Horizon Therapeutics Public Limited Company
Q3 2016 Earnings Call Transcript

Published: 7 Nov 2016

[Operator:]

Good morning and thank you for standing by. Welcome to the Horizon Pharma Plc Third Quarter 2016 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, Vince. 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; Dave Happel, Executive Vice President, Orphan Business Unit; George Hampton, Executive Vice President, Rheumatology and Primary Care; and Dr. Jeff Sherman, Executive Vice President, Research and Development, and Chief Medical Officer. Tim will provide a review of our third quarter results and an update on the business, Paul will provide additional detail on our financial performance, and Jeff will provide an update on our clinical development program for our orphan medicines. Tim will then provide closing remarks and we'll take the questions. As a reminder, during today's call, we will be making certain forward-looking statements, including financial projections and the expected timing, outcomes, 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, 2015, subsequent quarterly reports on Form 10-Q, and our earnings news release which was issued this morning. You are 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 regulatory filings from today that are available on our Investor website at www.horizonpharma.com. We have also posted an investor presentation to our website that summarizes our third quarter results. I will now turn the call over to Tim.

[Timothy P. Walbert:]

Thank you, Tina, and good morning, everyone. Today, we reported record sales results for the third quarter 2016 that were in line with the updated guidance we provided in October. Non-GAAP adjusted net sales were $273.7 million, representing year-over-year growth of 21%. Adjusted EBITDA was $141.2 million, representing almost 52% of adjusted non-GAAP net sales. As we have stated in the past, our long-term strategy is to build a more diversified, sustainable biopharmaceutical company anchored by a greater mix of orphan medicines, and we're doing that well. Our rare disease medicines, RAVICTI, ACTIMMUNE, KRYSTEXXA, and BUPHENYL represented 35% of our total non-GAAP adjusted net sales in the third quarter compared to 29% of net sales in the third quarter last year. We've made several strategic decisions this year to put Horizon Pharma on a strong path forward, including completion of two significant acquisitions in rare diseases as well as securing formulary status with two major PBMs. Last month, we completed the acquisition of Raptor, which adds two new rare disease medicines, PROCYSBI and Quinsair, and further diversifies our total company portfolio to 11 medicines, with over half in rare diseases. In fact, on a combined basis, including PROCYSBI and Quinsair, through the first nine months, our rare disease medicines now represent 44% of our total non-GAAP adjusted net sales. As we announced at the end of September, we completed a second major PBM agreement with Prime Therapeutics. In addition to our CVS/Caremark agreement, we now have formulary status secured for approximately 35% of covered lives in the United States. We remain in active discussions and negotiations with other PBMs and payers with a goal of further increasing access to our medicines. This morning, we also confirmed our full-year non-GAAP adjusted net sales guidance of approximately $1.045 billion to $1.050 billion which includes between $20 million to $25 million of estimated Raptor sales for the last two months of this year. We also confirmed our adjusted EBITDA guidance of approximately $450 million to $460 million. Year-over-year growth at the midpoint of our guidance ranges are 38% for non-GAAP adjusted net sales and 26% for adjusted EBITDA. I will now walk through our third quarter in more detail, beginning with our Orphan Business Unit and the recent acquisition of Raptor, which is a significant step forward in our goal to build a leading rare disease business. I'm also pleased to announce that several of the commercial leaders at Raptor will be joining the Horizon team. Dave Happel, who is Raptor's Chief Commercial Officer, has been appointed Executive Vice President of our Global Orphan Business Unit. At Raptor, Dave had responsibility for leading all global commercial activities for PROCYSBI and Quinsair. He brings more than 25 years of experience in biotech and pharma and, importantly, led the development of commercialization of ACTIMMUNE a number of years ago in his career. As we continue to build a leading rare disease business at Horizon, we're very pleased to have Dave leading this business. In addition, Eric Mosbrooker joins us from Raptor to lead the Orphan Business in the Americas and Asia Pacific, and Françoise de Craecker joins us from Raptor to lead the Orphan Business in Europe, Middle East, and Africa. As we noted in our 8-K this morning, net sales from the third quarter for PROCYSBI were $35.2 million and net sales for Quinsair were $1.7 million. PROCYSBI is indicated for the treatment of nephropathic cystinosis or rare life-threatening metabolic disorder that causes amino acid cysteine to accumulate in the tissue and organs in the body, causing irreversible damage. PROCYSBI is a strong strategic fit within our existing Orphan Business Unit. It's an important treatment options for many new patients as we further penetrate this market. PROCYSBI in many ways is very similar to our rare disease medicine, RAVICTI, which also treats rare pediatric metabolic disease. PROCYSBI has been primarily growth driver for Raptor and we believe it offers significant long-term potential with estimated global peak sales potential of more than $300 million per year. Raptor also brings us the orphan medicine, Quinsair, for cystic fibrosis, which is proprietary inhaled formulation of levofloxacin, approved in Europe and Canada for the management of chronic pulmonary infections due to pseudomonas aeruginosa in adult patients with cystic fibrosis. Quinsair is off to a strong start in Europe and is expected to launch in Canada by end of this year. Quinsair is not approved in the United States and, given its current status, we did not describe – or ascribed any value for U.S. approval in the acquisition model. As we evaluate the development of regulatory pathway for Quinsair in the U.S., its potential approval would be upside to our evaluation. In our Orphan Business Unit in the third quarter, which includes ACTIMMUNE, RAVICTI, and BUPHENYL, sales increased 8% year-over-year. Year-to-date, our Orphan Business has generated 51% growth. Given the relatively low market penetration of each medicine, we have a significant opportunity to help many more patients over time and drive sustainable long-term growth for these critical orphan medicines in their currently approved indications. RAVICTI sales were $42.2 million in the quarter and we've exceeded our goals for new patient starts this year, and continue to improve compliance and persistency rates. This is being driven by physicians' preferences to prescribe RAVICTI over other nitrogen scavenger medicines based on their positive clinical experience. The team has done a terrific job understanding the needs of patients living with urea cycle disorders which typically occur in young children and, in many cases, can be life-threatening. By continuing to educate physicians, patients, and their caregivers about the importance of tight ammonia control, we continue to expand the universe of patients who can benefit from RAVICTI. On the commercial side, we've also enhanced our analytics, refined our sales organization to improve our targeting efforts. Following our RAVICTI sNDA submission in June, we continue to expect a 10-month FDA review to potentially expand the current age range for RAVICTI in the United States from patients two years of age and older to patients two months of age and older. Outside of the U.S., we announced the commercial launch of RAVICTI in Canada last week and we expect to launch in Europe in 2017. There are approximately 100 Canadian patients living with UCDs that could benefit from RAVICTI therapy. ACTIMMUNE sales were $24.9 million in the quarter. Sales were primarily impacted by the discontinuation of direct – discretionary use patients, as well as a lower number of net new CGD patients added in the quarter. We expect the discretionary use portion of the business to continue to become smaller over time. Similar to our approach of RAVICTI, we continue to enhance our analytics to support ACTIMMUNE and refine the focus of our sales organization to improve our physician-targeting efforts. Our goals are to continue to identify and initiate new patients who can benefit from ACTIMMUNE therapy and increase adherence to patients currently receiving ACTIMMUNE. We're also investing in additional clinical account managers who will now have responsibility for large institutions, academic centers, and CGD thought leaders. This will allow the existing commercial team to identify new targets and new patients to support further growth of ACTIMMUNE in CGD. In May, we completed enrollment of our Phase 3 trial for ACTIMMUNE for the treatment of patients living with the rare neurologic disease, Friedreich's ataxia, or FA. If this data is positive, it will be a transformational opportunity for the estimated 3,700 people diagnosed with FA in the United States. These patients, many of whom are children and young adults, currently have no treatment options. We continue to estimate that peak U.S. sales in FA could be $500 million to $1 billion annually, and assuming positive data at the end of the year, we plan to submit a supplemental biologic license application for ACTIMMUNE by the end of the first quarter next year. As we discussed when we updated 2016 guidance on October 11, we've pulled forward some additional investment spending to ensure we're in best possible position to launch ACTIMMUNE successfully for FA, assuming positive data. We only get one chance to successfully launch a medicine, so we're going to ensure we have sufficient planning in place to do it right. We also want to ensure patients have access to our medicine, so we've started planning now for patient expanded access protocol in the United States. The intent of this program is to bridge the gap between completion of the Phase 3 clinical program and marketing of the medicine. There are currently no FDA-approved treatments for FA. Therefore, this program would only include patients with advanced disease that may not be eligible for other FA trials. This study would begin soon after receiving data from the Phase 3 trial, assuming it's positive. We're also investing in additional pipeline opportunities for ACTIMMUNE in combination with the PD-1 checkpoint inhibitor in both kidney and bladder cancer, and a Phase 1 investigator-initiated trial with Fox Chase Cancer Center. The first six-patient cohort was completed in May, the second six-patient cohort was completed in September, and the third cohort is now enrolling. Data from this Phase 1 trial will be submitted to a medical meeting for perpetual presentation next year if accepted. Next, our Rheumatology Business Unit, which includes KRYSTEXXA for refractory chronic gout and RAYOS, our delayed-release prednisone. RAYOS net sales increased 15% in the third quarter, driven by continued steady prescription volume growth. This result of continued improvement in commercial execution during the quarter and broader coverage in the rheumatology market by our sales force. KRYSTEXXA generated $25.6 million in net sales in the quarter, a sequential improvement of 29% versus the second quarter of 2016. KRYSTEXXA is a highly effective orphan biologic medicine and the only FDA-approved treatment that is indicated for refractory chronic gout, which is a population we estimate to be about 40,000 to 50,000 patients. It is still early in our efforts with the full commercial effort beginning in May of this year, but the commercial and clinical investments we begin in the first half have started to build strong momentum driven by steady growth in benefits investigations, which is a leading indicator for new patient starts. Benefit investigations are up more than 50% year-over-year which is driving steady growth in KRYSTEXXA vials and, as a result, we've seen strong increase in patients infused. To support the long-term growth of KRYSTEXXA following the Crealta acquisition, we continue to invest in additional marketing, medical education, and commercial infrastructure to support its long-term growth. This includes new patient access managers who are responsible for providing support to new accounts and for helping new patients and physicians navigate through the infusion process as well as the related reimbursement process. We continue to anticipate that KRYSTEXXA peak annual sales will exceed $250 million and our experience to-date gives us further confidence in the ultimate long-term potential of this important treatment options for refractory gout patients. At the American College of Rheumatology Meeting this November, we look forward to presenting two abstracts on KRYSTEXXA and one on RAYOS. It has been three years since KRYSTEXXA data has been discussed at any major medical meeting and this ACR Meeting is an excellent opportunity to position KRYSTEXXA the right way to key gout stakeholders including key opinion leaders and community rheumatologists. We're beginning to better understand the true value of this important medicine. The investigator initiative TRIPLE trial continues to enroll patients and has been expanded to also evaluate patients with increased weight. The goal of the TRIPLE trial is to help further expand the clinical profile of KRYSTEXXA and assess a reduction in immunogenicity following an increase in the frequency of dosing or now the amount of dose versus dosing in the original clinical program. Given the adaptive nature of this trial as well as the expansion of the trial to include additional patients, the investigators intend to gather the complete data set and submit it to a future medical meeting. We see meaningful opportunity ahead to accelerate the treatment of patients who suffer from painful refractory chronic gout. In our Primary Care Business Unit, third quarter sales increased 10% year-over-year driven by continued strong performance of PENNSAID 2%, our topical NSAID medicine, which is sold by both our Primary Care and Rheumatology sales forces. Sales of PENNSAID 2% were $80.2 million in the quarter, an increase of 83% year-over-year. Our gross and net sales percentage for primary care medicines for the third quarter is approximately 76%, and was in line with our previous full year gross to net guidance range of 75% to 80%. And finally, let me update you on our discussions with PBMs and payers. As we have discussed over the last several months, our mission has always been to secure and ensure broad patient access to our Primary Care medicines. To that end, we have put significant focus on securing formulary access for our primary care medicines with PBMs and key payers, as well as making investments required to expand and strengthen our managed care organization. Going into 2017, our goal was to secure at least one major PBM agreement for our primary care medicines. To-date, we have secured formulary access with both CVS/Caremark and Prime Therapeutics. These agreements combined represent approximately 35% of total covered lives in the United States. In addition, these two contracts provide durability for our primary care medicines going forward, and most importantly, significantly improve access to our medicines for potentially thousands of patients. These new agreements and any others we're able to complete further strengthen our ability to deliver sustainable net sales, while enhancing the ability of physicians to get the medicine they prescribe into the hands of their patients. We continue to be in active discussions with other PBMs and payers. We'll communicate any updates as we receive them. With that, let me turn the call over to Paul to review our review our financial results for the quarter in more detail. Paul?

[Paul W. Hoelscher:]

Thanks, Tim. This morning, we provided information in our third quarter earnings release, and on the Investor portion of our website that reconciles our GAAP results to certain non-GAAP financial measures. My comments will mainly focus on our non-GAAP results. Please review our earnings release for reconciliation to the GAAP results. Third quarter non-GAAP adjusted net sales were $273.7 million, an increase of 21% versus the third quarter of 2015. Sales growth was driven by strong performance across each of our business units. Third quarter adjusted EBITDA was $141.2 million, representing 51.6% of non-GAAP adjusted net sales. We're also confirming our full-year 2016 non-GAAP adjusted net sales guidance and adjusted EBITDA guidance. We expect non-GAAP adjusted net sales of approximately $1.045 billion to $1.050 billion, which include the effective contribution from Raptor medicines of between $20 million and $25 million for the last two months of 2016. We're also confirming full-year 2016 adjusted EBITDA guidance of $450 million to $460 million, which includes the impact of Raptor for the last two months of 2016, as well as expected higher operating expenses related to the additional investments in KRYSTEXXA, ACTIMMUNE in FA, and our managed care organization as we noted in our updated guidance on October 11. Now, I will review the operating section of the income statement in more detail. Third quarter non-GAAP gross profit margin was 91.6% of non-GAAP adjusted net sales and we continue to expect our non-GAAP gross profit margin for the full-year 2016 to be in the range of 91% to 92%. Total non-GAAP operating expense was $109.3 million, or 40% of non-GAAP adjusted net sales, in the quarter. Non-GAAP R&D expense in third quarter was $10.4 million, or 3.8% of non-GAAP adjusted net sales. This was due a higher level of investment as expected related to the ongoing Phase 1 dosing trial for ACTIMMUNE in certain cancers and continued clinical investments in KRYSTEXXA. We continue to expect a higher level of investment in the fourth quarter as we will be conducting ACTIMMUNE in FA Phase 3 data analysis and preparing for the initiation of the ACTIMMUNE expanded access program, as Tim referenced. We continue to expect full-year 2016 non-GAAP R&D investments to be in mid-single digit as percent of non-GAAP adjusted net sales. Non-GAAP sales and marketing expenses in the third quarter were 65.7% million, or 24% of non-GAAP adjusted net sales, and non-GAAP G&A expense was $33.1 million, or 12.1% of non-GAAP adjusted net sales. Next, I will turn to income taxes. As noted last quarter, we modified the method of calculating our non-GAAP income tax expense to align with revised non-GAAP guidance issued by the SEC on May 17. The non-GAAP tax rate was 9% in the third quarter and 14.6% for the first nine months. We continue to expect a non-GAAP tax rate in the mid-teens for the fourth and full year of 2016. Non-GAAP net income and non-GAAP diluted earnings per share in the third quarter were $115.5 million and $0.70, respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share in the third quarter of 2016 were 164.9 million shares. For 2016, we expect our weighted average diluted share count to be approximately 166 million shares outstanding. Now, let me provide a few high-level comments on our cash flow and balance sheet as of September 30, 2016. Regarding cash flow, GAAP operating cash flow was $128.8 million in the third quarter of 2016 and we generated $230.3 million of GAAP operating cash flow for the first nine months of 2016. Non-GAAP operating cash flow was $133.8 million in third quarter and we generated $259 million of non-GAAP operating cash flow for the first nine months of 2016. This represents a more than 50% year-over-year increase in cash flow generation as compared to the $167.2 million of non-GAAP operating cash flow in the first nine months of 2015. Cash and cash equivalents were $549.3 million as of September 30. On October 25, 2016, we issued $675 million of new debt, composed of a private offering of senior notes and incremental term loans under our existing senior secured credit facility and used the net proceeds to partially fund the acquisition of Raptor, as well as related fees and expenses. Following the issuance of this new debt, our new total principal amount of debt outstanding is $1.945 billion, composed of $770 million of senior secured term loans due in 2021; $475 million of 6.625% senior notes due 2023; $300 million dollars of 8.75% senior notes due in 2024; and $400 million of 2.5% exchangeable senior notes due in 2022. We estimate our total debt for the last 12 months adjusted EBITDA leverage ratio is approximately 4.3 times. As we did following the acquisition of Hyperion last year, we expect to rapidly de-lever over the next 12 to 18 months. Our capital structure following the issuance of the new debt results in a weighted average cash interest rate of approximate 5.6% based on current LIBOR rates. I will now turn the call over to Jeff.

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

Thank you, Paul, and good morning, everyone. I will provide an update on our clinical development programs for our orphan medicines and upcoming milestones. Let me begin with RAVICTI, which is indicated for urea cycle disorders, or UCD, an orphan disease that impacts about 2,000 people in the United States, primarily children. As we noted last quarter, we submitted to the FDA a supplemental New Drug Application, or sNDA, for RAVICTI to expand the age range for patients two years of age and older to patients two months of age and older. We continue to anticipate a typical 10-month review. In addition, in the first quarter of 2018, we expect to submit an sNDA to expand the RAVICTI age range to also include patients from birth to two months of age. Next, let's move on to ACTIMMUNE, which is in Phase 3 development for Friedreich's ataxia, or FA, a debilitating neurologic disease with no FDA-approved treatment. We completed enrollment in our Phase 3 STEADFAST trial in May and continue to expect to have top line data in late December of this year. Let me take a few moments to review some specifics including the trial design, patient population, primary end point, and other important details of this study. STEADFAST is a randomized, double-blind, placebo-controlled Phase 3 trial, had enrolled a total of 92 patients as of May 5 at four top FA centers across the country. We work closely on the design of the trial with the Friedreich's Ataxia Research Alliance, or FARA, and the principal investigator, David Lynch, from the Children's Hospital of Philadelphia, or CHOP, had reviewed the trial design with the FDA. Patients are dosed with either ACTIMMUNE or placebo, had it dosed up to 100 micrograms per meter squared. This is double the dose of the Phase 2 trial, which was 50 micrograms per meter squared. The dose was increased in the Phase 3 trial based on reports from Europe of improvement in treatment effect in FA with a higher dose. In the Phase 3 trial, the dose was titrated upward and administered at night to minimize the possibility of flu-like side effect. Based on the inclusion criteria, patients enrolled in the trial are between the ages 10 and 25, and have disease rated greater than stage 1 and less than stage 5 of FA. This was to target patients that were neither too early on in their disease nor too severe to better assess treatment effect. The primary end point is to modify Friedreich Ataxia Rating Scale, or FARS-mNeuro, which measures the disease progression score at six months of treatment. The FARS-mNeuro is an objective validated measures that assesses functional parameters such as speech, ability to swallow, upper and lower limb coordination, gait and posture from a baseline measure. This modified end point removes components viewed by the FDA to be more subjective such as the peripheral nerve assessment. The trial is sized conservatively based on the Phase 2 trial results in possible placebo effect based on other FA studies in terms of the projected FARS score difference and standard deviation to achieve a conventional 80% power at a 0.05 significant level or an approximately 3 points difference in FARS score. Working with FARA, we rigorously train the physicians conducting efficacy and safety assessments to help ensure high consistency and evaluation across the sites in the study. The physicians who are conducting efficacy assessment do not conduct the safety assessment. This helps to further reduce potential bias. With the last patient enrolled in the trial on May 5 and with a six-month treatment end point in two-week follow-up period, we expect the database will be locked in early December. To-date, 99% of the 92 patients have completed the six months' treatment, and we expect 100% completion this week. From there, data will be analyzed and we expect to have top line data available late December. Assuming positive results, we anticipate a late first quarter 2017 sBLA submission. If we receive a priority review with our Fast Track status, we could potentially have approval by the end of the third quarter of 2017. We would know if priority review was granted approximately 60 days following our sBLA submission. In addition, all patients in the Phase 3 pivotal trial have the opportunity to enroll into the extension study evaluating the long-term safety of ACTIMMUNE for FA for an additional 28 weeks. To-date, 95% of the patients have decided to enroll into this open-label extension. As Tim mentioned, we want to ensure patients have access to our medicine, so we have started planning now for an ACTIMMUNE expanded access protocol program for patients with advanced disease that may not be eligible for other FA trial. We are working with the FDA and FARA now on this protocol, so that we could start it as soon as possible if the Phase 3 data are positive. ACTIMMUNE is also being evaluated in a Phase 1 trial in combination with a PD-1 inhibitor medicine in various forms of cancer including bladder and kidney cancer. Preclinical research has indicated an interferon gamma could potentially enhance the effect of PD-1/PD-L1 inhibitors thus potentially improving cancer patient outcomes. Through our research collaboration with the Fox Chase Cancer Center, we hope to gain a better understanding of this combination. The first and second six-patient cohorts are completed and the third six-patient cohort is now enrolling. As Tim mentioned, if the data are accepted in an abstract submission, we could be in a position to present data from a Phase 1 trial next year. In addition to Fox Chase, we have received interest from other institutions to evaluate ACTIMMUNE in other oncology treatment setting. And finally, regarding KRYSTEXXA, we will have two abstracts at the American College of Rheumatology, or ACR, Meeting later this month in Washington, D.C. The first abstract is a retrospective analysis of data from two pivotal randomized KRYSTEXXA clinical trials. It concludes that refractory chronic outpatients, defined as non-responders in the trial, still achieved significant clinical benefit with respect to treatment, including reduction in tophi and improvements from baseline in their patient global assessment, tender and swollen joint, pain, and other measures. The second abstract is a retrospective review of KRYSTEXXA-treated gout patients who completed at least three infusions and compared to corticosteroid, methylprednisolone, or hydrocortisone used for advanced infusion reactions. The results indicate that methylprednisolone pre-infusion therapy may allow for longer prospective therapy duration compared to hydrocortisone. ACR will be the first medical meeting in three years where KRYSTEXXA will have a significant clinical presence, which will continue to expand the awareness of KRYSTEXXA as an important treatment option for refractory chronic gout sufferers. The investigator-initiated TRIPLE trial continues to enroll patients. It is evaluating immunogenicity as it relates to KRYSTEXXA both from a safety and efficacy perspective. As we have discussed, it has an adaptive design and the investigators have added new patient population. This includes the recent expansion to evaluate patients with increased body weight by giving them a higher dose of KRYSTEXXA for the first week versus the standard eight-milligram dose. The addition of other patient subpopulation of the TRIPLE trial depending on study data will help to more fully characterize patient response. Given that the trial is still enrolling patients, following trial completion, the investigators plan to submit the full dataset to a future scientific meeting. I look forward to sharing more with you about our clinical development programs as they advance. So with that, I will now turn the call back over to Tim.

[Timothy P. Walbert:]

Thanks, Jeff. To summarize the quarter, strategically, we've made significant progress this quarter and also this year executing against our long-term strategy as well is our short-term goals. We secured two major PBM agreements that further strengthen the durability and sustainability of our Primary Care Business, and we completed two acquisitions in rare disease as we continue to transition our company to be a leading rare disease organization. We continue to track toward our full-year 2016 net sales and adjusted EBITDA guidance. We continue to deliver on our core principles of strong commercial execution, clinical expansion of our existing medicines for patients in need, and broad patient access that ensures our medicines are affordable and accessible. Moving forward, we'll continue to drive and motivate our rapidly growing organization with the goal of continuing to deliver exceptional financial performance. With that, we'll now open it up for questions. Tina?

[Tina Ventura:]

Thank you, Tim. Vince, we will take our first question.

[Operator:]

Yes ma'am. Our first question is from Stephan Stewart of Goldman Sachs. Your line is open.

[Stephan Stewart:]

Good morning. Thanks for the questions. Just firstly on the Primary Care Business, with the Express settlement now out of the way, maybe can you provide some greater updates on how that discussion is going as we move into the year end?

[Timothy P. Walbert:]

Well, with Express Scripts, we have completed our discussions and we're waiting to hear results of their decision relative to the 2017 formulary decisions for our primary care medicines, and we would hope to hear a decision on that by the end of the year.

[Stephan Stewart:]

Got it. And on Raptor, hoping maybe you can provide some more refined synergy assumptions now that the deal is closed or at least on timing and when we are supposed to – or expect to see some of these synergies come through.

[Timothy P. Walbert:]

Well, we expect to see them continue to flow through throughout 2017 with the adjusted EBITDA margin being accretive to our existing EBITDA margin by the fourth quarter and continuing to be accretive to our adjusted EBITDA margin and beyond – from 2018 and beyond. I don't know, Paul, if you wanted to get into any other specifics.

[Paul W. Hoelscher:]

So, I mean, at this time we're estimating approximately $50 million synergies that, as Tim said, we expect to be by the end of 2017 having those fully achieved. So, 2017 will be less than that, but by at the end of the fourth quarter, we'll have achieved most of those synergies on a run rate.

[Stephan Stewart:]

Great. Thanks.

[Operator:]

Thanks. Our next question is from Mark Goodman of UBS. Your line is open.

[Marc Goodman:]

Yes. Good morning. Two questions. First, can you comment on the tax rate in the quarter and why it was unusual? Second, ACTIMMUNE seemed a little weak in the quarter; talk about the trends there. And third, during the preannouncement you spoke about increasing people and patient access people, and just can you give us more color on what's happened so far and what the plan is for the rollout of it? Thanks.

[Timothy P. Walbert:]

Sure, I'll take the second two and then Paul can take the tax question. Relative to ACTIMMUNE, there were two impacts in the quarter. We had lower discretionary patients that the majority of the ones that continue decline were IPF patients and for every one IPF patient that goes off medicine, it takes two CGD patients to make up for that lost patient. So, that has an incremental impact in the quarter. In addition, when you lose a commercial discretionary patient, it increases your gross net because you have a higher percentage of Medicaid patients. We have had one of the strongest months since we acquired the medicine in October, so we're pleased with how the business continues to accelerate. Relative to the second question around people, we're making good progress in hiring. I think we've completed the hiring of the patient access managers for ACTIMMUNE. We're moving well through the hiring of the (37

[Paul W. Hoelscher:]

Sure. So, on a quarter-by-quarter basis, we will have fluctuations, Mark, because of just the way GAAP taxes are calculated and non-GAAP too. So, we had a few discrete items this quarter, but it's primarily due to looking at your full-year rate, and when you get to the third quarter, if your full-year estimate changes by 1% or 2%, when you flow that through through your full nine months of earnings and have that hit just in the third quarter, it can skew the rate. The other thing that's unusual or that impacts us is if you start with a fairly low, either positive or negative, GAAP net income, when you flow through the non-GAAP adjustment, the rate can be distorted at any one quarter fairly easily. So, we try to focus kind of on the year-to-date and where we think the year is going to come out, and there will be fluctuations from quarter to quarter.

[Tina Ventura:]

Thanks, Mark. Vince, next question, please.

[Operator:]

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

[Annabel Samimy:]

Hi. Thanks for taking my questions. I have a few. With regard to ACTIMMUNE, I'm not saying this is going to happen, but if in any event that the Friedreich's ataxia trial doesn't work out, how much additional growth do you feel that you have from the current labeled indications, specifically I guess for CGD where it seems like you're placing a little bit more emphasis on? On Raptor, want to know about how you're going to prioritize your investment in R&D. They had a number of programs there. I don't think that you're pursuing all of them, so maybe you can give us some color there. And then on the PBM – I'm sorry; on the Primary Care Business, what kind of new commercial initiatives are you pursuing to take advantage of the increased tax if you have at least with CVS/Caremark and Prime? Thanks.

[Timothy P. Walbert:]

Sure, Annabel. So, with ACTIMMUNE, the focus is on CGD, given that it's about 2,000 patients versus a little over 100 for SMO, so that definitely is the focus, and we continue to see acceleration of patients and it's an individual patient-by-patient fight. We've added new key account managers to focus on the opinion leaders and key institutions, so that our existing clinical science associates can focus on driving new patients through the existing prescribing base. And the biggest opportunity is when you look at the trends in treating CGD, there are a number of patients that go on to get bone marrow transplants, and that's ensuring that if a patient does go on to bone marrow transplant that ACTIMMUNE is a bridge to that transplant, similar to what is done in SMO. So, we've seen an opportunity to be used before bone marrow transplant and if that transplant is not successful to reinitiate therapy on ACTIMMUNE. So, we expect to have continued strong growth there over time. With Raptor from an R&D perspective, the Huntington's and NASH programs were discontinued and put on hold pending incremental external investment and we're continuing to evaluate those. When it comes to studying in bronchiectamis, (sic) [bronchiectasis] (41

[Tina Ventura:]

Thanks, Annabel. Vince, next question please.

[Operator:]

Our next question is from Louise Chen of Guggenheim Securities. Your line is open.

[Louise Chen:]

Hi. Thanks for taking my questions. I had a few here. So, first question I had here was, we've got a lot of questions of what type of pricing you're getting on the additional formulary coverage that you've been receiving? So, any color you could provide there even if it's qualitative would be helpful. And then secondly, there's been a lot of concerns about pricing headwinds in primary care, but are there any concerns that you may have on the orphan drug side? It's something that people have brought up, so just curious what you think there. And then last thing here is just for ACTIMMUNE sales, when do you think the sales decline should stabilize here and how should we think about the franchise going forward without FA, just as a stand-alone basis for ACTIMMUNE? Thank you.

[Timothy P. Walbert:]

Sure, from a pricing standpoint, it's really when we look at gross to net, we expect these contracts to be neutral to gross to net with additional opportunity in the retail space where our commercial organization can continue to drive new prescription growth and ensure patients have that access. From a headwinds, when we look at our primary care organization, we've had net – average net realized price increases of about 2.5% to 3% annually, which is consistent with what we're seeing across the industry of an average net realized price increase of 2.8% in 2015. In the orphan side, we've had low- to mid-single digit average net realized price increase and looking at the orphan space, it's less than 5% of total drug spend and we haven't seen that increase significantly over time. So, the critical thing for us is we're dealing with PROCYSBI, with RAVICTI, genetically identified rare diseases in children with populations of less than few thousands, and we expect access to continue to be provided for those patients. Relative to ACTIMMUNE, we've seen about a 20% decline in the amount of discretionary use since we acquired ACTIMMUNE with IPF, going from about 21% to about 7%. And so, as IPF continues to decline as a percentage and that being a higher dose, we expect the impact of that to decline. And as I said earlier, we've seen one of our strongest month in October, post acquiring ACTIMMUNE and we see significant incremental opportunity to leverage our new key account managers, so that our existing clinical science associates can drive incremental prescriptions in the target positions they've been calling on. So, continued steady growth on a month-over-month basis, with positive FA, obviously a separate organization that will focus on prelaunch and launch activities.

[Tina Ventura:]

Thanks, Louise. Vince, next question please.

[Operator:]

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

[David Michael Steinberg:]

Yeah, thanks very much. I know a few months ago, you repurchased the global rights to ACTIMMUNE ex-U.S. and I was just wondering if you'd give us some color on your regulatory clinical strategy ex-U.S.. And then secondly, assuming you launched in other countries in Europe or other territories around the world, could you give us a sense of the magnitude of the opportunity, I know you said $0.5 billion to $1 billion peak sales opportunity, but what sort magnitude and is there a possibility of re-pricing the asset? I know you have approval for an older indication in Europe. Thanks.

[Timothy P. Walbert:]

Thanks, David. Well, as far as the regulatory strategy, we are continuing to evaluate that. We expect the acquisition to close either by the end of the year or in the first quarter. That would put the MAA in our hands where we can continue to provide access for CGD patients. When it comes to the ex-U.S. markets as a whole, we see it as being a greater than $100 million opportunity with separate opportunity that you had referenced of $500 million to $1 billion in the U.S.

[Tina Ventura:]

Thanks, David. Vince, next question please.

[Operator:]

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

[Gary Nachman:]

Hi. Good morning. If you could give us the actual number of patients on ACTIMMUNE, RAVICTI, and KRYSTEXXA, how those have changed that would be helpful. And then ACTIMMUNE for FA, if 95% of patients are enrolling into the expanded access open label, anything to read into that in terms of how these patients may be doing?

[Timothy P. Walbert:]

Sure, I'll take the first. When it comes to patients on medicine, there's about 385 to 390 patients on RAVICTI, 280 to 285 on ACTIMMUNE. We don't have an actual number on KRYSTEXXA, that's just based on vials sold. So, we haven't disclosed that number and don't have that actual number. When it comes to the ACTIMMUNE trial with 95% enrolling, when you look at the first six-month pivotal trial, that was a double-blind controlled trial 45 – it was designed to have 45 on placebo, 45 on ACTIMMUNE. The second six months, all patients would receive ACTIMMUNE. So, for patients who got placebo, they have the opportunity to then go on active drug. So, that certainly increased the continuation there. And from – as far as 95%, I think that's really a result of the fact there's no other approved treatments and patients and families working with FARA have estimated the importance of staying on these trials, getting the best results possible so that when we do get the ultimate data, it can provide the fullest answer to the FA community. As far as reading into results, we won't know until we know. We'll get the data in late December and our current plans are to put that out as soon in the New Year as possible and no way to read into it other than that.

[Tina Ventura:]

Thanks, Gary.

[Gary Nachman:]

Okay. Thanks.

[Tina Ventura:]

Vince, next question please.

[Operator:]

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

[David A. Amsellem:]

Thanks. So, on PROCYSBI, can you talk about the biggest challenges of getting patients converted to the drug? That's number one. And then, on Quinsair, in the U.S. – and I may have missed this -- can you talk about when you're planning to meet with the FDA and what's your general level of expectations on what you're going to have to do to get that market in the U.S. if that is indeed what you're looking to pursue? Thanks.

[Timothy P. Walbert:]

Thanks, David. I'll take the Quinsair question, and then Dave Happel's on, you can take the – really, what the effort has been to convert patients. In the U.S., we really look at evaluating all the data that available continue to meet with opinion leaders and look at incremental analysis that can be done, so that we fully understand the efficacy, continue to work with FDA. I don't think there's another meeting required with the FDA; it's just us completing incremental analysis now that we're a combined company, and then really finalizing plans on what it would take to submit with the existing data and what an advisory committee would or wouldn't look like and then what – when you look at typical scenarios like Quinsair as you saw with (51

[David A. Happel:]

Sure. Yeah. Thanks. The growth on PROCYSBI has been strong. We continue to convert a number of patients that were previously on immediate release cysteamine as well as those patients that are naïve or considered naïve to treatment. The hurdles are really on a patient-by-patient basis in being able to identify those that's all into one of the two categories that is those that were previously on immediate release and those that were previously undiagnosed. The efforts really take place at the field level and we still have a significant way to go to capture all these patients. So, we expect the growth to continue for the foreseeable future, and as Tim pointed, with the $300 million or roughly thereabouts market opportunity.

[Tina Ventura:]

Great. Thanks, David. Vince, next question please.

[Operator:]

Our next question is from Donald Ellis of JMP Securities. Your line is open.

[Donald Bruce Ellis:]

Thank you. Good morning. I'm going to go back to a previous question and get little bit more details. ACTIMMUNE in FA Phase 2 you said were dosed to 50 mics per meter squared, Phase 3 doubled the dose to 100 mics per meter squared. I mean, is it suggestive that when you double the dose you still had 95% of the patients wanting to enter into the long-term trial that there aren't any real side effect issues there? And are you planning on looking at any doses higher than 100 mics per meter squared?

[Timothy P. Walbert:]

Sure, let me just correct, I think I may have said we're going to release data in the first quarter. Our plan is to continue release data by the end of the year and I think the plans would be to continue to increase incremental data from the Phase 3 trial as we complete those analysis. When we look at the Phase 2 trial, the original intent there was to use the approved dose and to see if there was a clinical signal. As we continued to evaluate the Phase 2 results and looked at this disease in particular, decision was made to scale up to the 100 microgram. And what – as far as side effects, the dosing in the trial was similar to what our commercial organization has done with CGD, is to dose it at night with appropriate treatments like Tylenol to help overcome flu-like symptoms, which is predominant adverse event that is noticed. So, that's – we don't have adverse events results as yet to understand that more fully, but typically with the medicine on the market for 20 years, we don't expect anything related to the flu effect to be different than the commercial effort, and I think that was – is that the final question?

[Donald Bruce Ellis:]

Higher dose to be...

[Timothy P. Walbert:]

Oh, we do not have any plans for higher doses than 100 microgram at this point in time.

[Donald Bruce Ellis:]

All right. Great. Thank you very much.

[Tina Ventura:]

Thanks, Don. Vince, next question please?

[Operator:]

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

[Ken Cacciatore:]

Hey, guys. Just wanted to work back to the primary care products real quick. Just wondering, as you switch from kind of a PME as you continue to hopefully secure more managed care, what's the logistics in that going back to a kind of a retail pharmacy model? Is there anything we should just be aware of as you kind of work through those logistics? And then secondly, as you work through the negotiations with Express and others, is there a deadline that those negotiations have to complete that would make it difficult for them to kind of flip the switch for January 1 to have you – have access? I don't know if you can work all the way up to December 29 or 30. I mean, can you just talk about when this needs to be complete to be able to have access in January? Thank you.

[Timothy P. Walbert:]

Sure, Ken. As far as transition from Horizon Cares to managed care contracts, we expect to get north of 70% under contract as we complete the year. In that case, essentially you'll have less prescriptions going through the Horizon Cares program and more going through traditional pharmacies. We've had access to RAYOS and PENNSAID and also (56

[Ken Cacciatore:]

Thank you.

[Timothy P. Walbert:]

Thanks, Ken.

[Tina Ventura:]

Thanks, Ken. Vince, next question please.

[Operator:]

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

[Irina R. Koffler:]

Hi, thanks. So, the $528 average net realized price this quarter -- is that a good way to think about pricing without the contracts? And then is this price going to go down after contracting or I know you said it was going to be neutral to gross to net. And then in terms of the volumes of scripts going through the contract, so if you're saying 70% is going to be under contract by the end of the year, should we expect 70% of the scripts to be contracted or can more still persist in the Horizon Cares? And then my last question is on promotional investment and expenses. So, it sounds like you're still hiring some of your staff, but around fourth quarter, should we expect that to be a reasonable run rate in terms of spend for 2017 to model that forward? Thank you.

[Timothy P. Walbert:]

Sure. As far as the average net realized price from a 2016 versus 2015, it looks like it will be in the 2.5% to 3% increase on average, and we expect that rough increase to be in the low, pushing towards the mid-single digits. So, not substantially changing as it – into 2107. Relative to volume, the 70% would be volume of prescriptions that would be under contract assuming that we are able to secure the PBM contract with ESI. As far as promotional investments, we expect those as we announced in our updated guidance to be in place here in the fourth quarter. We're not commenting specifically on run rate for 2017, but we – assuming positive FA, we would have nine months of investing in that launch next year, which without sales occurring til the fourth quarter, so we would expect incremental investment in that case.

[Tina Ventura:]

Great. Thanks, Irina. We've got time for one more question, Vince.

[Operator:]

Thank you. Our last question is from David Risinger of Morgan Stanley. Your line is open.

[David R. Risinger:]

Thanks very much. I just have two questions, so both are financial. The first is with respect to SG&A, Paul, could you remind us what expenses if any associated with patient assistance or co-pay programs or other assistance to patients go into SG&A versus get subtracted out of net revenue? And then, the second question is, when should we expect you to provide 2017 financial guide? Thank you.

[Timothy P. Walbert:]

We'll give financial guidance in the first quarter for 2017 and...

[Paul W. Hoelscher:]

And on patient assistance, I mean it's all – it all comes out gross to net. And so, if you look at our – in our 10-Q, we have a table for the quarter and the year that lays out the walk of gross to net and shows the co-pay and patient assistance coming out of our net sales.

[David R. Risinger:]

Okay. Thank you.

[Tina Ventura:]

Thanks, David. And thanks, Vince. 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 pass code for that replay is 98231038. Thank you for your interest in Horizon Pharma and for joining us today.