Horizon Therapeutics Public Limited Company
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good morning, and thank you for standing by. Welcome to the Horizon Pharma plc First Quarter 2018 Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations.

[Tina Ventura:]

Thank you, Brian. Good morning, everyone, and thank you for joining us. On the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer; Paul Hoelscher, Executive Vice President, Chief Financial Officer; Shao-Lee Lin, Executive Vice President, Head of Research and Development and Chief Scientific Officer; Bob Carey, Executive Vice President, Chief Business Officer; and Vikram Karnani, Executive Vice President, Chief Commercial Officer. Tim will provide a high-level review of the first quarter and an update on the business. Paul will provide additional detail on our financial performance and guidance. Shao-Lee will discuss the clinical development programs for our rare disease medicines. And after closing remarks from Tim, we'll take your question. As a reminder, during today's call, we will be making certain forward-looking statements, including statements about financial projections, our business strategy, and the expected timing and impact of future events. These statements are subject to various risks that are described in our filings made with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year-ended December 31, 2017, subsequent quarterly reports on Form 10-Q and our earnings news release, which we issued this morning. You're cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligation to update such statements. In addition, on today's conference call, non-GAAP financial measures will be used. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and other filings from today that are available on our Investor website at www.horizonpharma.com. I will now turn the call over to Tim.

[Timothy P. Walbert:]

Thank you, Tina, and good morning, everyone. We made significant advancements during the first quarter toward our goal of becoming a leading rare disease medicines company with a robust pipeline of clinically differentiated medicines. Our orphan and rheumatology medicines drove our total company net sales growth again this quarter with net sales of $172.5 million, an increase of 11% and representing more than 75% of our total net sales. Excluding first quarter 2017 net sales of PROCYSBI and QUINSAIR in the EMEA, which were divested in June of last year, net sales for our orphan and rheumatology medicines increased 15%. Our biologic for uncontrolled gout, KRYSTEXXA, delivered another quarter of impressive performance, increasing 48% year-over-year. Additionally, it drove strong sequential growth of approximately 7% versus the fourth quarter of 2017. Enrollment in the teprotumumab Phase 3 trial is tracking ahead of our expectations, with 50% of patients now enrolled, putting us on track to complete enrollment by year-end if not earlier. In January, we transformed our R&D organization with the addition of our new head of R&D and Chief Scientific Officer, Shao-Lee Lin. She has already made great progress building our executive R&D leadership team, including therapeutic development heads for both orphan and rheumatology. We also announced several new development programs to augment our rheumatology portfolio. Shao-Lee will address these developments in her remarks shortly. Finally, this morning, we announced the new company operating structure that takes effect in the second quarter, realigning our business into two segments, our strategic growth business, orphan and rheumatology, and primary care. This change marks a pivotal next step in our ongoing strategic transformation to a company that is focused on rare disease medicines. I'll walk through the rationale behind this decision and how it advances our strategic goals in a moment. For the company overall, this morning, we reported first quarter net sales of $223.9 million and adjusted EBITDA of $33.6 million, again, driven by the strong growth of our orphan and rheumatology medicines. We also increased our full year 2018 net sales and adjusted EBITDA guidance, which now assumes a delay in the implementation of the 340B entity drug pricing rule from July 1, 2018 to July 1, 2019. Our full year 2018 net sales guidance is now $1.170 billion to $1.2 billion, which includes an increase in KRYSTEXXA year-over-year net sales growth to more than 65%. Our full year 2018 adjusted EBITDA guidance is now $390 million to $415 million. A new operating structure we announced this morning is the next step in our strategic direction we set in motion several years ago. In 2014, we launched the second phase of our strategy, beginning with the acquisition of Vidara and subsequently with the acquisitions of Hyperion, Crealta and Raptor. This resulted in the rapid diversification of the company into rare diseases, assembling a portfolio of six commercial rare disease medicines. Last year, we began the next phase of our strategy, which was to build a pipeline of clinically differentiated medicines. Our business development efforts have shifted towards acquiring a portfolio of these assets. This was first marked by the acquisition of teprotumumab last year. With Shao-Lee coming on board, the new executive additions to her R&D leadership team and also our new rheumatology development programs, we are making good initial progress on this strategy. We expect to continue our aggressive business development strategy, which is to build a portfolio of development-stage medicines to drive our long-term growth. The next step in our evolution is our announcement today of the realignment of our operating structure in the second quarter to operate our strategic orphan and rheumatology segment separately from our primary care segment. Structuring the business into two segments enables us to improve operating and resource allocation decisions with our long-term strategic goals in mind. To support the new structure, we have realigned our commercial operations and our new leadership position and promoted Vikram Karnani to Executive Vice President and Chief Commercial Officer. Vikram previously led our rheumatology business unit, driving the phenomenal growth and success of KRYSTEXXA. We're extremely pleased to have him in this important new role that'd be integral in moving us forward and executing the growth of our commercial business. We have done the same in R&D with the addition of Shao-Lee to strengthen our orphan and rheumatology development capabilities and continue to build our pipeline. Now turning to our first quarter results, our orphan and rheumatology medicines had net sales of $172.2 million in the quarter, growing double digits, driven by KRYSTEXXA, RAVICTI and PROCYSBI. KRYSTEXXA net sales of $46.7 million increased 48%, driven by continued strong year-over-year vial growth of approximately 44%. The expansion of the KRYSTEXXA commercial organization, which we completed in the fourth quarter of 2017, is expected to lead continued acceleration of KRYSTEXXA vial growth as we educate more and more physicians about the benefits of this medicine for uncontrolled gout. This includes our new efforts with nephrologists and we're pleased by the initial positive response that we've seen. As I mentioned, we now expect KRYSTEXXA to generate more than 65% net sales growth in 2018. RAVICTI and PROCYSBI generated net sales growth in the first quarter of 12% and 2%, respectively. Excluding the impact of first quarter 2017 EMEA net sales of PROCYSBI, which we divested in June of 2017, PROCYSBI net sales increased 12%. Continued conversion from older generation therapies as well as the addition of treatment-naïve patients contributed to the year-over-year new patient growth for both medicines. Overall, mid-single digit growth in average shipping patients was seen across our portfolio of orphan medicines, which is driven by high-teens year-over-year growth of active shipping patients of RAVICTI. Both RAVICTI and PROCYSBI are benefiting from updates to their labeled indications, which includes expanded use in younger patients. This has continued to strengthen physician confidence in the clinical profile when treating younger, treatment-naïve patients with these medicines. Finally, net sales of our primary care segment of $51.7 million were low in the quarter due to seasonality as well the timing of our price action. Paul will discuss this in detail shortly. I'll now turn it over to Paul. Paul?

[Paul W. Hoelscher:]

Thanks, Tim. My comments this morning will primarily focus on our non-GAAP results, unless otherwise noted. First quarter net sales of $223.9 million were driven by continued strong growth of our orphan and rheumatology medicines, which represented 77% of our net sales and increased 11% over the prior year. As we see across the industry, as a result of changes in insurance plans or deductible resets, first quarter net sales were affected by seasonality, although we saw somewhat greater impact than expected on our primary care medicines in the first quarter. Our non-GAAP gross profit ratio was 87% of net sales, which, as we indicated previously, is expected to be the lowest gross margin quarter of the year. Total non-GAAP operating expenses were $161.3 million. This included non-GAAP R&D expense of $15.2 million, which was lower than expected primarily due to the timing of teprotumumab manufacturing and process validation activities that shifted from the first quarter to the second quarter. Non-GAAP SG&A expenses was $146.1 million, primarily driven by commercial investments in KRYSTEXXA. Adjusted EBITDA was $33.6 million for the first quarter. Non-GAAP income tax expense for the first quarter was $3.8 million. Non-GAAP net income and non-GAAP diluted earnings per share in the first quarter of 2018 were $4.8 million and $0.03, respectively. The weighted average shares outstanding used to calculate the first quarter 2018 non-GAAP diluted EPS were 168 million shares. As I mentioned on the fourth quarter call, we expect our full year 2018 non-GAAP operating cash flow to be less than 2017 due to a one-time working capital benefit during 2017 of about $90 million. That was the result of the timing of implementation of managed care contracts with pharmacy benefit managers for our primary care business. Accordingly, non-GAAP operating cash flow was a negative $52.7 million in the first quarter of 2018. While a full quarter of rebates to the two major PBMs were reflected in our first quarter 2017 net sales, we did not receive or pay any invoices for the PBMs during the first quarter of 2017. In 2018, the billing cycle normalized and we had a full quarter of rebates for all PBMs reflected in both our net sales and our operating cash flows. This resulted in a difficult year-over-year operating cash flow comparison for the first quarter. This will also be a factor in the full year 2018 comparison as well. As of March 31, cash and cash equivalents were $674.3 million. The total principal amount of our debt outstanding was $2.02 billion. Net debt was $1.34 billion and our net debt to last 12 months adjusted EBITDA leverage ratio was 3.6 times. Using the midpoint of our updated full year guidance range, the ratio would be 3.3 times. Moving now to our outlook for 2018, as Tim mentioned, on May 7, the U.S. Department of Health and Human Services proposed to delay the implementation date of the 340B entity drug pricing rule for one year until July 1, 2019. As a result, we are now assuming this delay in our net sales and adjusted EBITDA guidance for the full year 2018. We now expect full year 2018 net sales to be in a range of $1.17 billion to $1.2 billion versus the previous range of $1.15 billion to $1.18 billion. Full year 2018 adjusted EBITDA is now expected to be in the range of $390 million to $415 million versus the previous range of $370 million to $395 million. And we now expect KRYSTEXXA year-over-year net sales growth of more than 65%. Beginning with the second quarter, we'll formally report financial results of our new operating segments, reporting net sales and operating income for each, which will enable shareholders to better access each segment. We expect full year net sales growth for our strategic growth segment, orphan and rheumatology, to be more than 20%, which includes our revised expectation for full year of KRYSTEXXA net sales growth of more than 65%, along with continued strong growth from our key orphan medicines, RAVICTI and PROCYSBI. Finally, as we noted, the sale in late June of 2017 of the marketing rights for PROCYSBI and QUINSAIR in Europe, the Middle East and Africa have a negative impact on the growth comparisons of those medicines in the first half of the year. We continue to expect full year net sales for the primary care segment to exceed $350 million. Important to understand in the quarterly run rate to achieve those full year expectation is the fact that first quarter primary care net sales included a $14 million additional accrual for medicines in the wholesale and retail channels at the time of our February price increase. While the price increase is expected to benefit full year net sales, in the period we affect the price increase, we are required to accrue for additional gross to net cost for medicines in the wholesale and retail channel. The additional accrual related to last year's price increase occurred at the end of December of 2016, and as a result, did not impact the 2017 first quarter results. Excluding this $14 million additional accrual, primary care net sales on a pro forma basis were roughly consistent with first quarter 2017 results. We expect our non-GAAP gross profit ratio to range between 89% and 90% in line with 2017. Moving to operating expenses, we continue to expect non-GAAP R&D as a percentage of sales to be in the mid- to high single-digits for the full year, driven by the ramp up of our Phase 3 teprotumumab clinical program and related manufacturing and process validation work, as well as our rheumatology pipeline programs and investigator-initiated trials. We expect R&D to increase on a dollar basis sequentially from the first quarter to the second related to the timing of some spend, including some teprotumumab CMC expenses that are now expected to be incurred in the second quarter versus the first quarter. We continue to anticipate year-over-year increase in non-GAAP SG&A spending year-over-year, primarily reflecting the full year impact of the expanded KRYSTEXXA commercial organization and additional KRYSTEXXA promotion-related investments. Full year non-GAAP net interest expense, which is net of interest income, is expected to range between $105 million and $110 million, as previously guided. Our full year non-GAAP tax rate is expected to be in the high single-digits. As we have stated previously, our tax rate projections could change significantly as a result of any acquisitions or divestitures made by the company. We expect our full year 2018 weighted average diluted share count to be between 165 million and 170 million shares. And briefly regarding our second quarter expectations, we expect net sales to be 23% to 24% of our full year net sales guidance and adjusted EBITDA to be 22% to 23% of our full year adjusted EBITDA guidance. This is in line with our expectations for stronger performance in the second half of the year for our orphan and rheumatology medicines, particularly KRYSTEXXA, as well as our primary care medicines. I'll turn the call over now to Shao-Lee.

[Shao-Lee Lin:]

Thank you, Paul, and good morning, everyone. Tim has emphasized Horizon Pharma's ongoing strategic transformation into a biopharmaceutical company focused on rare disease medicines. Yielding a robust pipeline of clinically differentiated medicines and a strong R&D team is key to that strategy. Since I joined the company in January, one of my immediate goals has been to enhance our R&D capabilities. And I am pleased to announce that we have added four key leadership roles to the R&D organization. First, a head of development sciences, who will be leading a number of development functions critical to successfully building our R&D capabilities, including clinical pharmacology, statistics, toxicology and biomarkers to name a few. We've also added a head of external research and development, who will lead our R&D efforts in identifying, evaluating and executing transactions to bring in external innovation and partnership with commercial, business development and other key functions. This role will be critical to Horizon Pharma's continued growth through the licensing and acquisition of new portfolio opportunities. We have two new therapeutic area heads, one for orphan and one for rheumatology, who each lead their respective therapeutic areas from a clinical development strategy and portfolio management perspective. These therapeutic area leadership roles also support our new operational structure and the company's increasing focus on our strategic growth medicines. I have known these new leaders for many years and I'm very pleased that they have chosen to join Horizon Pharma at this exciting time. Their proven track records, acumen and cumulative experience, which includes extensive research and development in orphan medicines, rheumatology, immunology and biopharma, will go far in helping us to quickly bolster our R&D capabilities and build out our pipeline. And as we build our organization and our pipeline, we constantly evaluate ongoing work to ensure it remains aligned with our strategic focus. To that end, investigator-initiated trials for ACTIMMUNE in oncology will continue to be supported with drug supply, but not additional financing, allowing us to focus on our longer-term strategic pipeline programs. The area of focus that's most exciting to me is teprotumumab. And today, we announced that we are already 50% enrolled in the Phase 3 trial, and therefore on track to complete enrollment by year-end, if not earlier. Teprotumumab is a fully human monoclonal antibody that blocks the insulin‐like growth factor-1 receptor, or IGF‐1 receptor, to treat thyroid eye disease or TED. As a reminder, TED appears in about 30% of patients with Graves' disease. In patients with active TED, IGF-1 receptor is over-expressed on orbital tissues, resulting in local inflammation, orbital fibroblast proliferation and orbital tissue expansion, which can lead to proptosis or bulging of the eye. Teprotumumab demonstrated dramatic Phase 2 results where it significantly reduced proptosis and is published in New England Journal of Medicine last May. Dr. Terry Smith, one of the authors of The New England Journal of Medicine article, presented the Phase 2 data at ENDO, Annual Meeting of the Endocrine Society held in Chicago in March. Interest in the presentation was high. And looking forward, we plan to present additional data from the Phase 2 study from week 72, which was 48 weeks after the end of the treatment period and hence, off study drug for that duration. This data will be submitted to a medical meeting later this year and will include evaluations of the potential of teprotumumab to modify disease based on assessment of measures, including proptosis response and improvement to diplopia or double vision, measured at the end of the treatment period or week 24 and at the week 72 follow-up, almost a full year after last dose of teprotumumab. If approved, teprotumumab would be the only FDA approved medicine available to treat TED. Moving now to rheumatology and KRYSTEXXA, a key component of our clinical approach for uncontrolled gout is to evaluate options to improve response rates to KRYSTEXXA. About half of patients who take KRYSTEXXA achieved complete response therapy. Relative to degrees of response achieved with biologics across the other types of arthritis, the magnitude of complete response achieved with KRYSTEXXA is impressive. Nonetheless, we aim to improve it, as well as continue to improve understanding of the safety and proper use of KRYSTEXXA. One way we're doing this is through the support of two investigator-initiated trials, TRIPLE and RECIPE, to examine the effectiveness of concomitant immunomodulator therapy on the rate of immune response to KRYSTEXXA. The addition of immunomodulators to biological therapies has been well documented to decrease rates of immunogenicity. And both TRIPLE and RECIPE add well-known immunomodulators commonly used by rheumatologists, KRYSTEXXA, with the goal dampening the immune response during the course of treatment and thereby decreasing the production of anti-drug antibodies to KRYSTEXXA. This would potentially allow for both a longer duration of treatment and an increase in overall response rate. Both trials are open and actively recruiting patients. To complement our work to improve the response rates of KRYSTEXXA, we are working with key opinion leaders to understand how best to characterize the complete response in uncontrolled gout, and hence, inform what an optimal duration of treatment might be. This includes developing a tool to frame degrees of response. Similar to the ACR 20/50/70 scoring for rheumatoid arthritis, which is familiar to many, this response scale for uncontrolled gout should better help to frame understanding of the magnitude of clinical impact we are achieving with KRYSTEXXA. Another scientific area of focus for us is to advance the understanding of gout as a chronic systemic disease. Increasing evidence points to a complex relationship between high uric acid, inflammation and a variety of serious medical conditions, among them, high blood pressure, chronic kidney disease and even potential for early death due to heart disease. Uric acid deposits occur not only in the joints, but also in other locations throughout the body. And the data presented at ACR last year showed that decreasing serum uric acid with KRYSTEXXA has been associated with additional potentially beneficial effects such as lowering blood pressure. We will continue to present more data from work across these things during the year, including upcoming medical meetings in rheumatology as well as nephrology. We also remain excited about our two early stage programs, as next-generation approaches to uncontrolled gout that could take us further in our efforts to decrease immunogenicity, improve response rate and also potential for subcutaneous dosing. HZN‐003 is a pre-clinical program with optimized uricase and optimized PEGylation technology. The other program is exploring PASylated uricase technology, which offers a new amino acid based approach to extending the half-life of uricase. These programs offer additional opportunities to enhance our leadership in uncontrolled gout. To conclude, I'll reiterate that I am very pleased with the progress we are making in the R&D organization, our new R&D leadership and our key programs. We remain committed to supporting the company's strategy to build a strong pipeline, maximize our growth medicines and enhance our R&D capabilities with the goal to support sustainable growth and deliver Horizon Pharma's mission to bring new medicines to patients who need them. I look forward to updating you on our continued progress again next quarter. And with that, I'll turn it over to Tim for his concluding remarks.

[Timothy P. Walbert:]

Thank you, Shao-Lee. The first quarter was another quarter of progress towards our goal of becoming a leading rare disease company. We saw strong double-digit growth in our strategic business, the orphan and rheumatology medicines, which make up the majority of our company's net sales. KRYSTEXXA continues to deliver impressive performance towards its full year net sales target growth of 65%. Our Phase 3 teprotumumab trial is 50% enrolled and on track to complete by year end, if not earlier. We greatly enhanced our R&D organization with Shao-Lee Lin joining as well as our new executive R&D team, and the addition of our new rheumatology development programs. We raised our full year guidance for both net sales and adjusted EBITDA, as well as our expectations for full year KRYSTEXXA net sales growth. And we took the next step in our evolution of announcing a new operating structure with our strategic business, the orphan and rheumatology segment and the primary care segment, which will enable us to more efficiently focus on the strategic initiatives that are transforming us into a leading rare disease medicine company. All this progress is aimed at driving strong and sustainable long-term growth as well generating returns for Horizon Pharma and our shareholders. With that, we'll now open the call for questions.

[Tina Ventura:]

Thank you.

[Operator:]

Thank you. And our first question will come from the line of Annabel Samimy with Stifel. Your line is now open.

[Annabel Eva Samimy:]

Hi, guys. Thanks for taking my question. I have a lot of questions, but I'll focus primarily on KRYSTEXXA. So, I wanted to get a little bit more perspective on how you might penetrate nephrology. I mean, we're aware that many patients in clinical trials had kidney disease. Some nephrologists may not be as aware the extent to which their patients have uncontrolled gout. So I guess this is a situation where you'll need to do a tremendous amount of education of this nephrology community before they think about a treatment or they recognize this problem they've just really been waiting for a treatment to be able to treat these patients. And then, what kind of contribution of growth will nephrology have versus the rheumatology population?

[Timothy P. Walbert:]

Sure, Annabel. So I think for this year, nephrology, we see the majority of the contribution to overall KRYSTEXXA being more in the second half and moving into double-digit percentage of overall vials by the end of the year. And Vikram can speak to the first part of your question.

[Vikram Karnani:]

Yeah. Thanks for the question. We've been actively calling now on nephrologists. We've had a lot of new tools and messaging in the hands of our commercial force that is out there, and the response has been very encouraging. We've talked about it before that we have a meaningful opportunity, in that a large portion of the nephrologists have not necessarily even heard of KRYSTEXXA, but even those that have heard of KRYSTEXXA never have prescribed it. So we've completed a tremendous amount of research in this area – in this therapeutic area. We continue to see that there are a lot of patients that have chronic kidney disease that also have gout. And the response from nephrologists has been very, very encouraging. The area where we're spending a lot of time with them is helping them through identify alternate sites of care for infusion, but the urgency to treat chronic kidney disease and specifically uncontrolled gout that goes with these patients is absolutely there, and we're very, very encouraged by the – what we've observed. In fact, I would say that in the first quarter, we saw an increase of about 40% of benefits investigations related to nephrology, which is a leading indicator of future vial growth that Tim talked about.

[Annabel Eva Samimy:]

Okay. And then on the TRIPLE trial, well, both TRIPLE and RECIPE have the immunosuppressant therapy in combination. Can you just tell us, with TRIPLE, it's an open label study, so are we going to be getting some data from that study before we see RECIPE, given that it's a blinded study, and will that be a good indication of where RECIPE may come up? Thanks.

[Shao-Lee Lin:]

Yes, maybe I'll field that. So, you're right, TRIPLE is an open-label study and we have the potential of looking at that along the way where RECIPE is double-blinded. That having been said, we have the opportunity to take a look at interim data with RECIPE as well. So I think that the bottom line is immunogenicity is a very concrete endpoint and we anticipate that – or objective endpoint and we anticipate that we'll have sort of the chance to see which direction we're moving with those interventions with relatively few patients treated.

[Tina Ventura:]

Great. Thanks, Annabel. Brian, next question please?

[Operator:]

Thank you. And our next question is going to come from the line of Dana Flanders with Goldman Sachs. Your line is now open.

[Dana Flanders:]

Hi. Thank you very much for the questions. My first one here just on the tepro update today. You mentioned that enrollment was happening a little bit ahead of schedule. I mean, what does that just mean in terms of when that data could read out and then the filing timelines? I mean, if enrollment continues at its current pace, when could we get that? And then my second question, just on the – update on the reporting structure that will take place next quarter. I think you said you were going to give margins as well, which will be very, very helpful. But just as you think about realigning just your ex-commercial operations, I mean, what was the rationale behind that? And then, does that also make a sale of the primary care business easier if that's a path you decide to go down? Thank you.

[Timothy P. Walbert:]

So with teprotumumab, right now, enrollment is tracking ahead of expectations. And as we discussed, it's hard to predict whether that means we finish by the end of the year or earlier. Right now, based on things, we may be able to pick up a few months, but we have to see how overall it plays out over the summer months. So we'll update that more as we continue. Relative to the reporting structure, it's key for us as we manage the long-term business and continue to have margin expansion in the orphan and rheumatology segment to truly be able to align and allocate resources against that strategic business. And we expect to have an increase in R&D expenses, and also, as we expand margins, we need to make sure that we're aligning resources appropriately relative to G&A against a smaller infrastructure business. So this allows us to make sure that each business has the right allocations, both of R&D expenses as well as G&A expenses. And they're two different businesses and allows us to manage them appropriately. Bob, I don't know if you want to comment about any of the strategic approaches of the business.

[Robert F. Carey:]

I mean, our comment on it is that, as we've said in the past, all options are on the table for the business. This will provide a little bit more information. And it's unclear what the results of that will be.

[Tina Ventura:]

Great.

[Dana Flanders:]

Thank you.

[Tina Ventura:]

Thanks, Dana. Brian, next question please?

[Operator:]

Yes ma'am. Our next question will come from the line of Gary Nachman, BMO Capital Markets. Your line is now open.

[Gary Nachman:]

Hi. Good morning. First to follow-up on KRYSTEXXA. You'll need a significant step up throughout the year to achieve the guidance. Is there a seasonality component with this product we should think about? And are you expecting an updated label with immunogenicity data by end of the year? And then, I have a follow-up on tepro.

[Timothy P. Walbert:]

Sure. Relative to seasonality, we do see some, obviously, in the beginning of the year as people change insurance and are getting re-verified. We feel very good that we still saw 7% sequential growth of KRYSTEXXA in spite of that. We're very pleased with the 48% growth in the first quarter and continue to expect that expanded sales force, now that they've had three, four months in the market, to continue to drive incremental uptake in rheumatology and nephrology. So we're comfortable with our forecast as that moves throughout the year. Relative to the label expansion and the FDA, we're currently in discussions with them around the label and we don't have a specific timeline, but we're having constructive dialog at this point in time. You have a follow-up?

[Gary Nachman:]

Okay. Yes. Well, on that, do you think if you get that label, then that would certainly help in the back half of the year? Could that be a meaningful contribution?

[Timothy P. Walbert:]

Well, I think that the label really puts out what has been understood over the last two years in how to appropriately use stopping rules in treating these patients, so we don't necessarily see that as a growth accelerator. We feel confident that our expansion efforts and our overall – the experience that rheumatologists and now starting nephrologists are getting with individual patients and then expanding the number of patients per physician is what's going to drive our uptake. So that's not a determinant of acceleration of growth.

[Gary Nachman:]

Okay. And then just quickly on tepro, just remind us how many sites you're using for the Phase 3? And are you confident the right patients are being enrolled in? And just remind us the profile of those patients. Thank you.

[Timothy P. Walbert:]

So low single-digit number of sites and Shao-Lee can take the second question part of that.

[Shao-Lee Lin:]

Yeah. So I think that the acceleration that you've seen in enrollment is really due to both the excitement based on the Phase 2 results as well as the expertise of the investigators that have been involved in both the Phase 2 study as well as Phase 3. And so, given that, we're confident that these are the penultimate experts in the field who are very excited about the possibility of having a therapeutic for their patients. And therefore, we have the utmost confidence in the patients that they're enrolling.

[Gary Nachman:]

Okay. Thank you.

[Tina Ventura:]

Great. Thanks, Gary. Brian, next question please?

[Operator:]

Yes ma'am. Our next question will come from the line of Irina Koffler with Mizuho. Your line is now open.

[Irina R. Koffler:]

Hi. Thanks for taking my question. With respect to the 340B rule, the company is going to benefit not only in the second half of 2018, but also in 2019. So I just wanted to see if you could offer any potential thoughts around that? And just maybe 340B and Medicare changes in general, do you think the 340B will get pushed again next year? Are there any potential implications, if there is any changes to the ASP plus 6% pricing to KRYSTEXXA? Thank you.

[Timothy P. Walbert:]

Sure. So, relative to 2019, we haven't given guidance and certainly, we'll expect an impact, and as we get to that point, we'll provide more details. And maybe just stepping back and looking at the 340B program, the original intent of this program was to be an important safety net for vulnerable or uninsured patients. And there was a small number of original 340B designated hospitals. There's, I think, in the low-90s, 91, 92 sites initially to today where there are over 35,000 hospitals that take advantage of this program. And there's a lot of moving parts. You saw that the ASP reimbursement changed from ASP minus 22% to ASP – or ASP plus 6% to ASP minus 22%. There's delay with potential changes to the entity drug pricing rule, which we discussed and impacts KRYSTEXXA. And there's also a number of different hearings and legislation going on relative to greater program transparency, which we fully support. It's important to make sure that patients get the important safety net and we're helping indigent patients, but also it's important that these discounts are used appropriately. When we look at the ceiling price rule, it was extended for one year. We don't know anything about further extensions. And this is something that we believe allows them (00

[Irina R. Koffler:]

Thanks.

[Tina Ventura:]

Thanks so much. Brian, just one quick clarification before we move on. Tepro sites for Phase 3 are low double-digit, not low single-digit in number, just wanted to clarify that. Go ahead, Brian.

[Operator:]

Yes ma'am. Thank you. Our next question will come from the line of Ken Cacciatore with Cowen & Company. Your line is now open.

[Ken Cacciatore:]

Great. Thanks, guys. Congratulations on all the progress. On the orphan side of the business, it's hard not to appreciate kind of where you were a year ago and where you are now and all the advancements in tepro. So in that vein, good to see that you're taking this step to start separating the business, but I think shareholders like to know where is the conclusion to this process. Sounds like you need to invest in a little bit of separate management and separate financings and to really let folks know the differences in the business. So can you just give us some sense of maybe how this plays out? If you're not successful and ultimately selling the business, which is dependent on someone else, can you spin it or is this something that we should just kind of steal ourselves for that we're going to be seeing two separate financings? Maybe just a little bit more color on the process, why you took this step as opposed to just an outright sale now, and maybe where it goes so we can kind of understand how long we'll be reporting this way. Thank you.

[Timothy P. Walbert:]

Well, first of all, we just completed a process to be in a position to reporting two segments. And the most important aspect of this is, this is how we're running our business. We have the strategic orphan and rheumatology business. They're two different businesses and they need to be managed separately. They have different margin profiles. And we think it's important to manage them differently and then report the different – both revenues and margins of those business to investors. So that was the intent of that. We expect to have significant increase in R&D expenses and further management of our SG&A expenses in the rheum and orphan segment as we grow that business. And we also expect, over time, accretion in margins as KRYSTEXXA continues to ramp up with a stable expense base. So that's a primary reason for doing it. Relative to long-term, and I think we are first getting in place to how to manage them appropriately with the appropriate cost structures. And then, we're going to continue to make sure that we're optimizing the business and pursuing all alternatives, including business development to expand the rheum and orphan segment and continue to understand if there's strategic opportunities for primary care. At this point in time, we don't have anything else to report.

[Ken Cacciatore:]

Thank you, Tim.

[Tina Ventura:]

Thanks. Next question please, Brian?

[Operator:]

Thank you. Our next question will come from the line of David Amsellem with Piper Jaffray. Your line is now open.

[David A. Amsellem:]

Thanks. So just on KRYSTEXXA, and I may have missed this, you said or you're willing to say how many patients were on treatment in 2017. And given the guidance, what that implies in terms of number of patients? So that's number one. And then, switching gears to the orphan business. I was curious to get your thoughts on PROCYSBI. What's happening there? Was it a 2% year-over-year growth? So, are there any signs that we should be aware of that it's maturing, and maybe talk about penetration for that product and where you think it might go? Thanks.

[Timothy P. Walbert:]

Sure. When it comes to patient numbers on KRYSTEXXA, right now, just be a distribution, it is difficult to get to specific numbers of patients. We estimated that we have about 2,000 patients on drug last year and we expect that to grow commensurate with the growth that we projected in overall sales. When you look at the orphan side, when you take out the sale of the European PROCYSBI rights and look at PROCYSBI, primarily U.S. on a year-over-year, apples-to-apples basis, that business grew 12%. We saw mid-single digit year-over-year growth in average shipping patients. So, PROCYSBI is performing at our expectations. RAVICTI continue to accelerate in high single-digits on average shipping patients growth on a year-over-year basis. So, both RAVICTI and PROCYSBI are growing well, and the overall orphan business grew year-over-year about 6% in average shipping patients. So, we're pleased with where the growth profile is of both those medicines.

[David A. Amsellem:]

Tim, are you willing to go through penetration numbers for PROCYSBI and RAVICTI versus relative to the predecessor compounds?

[Timothy P. Walbert:]

So, I think if you look at market shares, RAVICTI has over 50% market share. I think with PROCYSBI, it's in a similar range. And with ACTIMMUNE, it has a smaller percentage. So, that's overall patient population that are diagnosed and treated. If you look at RAVICTI, about half the patients that ultimately have UCDs are diagnosed and we see continued expansion into earlier diagnosis. And with our new label, which allows use of RAVICTI much earlier in patients' lives as early as two months, we see the opportunity to continue to drive growth there. And similarly, in shortening the time in which from birth from when a patient go on PROCYSBI, we see an opportunity to control cystinosis levels much – cysteamine levels much better with PROCYSBI. So, the real penetration is in naïve patients earlier to best manage their lives.

[Tina Ventura:]

Great. Thanks, David. Brian, next question please?

[Operator:]

Yes, ma'am. Our next question will come from the line of Louise Chen with Cantor Fitzgerald. Your line is now open.

[Louise Chen:]

Hi. Thanks for taking my question. So, first question I had was with respect to business development. Just curious if there's anything on the table for this year with the possibility? And if so, what the size may look like capacity for deals, any timing and what you're looking at? And then secondly, just on the primary care and KRYSTEXXA. We've been getting a lot of questions this morning on the quarterly ramp and how it's going to have to ramp up a lot to kind of meet your expectations for 2018. So, any color you could provide behind that would be great. Thanks.

[Timothy P. Walbert:]

Well, first on the KRYSTEXXA, I think as I mentioned earlier, we had 48% growth year-over-year in the first quarter. Our expanded sales force is just really hitting stride and we expect them to continue to have a significant increase and impact as each month goes by. Our penetration, and as Vikram mentioned, we saw a 40% increase in the first quarter benefits investigations in nephrology. So we continue to see increasing momentum in the KRYSTEXXA business and we're confident in the ability to achieve our expectations. On primary care, as Paul reviewed, we think that sets up for good growth in the subsequent quarters and we feel good about our guidance there. And Bob, do you want to speak to business development, please?

[Robert F. Carey:]

Sure, sure. So, we typically have multiple opportunities underway in terms of evaluation and that has been the status for the last few years. It's an attempt to put enough opportunities in play that we are able to get one or two, maybe three strategic transactions done over a 12-month period. And at this point, we've got capacity to put capital to work for acquisitions or licensings that are non-EBITDA producing in the (00

[Tina Ventura:]

Thanks, Louise. Brian, next question please?

[Operator:]

Thank you. And our next question will come from the line of David Risinger with Morgan Stanley. Your line is now open.

[David R. Risinger:]

Yes. Thanks very much. I have two questions. First, could you just talk a little bit about where you stand with your contracts with CVS and Express Scripts? I know that those were long-term contracts that you had signed, but in the event of material transactions that occur for those companies, would there be potentially any early renegotiation of those primary care contracts? And then second, could you just provide a little bit more color, please, on the outlook for cash royalties? I know that you exclude those from your quarterly non-GAAP numbers, but I just don't have a sense for how to model those and whether those are expected to be ongoing royalties that are paid on select products. Thank you very much.

[Timothy P. Walbert:]

First relative to the contracts, nothing's changed. Paul, do you want to take the second?

[Paul W. Hoelscher:]

Yes. So, from our non-GAAP operating earnings, we actually add the cash royalties back in. So we make sure that all of the cash royalties are fully reflected in our non-GAAP adjusted EBITDA and our non-GAAP net income. So, they're fully reflected in there. And the amounts and levels of our royalties by product are spelled out in detail in the 10-K.

[Tina Ventura:]

Great. Thanks, David. Brian, we have time for one more question, please.

[Operator:]

Thank you. Our last question will come from the line of David Steinberg with Jefferies. Your line is now open.

[David Michael Steinberg:]

Thanks. I have a couple of questions on teprotumumab. First, I know thyroid eye disease is not chronic, it's more intermittent. I'm just curious, how many – I know earlier in this year you had more information on prevalence incidents and you raised your peak sales estimate. So I was just curious, in a patient's lifetime, how many times do you think they would take a course of therapy or maybe a better way of putting it is, say, in a 10-year period, how often would they have a course? And then secondly, there's obviously a clear unmet need. There are no therapies that really work at this point, but there are some others in development. I was just curious, as you look at the landscape of competitive products, are there any that concern you as competitive threats? For example, I know in Europe, there's some excitement over the thyrotropin receptor inhibitors. Could you comment on potential competition? Thanks.

[Timothy P. Walbert:]

Sure. First, with the market and treatment, we estimate the population to be 15,000 to 20,000 based on understanding of epidemiology and there are two segments of this market. There is the active phase, which is really the inflammatory phase of TED, where patients can receive treatment that can impact them. And typically, that's on average about a year for patients. For smokers, that can be as long as two years. Once patients move into the inactive or fibrotic stage, that is the bulk of patients that really have no other option other than really decompression surgery to try to minimize double vision, to minimize some of the real challenges that they face. Based on our current data, patients receive eight doses over six months and we showed the results of about 70% response rate in reduction of proptosis in those patients. In our long-term follow-up study in our Phase 3 program, the extension trial, we'll get a better understanding if there's a small percentage of patients who could be eligible for retreatment. But based on data right now, the active phase percentage of patients or number of patients is 15,000 to 20,000 in the U.S., similar potential population in Europe. And we expect the majority of patients receive one treatment course, which is eight doses. Shao-Lee, do you want to talk to competition, please?

[Shao-Lee Lin:]

Yes. So, thanks for that question. So you asked specifically about the TSH receptor blockers that are being developed. And those are actually being developed specifically for Graves' disease or hyperthyroidism to treat that aspect of the disease state and not thyroid eye disease itself. And what we know about thyroid eye disease is that, actually, that the active state can happen even when the individuals are euthyroid, so meaning that when their thyroid disease is well under control or even not yet evident. So, it's not clear that antibodies against the TSH receptor, which will control the hyperthyroidism, will actually have an impact on thyroid eye disease itself. And what we do know of the biology of thyroid eye disease is that the IGF-1 receptor that teprotumumab targets is over-expressed on tissues surrounding the eye, the muscles and the fat. There are some hyper-proliferation of the fact that also contributes to the proptosis and obviously the fibrosis of the muscles that contributes to derangements in terms of eye movement, et cetera. And so, we believe that the IGF-1 receptor antagonist, that is teprotumumab, actually, specifically targets thyroid eye disease and is a principal part of the underlying mechanism. So at least at this juncture, we don't think that there's evidence that suggest that this is going to be problematic. In addition, ultimately, IGF-1 receptor or teprotumumab will be out in the market and it'll be the standard of care, assuming that we're successful with our Phase 3 program. And so anything that comes after that would need to be compared to the effects of teprotumumab.

[Tina Ventura:]

Great. Thanks, Shao-Lee. Thanks, David and thank you, Brian. This concludes our call this morning. A replay of this call will be available in approximately two hours. Thank you for joining us.

[Operator:]

Thank you. Ladies and gentlemen, at this time, this concludes our conference. We thank you for your participation today and you may now disconnect. Everybody, have a wonderful day.