was the reason behind the weakness? And how do you expect this playing out in the remainder of 2020? And regarding the two products that could be potentially -- approved this year, will you be in a position to immediately launch them upon the approval? Thank you.

Mark Trudeau -- Chief Executive Officer

Yes. On the launch products, we would be in a position to immediately launch those and promote those, and that would be our intent. And again, I gave some additional comments on how we think about those two products. But just to reiterate, we think they present significant innovation.

They address the patients with severe and critical conditions that have a significant unmet need. And we see these as clearly strategic opportunities for the company, much in line with our mission to focus on severe and critical patients. So these two very important products for us, and we want to resource those appropriately, get those into the market as quickly as possible for the benefit of patients.

Bryan Reasons -- Chief Financial Officer

On the cash flow from operations, as part of its first quarter -- this is always a little weaker and the fourth quarter is usually our strongest quarter from cash flows. We did have a little more volatility in kind of the timing of some of the payments and receipts. So if you look at our working capital on the balance sheet, you can see that, that moved -- that kind of caused a little bit of sequential volatility in our operating cash flows.

Daniel Speciale -- Vice President of Investor Relations

Yes. The one other thing I'd highlight there, too, is, obviously, we've got a number of legal matters that are ongoing. And so as a result of that, with consultancy spend and legal spend, obviously those things are certainly ticking higher than maybe where they would historically be as well. Maybe we'll move to one last question, please.

Operator

And your final question does come from the line of Miles Highsmith with Deutsche Bank.

Miles Highsmith -- Deutsche Bank -- Analyst

Hi. Good morning, guys. So first question, just on of OFIRMEV, I was trying to get a little better sense there. Can you talk maybe just broadly about that in terms of -- maybe it's like what were the trends of revenue the first two months versus the last month or maybe you could talk maybe about in terms of what proportion of that revenue is associated with elective versus nonelective or in-patient versus outpatient.

Any color you can give us there so we can dive a little deeper on our own will be appreciated. And then the follow-up question would be just on the cost side. Again, echo the -- you guys held up costs just pretty well given the dynamics in the quarter. Just wanted to see if you could talk to us a little bit about on the COGS side, on the SG&A side, what proportion of those do you have some discretion over in terms of decisions you can make in the event that we do see some more significant revenue reductions in the Q2 and thereafter.

Can you talk qualitatively about that or certainly, if there's a dollar number that you can share? That would be appreciated, too. Thank you.

Mark Trudeau -- Chief Executive Officer

Yes. I'll take the OFIRMEV question, and I'll ask Bryan to comment on the cost question. So again, going back to OFIRMEV, we touched on this a little bit earlier. We believe that the majority of the OFIRMEV shortfall in the first quarter was the result of reduced patient volumes.

And so based on what we're anticipating and seeing for the second quarter, we would expect that OFIRMEV is going to be under significant pressure. Again, we would expect just like the impact on OFIRMEV was relatively rapid, we saw a pretty direct correlation between the drop in patient volumes and sales that if the market returns to more normalized levels, we would expect to see a similar kind of steep rebound. The question is when does that happen and what's the trajectory and to what level. And it's going to be, I think, largely dependent on how things do return to a new normal and what the new normal looks like.

There is also likely to be, and we did experience a little bit of that in the first quarter, some quarter-to-quarter variations, given the fact that this product is also coming closer to loss of exclusivity, which we would really anticipate in the fourth quarter, you do see some customers changing their orders. Again, that's not something that we have a lot of visibility to in terms of the rationale for that. But that does tend to happen with products that are coming closer to loss of exclusivity. So it's those two factors.

But it's predominantly driven by the decline in patient volumes. So again, I would expect the second quarter is just going to be pretty challenging for OFIRMEV. Third and fourth quarter remain to be seen based on how the country and patient volumes recover from this pandemic.

Daniel Speciale -- Vice President of Investor Relations

And maybe Bryan -- Mark, maybe one thing I'd add to that, too. I mean, I think it's really important to note that Q4 was incredibly strong for that product. And the order variability that we've seen over the last few quarters has been pretty significant. And I think this is something that we should expect to see this as we move toward that LOE event later this year.

I think it just so happens that the COVID pandemic kind of heightened some of that in this quarter. so as a result of that, I mean we expected that there was going to be some degradation in that product on a sequential basis and even year over year notwithstanding the COVID impact. So I think it's just really important maybe keep that as a frame of reference when you're looking at this number. Maybe, Bryan, you want to --

Bryan Reasons -- Chief Financial Officer

Yes. I mean, leading into this year, we knew that OFIRMEV had an LOE. We knew that -- and we knew we'd have some top line pressure. We also planned to move toward a separation of the Generics business.

So all these things, we had plans under way looking at the cost structure and the way we operate. And we do have flexibility and to reduce SG&A and COGS to a certain extent and continually look at that. And I think if you look historically, we've shown the ability to manage the middle of the P&L in a very responsible way. And then so -- and we'd expect to be able to continue to manage the middle of our P&L in that way.

Daniel Speciale -- Vice President of Investor Relations

Great. Thanks for the question. And obviously, I appreciate everybody bearing with us for a little bit over time. So I'd like to thank you all for joining us this morning.

As a reminder, a replay of the call will be available later today on our website and I'll be available throughout the day to answer any follow-up questions you may have. Hope everyone is doing well, and I appreciate you guys joining us. Be well.

Operator

[Operator signoff]

Duration: 70 minutes

Call participants:

Daniel Speciale -- Vice President of Investor Relations

Mark Trudeau -- Chief Executive Officer

Steven Romano -- Chief Scientific Officer

Bryan Reasons -- Chief Financial Officer

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

David Amsellem -- Piper Sandler -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Ami Fadia -- SVB Leerink -- Analyst

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Chris Schott -- J.P. Morgan -- Analyst

Lucas Lee -- Raymond James -- Analyst

Miles Highsmith -- Deutsche Bank -- Analyst

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