Horizon Therapeutics Public Limited Company
Q3 2017 Earnings Call Transcript

Published: 6 Nov 2017

[Operator:]

Good morning and thank you for standing by. Welcome to the Horizon Pharma Plc Third 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:]

Thanks, Ayela. 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, Commercial Development and Strategy; Eric Mosbrooker, Senior 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 third 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 program for our rare disease medicine, including the recently initiated Phase 3 trial for teprotumumab. 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 of future events. These statements are subject to various risks that are described in our filings made with the SEC, 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 third quarter results. And with that, I'll turn the call over to Tim.

[Timothy P. Walbert:]

Thank you, Tina, and good morning, everyone. This morning, we announced another quarter of strong performance, driven by the continued growth of our orphan and rheumatology business units. Third quarter net sales were $271.6 million and adjusted EBITDA was $108.1 million. As we noted in our release, based on our year-to-date performance, we are raising our full-year 2017 net sales guidance range to $1.030 billion to $ 1.050 billion, and raising the lower end of our full-year 2017 adjusted EBITDA guidance range to $350 million to $375 million. Paul will cover our financial performance and guidance in greater detail shortly. Before I review our third quarter business unit results, let me briefly comment on our long-term strategic direction and where we are in that journey as a company. For those of you that have followed us, you know that Horizon Pharma is a very different company than we were when we first launched as a public company in 2011. At that time, we were focused on building out our infrastructure and commercial footprint to generate sustainable earnings and cash flow. We did that quite quickly via our primary care business. In the second half of 2014, we began the next phase of our strategy, which focused on rapid diversification of our business into rare diseases. Over the last three years, beginning with our acquisition of Vidara in September 2014 and the subsequent acquisitions of Hyperion, Crealta, and Raptor, we rapidly built a rare disease business that now represents the majority of our total company net sales, about 60% today. And sales of those rare disease medicines increased 65% year-over-year in the third quarter. Today, we are focused on the growth of our rare disease medicines, which include our durable growth medicines RAVICTI, PROCYSBI, and ACTIMMUNE; as well as our high-growth biologic, KRYSTEXXA. Our significant progress in revitalizing and repositioning KRYSTEXXA, as well as our recent expansion into the nephrology space, led us to raise our peak sales expectations to more than $400 million earlier this year. And today, we provided our expectation that KRYSTEXXA net sales will grow more than 50% in 2018. This assumes that the 340B ceiling drug price will go into effect on July 1 of 2018. Commercial execution is a key competency for the company but sustainable growth over long-term requires much more than that. It requires a pipeline of differentiated and clinically relevant development-stage medicines which we're now building. The acquisition of teprotumumab on May 8 marked the beginning of this important next phase of our strategy, and we have a uniquely strong business development team making a significant effort to build and acquire a portfolio of development-stage clinical candidates. On October 25, ahead of our original expectations, we announced the first patient was enrolled and infused in our Phase 3 confirmatory clinical trial evaluating teprotumumab for the treatment of thyroid eye disease, or TED. TED is a rare, painful, and debilitating condition in which the eye muscles and fatty tissue behind the eye become inflamed. This often causes proptosis where the eyes are pushed forward, causing the eyeball to protrude from the socket, which can impair a full eyelid closure and cause corneal ulceration and other serious complications. Teprotumumab demonstrated ground-breaking efficacy in its Phase 2 clinical trial, of which the results were published in New England Journal of Medicine in May of this year. Jeff will walk through these Phase 2 results in a moment, as well as an update on our newly initiated Phase 3 trial. The dramatic Phase 2 results of teprotumumab, along with recent interactions with Phase 3 investigators, have significantly increased our confidence enrolling a Phase 3 trial in a timely manner. Furthermore, we are completing our teprotumumab market research and commercial planning for the U.S. and rest-of-world markets, and preliminarily, our assessments show that teprotumumab's net sales potential is increasing considerably. I will now review our third quarter business unit results. First, our orphan business unit generated $117.4 million in net sales in the quarter, an increase of 64% year-over-year. RAVICTI net sales for the quarter increased 21% year-over-year to $50.9 million. This was driven by continued conversion of patients from older-generation nitrogen-scavenger therapies, as well as an increase in treatment-naïve patients. Active shipping patients increased more than 25% in the third quarter compared to last year. We continue to expect double-digit net sales growth for RAVICTI in 2017. PROCYSBI net sales in the quarter were $33.5 million, which no longer include net sales in the Europe, Middle East, and Africa regions, following our sale of these rights to Chiesi at the end of June this year. At the time of divestiture, we stated the sale would result in a $50 million reduction of PROCYSBI and QUINSAIR net sales in the second half, with the majority of affected sales coming from PROCYSBI. Additionally, PROCYSBI was launched in Canada at the end of October, where it is the only cystine-depleting medicine approved in Canada for the treatment of nephropathic cystinosis. Third quarter net sales for ACTIMMUNE were $29.2 million, an increase of 17% compared to 2016. For the first nine months, ACTIMMUNE net sales were up 5% year-over-year and we continue to expect a similar rate of growth for the full year. In our rheumatology business unit, which includes both KRYSTEXXA and RAYOS, third quarter net sales increased 44% to $58.1 million. KRYSTEXXA generated net sales of $42.8 million, an increase of 67% compared to the third quarter of 2016, and this is primarily driven by strong KRYSTEXXA vial growth. We expect continued strong demand for KRYSTEXXA moving forward, particularly given the commercial and clinical investments we are making in this medicine. And as I mentioned earlier, we expect net sales of KRYSTEXXA to grow greater than 50% in 2018. As of the fourth quarter, we are targeting nephrologists for the first time. In addition to the large hard tophi that occur on fingers, toes, and elbows, chronic gout patients also have many co-morbid conditions. Gout does not just occur in the joints; uric acid deposits can also build up in the organs such as the heart and kidneys. In fact, gout is highly correlated with chronic kidney disease, or CKD. Between 25% to 50% of CKD patients have gout, and our data indicates that there are approximately 50,000 uncontrolled gout patients currently being treated by nephrologists, providing a significant opportunity to accelerate the number of patients treated with KRYSTEXXA. We now estimate that the total addressable patient population for uncontrolled gout patients treated by both rheumatologists and nephrologists to be approximately 100,000 in the United States. This year, we estimate there are between 1,500 and 2,000 uncontrolled gout patients being treated with KRYSTEXXA, representing less than 2% of the addressable market. We expect to rapidly and substantially grow our share of this market over the coming years. Building on the strong commercial team we put in place last year, we've began a second expansion in the third quarter. We have hired highly-experienced biologic sales specialists, as well as medical science liaisons and patient access managers to further accelerate the number of patients receiving the benefit of treatment of KRYSTEXXA. We expect to complete the expansion here in the fourth quarter, and our expanded commercial team is embarking on new initiatives to further penetrate the current rheumatology audience and, over the last few weeks, began promoting KRYSTEXXA to nephrologists. We therefore expect our expanded commercial organization to be fully trained and begin to drive new patients treated as we move into 2018. Early feedback has been positive with a number of patients already being treated in nephrology. In addition to our commercial investments, we've continued to educate clinicians about the compelling efficacy and safety profile of KRYSTEXXA. We had a significant presence at the American Society of Nephrology meeting last week and the American College of Rheumatology meeting is going on this week, and Jeff will discuss the KRYSTEXXA data presented at both of these meetings. In our primary care business, third quarter net sales were $96.1 million, which was in line with our expectations. With that, I'll 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. Net sales totaled $271.6 million, driven by continued strong growth in the company's orphan and rheumatology business units. Our non-GAAP gross profit percentage was 89.6% in the third quarter, in line with our expectations. Total non-GAAP operating expenses were $135.6 million, which was somewhat lower than our expectations, as the timing of some spend shifted from the third quarter to the fourth quarter. Non-GAAP R&D expense was $17 million, primarily driven by preparation for the Phase 3 trial of teprotumumab, as well as continued clinical investments in KRYSTEXXA and RAVICTI. Non-GAAP SG&A expenses were $118.6 million. The increase versus the third quarter of 2016 was primarily due to expanded commercial investments in KRYSTEXXA and expenses related to the Raptor business we acquired in October 2016. Third quarter 2017 adjusted EBITDA was $108.1 million. The non-GAAP income tax rate for the third quarter of 2017 was 47.3%, in line with our expectations. Non-GAAP net income and non-GAAP diluted earnings per share in the third quarter of 2017 were $43.1 million and $0.26, respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share for the third quarter of 2017 were 165.8 million shares. Our GAAP operating cash flow was $68.3 million and non-GAAP operating cash flow was $83.5 million. At September 30, cash and cash equivalents were $625 million. The total principal amount of our outstanding debt as of September 30th was $2.023 billion, and net debt was $1.398 billion. Our net debt to last 12 months adjusted EBITDA leverage ratio was 3.3 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 activity this year. On October 23, we refinanced our secured senior term loan at an interest rate of LIBOR plus 3.25%, a 50-basis-point reduction compared to the previous interest rate of LIBOR plus 3.75%. Our current capital structure results in a weighted average cash interest rate of 5.2% based on current LIBOR rates. This morning, we increased our full-year 2017 net sales guidance range to $1.030 billion to $1.050 billion from the previous $1.010 billion to $1.045 billion, and raised the lower end of our full year 2017 adjusted EBITDA guidance range to $350 million to $375 million from the previous $340 million to $375 million. Our revised net sales guidance incorporates the following assumptions

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

Thank you, Paul. I will begin with teprotumumab, our fully human monoclonal antibody, and Phase 3 development for the treatment of moderate to severe TED. There are no FDA-approved therapies for TED and, thus, there is a significant unmet need for an effective and safe treatment. Because there are no approved therapies, the currently used options, such as high-dose steroids, result in limited efficacy and frequent safety issues. Often, the only option for TED patients is surgery, which is highly complex, invasive, and may only result in partial effect. Furthermore, it often needs to be repeated multiple times given technical challenges in this disease. In fact, many patients may have three or more surgeries per eye. Teprotumumab is an insulin-like growth factor 1 receptor inhibitor, or IGF-1R inhibitor, and works by blocking specific autoimmune pathophysiology that causes active TED. By blocking IGF-1R, teprotumumab diminishes local inflammation, prevents orbital fibroblast proliferation, and reduces tissue expansion, thus restoring the orbital tissue to a more normal state. The groundbreaking Phase 2 results published in the New England Journal of Medicine in May described teprotumumab as having a potentially diseased-modifying treatment effect. The Phase 2 trial showed that for the intent-to-treat study population, 69% of the study patients receiving teprotumumab demonstrated a statistically significant response compared to 20% of patients in the placebo group at week 24, with a p value less than or equal to 0.001. The primary end point of the Phase 2 trial was the response in the treatment of the study eye, as defined as a reduction in the Clinical Activity Score of 2 points or more and a reduction of proptosis of 2 millimeters or greater at 24 weeks. These results have generated a great deal of excitement on the part of physicians and patients, as the development of teprotumumab advances. Reflecting this excitement, on October 25, we announced the first patient was enrolled in our Phase 3 confirmatory trial named OPTIC, ahead of schedule. 76 patients in total will be enrolled in the study. The primary end point for the Phase 3 trial, as agreed to with the FDA, is the effect of teprotumumab versus placebo on the proptosis responder rate at week 24. This is defined as the percentage of participants with a reduction of more than or equal to 2 millimeters from baseline in the study eye, which is a readily measurable and objective end point. The main secondary end point is the same as the primary end point of the Phase 2 trial. We expect to be in a position to submit data from the Phase 3 trial in the second half of 2019. Teprotumumab has U.S. FDA orphan, fast track, and breakthrough therapy designation, which could allow for a six months review time line if granted by FDA. Teprotumumab exemplifies our focus to acquire development-stage medicines through our business development efforts, so that we can bring highly-differentiated and clinically-compelling therapies to patients living with diseases that have limited treatment options. An additional component of our strategy is to collaborate with leading academic institutions and key opinion leaders to optimize our currently marketed medicines through further scientific study. This includes work underway with KRYSTEXXA. There are four KRYSTEXXA posters being presented at this week's American College of Rheumatology Annual Meeting, and we had one at last week's American Society of Nephrology Kidney Week Meeting. Emerging data from the ongoing investigator-initiated TRIPLE trial will be presented later today at the ACR Meeting by doctors Ken Saag and Peter Lipsky. The trial is adaptive in nature and designed to answer a number of questions about KRYSTEXXA, including how to improve the response rate to KRYSTEXXA and reduce infusion reaction. Of note, the study is the first to demonstrate prospectively that when treatment-stopping rules are followed, which is occurring more frequently in real-world practice, the rate of infusion reactions can be dramatically reduced, with the rate being less than 1% to-date in the ongoing TRIPLE trial versus 26% in the current KRYSTEXXA label. We have submitted a safety update to the FDA where we have proposed an update to the prescribing information for KRYSTEXXA. This submission is based on additional analysis of the Phase 3 clinical trials, post-marketing safety data, and supported by data to-date from the TRIPLE trial that collectively demonstrated a very low infusion reaction rate when stopping rules were used. As the TRIPLE trial continues to evolve and progress, we expect to generate additional data and subpopulation analyses that will help the gout community continue to learn how to treat patients more effectively. Dr. Lipsky is adding more cohorts, including one evaluating if the addition of a commonly used immunomodulator, azathioprine, has the potential to improve response rate. TRIPLE is one part of a broader comprehensive strategy that we have in place to evaluate ways to improve the response rate to KRYSTEXXA. Another investigator-initiated trial is being conducted by Dr. Ken Saag of the University of Alabama Birmingham. The trial is named RECIPE and will evaluate immunomodulation with mycophenolate treatment along with KRYSTEXXA. The RECIPE trial is expected to begin by the end of the year. Several other KRYSTEXXA abstracts are also being presented at the American College of Rheumatology Meeting. This includes data that shows responders to KRYSTEXXA experience significant reductions in blood pressure, independent of changes in renal function. This is an important finding, as we evolve our understanding of KRYSTEXXA in the nephrology area and in chronic kidney disease patients. As Tim mentioned, chronic kidney disease is a frequent, co-morbid condition for patients with uncontrolled gout. We presented this blood pressure data at the American Society of Nephrology Meeting as well. An additional poster concluded that the lower the serum uric acid levels achieved with KRYSTEXXA, the faster a patient's tophi resolve; and a final poster assesses evidence-based development of criteria for complete response in patients with uncontrolled gout using KRYSTEXXA Phase 3 data. As noted in our earnings news release, we'll be discussing this information in greater detail on a KRYSTEXXA-focused investor call later this week. Data on PROCYSBI was also presented at last week's American Society of Nephrology Meeting. The study demonstrated the impact of one year of PROCYSBI therapy on children six years of age or younger, with nephropathic cystinosis, who never before received cysteamine treatment. The children in the study were able with PROCYSBI to maintain their cystine levels, a biomarker for disease control, and also to reach several important physical development milestones such as height, weight and body surface area similar to what are expected for an average child of the same age. Finally, I will briefly update the work on three cancer-combination studies with ACTIMMUNE, which continue to progress. An investigator-initiated study at the Moffitt Cancer Center is underway and enrolling patients. The study is evaluating ACTIMMUNE in combination with Herceptin, Perjeta, and Taxol and aims to determine the optimal dosing and treatment combination in certain advanced breast cancer patients. The other two investigator-initiated combination therapy trials focus on PD1 inhibitors. The National Cancer Institute-supported program evaluating ACTIMMUNE in combination with KEYTRUDA to treat cutaneous T-cell lymphoma patients is on track to begin by year-end. In addition, the Fox Chase study evaluating ACTIMMUNE in combination with OPDIVO, continues to enroll its fourth cohort of patients, and we expect to have dose level results by the end of the year. I will now hand the call back to Tim for his final comments before question-and-answer.

[Timothy P. Walbert:]

Thank you, Jeff. We delivered another quarter of strong performance driven by our continued growth of our orphan and rheumatology business units. Our rare disease medicines now represent 60% of sales and increased 65% in the quarter. We increased our full-year 2017 net sales guidance range to $1.030 billion to $1.050 billion and raised the lower end of our full-year 2017 adjusted EBITDA guidance range to $350 million to $375 million. We're delivering against our commercial priorities and investing in KRYSTEXXA to generate sustainable, long-term growth, including more than 50% net sales growth expected in 2018. As we continue to make progress on the next phase of our company strategy, which is to build a development-stage pipeline to drive our growth over the long-term, we advance this strategy with the initiation of the teprotumumab Phase 3 confirmatory trial last month, ahead of our original expectations. At this point, we'll open up the call to questions.

[Operator:]

Our first question is from Dana Flanders with Goldman Sachs. Your line is now open.

[Dana Flanders:]

Hi. Thank you very much for the questions, and congratulations on the quarter.

[Timothy P. Walbert:]

Hi, Dana.

[Dana Flanders:]

Hi. My first one, just on KRYSTEXXA; can you talk a little bit more about the 2018 outlook provided today? Very strong growth number; you are clearly executing on the business. Can you just help frame the nephrology market and the sales message, and how you are thinking about penetrating that market? I mean, how does it differ from the rheumatology market and maybe some of the opportunity to drive growth there, but also some of the challenges when you think about, are these physicians familiar dosing a biologic and dealing with the KRYSTEXXA AE profile and so forth? And then just my second one, can you elaborate a little bit on the early physician feedback and receptivity so far from the TRIPLE trial data presented? Thank you very much.

[Timothy P. Walbert:]

Sure. So, looking at how we project 2018, we started with looking at the expansion we did last year and the penetration that we're able to drive in rheumatology, going after about 50% of the rheumatology population with that expansion. With this expansion, we're increasing the penetration in rheumatology to 75%, and we expect to penetrate about 75% of nephrologists. So, a lot of it is based on the success we had in rheumatology, and also we did several pilots with some of our sales specialists calling a nephrologist to better understand the required messaging, as well as the uptake based on that effort. When we look at nephrologists and their ability to adopt KRYSTEXXA, we see several advantages. First of all, in dealing with CKD, they're used to dealing with very sick patients. So, their understanding of infusions and ability to manage safety concerns is quite substantial. In addition, we're going in to meet with these folks in a much different place with KRYSTEXXA. The challenges we had in rheumatology overcoming years of misinformation and lack of effective promotion don't have the same challenges in nephrology where there wasn't any significant effort by any of the prior companies that owned KRYSTEXXA. So, we believe we will have much less difficulty overcoming negative messages that may have been out there, and really focus on the positive benefits in their CKD patients that also have chronic gout. So, we feel very strong about our ability to drive the uptake in nephrology as we move into next year. We think they have a very good understanding of very sick patients. And also, the additional data that we've generated from post-marketing studies, as well as from the TRIPLE trial, show a significant reduction in infusion reactions as a result of implementing stopping rules. So, we think, all of those messages, along with strong benefit that we've seen in patients' response to KRYSTEXXA, position us well to drive significant uptake. When it comes to the TRIPLE trial and data and feedback specifically, I'll let Jeff answer that question.

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

The feedback has been positive to-date. As I mentioned, the TRIPLE poster will be presented later today at the ACR meeting. We'll have more information on that later this week in the follow-up call. Certainly, the key item from the TRIPLE trial is what Tim mentioned, which is prospectively by instituting stopping rules, there's a marked decrease in infusion-related reactions. So, the product can be given safely and effectively to patients who have chronic refractory gout.

[Timothy P. Walbert:]

Yeah. Also, when we look at KRYSTEXXA opportunity, right now, as I mentioned in my remarks, we're about 1,500 to 2,000 patients in rheumatology; about 2% of the now 100,000 patient population. So, we see significant opportunity for incremental penetration in rheumatology, as well as now an equal opportunity in nephrology. So, we see, we're just at the beginning of penetrating the opportunity to KRYSTEXXA. Feedback that we've gotten overall in rheumatology has been extremely positive with patients getting benefit because physicians now know how to best use KRYSTEXXA in this patient population. So, that's all what went behind our strong guidance for 2018 with KRYSTEXXA.

[Tina Ventura:]

Great. Thanks, Dana. Next question, please.

[Operator:]

Our next question is from David Steinberg with Jefferies. Your line is now open.

[David Michael Steinberg:]

Thanks very much. A couple of questions in teprotumumab. The first is, I think when you first acquired the product, you indicated that the patient population is about 10,000 in the U.S. and peak sales to be about $250 million . Curious, now that you have the asset, has your thinking changed? And then secondly, what's your view on incidence versus prevalence? Is this a course of therapy that the patient would just have once in their lifetime, or would there be multiple courses throughout? Thanks.

[Timothy P. Walbert:]

Well, sure. So, first, as far as the patient population, we're still doing our research, but we believe it could be 50% or greater number of patients. In a second, I'll have Dave comment on some of the work that we're doing to understand the differences between the smoker population and non-smoker. The opportunity from a net sales perspective we think will be substantially higher, and as we complete our work over the next few months, we'll be communicating that. And maybe Dave, you want to speak to incidence/prevalence and some of the work you've done?

[David A. Happel:]

Yeah, sure. Thanks, Tim. Dave, we've been conducting a fair amount of market research, not only in the disease but also into teprotumumab, to understand exactly where it fits in the treatment algorithm for TED. And what we have begun to discover is that the annual patient population eligible for treatment is really based on, as Tim indicated, both a prevalent number and an incidental number. And looking a little bit deeper into the segmentation of the patient population, we have begun to understand that some patients remain in the active phase of the disease, which is the optimal time to use a pharmaceutical therapy, versus those that move in and out of the active phase quickly. And as we have begun our research with physicians and looking at medical claims and the claims database to understand the patient journey and the patient experience, we now know that some patients, like smokers, stay in the disease and remain in the active phase for a much longer period of time. And, that, combined with our greater understanding of the disease itself has led us to believe and we're confident that the patient population is actually larger than we first understood and, consequently, the market opportunity, the revenue opportunity as well. We anticipate that we'll be able to conclude the vast majority of our market research over the next several months and we will be able to update our figures at that time.

[Timothy P. Walbert:]

Thanks, Dave. And I think the key thing as we want to look at the opportunity for teprotumumab is looking at the Phase 2 data which showed dramatic 69% response rate versus only 27% for placebo, where data has never been seen for anything from steroids to rituximab or any other agent. So, with these dramatic results, as Jeff mentioned, we've seen a lot of excitement around enrollment in the Phase 3 trial and with orphan-like pricing, we see the peak sales opportunity as a multiple, if not greater, of our original expectations.

[Tina Ventura:]

Great. Thank you...

[David Michael Steinberg:]

Okay. Great. Thanks.

[Tina Ventura:]

...very much. Next question, please.

[Operator:]

Our next question is from Marc Goodman with UBS. Your line is now open.

[Marc Goodman:]

Yes. Good morning. I want to talk about the sales guidance for the rest of the year. First, rheumatology; it just seems a little bit lower than I would have expected, just given the ramp that we're seeing, curious why there? And then, on the primary care side, when you say above $350 million, I mean it just feels like pricing has got to get worse in the fourth quarter relative to third quarter for some of these products. And I was curious why you're forecasting that? And maybe you can just give us a dynamic of what happened in the second to the third quarter for some of them to help us understand what that dynamic is. Thanks.

[Timothy P. Walbert:]

Sure, Marc. So, when you look at the overall ANRP for the primary care in the third quarter, it was roughly similar. If you include RAYOS for just the primary care products, it was slightly down. And what we saw is PENNSAID, essentially flat; and DUEXIS and VIMOVO, down. So, as we look at our primary care guidance, we continue to believe for the year, it'll be over $350 million and, we think, we have realistic guidance out there. The main focus that we look at is – for the rheumatology group, we've had very strong growth and I think sequentially in the quarter for RAYOS, it was up 11% in prescriptions over the second quarter and over 40% growth in vials in the third quarter over prior year. So, as we look at it in the fourth quarter, the sales force is going through a complete expansion and all the reps are going through new territories. So, their territories are getting smaller. So, we're factoring that in to the fourth quarter, and we expect them to be fully up and running and drive that 50% growth that we expect in 2018.

[Marc Goodman:]

And how do you think about the primary care business next year?

[Timothy P. Walbert:]

At this point, well, we don't have guidance for 2018. We think we have been successful in stabilizing the business, and think we can continue to do that. And we plan to give guidance on our fourth quarter call.

[Tina Ventura:]

Thanks, Marc. Next question, please?

[Operator:]

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

[Annabel Eva Samimy:]

Hi. Thanks for taking the question. So, I wanted to ask you a little bit about KRYSTEXXA and how treatment patterns are behaving. I know that, at some point, earlier in the year, there's a trend towards using more immunosuppressants while they're on – trying to treat with KRYSTEXXA to manage through their immunogenicity. To what extent do you think those patterns will continue, regardless of the TRIPLE data? Are they going to move towards tolerizing them or staying on immunosuppressants and what to them is more manageable? And then if I could ask you additional questions on PROCYSBI and RAVICTI growth, just a little bit more granularity there; in terms of the penetrations and the conversions, are you just converting patients who are on treatment, or you're starting to identify new patients for RAVICTI? And specifically for PROCYSBI, are you starting to penetrate the diagnosed but untreated populations? Thanks.

[Timothy P. Walbert:]

Sure. With KRYSTEXXA, Vikram, you want to take that? And then Eric can take the PROCYSBI and RAVICTI question.

[Vikram Karnani:]

Sure, Tim. So, with regards to KRYSTEXXA, your question was specifically around immunomodulation, we continue to hear from rheumatologists around the country. First of all, rheumatologists are very familiar with the concept of immunomodulation. Many already use it given that biologics are frequently used to treat other rheumatic diseases. So, this is not a new concept for them. They're very comfortable. And throughout the year and throughout the country, we've heard from folks that have used it and have had fairly significant success in improving response rates. So, from our standpoint, there has been a tremendous amount of interest in exploring either use of immunomodulation with KRYSTEXXA and we expect that interest to continue in the form of request for studies and so on and so forth. I think we also – Jeff also talked about the use of an immunomodulator in the RECIPE trial, which we'll talk about a little bit more later this week, as well as TRIPLE which is also evolving to include immunomodulation. So, we're very hopeful and we believe that this is one of the few exciting approaches that may improve our response rate for KRYSTEXXA.

[Timothy P. Walbert:]

Thanks, Vikram. Eric?

[Eric Mosbrooker:]

And on PROCYSBI and RAVICTI; and the RAVICTI patient numbers, as Tim mentioned, we're up about 25% year-over-year in terms of active shipping patients; PROCYSBI is up modestly. Both of those products are benefiting from both groups you mentioned. So, we're continuing to see conversions from both the initial cystine-depleting therapy and the other nitrogen-scavengers for RAVICTI as well as diagnosed but untreated patients.

[Tina Ventura:]

Great. Thank you. Next question, please.

[Operator:]

Our next question is from David Amsellem with Piper Jaffray. Your line is now open.

[David A. Amsellem:]

Thanks. So, I just wanted to ask a couple of bus-dev/M&A-related questions. So, first, can you talk about your acquisition bandwidth right now in terms of the size of a deal that you could potentially do? And then, secondly, can you talk about – relating to the pipeline comments you made or prioritizing pipeline-related acquisitions, is the focus going to be more teprotumumab-like acquisitions in terms of stage of development or are you casting a wider net? And then, lastly, on the primary care business, I think it's telling how little you've talked about it on this call compared to other calls. So, I guess, the question here is how big of a priority or is it a priority to find a taker for the business and failing that, just the restructuring, to take some cost out of the model? Thanks.

[Robert F. Carey:]

Sure. Thanks, David. First question on capacity, we ended the quarter with $625 million in cash. We need somewhere in the neighborhood of $150 million to $200 million cash on hand to safely run the business. So, that defines the amount of cash that we've got available to work with. And then, what we said to the market and we continue to pursue that as an objective is to keep leverage in a reasonable range, so we're not going to overextend the company with respect to taking on additional debt. So, we consider ourselves to have a lot of flexibility on what we can do at this point. As to focus, yes, we're looking for additional assets that look like tepro. A stated objective is to build the pipeline and create sustainable, long-term growth in the business. But we haven't lost focus on trying to find and accessing on-market assets, and there are a number of those that we continue to look at, evaluate, and attempt to transact on. But these are all hard to get done with a lot of risk involved in them. And so, at any one point in time, we've got several of those in play, but it takes time and you have to have a lot of shots on goal to get them done. And so, we continue to be in that mode. As to primary care, as we've said historically, all options are on the table with regard to primary care. We believe it's a sustainable business. We're going to access the cash flow from primary care to fuel growth in the business overall, and we can access that cash flow through a couple of different means. It could be an annuity over time, it could be a bolus. And so, we are actively looking at both options and preparing ourselves to, one, ensure that we maximize the value of that for the business so that we can take advantage of that cash flow.

[Tina Ventura:]

Thank you. Next question, please.

[Operator:]

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

[Louise Chen:]

Hi. Thanks for taking my questions. So, my first question here is how we should think about PROCYSBI sales in 2018, given some of the headwinds you're alluding the EU sales. Is this still a growth asset next year? And then, secondly, just a follow-up on the primary care question. If you were to spin or sell that business, could you take some debt with that business if you were to do that? And the last thing is, can you comment on what is driving the increase in accounts receivable and the days sales outstanding? Thanks.

[Robert F. Carey:]

So, on the PROCYSBI growth asset, Eric?

[Timothy P. Walbert:]

Yeah. We expect it to be a growth asset in 2018. We continue to convert patients, so we're confident in our ability to grow that asset over time.

[Robert F. Carey:]

Yeah. And on PC, can we transfer that along with it? The answer to that is no. But if we were to sell it, we would use cash to reduce debt. And then, on AR, Paul?

[Paul W. Hoelscher:]

Yeah. I mean, AR was basically flat versus the second quarter. And with our – especially, with the primary care business there's a high gross to net. I mean, our receivables are driven by our change in gross sales not net sales, and it's really based on the last month of sales each quarter. So, it can fluctuate quarter-to-quarter, but our terms are really unchanged and they generally stay in the mid-30s on a DSO standpoint based on gross sales.

[Tina Ventura:]

Thanks. Next question, please.

[Operator:]

Our next question is from Gary Nachman with BMO Capital Markets. Your line is now open.

[Gary Nachman:]

Hi. Good morning. A few follow-ups on KRYSTEXXA. First, how long before you could potentially change the label for it with data from the TRIPLE trial? How important is that to change behavior with that product? And then secondly, how should we think about the impact from the 340B pricing change next year, that's being absorbed in a 50% growth next year? And then lastly, just, what are the total reps that will be detailing both rheumatology and nephrology, and how much overlap is there between them? Thanks.

[Timothy P. Walbert:]

Okay. So, as far as changing the label, we would expect it to be a standard 10-month time line, so sometime in the second half of next year. We think there is a good understanding in rheumatology of the change in the data from the initial Phase 3 data to post-marketing data safety surveillance, as well as the TRIPLE trial. So, we think there's a good understanding of that, and we do think that a change in the label from the data that showed 26% to a rate below 1% would incrementally and substantially benefit our ability to promote the stopping rules that are appropriate for patients. As far as impact from 340B, it's about 25% of our business, as we said in the past, and we've included that potential impact beginning July 1st in our assumptions for 50% growth in 2018. Total reps are about 85. We have over 20 medical liaisons and about an equal number of patient access managers. So, when you when you put the whole organization in, the active in the field, population is 125-plus along with the internal support organization.

[Tina Ventura:]

Great. Thank you.

[Timothy P. Walbert:]

As far as overlap, each of our representatives calls on both rheumatology and nephrology in their territory.

[Gary Nachman:]

Okay. And then quickly, someone asked before if you'd scale back on primary care. So, could you just answer that question on the primary care?

[Timothy P. Walbert:]

I didn't hear that question.

[Tina Ventura:]

There was a bug there, Gary. If you could just restate that.

[Gary Nachman:]

Yeah. Yeah. Someone asked earlier if you might scale back on promotional efforts, I guess, behind primary care. Just, if you're thinking of restructuring that business more. So, if you could just comment on that.

[Timothy P. Walbert:]

No. We expect to continue the promotion. We've seen strong stabilization of prescriptions. There is quarter-to-quarter variability as we've seen in the gross to net but the underlying prescription growth is being successfully managed with the current promotional effort and we expect that to continue.

[Tina Ventura:]

Thanks. Next question, please.

[Operator:]

Our next question is from Irina Koffler with Mizuho. Your line is now open.

[Irina Rivkind Koffler:]

Hi. Thanks for taking the questions. With respect to fourth quarter spend, is this a good run rate to think about going into 2018 now that your KRYSTEXXA sales force will be fully loaded? That's the first question. And the second one is, now that your business is more orphan drug-focused, should we expect some of the similar seasonality in the first quarter that we've seen in prior years, when it was mostly tied to the reimbursement around the primary care products? Thanks very much.

[Timothy P. Walbert:]

So, on seasonality with biologics and rare diseases across the industry, you see a lot of re-verifications going on in the December and January timeframe. So, seasonality is certainly an impact across all medicines in our space for all businesses. From a fourth quarter spend standpoint, Paul can comment.

[Paul W. Hoelscher:]

Well, we're not giving guidance on 2018 other than the KRYSTEXXA sales at this point, but you are correct. I mean, the fourth quarter should be fairly – pretty much fully loaded for the KRYSTEXXA commercial expansion. So, that run rate for that piece should be fairly set. We're also spending on the tepro Phase 3. And again, the first patient was October, so it's really not fully loaded until the first quarter next year, but we'll give more guidance on 2018 in the first few months of 2018.

[Irina Rivkind Koffler:]

Great. Thanks.

[Tina Ventura:]

Thank you. Operator, we have time for one more question, please.

[Operator:]

Our last question is from Liav Abraham with Citi. Your line is now open.

[Liav Abraham:]

Good morning. Just one quick follow-up on tepro and thank you for the color you provided there. How should we – how are you thinking about potential pricing per treatment? What's a good analog to think of there when we're modeling? Thank you.

[Timothy P. Walbert:]

Thanks, Liav. I think, as we're looking here right now, if you look at – I would look at just benchmark pricing for orphan medicines with a population in the 10,000 to 20,000 patients treated per year.

[Tina Ventura:]

Great. Thank you. Operator, I think I'll move on with my closing comments now. Before, we close the call, I just wanted to remind everyone to mark your calendars for several upcoming events for Horizon. Later this week on Thursday, November 9 at 10