Horizon Therapeutics Public Limited Company
Q2 2017 Earnings Call Transcript

Published: 7 Aug 2017

[Operator:]

Good morning, and thank you for standing by. Welcome to the Horizon Pharma Second Quarter 2017 Earnings Conference Call. As a reminder, today's conference is being recorded. I would now like to introduce Ms. Tina Ventura, Senior Vice President, Investor Relations.

[Tina Ventura:]

Thank you, Nicole. 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-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 second 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. Tim will then provide closing remarks, and we'll 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 to 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. 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 documents 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 second quarter results. And with that, I will now turn the call over to Tim. Tim?

[Timothy P. Walbert:]

Thank you, Tina, and good morning, everyone. This morning, we reported second quarter net sales of $289.5 million and adjusted EBITDA of $127 million, both above our expectations. This was driven by significant growth of KRYSTEXXA and RAVICTI, as well as the strong execution within our primary care business. As a result, we're increasing both our full year net sales and adjusted EBITDA guidance. Our increased net sales guidance is now $1.01 billion to $1.045 billion, up from the previous range of $985 million to $1.02 billion. Our increased adjusted EBITDA guidance is now $340 million to $375 million, up from the previous range of $315 million to $350 million. Paul will cover our financial performance and guidance in greater detail shortly. Second quarter net sales for rare disease medicines increased 70%, and our strategy is to accelerate organic growth of our market medicines and continue our disciplined business development approach while expanding our focus to include building a rare disease portfolio of development-stage medicines. During the quarter, we made substantial progress in executing this strategy. We initiated the expansion of our KRYSTEXXA commercial organization, where expect to nearly double the group by year-end. Our significant progress since relaunching KRYSTEXXA a year ago has given us confidence to increase our expectations for peak annual net sales to more than $400 million. Our peak sales expectation is underscored by new data presented in June at the EULAR Congress that showed a more than 400% increase in gout hospitalizations since 1993 at an annual cost of $43 billion. With our expanded commercial organization, we have a significant opportunity to market this highly-effective medicine to many more physicians and their refractory chronic gout patients. We also announced in the second quarter that we divested the rights to PROCYSBI and QUINSAIR in Europe, the Middle East, and Africa. The reason for this divestiture of this business was the alignment of resources to higher‐priority, high‐return businesses and we received proceeds of $72 million. We also accelerated our strategy to add development-stage rare disease medicines with the acquisition of teprotumumab, a late‐stage biologic medicine. We anticipate beginning the confirmatory Phase 3 trial by year-end. And teprotumumab is in development for thyroid eye disease, or TED, a debilitating and painful condition for which there are no approved therapies. With fast track, breakthrough therapy, and orphan drug designations, as well as impressive Phase 2 results published in The New England Journal of Medicine, teprotumumab marks an important step in our strategy of assembling a portfolio of development‐stage clinical candidates. We believe peak annual net sales for teprotumumab in the United States could exceed $250 million. Last week, we expanded our board of directors with two experienced senior executives, Pascale Witz and James Shannon. Pascale was most recently head of Sanofi's global Diabetes and Cardiovascular business, and before that, she ran GE Healthcare's Medical Diagnostics business. James is a former Chief Medical Officer at GlaxoSmithKline, and prior to that, held several senior leadership roles at Novartis, including the Global Head of Pharmaceutical Development. They both bring a depth of expertise and experience that will be invaluable in guiding our continued growth and transformation. I'll now review our business unit results. Our orphan business unit generated $120.4 million in net sales in the quarter, an increase of 64% year-over-year. RAVICTI net sales for the quarter increased 20% year-over-year to $47.2 million. This was driven by continued conversion of patients from older-generation nitrogen-scavenger therapies, as well as an increase in treatment-naive patients. Active shipping patients increased more than 25% in the second quarter compared to last year. This was partially driven by new commercial patients following the FDA's approval in late April of RAVICTI's expanded indication in children two months of age to two years of age and older. We expect continued double-digit net sales growth for RAVICTI in 2017, with room for additional uptake as we identify more undiagnosed and untreated urea cycle disorder patients. In addition, we continue to expect a second-half 2017 launch of RAVICTI in Europe in partnership with SOBI [Swedish Orphan Biovitrum AB]. PROCYSBI net sales in the quarter were $36.7 million, an increase of 17% compared to second quarter 2016 sales of $31.4 million under Raptor. Driving this growth was demand from patients converting from older-generation therapy as well as from treatment-naive patients, resulting in a year-over-year increase in global active shipping patients of more than 15%. The differentiated profile of PROCYSBI was reinforced with new clinical data this quarter highlighting its improved side effect profile, including a reduction of body odor and bad breath, important quality-of-life issues for patients living with nephropathic cystinosis. As a reminder, we expect the divestiture of European rights to result in a reduction of approximately $15 million to our second half net sales, with the vast majority of this from PROCYSBI. Second quarter net sales for ACTIMMUNE were $28.8 million, an increase of 10% sequentially from the first quarter of 2017. This was due in part to the evolution of our commercial strategy to establish the role of ACTIMMUNE in a broader range of CGD patients, including those awaiting bone marrow transplants. We expect ACTIMMUNE growth this year in the low single-digits, driven by a year-over-year growth in the second half. Jeff will review our oncology pipeline opportunities with ACTIMMUNE in more detail as well. In our rheumatology business unit, which includes both KRYSTEXXA and RAYOS, second quarter 2017 net sales increased 56% to $51.7 million. KRYSTEXXA generated net sales of $38.3 million, and its strong vial growth continued, showing year-over-year growth of more than 40% and sequential growth in the high teens. We expect continued strong demand for KRYSTEXXA moving forward. As background, when we acquired the medicine early 2016, KRYSTEXXA was minimally resourced unlike the viable clinical and commercial strategy. Physician and patient feedback from the success of being treated with KRYSTEXXA gives me great confidence in our ability to drive continued acceleration on a number of patients taking this medicine. Our goal last year was to revitalize KRYSTEXXA by optimizing the commercial strategy, educating physicians about its impressive clinical data, and driving it toward the potential we knew it had. Our projected annual – peak annual net sales at that time were for more than $250 million. And as we've made significant progress toward this initial goal more rapidly than we expected due to the execution of our commercial organization, we therefore announced in May that we have seen greater net sales potential and we would significantly increase our investment in KRYSTEXXA. We now project peak annual net sales of more than $400 million, and we're on track to nearly double the commercial organization, which we expect to be complete by year-end. Primary care's second quarter net sales were $117.4 million, a sequential improvement from first quarter 2017 and ahead of our expectations. This is a result of better-than-expected demand, as well as an increase in average net realized price, or ANRP. With that, I will now turn the call over to Paul.

[Paul W. Hoelscher:]

Thanks, Tim. My comments this morning will primarily focus on our non-GAAP results unless otherwise indicated. I will begin with second quarter financial results and then move to guidance. Net sales totaled $289.5 million, an increase of 12% versus the second quarter of 2016, driven by continued strong growth in the company's orphan and rheumatology business units. Our non-GAAP gross profit ratio was 90.6% of net sales in the second quarter. Total non-GAAP operating expenses were $135.2 million. Non-GAAP R&D expense was $12.7 million, and included clinical investments in RAVICTI, KRYSTEXXA, and teprotumumab. We expect non-GAAP R&D expense to increase beginning in the third quarter due to the preparation for an initiation of the teprotumumab Phase 3 trial. Non-GAAP SG&A expenses were $122.5 million, an increase of $15.4 million versus the second quarter of 2016. This was principally due to the increased commercial investments in KRYSTEXXA and expenses related to the Raptor business we acquired in October of 2016. Second quarter adjusted EBITDA was $127 million. The income tax rate in the second quarter of 2017 on a GAAP basis was 0.8% and 32.2% on a non-GAAP basis. The non-GAAP tax rate was lower than our projected rate for the quarter, primarily due to the tax treatment of the River Vision acquisition, which was different than anticipated at the time of our first quarter earnings call. Non-GAAP net income and non-GAAP diluted earnings per share in the second quarter of 2017 were $68.3 million and $0.41, respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share for the second quarter of 2017 was 165 million shares. Moving now to cash flow and balance sheet for the second quarter, our GAAP operating cash flow was $47.9 million and non-GAAP operating cash flow was $86.4 million. At June 30, cash and cash equivalents were $554.3 million. The total principal amount of our debt outstanding at June 30 was $2.023 billion, and net debt was $1.469 billion. Our net debt to the last 12 months adjusted EBITDA leverage ratio was 3.2 times. Based on our current guidance and cash generation expectations, we expect our net debt to adjusted EBITDA leverage ratio at year-end to remain below 4 times, assuming no additional M&A this year. Our current capital structure results in a weighted average cash interest rate of approximately 5.4% based on current LIBOR rates. Moving on now to guidance; this morning, we increased our guidance for both our net sales and adjusted EBITDA as a result of better than expected second quarter performance. Our revised net sales guidance range is $1.01 billion to $1.045 billion. The adjusted EBITDA guidance range which is in line with our increase to net sales is now $340 million to $375 million. Our revised net sales guidance range incorporates the following assumptions

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

Thank you, Paul. We have begun to expand our internal clinical development pipeline to drive Horizon Pharma's long-term growth. We are working on programs that we believe will result in compelling clinical outcomes to bring first-in-kind therapies to market such as teprotumumab, as well as optimizing currently marketed medicines through further scientific study such as KRYSTEXXA. Our key focus is to acquire development-stage medicines through our business development effort. Teprotumumab is a fully human monoclonal antibody that is in late-stage development as a treatment from moderate to severe thyroid eye disease, or TED. TED is a rare, debilitating, and very painful autoimmune disease that occurs when the body's immune system attacks the back of the eye and causes inflation in the eye muscles and fatty tissue behind the eye, which can cause the eyes to bulge, a condition known as proptosis. More technically stated, TED is caused by immunoglobulins that activate an increase in insulin-like growth factor-1 receptor, IGF-1R activity, which results in growth of orbital tissue. Inhibiting IGF-1R attenuates the elevated hormone activity that leads to TED. TED can occur in patients with Graves' disease, a thyroid disorder that causes hyperthyroidism in which the thyroid gland produces excess hormone. TED has no FDA-approved therapy, and with an estimated population of approximately 10,000 moderate to severe TED patients in the U.S. alone, it represents a significant unmet need. Orphan designation for teprotumumab has been granted by the FDA for this indication. The teprotumumab Phase 2 clinical trial was the largest ever multicenter trial completed in TED. It was a double-blind, randomized placebo-controlled trial involving 88 patients and lasting 24 weeks, with an infusion of drug administered every three weeks for a total of eight infusions. The primary end point of the Phase 2 trial was the response of the study eye, defined as a reduction in the clinical activity score, or CAS, of 2 points or more and a reduction of proptosis of 2 millimeters or greater at 24 weeks. The Phase 2 trial demonstrated significant clinical efficacy in the treatment of the disease. The study results, which were published in The New England Journal of Medicine in May showed that for the intent to treat study population, 69% of the study participants receiving teprotumumab demonstrated a statistically significant response compared to 20% of the placebo group at week 24, with a p value less than or equal to 0.001. In addition, the therapeutic effects were rapid, with 43% of the teprotumumab patients demonstrating a response versus only 4% of the placebo group at week 6. Other efficacy measures were significant as well. We remain on track to begin confirmatory Phase 3 trial by year-end. It will be similar in design to the Phase 2 trial, allowing us to leverage the key learnings from that study. Furthermore, with fast track and breakthrough therapy designations from the FDA, we will be able to submit sections of the biologics license application, or BLA, on a rolling basis, as well as be considered for priority and expedited review. Regarding KRYSTEXXA, our strategy is to help key opinion leaders and community practitioners better understand the efficacy and safety of this medicine. Our clinical development program is focused on addressing immunogenicity both from a safety and efficacy perspective through the investigator-initiated TRIPLE trial. This adaptive design study is progressing well and continues to enroll patients, with more than 65 enrolled, and we hope to have more data to share at future medical meetings. Furthermore, we are looking at additional strategies to address immunogenicity, including immunomodulation. Another way we are investing in the medicine is to expand awareness of KRYSTEXXA among rheumatologists through scientific data presentations. The burden of gout on patients and the healthcare system is significant and not fully appreciated or adequately addressed. KRYSTEXXA can and is helping to address this problem. New KRYSTEXXA data presented at the recent EULAR Congress in June showed, among other things, that KRYSTEXXA demonstrated significant clinical benefit in both patients with and without clinically apparent tophi, and it rapidly resolved tophi in patients considered responders by substantially lowering and maintaining serum uric acid levels. With ACTIMMUNE, our interferon gamma medicine in development in oncology, preclinical research indicates that interferon gamma can potentially enhance the effect of PD‐1 and PD‐L1 inhibitors and improve cancer‐patient outcomes. We are investing in two investigator‐initiated combination therapy trials with PD‐1 inhibitors, one with the Fox Chase Cancer Center and the other with the National Cancer Institute. The Fox Chase study is evaluating whether ACTIMMUNE enhances the effect of a PD‐1 inhibitor, OPDIVO, in a Phase 1 oncology dose‐escalation trial. The trial continues to progress well. Preliminary data in the first three cohorts of the study appear to indicate that the combination therapy is safe and well-tolerated. Patients are currently being enrolled in the fourth cohort, and we expect to have dosing‐level results by the end of the year, informing the decision for proceeding to the next phase of the study. The National Cancer Institute‐supported program plans to evaluate ACTIMMUNE in combination with KEYTRUDA, a PD‐1 inhibitor, to treat cutaneous T‐cell lymphoma patients. This Phase 2 study remains on track to begin later this year. A third cancer‐combination study is also underway at the Moffitt Cancer Center. It is evaluating ACTIMMUNE with TAXOL, Herceptin, and PERJETA to determine the optimal dosing in certain advanced breast cancer patients. While in the very early stages, the study underscores the high level of interest on the part of several academic and clinical institutions in studying ACTIMMUNE as combination therapy in certain cancers. I will now hand the call back to Tim for his final comments before question-and-answers.

[Timothy P. Walbert:]

Thanks, Jeff. The second quarter was encouraging for us. We delivered strong second quarter financial results and continued to execute on our rare disease medicine growth strategy, growing rare‐disease sales 70%; adding teprotumumab, a late‐stage development program, to our pipeline; and significantly increasing our investment in KRYSTEXXA's commercial efforts to drive the upside potential we see for this important medicine. We are well-positioned to continue our growth strategy, and we remain focused on driving the business forward. At this point, we'll open up the call for questions.

[Operator:]

Thank you. Our first question comes from the line of Marc Goodman of UBS. Your line is now open.

[Marc Goodman:]

Morning. I guess, two things. Maybe you can give us a little more flavor on the primary care business. You didn't talk much about it on the call and, obviously, there was some upside there and it just looks very strange on the guidance for the year. It almost looks like the second quarter benefited a lot but the rest of the year may not benefit nearly as much. So, just give us a little flavor there. And then on the orphan side, can you talk about the number of patients on some of the drugs like you normally do? Thank you.

[Timothy P. Walbert:]

I'll take the first question and then hand it over to Dave for the second. Relative to our primary care business, we had lower first quarter for a number of reasons as we discussed relative to average net realized price and seasonality. We did see good improvements in the co-pay cost as well a reduction in fully bought down expenses, and we definitely saw that flow through. But also, we saw a significant increase in the demand generation by our sales force, which was especially impressive given that we had reduced it by about a third at the beginning of the quarter. So, really been around strong growth from a demand standpoint, we saw about a third improvement in the average net realized price from the first quarter. As we look forward, certainly we're being conservative, and I think you've seen us as we approach the primary care business. It's a core driver of cash flow. Our focus is driving our rheum and orphan business and stabilizing primary care, but we're still being what we believe is appropriately conservative as we see the next several months and quarters continue. So, Dave, I'll let you handle the second.

[David A. Happel:]

Sure. So, for the individual orphan products, we haven't provided the specific patient numbers, but we have provided market shares. RAVICTI came in at 47% this quarter, up from 37% from a year ago; PROCYSBI was at 53% of the diagnosed patient population versus 48% from a year ago; and ACTIMMUNE came in at just under 20% of the diagnosed CGD patient population, which was essentially flat from the same period last year.

[Timothy P. Walbert:]

We did see, as we went through in the prepared remarks, a significant increase in active shipping patients year-over-year, 25% for RAVICTI and over 15% for PROCYSBI. So, strong both sequential in year-over-year growth. So, with that, next question?

[Operator:]

Our next question comes from the line of Ken Cacciatore of Cowen & Company. Your line is now open.

[Ken Cacciatore:]

Hey guys, congratulations on the quarter. Just wanted to ask on that primary care business. Now, that we're getting into the contracting period for next year, maybe the sustainability of that portfolio or maybe some comments into 2018. And then also, last quarter, there was talk of potentially selling that business. Can you just discuss kind of strategic thoughts around primary care? Thank you.

[Timothy P. Walbert:]

Sure. Well, it's been core to the company and driving strong cash flows, and we haven't made any decisions on the business. We will always consider all strategic opportunities, but the business is driving significant cash flow for the company. Relative to the selling season and custom lives in 2018, we're not giving 2018 guidance. What we've seen is our contracts are continuing to mature sequentially and we're seeing good growth within the existing contracts we have. As far as broad adoption of custom clients, that's not built in to our forecast, in our internal models, or guidance. And we don't have any specific read on 2018 as yet, but we feel good about the progress in the business and ability to stabilize it. The point from where we go here forward in 2018 is to be conservative, focus on the growth of our rheum and orphan business and really drive consistent, stable cash flow out of the primary care business.

[Ken Cacciatore:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Annabel Sammy (sic) [Samimy] of Stifel. Your line is now open.

[Annabel Samimy:]

Hi. Thanks for taking my question. Just wanted to talk a little bit about KRYSTEXXA. Obviously, you took some of the infrastructure from primary care and reinvested it into the orphan drug, and I think KRYSTEXXA sales force was expanded. Can you talk about, I guess, the target audience that you're looking at now; is it strictly in rheumatology or finding new physician targets to expand the indication? And then, separately, on business development, it looks like you're making greater investments in R&D. How should we think about business development? Are you looking primarily at now (30

[Timothy P. Walbert:]

I'll let Vikram take the first and then Bob can handle the business development. Vikram?

[Vikram Karnani:]

Yeah. Thank you. So, as we've expanded the business and grown the business last year, we've realized there is a significant more opportunity for KRYSTEXXA that we intend to tap into as we continue to expand the team. The opportunity in rheumatology is larger than we previously thought. We've only penetrated about 50% of the rheumatologists thus far and intend to grow that to more than 75% with the expansion. There is significant market opportunity in nephrology which is almost as large as the opportunity in rheumatology, and then, of course, there's significant market opportunity within primary care. There are a lot of patients, tophaceous gout patients with high serum uric acid levels that exist in primary care that need to be treated via referral over to a specialist. We've conducted some small pilot programs in certain geographies around the country calling on both nephrologists, as well as primary care physicians, helping create a referral (31

[Timothy P. Walbert:]

Yeah, and the size of the commercial organization is on track to almost double by year-end, and that includes our specialty account managers, patient access managers, medical scientific liaisons. And as Vikram talked about it, we were a touch to hitting about 50% of the target rheumatologists. That's going to grow to hitting 75%, and then with the expansion, looking to hit about 75% of key prescribing nephrologists. So, significant increase in our ability to penetrate the prescribing audience. Bob, do you want to take the second?

[Annabel Samimy:]

Maybe not?

[Timothy P. Walbert:]

Bob might be on mute. So, I'll just talk through it. So, when we look at our strategy from a business development standpoint, we continue to look for on-market assets that can complement our efforts in the rheumatology business, as well as in the rare disease business. From the standpoint of development-stage assets, that is certainly part of our ongoing strategy with teprotumumab being the first. We're very excited about the opportunity that that offers with the derisked molecule, great Phase 2 data. So, we are going to look to expand our effort and bring in significant increase in a number of development-stage assets focused on rare disease or supporting our rheumatology effort while continuing what has been a successful business development strategy for accretive commercial assets. So, it's not stopping one and starting the other; it's really adding and evolving from our current successful business development strategy to more adding the pipeline and building towards long-term value creation.

[Annabel Samimy:]

Great. Thank you.

[Timothy P. Walbert:]

Thanks, Annabel.

[Operator:]

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

[Gary Nachman:]

Hi. Good morning. First, on KRYSTEXXA, could you just explain more about the expected change in ANRP that you talked about? How much that will be and will it affect any other products in the portfolio? And then, do you plan on making any changes to the selling and promotional efforts behind any of the orphan drugs like you did with KRYSTEXXA? If you think that will help accelerate growth of those products.

[Timothy P. Walbert:]

We think we're appropriately resourced on the – with RAVICTI and PROCYSBI as well as ACTIMMUNE. Dave and Eric Mosbrooker have built a very solid team of leaders there. And that's not a business that significantly increased in promotional dollars or people is what drives it, it's continued generation of bringing new patients on from older therapies and help finding new patients. Relative to KRYSTEXXA, again, we continue to expect strong growth in vials. We do expect an increase in the ANRP – or a reduction in the ANRP which is an increase in gross to net to account for what could be a change relative to 340B. We've been effective and seeing what's occurring down at DC where there have been three delays throughout the year of implementation of that rule. We're being conservative at this point but the key thing is we're going to continue to drive significant vial growth in both 2017 and beyond, and feel confident in the outcome of the long-term prospects for that business.

[Gary Nachman:]

Okay. And that change wouldn't affect any of the other...

[Timothy P. Walbert:]

No. That's...

[Gary Nachman:]

...orphan drugs (35

[Timothy P. Walbert:]

That's just related to KRYSTEXXA.

[Gary Nachman:]

Okay. And then just one quick follow-up. Just, Tim, review your confidence level in the overall IP situation for RAVICTI. There's obviously some noise out there. So, if you could clarify some of that. And if you think the new patent that was just issued will be difficult for generics to get around.

[Timothy P. Walbert:]

Well, we feel very good about the long-term prospects for RAVICTI, and we're following a similar playbook that we do for all of our medicines where it's not just the IP that is in place when we acquire them but a significant prosecution history. We have confidence that just like we did with VIMOVO and PENNSAID recently where the additional patent prosecution and elucidation of the innovation of those medicines really allowed us to win those cases in court. With RAVICTI, we recently got another patent the 197 [US9561197] patent that extends out to 2030. It's a part of a completely different patent family than the 559 [US9095559] patent that was referenced over the last few weeks and it's related to different dosing decision criteria and is unaffected by any decision on the 559. But importantly, we also have a number of additional patents that are being prosecuted through the [ph] TrackOne (36

[Gary Nachman:]

Okay. Thank you.

[Operator:]

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

[Timothy P. Walbert:]

Hi, David.

[David A. Amsellem:]

Thanks. Hey. Just a couple. So, first on KRYSTEXXA, just a follow-up question. Wanted to get a sense of how much of pre-infusion prophylaxis has helped to drive volumes? In other words, doctors being educated on what to administer prior to infusion to prevent reactions, because I know there were some data presented I believe last year on that. So maybe you can talk about it. And then secondly on PENNSAID, you had mentioned earlier this year that one of the headwinds was the generic availability of Voltaren or multiple generics and step at it. So, I wanted to get a sense from you on how much of a headwind you think that's going to be going forward? Do you see PENNSAID volume sort of stabilizing? It looked like the – just from the IMS data, year-over-year volumes still are kind of soft, so maybe you can talk to that dynamic as well. Thanks.

[Timothy P. Walbert:]

So, I'll address the first part of KRYSTEXXA. One of the key things we believe that the educational effort has helped to understand is not just where do the right patients and how to use KRYSTEXXA but also when to stop. So, one of the most important things for safety with any medication like this is to identify what are the right stopping rules, and that is any patient that has a serum uric acid that pops above six. So, it's regularly monitoring these patients. If they do have a pop in their serum uric acid levels, get them off the medicine. So, it's really educating appropriate patients to use the medicine and then when to stop. The other has been the continued results from our TRIPLE trial which has been an iterative investigator-initiated trial where we have over 65 patients currently on it which is approximating the size of our Phase 3 clinical program where we have seen differential results from what was seen in the clinical program by increasing the dose frequency from every other week for the first three weeks to once a week for three weeks. And, Jeff, I don't know if you want to comment further on the results.

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

Yeah. We're looking to having those presented in a future scientific conference. But as Tim said, one of the ways to work around the immunogenicity issue is through tolerization which is increasing the frequency of dosing, as well as looking at adjusting the dose as well. In addition to that, we're looking at immunomodulation. The data you were referring to in terms of premedication, it looks like methylprednisolone may be more effective, but the key here is to really to close monitoring it, Tim mentioned, of serum uric acid and then looking to discontinue that if the serum uric acid rises above six in two consecutive doses.

[Timothy P. Walbert:]

And one of the things relative to immunomodulation is that we are planning later this year to begin an investigator-initiated trial with several key investigators to understand that if adding immunomodulators to KRYSTEXXA in addition to what we've seen with colorization can further enhance the safety and efficacy of the medicine. So, more to come on that.

[Operator:]

Thank you. Our next question comes from the line of Louise Chen of Cantor Fitzgerald. Your line is now open.

[Louise Chen:]

Hi. Thanks for taking my questions. I had a few here. The first question I had is just on KRYSTEXXA and how we should think about the EBITDA margins? Just based on what you've publicly disclosed, our math gets us to something sort of in the 20% range, and I'm wondering if that could go to what we see for similar types of drugs in the industry at 50% to 60% over time? And I'm not sure if my math is correct, I'm just running that by you. Secondly is just on your cash tax rate. If you think the single-digit cash tax rate will persist for the foreseeable future, how should we think about that? And the last question here is just if there were a change of control, I'm not suggesting that there would be, just curious of the mechanics of it for Horizon, how does that affect your affect your deal with Express Scripts, if at all? Thank you.

[Timothy P. Walbert:]

(41

[Paul W. Hoelscher:]

Yeah. On cash taxes, I think we've said this before, as we utilize NOLs, we would expect over the next four to five years that the tax rate will gradually increase into the low double-digit, mid-teen range by the time you get out – to be out four or five years.

[Tina Ventura:]

And what was your last question, Louise, again?

[Louise Chen:]

Yeah. About a change of control. If there was a change of control for Horizon. Let's just say the company were acquired, I'm not suggesting that it should be, how would the Express Scripts deal change if at all?

[Timothy P. Walbert:]

We're not going to get into specifics of the contract at this point in time.

[Louise Chen:]

Okay. Thanks.

[Tina Ventura:]

Next question.

[Operator:]

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

[Donald Bruce Ellis:]

Thank you and good morning. I have three questions. The first one for Vikram. A couple of months ago, there were some data presented on a potential competitor for KRYSTEXXA. Can you give us your thoughts on the competitive position of KRYSTEXXA? Next question is for Paul. Where do you stand with the share repurchase program? And last question is for Dave regarding RAVICTI. What's driving the growth here and how long do you think that can continue? Thanks.

[Vikram Karnani:]

Okay. So, regarding KRYSTEXXA, about KRYSTEXXA's growth potential, we have a really good plan in place. I think Tim's talked about it earlier, that we're already executing on to improve immunogenicity. I think the product you're referring to, the company is referring to is Selecta which has a product in development called SEL-212. SEL-212 is a combination of pegsiticase with an immune modulator, in this case, rapamycin. And I think what we alluded earlier in the call is that we have a strategy, we have a two-pronged strategy. We've already discussed TRIPLE, but we are also investigating the use of an immune modulator with KRYSTEXXA. One thing to point out about rapamycin, which is the product being used in the case of Selecta, it is fairly limiting to a rheumatologist. Rheumatologists today rarely use rapamycin. It's likely given the black box warning for infections in lymphoma associated with the product. Therefore, our strategy is more of an open strategy. We like to give rheumatologists the option to use other immune modulators which they're much more familiar with like methotrexate, like CellCept, like azathioprine, and then options as well. So, in other words, I guess we've already seen very strong growth for KRYSTEXXA. We expect that by the time this Selecta product comes into market, which should be several years from now, we would have a very strong position as we're already seeing with the trajectory of this brand. Physicians are feeling much more confident with the educational effort and the support efforts such as our patient access managers that are contributing to the growth of KRYSTEXXA, and we don't expect that to stop.

[Timothy P. Walbert:]

And the second question, I think. (46

[Paul W. Hoelscher:]

Yeah. On share repurchase, we did purchase a very modest amount during the quarter. We had a lot of discussions. We got feedback from both our equity shareholders and our debt investors in the quarter. And in general, we think M&A continues to be the better use of our capital for the long term, and don't believe it's prudent to use our cash at this time given our leverage to buy back a significant amount of shares.

[Donald Bruce Ellis:]

Okay.

[David A. Happel:]

Okay. And then the last question on RAVICTI, we remain really bullish on the future of RAVICTI. As Tim indicated, we grew 25% in terms of active shipping patients for this particular quarter over the same period last year. We expect that kind of growth to continue in the foreseeable future, it's largely driven by a base of patients that are still on other nitrogen scavengers that are continuing to convert to RAVICTI, as well as those patients that are becoming diagnosed and moving to RAVICTI. And then, finally, I would say that we've had a strong increase in the number of very young patients in the two-month to two-year range as a result of the change in labeling that has driven a significant number of patients to come on to RAVICTI as well, and we expect all of those metrics to continue to support the brand and grow it for the foreseeable future.

[Donald Bruce Ellis:]

Great. Thanks for taking the questions.

[Operator:]

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

[David R. Risinger:]

Thanks very much. So, I have two questions for Tim and one for Paul. Tim, could you just talk about the formulary success recently, meaning, just go into some more detail on how prescriptions are better reimbursed in the second quarter? And what your expectations are for the third quarter? Should we expect your primary care revenue to be up sequentially in the third quarter of this year versus the second quarter that you just reported? Second, if you could talk about the EBITDA beat and the guidance raise. So, in terms of the numbers, you beat the consensus EBITDA by $62 million. You raised guidance by only $25 million. So, if you could talk about that in some detail. And then, Paul, if you could speak to whether there was any rebate reserve adjustments of any note in the second quarter for any products. Thank you.

[Timothy P. Walbert:]

So, relative to second quarter in primary care, the sequential improvement was driven three-fold. That was a lowering of out-of-pocket costs as patients meet their deductibles, and historically we've seen sequential improvement in that. Also as the contracts that we have in place mature, we're getting a lower sequential amount of prescriptions that we fully bought down, along with what has been very strong demand for the – just driving the business on a sequential second quarter versus first quarter. I'm not giving any specific guidance relative to third quarter. We did up the guidance to over $350 million for the year. We're being conservative, and we want to see how things play out. Relative to the EBITDA guidance, what you saw is the top and bottom both were increased by $25 million which is based on our expectations of year-over-year growth in the rheumatology/orphan business as well as our more conservative guidance on the primary care side. So, Paul, want to comment on...

[Paul W. Hoelscher:]

Yeah. So, there's nothing really – no significant rebate adjustments. In the quarter, we did have – if you look at the Q, we do note one minor adjustment for PROCYSBI that was applied back against the opening balance sheet, but nothing significant in the P&L.

[David R. Risinger:]

Thank you.

[Tina Ventura:]

Thanks, Dave.

[Operator:]

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

[Liav Abraham:]

Good morning. Can you comment briefly on the profitability of your primary care business? Was it profitable in Q2, and any thoughts around profitability for the remainder of the year? And any quantitative details around this would be helpful. And then secondly on teprotumumab, I'd be interested in any initial comments that you have on Phase 3 trial design including maybe some more specifics on timing and when we could see headline data there. Thank you.

[Timothy P. Walbert:]

All right. So, relative, it is a – primary care is a profitable business and has been for the last, I would say, over three years. We don't break things out specifically or manage our business on a segment level. It's about 35% of sales and a similar percentage of our EBITDA, and it generates significant profit and cash flow. Relative to teprotumumab, we do expect – this is a confirmatory trial, the Phase 2 trial was an 88-patient trial with substantial results versus placebo. So, we need to confirm those results. So, it will be, as a result, of similar size and similar design to the Phase 2 trial, and we're finalizing that and as we announce it, we will get into more specifics. As far as timing, once we announced the initiation of it, we will get into more details of when that data. So, typically, you have over a year for enrollment and last patient in has another six months. So, from time of enrollment, you would typically have 18 to 24 months depending on how things go. It's a similar size as Phase 2. It's not having to upsize, so that should be helpful. The important thing as far as time lines is that you have significant unmet need here. There's many autoimmune diseases where there hasn't been another proved treatment. People use steroids and/or rituximab. And in this case, neither steroids nor rituximab have shown any material benefit in reduction of proptosis or any of the aggregate scores. So, with no improved therapies, nothing that they're using today working, we would see that there being opportunity assuming confirmation results to rapidly move this through the regulatory authorities.

[Liav Abraham:]

Thank you.

[Tina Ventura:]

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

[Operator:]

Thank you. Our last question comes from the line of Irina Koffler of Mizuho. Your line is now open.

[Irina Rivkind Koffler:]

Hi. Thank you for taking the questions. Was there any inventory stocking in the primarily care or orphan business this quarter is the first question. And the second question is on quarterly spend in SG&A. I think on the first quarter call, we heard that spending was going to be similar to first quarter, and then this quarter, it was a bit lower. So, can you help us think through the next couple of quarters in terms of the numbers? Are they going to be closer to first quarter or second quarter? Thank you.

[Timothy P. Walbert:]

On the first, no. On the second, relative – Paul went through in his remarks, that we expect it to increase in the second half due to the initiation and efforts of the teprotumumab Phase 3 program.

[Irina Rivkind Koffler:]

Great.

[Tina Ventura:]

Thanks, Irina. Nicole, go ahead.

[Operator:]

And with that, I'll hand back over to Ms. Tina Ventura for the closing remarks.

[Tina Ventura:]

Great. Thanks, Nicole. That concludes our call this morning. A replay of this call will be available in about two hours by calling 1-855-859-2056 and the pass code for that replay is 45942068. Thanks so much for joining us today.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.