Horizon Therapeutics Public Limited Company
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good morning and thank you for standing by. Welcome to the Horizon Pharma plc First Quarter 2017 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, Cailey. 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; Bob Carey, Executive Vice President, Chief Business Officer; Jeff Sherman, Executive Vice President, Research and Development and Chief Medical Officer; Dave Happel, Executive Vice President for Orphan Business Unit; Vikram Karnani, Senior Vice President, Rheumatology Business Unit; and George Hampton, Executive Vice President Primary Care Business Unit. 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, and Jeff will provide a brief update on our clinical development programs for our rare disease medicines, including our announcement today to acquire River Vision Development Corp. and its biologic candidate, teprotumumab. Tim will then provide closing remarks and will take your questions. 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, 2016, subsequent quarterly reports on Form 10-Q and our earnings news release, which was issued this morning. We caution 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 regulatory filings from today that are available on our Investor website at www.horizonpharma.com. We've also posted an Investor Presentation to our website that summarizes our first quarter results and contains additional reconciliations of non-GAAP measures to the comparable GAAP measures. Tim will reference certain slides during his remarks today. And with that, I'll turn the call over to Tim.

[Timothy P. Walbert:]

Thank you, Tina, and good morning, everyone. This morning, we reported first quarter net sales of $221 million and adjusted EBITDA of $52 million, driving the 8% increase in net sales was a strong performance of our orphan and rheumatology business units, with record sales from both KRYSTEXXA and RAVICTI. Our primary care business unit results came in significantly below expectations, following the implementation of a new commercial model, where we are now contracting with pharmacy benefit managers and payers to help patients obtain access to our medicines. We're addressing its underperformance, including reducing certain costs in the primary care business unit to align our cost structure with the lower expected sales. With greater visibility into the impact of this transition, we're lowering our full-year 2017 net sales guidance range. It is now $1 billion to $1.035 billion, and our adjusted EBITDA guidance is now $315 million to $350 million, which includes the added R&D spend for teprotumumab, which we announced that we acquired today. We have successfully transformed the company to one that is primarily focused on rare disease medicines, which now represents 65% of our sales and increased 75% in the quarter versus last year. We're also significantly increasing investment at one our key growth drivers, KRYSTEXXA. And as a result, we are raising our estimate of peak annual net sales for KRYSTEXXA to more than $400 million from more than $250 million. We also announced this morning our acquisition of River Vision, which brings us teprotumumab, a biologic medicine candidate poised to enter its confirmatory Phase 3 study for thyroid eye disease, or TED, in the second half of this year. In addition, this morning we announced the board's authorization of a share repurchase program for up to 10% of our outstanding shares. I will now discuss our business unit results and begin with primary care. Total first quarter net sales for primary care business unit, which include PENNSAID 2%, DUEXIS, VIMOVO and MIGERGOT were $65.6 million. The lower net sales results were linked to implementing a new contracting model, which we elected to pursue last year in order to secure broader inclusion of our primary care medicines on formularies. Most of the agreements became effective on January 1, 2017 and we recently learned when we received first quarter rebate invoices from these PBMs at the end of April and the beginning of May that the implementation of this model has not performed in accordance with our expectations. While our first quarter total prescription volumes for PENNSAID 2%, DUEXIS and VIMOVO were roughly line with our expectations, the average net realized price, or ANRP, of these medicines came in significantly below expectations. This lower ANRP was driven by higher patient assistance cost and higher PBM rebate levels than we anticipated for three key reasons, which are summarized on slide 9 of the deck we posted online. First, we saw lower adoption rates than we anticipated for our medicines onto certain formularies. Because our medicines were not adopted or covered by these plans, Horizon stepped in with patient support so that patients could access our medicines, and this resulted in higher-than-expected patient assistance costs. Second, most of the plans that have covered our primary care medicines in the first quarter are plans that require a higher rebate resulting in higher-than-expected rebate costs. And third, in the portion of our prescriptions that flow through plans that are not contracted, we have seen an accelerated level of managed care control, which equates to more restrictive or exclusionary formularies. This industry-wide trend is impacting our primary care business unit to a higher degree than we anticipated. Let me take a step back and cover this in more detail. as shown on slide 10, by way of background, PBM clients broadly fall into two categories. Those clients that follow PBM-chosen formulary and those clients that do not, often referred to as custom clients. With PBM-chosen formularies, they're administered by the PBM. With custom clients, the PBM works on behalf of its clients to create formularies customized for that specific client. The rebate amounts paid to the PBMs for clients that follow the PBM-chosen formulary are typically much higher than rebates paid to custom clients. When we entered into the PBM contracts, we assumed a certain mix between these two types of clients. And what we saw in the first quarter was a much lower adoption by custom clients than we expected. So why was this mix different than our expectations? When we established financial guidance for full year 2017, we made estimates of the adoption rate and mix between each type of PBM client. This took into account input from the PBMs. While we could see prescription volumes during the quarter, we do not have full visibility into the actual client mix and the magnitude of the difference until we receive detailed PBM invoices at the end of April and beginning of May. That dynamic plus the industry-wide increase and acceleration in managed care control resulted in a significantly lower ANRP for our primary care medicines in the quarter. While we continue to work to drive adoption of primary care medicines with custom clients, we're not expecting improvement in the level of adoption for the remainder of 2017. Therefore, we have incorporated a higher level of patient assistance costs, a higher level of rebates and a lower level of total prescription volume for primary care into our revised full year 2017 net sales forecast. This has resulted in reduction to our net sales and adjusted EBITDA guidance for the full year of 2017. We now expect primary care sales of more than $300 million in 2017. So, what does this mean for our primary care business unit moving forward? First, we still believe the transition to the contracting model was the right one to make. As we discussed with you in 2016, we have seen the trend in managed care control significantly increase and it has further accelerated in 2017. Therefore, transition to a contracted business model with the PBMs and payers made and continues to make good sense for the long-term sustainability of this business unit. As we have been communicating for the past two years, we see primary care as a source of cash flow to support the expansion, diversification and growth of our orphan and rheumatology business units. Further, to continue generating cash flow contributions from our primary care business unit, we're reducing certain costs in primary care and other areas of our company. We are reinvesting a portion of these funds from those cost reductions to accelerate growth of KRYSTEXXA and support the clinical development of teprotumumab. Moving now on to our orphan and rheumatology business units. Both delivered record performance in the quarter and are the growth engines for our future. I'll begin with our rheumatology business unit which generated net sales of $42.8 million or an increase of 56%. KRYSTEXXA, our biologic medicine for refractory chronic gout, generated record net sales of $31.6 million, an increase of 96% year-over-year. This was driven by the execution of our commercial organization, which drove strong increase in year-over-year vial growth. Last year, we increased our investment in KRYSTEXXA with additional marketing, medical education and commercial infrastructure, including adding Patient Access Managers to focus on patient and account support for additional KRYSTEXXA treatment sites. This investment is yielding the results we were planning for and KRYSTEXXA is seeing strong momentum as a result. Based on the continued acceleration we have seen with KRYSTEXXA and the clear unmet need that exists for the 40,000 to 50,000 refractory chronic gout sufferers, we're investing significant additional resources to expand our reach to physicians and increase awareness of refractory chronic gout among both physicians and patients. Supporting this effort is an expansion of our KRYSTEXXA commercial organization to nearly 200 employees from more than 100 currently, beginning immediately and continuing through the second half of this year. We now expect KRYSTEXXA to generate peak annual net sales of more than $400 million, up from more than $250 million. Now I'll discuss our orphan business unit, which is now the company's largest business unit in terms of net sales. Our orphan business unit generated $113 million of net sales in the quarter, up 70% year-over-year. Driving this strong performance was record net sales of RAVICTI, which generated sales of $43.9 million in the quarter, an increase of 18% versus the first quarter of 2016. This was due to continued growth in active shipping (11

[Paul W. Hoelscher:]

Thanks, Tim. My comments this morning will primarily focus on our non-GAAP results. I'll begin with the first quarter financial results and then move to a discussion of our full year and second quarter 2017 guidance. For the first quarter, net sales totaled $221 million, an increase of 8% versus the first quarter of 2016. Our non-GAAP gross profit ratio was 88.5% of net sales in the first quarter and was lower than previous quarters primarily due to lower ANRP in the primary care business unit. Total non-GAAP operating expenses were $143.2 million, non-GAAP R&D expense was $10.8 million and included clinical investments in KRYSTEXXA, PROCYSBI, RAVICTI and ACTIMMUNE oncology. Beginning with the first quarter this year, we are combining sales and marketing expenses, and general and administrative expenses into a single expense line item, SG&A, in order to simplify our presentation and conform to standard practices of our peer group. For reference, we have provided two years of history in the earnings press release. Non-GAAP SG&A expenses were $132.3 million, an increase of $27.8 million versus the first quarter of 2016. This increase was principally due to the increased investment in KRYSTEXXA which began in the second quarter of 2016, and SG&A related to the Raptor business that we acquired in 2016. The income tax rate in the first quarter of 2017 on a GAAP basis was 34.4% and on a non-GAAP basis was negative 37%. Non-GAAP net income and non-GAAP diluted earnings per share in the first quarter of 2017 were $35 million and $0.21, respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share in the first quarter of 2017 was $164.9 million. And lastly, before moving to the discussion of full year guidance, let me provide a few high-level comments about our cash flow and balance sheet. For the first quarter of 2017, we generated $20.7 million of operating cash flow on a GAAP basis. On a non-GAAP basis, operating cash flow for the first quarter was $65.2 million. Cash and cash equivalents were $603.4 million as of March 31. During the first quarter, we refinanced our senior secured term loans, consolidated the term loans at a lower interest rate and extended the maturity date from 2021 to 2024. As of March 31, the total principal amount of our debt outstanding was $2.025 billion. Please note that the refinancing had a negative impact on our first quarter operating cash flow due to the fact that we were required to pay our term loan accrued interest balance of $5.4 million at the time of the refinancing. Our next interest payment was originally scheduled for May. This lowered our operating cash flow results for the first quarter on both a GAAP and a non-GAAP basis. Based on the midpoint of our 2017 full year adjusted EBITDA guidance, our net debt as of March 31, adjusted for the upfront payments for River Vision, represents a net debt-to-EBITDA leverage ratio of 4.7 times. Our current capital structure resulted in a weighted average cash interest rate of approximately 5.3% based in current LIBOR rates. Now, moving on to guidance. As Tim referenced, reflecting the impact of lower-than-expected first quarter primary care results on our expectations for the full year, our revised net sales guidance for the full year 2017 is $1 billion to $1.035 billion and full year adjusted EBITDA is $315 million to $350 million. This assumes continued strong growth for both the orphan and rheumatology business units, and primary care net sales to be more than $300 million. Full year non-GAAP gross margin is expected to be approximately 89% to 90%, a slight decrease from the prior guidance due to lower primary care ANRP . Regarding our full year operating expenses, as Tim referenced, we are reducing certain costs in our primary care business unit as well as other company costs. We are investing a portion of those cost savings into KRYSTEXXA in order to further accelerate net sales growth in 2018 and beyond. Our cost reduction initiatives, net of the KRYSTEXXA investment, will primarily affect the second half of the year. However, the benefit of the cost reduction will be offset by the investment of approximately $20 million in development-related expenses associated with our River Vision acquisition, and that spending will occur primarily in the second half of 2017. Therefore, we anticipate the our quarterly operating expense for the remainder of the year, on a dollar basis, to be similar to the first quarter operating expense. For interest expense, we expect a range of between $105 million and $110 million for full year 2017 based on current LIBOR rates. Based on our revised guidance, we now expect a non-GAAP tax rate in the low 30s for the full year 2017. This is higher than our previous guidance principally due to a change in the forecasted mix of earnings by tax jurisdiction as a result of the lower net sales expected for primary care in 2017. Our full year tax rate guidance for 2017 reflects the River Vision transaction announced this morning. As we have said before, any future acquisitions may impact our forecasted non-GAAP tax rate. Relative to share count for the full year, we expect our weighted average diluted share count to be in a similar range as the first quarter. For the second quarter, we expect net sales to be 23% to 24% of our full year 2017 net sales guidance. And we expect the adjusted EBITDA to be 18% to 21% of our full year 2017 adjusted EBITDA guidance. This includes strong continued growth of our rheumatology and orphan business units, offset by the expected decline in primary care. And as a reminder, we expect second quarter operating expense, on a dollar basis, to be in line with the first quarter. We expect the non-GAAP tax rate in the second quarter to be approximately 55% to 60%, which given the first quarter's favorable tax rate of negative 37% would result in a first half non-GAAP tax rate consistent with our full year guidance of the low 30s. I'll now conclude with a brief comment on our recent share repurchase authorization of up to 16 million shares. Our current intention is to execute a portion of the buyback authorization this year depending on market conditions and our other investment opportunities. With that, I'll now turn the call over to Jeff.

[Jeffrey W. Sherman, M.D., FACP:]

Thank you, Paul. I will provide a brief update on our clinical development programs concluding with the review of the teprotumumab program, which we are acquiring with the River Vision transaction. Let us start with RAVICTI, which is indicated for UCDs. As we announced last week, we received FDA approval for supplemental new drug application, or sNDA, for RAVICTI to expand the age range from patients two years of age and older to patients two months of age and older. This is an important step in helping young children with UCDs and the devastating effects of hyperammonemic events. We're also studying patients from birth to two months of age and remain on track to submit an sNDA to expand to this age range by the first quarter of 2018. Now, let me touch on ACTIMMUNE and our development efforts in oncology. As we have previously discussed, we are evaluating ACTIMMUNE to enhance the effect of a PD-1 inhibitor, OPDIVO, in a Phase 1 oncology dose escalation trial with the Fox Chase Cancer Center. The trial continues to progress well. Pre-clinical research indicates that interferon gamma could potentially enhance the effects of PD-1 and PD-L1 inhibitors, potentially improving cancer patient outcome. As we discussed last quarter, data was presented from the Fox Chase trial at the American Society of Clinical Oncology, Society for Immunotherapy of Cancer Meeting. While early, preliminary data show that combination therapy with ACTIMMUNE and OPDIVO was safe and well tolerated in the first two cohorts, and the study continues to assess additional dose cohorts. While the results are early, we are encouraged. The information being analyzed will inform the decision to proceed into the next phase of the study and we look forward to additional data being made available in the coming months. In addition to Fox Chase, a number of other leading academic and clinical institutions have expressed interest in studying ACTIMMUNE as combination of therapy in certain cancers. This includes the recent decision of the National Cancer Institute to initiate a study later this year to treat patients with cutaneous T-cell lymphoma with ACTIMMUNE and KEYTRUDA, PD-1 inhibitor. With KRYSTEXXA, beginning with the American College of Rheumatology Meeting last November, we had a significant clinical presence where we presented KRYSTEXXA clinical data and expanded the awareness of KRYSTEXXA as an important option for patients suffering from refractory chronic gout. We are continuing to build on these efforts and look forward to presenting additional data at upcoming rheumatology meetings. And as we have discussed before, the investigator-initiated TRIPLE trial continues to enroll patients and provide informative data. The trial is evaluating immunogenicity as it relates to KRYSTEXXA and studying a number of different subsets of patients, including those with an increased body weight. Lastly, let me share some insight on the acquisition we announced this morning of River Vision and its late stage biologic candidate, teprotumumab for TED. Teprotumumab is a fully human monoclonal antibody that is in late stage development as a treatment for moderate to severe TED. It targets the insulin-like Growth Factor-1 receptor or IGF-1R. TED is a rare, debilitating and very painful condition that today has no FDA-approved therapeutic treatment. It is associated with Graves' disease, a common thyroid disorder that causes hyperthyroidism when the thyroid gland produces excess hormone. The treatment approach for TED today includes high-dose steroids, biologics such as rituximab, radiation and surgery. These treatments have limited efficacy as well as safety concerns. Because teprotumumab inhibits IGF-1R, it is in development to specifically target the underlying cause of TED where we have seen significant clinical efficacy in the reduction of proptosis, which is a measure of eye protrusion and the main symptom of TED. Teprotumumab has completed Phase 2 clinical development. A multicenter, double-blind, randomized, placebo-controlled Phase 2 study lasted 24 weeks and involved 88 patients. It was the largest ever multicenter trial in TED. The study shows that 69% of the study patients receiving infusions of teprotumumab once every three weeks in treating active moderate to severe TED demonstrated statistically significant reduced proptosis and increased quality of life compared to 20% in the placebo group. Additionally, teprotumumab was well tolerated, with hyperglycemia as the only drug-related adverse event in diabetic patients, which was controlled by adjusting their diabetes medications. In fact, last week, the Phase 2 clinical trial results were published in the New England Journal of Medicine. The goal of the pivotal Phase 3 trial, which we anticipate beginning in the second half of this year, is to confirm the Phase 2 results. The Phase 3 trial will be similar in design to the Phase 2 trial and is currently under discussion with the FDA. Teprotumumab has received orphan drug, fast track and breakthrough therapy designations from the FDA. Fast track designation means that we will have the ability to submit sections of the BLA dossier on a rolling basis, as well as to be considered for priority review at the time of the BLA submission. Breakthrough therapy designation means that FDA will expedite the development and BLA review of teprotumumab. We also plan to explore other applications of teprotumumab where inhibition of IGF-1R could yield therapeutic benefits. I look forward to sharing more with you about our clinical development programs as they advance. With that, I will turn the call back over to Tim.

[Timothy P. Walbert:]

Thank you, Jeff. In summary, we delivered strong first quarter performance in our orphan and rheumatology business units, with record sales of KRYSTEXXA and RAVICTI, which supports our transformation to a company predominantly focused on rare disease medicines. The acquisition of River Vision and teprotumumab announced today builds on that strategy by adding a late stage development program in our orphan business unit. Our cash flows and balance sheet gives us flexibility to consider strategic opportunities that support our growth strategy as well as share repurchase authorization. Each of these initiatives allows us to generate long-term value for our shareholders. Finally, while our primary care results were significantly lower than perspective, we are managing the transition to a contracting model, which we continue to believe was the right decision to enhance the durability and sustainability of this business over the long term. Ultimately, our diversification strategy over the last two and a half years has allowed us to shift the mix of our business from 100% primary care sales in the first half of 2014 to approximately 65% rare disease medicine sales in the first quarter of 2017. We believe we are well positioned to continue our diversification strategy and drive the business forward. With that, Tina, we'll open the call for questions.

[Tina Ventura:]

Thanks, Tim. Cailey, please open the call.

[Operator:]

Our first question comes from the line of Ken Cacciatore with Cowen and Company. Your line is open.

[Ken Cacciatore:]

Hey. Good morning, guys.

[Timothy P. Walbert:]

Good morning, Ken.

[Ken Cacciatore:]

A question on the specialty pharma business. Just wondering what strategic alternatives could you contemplate with that business? And then, also, as a follow-up, just help us understand what you can do or what you can control to get that coverage up. I just don't know the difference between what you can do and what your partners in managed care are doing. How do you impact that? Thank you.

[Robert F. Carey:]

So, Ken, this is Bob Carey. Regarding primary care and what our options are, as we have stated in the past, all options are on the table. We continue to look for strategic alternatives if they're available. And so, we will continue to do that as we move forward here. We have, as we've talked about in the past, viewed the primary care business as a source of cash flow that we're using to diversify the business into specialty orphan assets and specialty assets, which we've successfully executed on over the last two and a half-plus years. And as we see other opportunities arise for this business, if there is a transaction that makes sense, then we will pursue it. So, our eyes are open and we're being aggressive about looking for opportunities. And with that, maybe I'll turn it over to Tim to answer the other part of the question.

[Timothy P. Walbert:]

So, with the second question, Ken, let me just talk about what we saw in the first quarter and what we expect for the rest of the year. First of all, we didn't have any internal data or visibility into the mix of PBM clients until late April or early May when we received invoices from them and got that visibility into the actual mix between the PBM-chosen clients, or what was referred exclusion lives as typically referred as, and custom clients. And at that time, we were able to figure out the financial impact. The mix of PBM-chosen formulary clients and custom clients was significantly different than what we expected and the mix was skewed to much higher PBM-chosen formulary clients, which had a higher rebate. So, a very small portion of the mix was actually from custom clients, which we had a lower rebate because our overall strategy in negotiating is come to a blended rebate where we pay lower rebate costs, where there's less control in the custom clients and higher rebates in what's called PBM-chosen formulary clients. So, ultimately, this meant that our medicines weren't covered on those custom client formularies, and therefore, we've provided incremental patient assistance above our expectations. So, ultimately, we went from a large number of prescriptions that would be at a lower rebate to the opposite where we had much few number of prescriptions at a lower rebate, which resulted in much larger number of prescriptions that we overall provided via patient assistance. On a net basis, this is what led to the lower average net realized price. And as we look forward to the impact to rest of the year and based on the discussions with custom clients that we had in March and April and, so far, early in May, we learned that we should expect a much lower assumption of adoption by these custom clients for the remainder of 2017. They made their decisions during the selling season last year and we don't expect any material change within the custom client formulary coverage for the remainder of 2017, which is what we built in to our go-forward guidance. And as we said during the call, we're reducing costs in our primary care business and we're reinvesting it in growth to drive the expansion and long-term growth of KRYSTEXXA and into the development of teprotumumab.

[Ken Cacciatore:]

Okay. Thank you.

[Tina Ventura:]

Thanks, Ken. Cailey, we'll take the next question, please.

[Operator:]

Our next question comes from the line of David Amsellem with Piper Jaffray. Your line is open.

[David A. Amsellem:]

Thanks. So, maybe I'll ask a strategic alternatives question on the primary care business another way. I guess the way I'd ask it is, you have set these aspirational targets by 2020 for the top line, I believe it was something around $2 billion. So, I guess, maybe the question is this, I mean, do you see Horizon as having a presence in pain/primary care (35

[Timothy P. Walbert:]

So, I'll start with KRYSTEXXA. We have not seen any plateauing at all. We actually continue to see acceleration of the vials on a monthly and quarterly basis. Vikram, do you want to add anything?

[Vikram Karnani:]

Yeah, I think the only thing I'll add here is the momentum continues in terms of adoption of new accounts, as well as vials, as Tim pointed out. So, we don't see any plateauing in terms of volume or additional patients getting on therapy.

[Timothy P. Walbert:]

And one of the things that we've seen with adding our Patient Access Managers in the fourth quarter is a decrease in time from benefit investigation to patients actually getting infused, and that's something that we're going to address by significantly increasing the number of Patient Access Managers as part of our overall expansion. And we expect a continued acceleration of vials on a monthly and quarterly basis throughout the rest of the year. To your first question, David, around what we expect by 2020 and 2021, our first is that we expect strong growth above our original expectations with KRYSTEXXA, where we now expect it to be over $400 million in peak sales as you saw today with both RAVICTI and PROCYSBI, strong 20% sequential growth in average shipping patients or year-over-year growth in average shipping patients. So, we expect our orphan group and KRYSTEXXA, where Raptor wasn't included in those original expectations, to be a fair amount higher than our original thoughts towards the end of the decade. As far as the alternatives with primary care, I'll let Bob address that.

[Robert F. Carey:]

Sure. And I think, David, given the change in that business, we still maintain the same position on it that it is a source of cash flow that we can redeploy into the further expansion of our orphan and rheumatology business. That's our planning scenario as we move forward. So, that would indicate that, absent some opportunity arising where we were to monetize it for some attractive sum, we will continue to manage it in that way. And so, we see a good source of cash flow for us to continue the expansion of our business, which is the plan that we're pursuing.

[Tina Ventura:]

Thanks, David. Cailey, next question, please.

[Operator:]

Our next question comes from the line of Marc Goodman with UBS. Your line is open.

[Marc Goodman:]

Yes. Morning. I guess first, if you take a product like VIMOVO and the revenues that you put up, I mean should we assume we just take the pricing on VIMOVO that kind of came in with the scripts for the quarter, that the pricing is going to basically stay the same and the scripts are going to come down? I mean, just give us a sense of how you're thinking about this. I mean, if you're pulling some promotion, we should expect obviously prescriptions not really to get better, but are we expecting pricing to get better throughout this year? Just help us, because it almost looks like the way you've got guidance of $300 million, it's like kind of take what you see in the first quarter and it's not much of a change, so it doesn't seem like there's much of improvement. And, Tim, you mentioned that you still believe signing these contracts was the right strategy, but I guess maybe you could just explain to us what you mean by that because it doesn't feel that way. And then third on KRYSTEXXA, I know that you've got a lot of different studies that are going on by different physicians and stuff. Where are we on those studies? They haven't even come out yet to help you with that product and it seems like the product's really taken off. Thanks.

[Timothy P. Walbert:]

Well, with KRYSTEXXA in the TRIPLE trial that we've discussed, it has come out in several forms. It's been at abstracts at the ACR Meeting most recently in November, we expect to see more abstracts coming out in the June timeframe at the European rheumatology conference, EULAR. So, these are investigator-initiated trials where as we get ongoing updates, those updates are communicated at key industry conferences. So, to get to your first question, Marc, when we look at – relative to contracting, this is the right decision. It's certainly a reasonable question, and it's one that we've thought about a lot over the last 10 days as we've gotten this information. We do believe that contracting was the right decision to provide long-term access to our medicines, but it certainly was a more negative impact in the short term, in effect that's reset the business. And when we look at it and see over the last two years, and many of our peers have noted this, the market's changing, we saw the trend in managed care control continue to increase with payers putting more barriers in place. So, as we saw this trend continuing, we made the decision to do these contracts. What we've seen so far in 2017 in our non-contracted lives is a dramatic increase in acceleration of controls in 2017. So, we believe that if in fact, we did not do these contracts that long term we would be in a negative position. So, we think we made the right decision in the long term for this business. It's a one-time reset based on the dynamics that we discussed. Relative to how we see the rest of the year going, we expect to drive sequential improvement in ANRP throughout the year as we have seen historically. And this is assumed in our updated primary care guidance of greater than $300 million. When we looked at TRx volume assumptions, it's reflected, as you noted, of reduced commercial infrastructure, and we're no longer expecting retail prescription uplift from the PBM agreements. And we have increased control impacting volume. So, when we look at our assumptions. Like you see most years, the impact on deductibles and co-pay and co-insurance in the beginning of the year, those areas will continue to improve. But as I mentioned earlier, the custom clients and getting on incremental formularies in 2017 is not expected.

[Marc Goodman:]

Tim, is the primary care business profitable right now, and if it's not, when will it be?

[Timothy P. Walbert:]

It is.

[Marc Goodman:]

It is?

[Timothy P. Walbert:]

And it remains profitable.

[Marc Goodman:]

Even at the first quarter levels?

[Timothy P. Walbert:]

When we look at 2017, we expect the business to be profitable.

[Tina Ventura:]

Thanks, Marc. Cailey, next question, please.

[Operator:]

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

[Andrew Ang:]

Hey, guys. This is Andrew in for Annabel. I had a question...

[Timothy P. Walbert:]

Hi, Andrew.

[Andrew Ang:]

Hey. On the negative ANRPs. What other work are you doing with PBMs to address this for this year and longer term? And my second question is on the leverage ratio. So, the leverage ratio's supposed decline with increasing EBITDA. But now you that have a declining EBITDA, what can you do about the leverage ratio? It looks like you're using extra cash for cash repurchases.

[Timothy P. Walbert:]

So, when we look at our leverage ratio, yes, our EBITDA's reset (43

[Tina Ventura:]

Right. How's the ANRP going to move up throughout the year? What are you going to do with PBMs in order to address this.

[Timothy P. Walbert:]

Right. So, relative to PBMs, one of the things I mentioned earlier is that as we've been out having discussions with our managed care team over the March, April and to this month, what we've learned is that these custom clients where they develop their own formularies in conjunction with the PBMs, we don't expect to get incremental formulary coverages in 2017. However, we do expect the selling season for 2018 to begin in early and throughout the third and into the fourth quarter. So, our managed care effort and that team's effort will be working with plans, PBMs and formularies to really drive a strong formulary coverage with the custom clients as we can for beginning of 2018.

[Tina Ventura:]

Thanks, Andrew.

[Andrew Ang:]

Thank you.

[Tina Ventura:]

Cailey?

[Operator:]

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

[Gary Nachman:]

Hi. First, I just wanted to confirm that last point. So, is this just a one-year dynamic until you get some of these custom clients on board, or could we actually see significant declines in primary care going forward beyond this year? Just elaborate on that. And then priorities with cash, did share repo move to the top? Will we see more bolt-ons? Could you actually do a transformational deal at this point if you found something that was interesting for you?

[Robert F. Carey:]

Gary, on the second part of the question, at this point, what we see as capacity is we've got, round numbers, about $0.5 billion in capital to work with in 2017, that's available cash and cash flow that is generated through the balance of this year. And so, we're going to continue to look for opportunities to deploy that into transactions that will be overall value-added. Secondly, with respect to additional debt capacity, unless there's a significant EBITDA-generating asset, that's not in the plans at this point. And as for transformational transactions, we continue to look, but at this point there's nothing that we would point to on the horizon, rather it's probably going to be more incremental as opposed to transformational, unless something arises that we can't anticipate right now.

[Timothy P. Walbert:]

And Gary, to your first question relative to moving forward, the key thing in looking at is there upside as we move into 2018, the key thing for us to understand is what occurs during that 2018 selling season. We have a good understanding what's going to occur in the PBM-chosen formularies, but the key to understand for us is the uptake in custom clients that will be part of that selling season that occurs in the third quarter. So for that reason, we think it's prudent to see how the rest of the year plays out and continue to focus on that business. As Bob mentioned, it's going to continue to generate cash flow, sales and EBITDA, but at this point, we don't have enough information to provide forward guidance in 2018.

[Gary Nachman:]

And just one quick follow-up on the cost cuts, did you take anyone out from the managed care effort or is it all just on the actual sales reps? Just to give us a little bit of color around that. Thanks.

[Timothy P. Walbert:]

So, to the question on managed care effort, we've put a managed care team in place that is going to be critical to be working with individual payers, PBMs throughout the second and third quarters to give ourselves the best chance possible to be included in some of these custom client lives. So, that organization will be critical moving forward.

[Tina Ventura:]

Thanks, Gary.

[Gary Nachman:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Donald Ellis with JMP Securities. Your line is open.

[Donald Bruce Ellis:]

Thank you. Good morning, everyone.

[Timothy P. Walbert:]

Good morning.

[Donald Bruce Ellis:]

A couple questions, back on this – today's acquisition of River Vision, Phase 2 compound going into Phase 3, and announcing a stock buyback at the same time. Bob, is that telling us – suggesting to us something about the price and availability of currently marketed maybe accretive product acquisitions? And then secondly, more philosophically, everyone's talking about the primary care franchise business and your increasing reliance in the orphan drug business, which is exactly what you said you were going to do. When do you simply divest the primary care/spec pharma business, become a 100% orphan business and enjoy much higher biotech multiple, and remove your company from the kind of the Valeant, Mylan (49

[Timothy P. Walbert:]

Well, certainly a good point. We look at our business – as you mentioned, our strategy has been to diversify. Two years ago, we had all primary care, now 65% of our business is in orphan, KRYSTEXXA, and we expect that to continue to accelerate especially with the addition of teprotumumab and moving into late stage development. So, that is going to be the focus when we look at further acquisitions. If we can get bolt-on in-licensing and other type acquisitions, we're certainly going to look to build the long-term future of our orphan business. Bob has mentioned and can reiterate what our views are as far as the primary care business and strategic options.

[Robert F. Carey:]

Sure. And Don, if there was an opportunity to sell the business for an attractive price, we would execute on that and become a primarily or an exclusively orphan/rheum business. We see today an opportunity to continue to run that business and generate cash flows. So, the only planning scenario that we can control is that one, and so that's what we're doing but availing ourselves of opportunities. We're encouraged with the strategy that we've been pursuing. We've built, based on the guidance we put out here, a $700 million a year orphan/rheumatology business in 2017 that has very attractive growth rates and attractive margins and one that we're going to continue to focus on building. So, we're excited about the opportunity to do that and we believe we can be successful as we have been over the last two and a half years pursuing that strategy. We continue to see opportunities. So the move into River Vision isn't a reaction to there being overly high prices for revenue/EBITDA-producing assets, but rather part of the strategy that we've been executing on, which is to build a portfolio of development stage compounds behind the portfolio of commercial compounds that we have in orphan and rheum. And we think that that's going to provide us with a longer runway on the business, as well as allow us to continue to move into differentiated proprietary assets that have – where there's high medical need in the markets with these patients. And so, it's all part of a strategy that we've been pursuing and will continue to pursue, and believe we can be successful in executing on.

[Donald Bruce Ellis:]

Thank you for taking my question.

[Tina Ventura:]

Thanks, Don. Cailey?

[Operator:]

Thank you. Our next question comes from the line of David Risinger with Morgan Stanley. Your line is open.

[David R. Risinger:]

Yes. Thanks very much.

[Timothy P. Walbert:]

Hi, David.

[David R. Risinger:]

Hello. I have a question for Tim and then for Paul. So, Tim, when you discussed the benefits of PBM contracting this winter, I think you conveyed the improved coverage benefits offering and opportunity for potentially growing volumes, but on today's call, you've emphasized increased control. So, if you could just talk a little bit more about that and how that happened in the face of the PBM contracts that you signed. And then, a second question, Paul, is could you just update us on the pro forma net debt that you have post today's deal? I just wanted to understand that figure to compare it to the forward EBITDA of the midpoint, I believe, is $333 million. Thank you.

[Timothy P. Walbert:]

All right. Thanks, Dave. Appreciate the question, and certainly reasonable. Again, I'll step back and look at where we were with our 2017 guidance in February. At the time, we expected an estimated adoption trajectory and mix of PBM clients between those custom clients I've discussed and PBM-chosen formulary clients, knowing that we're unable to participate in the 2017 selling because were informed of those decisions late in 2016. Our guidance was also based on an understanding of our patient assistance costs that we had through mid February and our estimate in what we saw in prescription volume. So, when we look at what happened in the first quarter, as I discussed earlier, is we didn't have the internal data and visibility into the mix of those PBM clients. And it wasn't till we had the detailed invoices in late April and early May that we had full insight into the actual mix of these PBM-chosen clients and the custom clients, and at that time, when we could actually calculate the financial impact, were very surprised by what we saw. And what we found was that the mix of PBM-chosen formulary clients and the custom clients was significantly different than what we expected. So, the mix was skewed towards the higher PBM-chosen formulary clients where we pay a high rebate. So, our net rebate cost increased significantly. I mean, it ultimately meant that our medicines weren't covered on these custom client formularies and we provided incremental patient assistance which drove incremental cost and gross to net. So, we went from an assumption that we had a large number of prescriptions that would be at a low rebate to a situation that was the opposite, and that we needed a – had a much fewer number of prescriptions at a low rebate, where we had much larger prescriptions that we had to subsidize through patient support. This is what drove decreased ANRP. And when you look at prescription volume, our volume in the first quarter was generally in line with our expectations. But moving forward, our volume is expected to reflect our reduced commercial infrastructure as well as increased control, all of which was factored into the guidance that we discussed this morning. Paul, do you want to take the second question?

[Paul W. Hoelscher:]

Yeah. So, David, the total debt right now is $2.025 billion. As we said, we had $604 million of cash at March 31. And if you back out the $145 million that we'd be paying today for River Vision, that leaves you about $460 million of cash. And so, on a net debt basis, you have about $1.57 billion of debt. And with the midpoint of our EBITDA range, that leaves you at about a 4.7 times net debt leverage.

[Tina Ventura:]

Thanks, David.

[David R. Risinger:]

Thank you.

[Tina Ventura:]

Cailey, I think we have time for one more question.

[Operator:]

Thank you. Our last question comes from the line of Liav Abraham with Citi. Your line is open.

[Liav Abraham:]

Good morning. Many of my questions have been asked, but I just wanted to touch on your longer term projections for your primary care business. Tim, you've talked about $800 million in primary care revenues by 2020. Can you provide any updated thoughts on what this number could be and to what extent you have the visibility to forecast this business beyond 2017 and through the end of the decade? Thank you.

[Timothy P. Walbert:]

That's a question I just answered, so I'll just reiterate what I said, and that is that we expect the primary care business to continue to generate cash flow and EBITDA and be profitable. And we believe it's prudent to see how the rest of the year plays out. And as I mentioned, it's critical that we get an understanding what the selling season looks like and how we understand what the PBM-chosen formularies look like. We need to better understand what the custom-client formularies look like as a result of that selling season and at that point, we will provide go-forward guidance.

[Tina Ventura:]

Great. Thanks, Liav, and thanks, Cailey. That concludes our call this morning. A replay of this call will be available in approximately two hours by calling 1-855-859-2056 and the passcode for that replay is 4624726. Thanks for joining us today.

[Operator:]

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.