Horizon Therapeutics Public Limited Company
Q4 2016 Earnings Call Transcript

Published: 27 Feb 2017

[Operator:]

Good morning and thank you for standing by. Welcome to the Horizon Pharma plc Fourth Quarter 2016 Earnings Conference Call. As a reminder, today’s call is being recorded. I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations.

[Tina Ventura:]

Thank you, Shenille. 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; and Jeff Sherman, Executive Vice President, Research and Development, and Chief Medical Officer. Tim will discuss our 2016 results and our outlook for 2017, Paul will provide additional detail on our financial performance, and Jeff will provide a brief update on our clinical development program for our orphan medicines. Tim will then provide closing remarks and we’ll take your questions. As a reminder, during today’s call, we will be making certain forward-looking statements, including 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 filed this morning, subsequent quarterly reports on Form 10-Q and our earnings news release which was also 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 2016 performance and outlook for 2017. And with that, I will now turn the call over to Tim.

[Timothy Walbert:]

Thank you, Tina, and good morning, everyone. This morning, we reported our fourth quarter and full year 2016 results, delivering another year of exceptional financial performance for our shareholders. We also achieved an important milestone for our company, surpassing $1 billion in adjusted net sales following a rapid growth and transformation over the last five years. For perspective in 2011, we generated just $7 million in net sales in our first year as a publically traded company. We’ve accomplished a great deal over this timeframe, executing on our organic growth opportunities, evolving our business model and completing six acquisitions that have diversified our company from 2 medicines to 11. Led now by our fast growing orphan medicines, we are very well positioned to continue to deliver on our top tier growth expectations over the long-term. For the full-year 2016, we met for exceeded expectations for both net sales and adjusted EBITDA. Our full-year 2016 non-GAAP adjusted net sales of $1.46 billion increased 38% over 2015 driven by growth in each of our three business units. Our adjusted EBITDA of $471 million increased 30%. We also generated very strong adjusted operating cash flow of $193 million in the fourth quarter and $453 million for the full-year. We ended the year with a cash balance of $509 million. In addition to delivering strong financial performance, we made significant progress against our strategy to build a more diversified and durable high growth biopharmaceutical company, anchored by great mix of orphan medicines. We completed two strategic transactions in 2016, bringing us three new orphan medicines

[Paul Hoelscher:]

Thanks, Tim. This morning we provided information in our fourth quarter earnings release and on the Investors portion of our website that reconciles our GAAP results to certain non-GAAP financial measures. My comments will primarily focus on our non-GAAP results. Please review our earnings release for reconciliations to the GAAP results. Fourth quarter net sales were $310.3 million, an increase of 27% versus the fourth quarter of 2015. Sales growth was driven by strong performance across each of our business units

[Jeffrey Sherman:]

Thank you, Paul, and good morning, everyone. Today, I will provide a brief update on our clinical development programs and upcoming milestones as we look ahead to 2017. I’ll start with RAVICTI, which is indicated for urea cycle disorders, or UCD, an orphan disease that primarily impacts children. RAVICTI is currently marketed in the U.S. and Canada. And as Tim mentioned, we expect to launch RAVICTI in Europe in 2017 in partnership with SOBI. As a reminder, SOBI is also our partner today in Europe for BUPHENYL known as Ammonaps in certain markets. As we noted last quarter, we submitted to the FDA a supplemental new drug application or sNDA for RAVICTI to expand the age range from patients two years of age and older to patients two months of age and older. Data used to support this two month, two year sNDA will be presented in poster session at the American College of Medical Genetics and Genomics, ACMG Annual Clinical Genetics meeting at the end of March in Phoenix. The data showed that RAVICTI was safe and effective in UCD patients two months, two years of age demonstrating short and long-term control of ammonia and glutamine level, and decreased frequency of hyperammonemic crises compared to what was seen in older patients. We are also studying patients with RAVICTI from birth to two months of age and remain on track submit a sNDA to further expand to this age range in the first quarter of 2018. Moving on to ACTIMMUNE, we’re evaluating this medicine to enhance the effect of a PD-1 inhibitor and a Phase 1 oncology dose escalation trial with the Fox Chase Cancer Center. Preclinical research indicates an interferon gamma to potentially enhance the effect of PD-1 and PD-L1 inhibitors thus potentially improving cancer patient outcomes. Initial data from the Fox Chase trial was presented at the American Society of Clinical Oncology, society for immunotherapy of cancer, meeting last week. Investigators presented preliminary safety data and correlative peripheral blood immune activation findings in the first two cohorts of the study evaluating ACTIMMUNE in combination with the PD-1 inhibitor nivolumab in solid tumors for certain cancers. Data that was presented from the first two cohorts with advanced solid tumors who had progressed after initial prior therapy. Patients were treated with one week induction of ACTIMMUNE followed by a combination phase with ACTIMMUNE and nivolumab for three months. Patients with clinical benefit could then remain on nivolumab alone for up to one year. The preliminary data showed a combination therapy with ACTIMMUNE and nivolumab was safe and well tolerated in the first two cohorts. The third cohort of patients receiving the combination is still under study. The data also shows statistically significant activation of certain monocytes for white blood cells and peripheral blood, which demonstrates that ACTIMMUNE is having the desired effect of stimulating immune cells. These are very early results and the information being analyzed will inform the decision to proceed into the next phase of study. There is also a great deal of information to be gleaned from the multiple biomarkers and histopathology from tumor samples that will be assessed at a later time point. And we look forward to additional data being made available in the coming months. In addition to Fox Chase, a number of other academic and clinical institutions expressed interest in studying ACTIMMUNE as combination therapy in certain cancers and we’re evaluating additional investigator-initiated trials that could begin in 2017. Next, regarding KRYSTEXXA, as we have highlighted before, investigator-initiated triple trial continues to enroll patients. It is evaluating immunogenicity as it relates to KRYSTEXXA in studying a number of different subsets including patients in an increased body weight. Following trial completions, the investigators plan to submit the dataset to a future scientific meeting. We had a dimension of significant clinical presence at the American College of Rheumatology ACR meeting in November, where we presented KRYSTEXXA clinical data and expanded the awareness for KRYSTEXXA as an important option for patients suffering from refractory chronic gout. To wrap up on QUINSAIR, after evaluating regulatory options and based on feedback from the FDA, we have decided to discontinue efforts to pursue QUINSAIR approvals in the U.S. for chronic pulmonary infections in patients with cystic fibrosis. As a reminder, we did not ascribe any value for U.S. approval of QUINSAIR for any indication when we acquired Raptor. I look forward to sharing more with you about our clinical development programs as they advance. With that, I will turn the call back over to Tim.

[Timothy Walbert:]

Thank you, Jeff. 2016 was another exceptional year of performance for Horizon Pharma, where we met or exceeded our expectations, delivering 38% non-GAAP adjusted net sales growth, 30% adjusted EBITDA growth and generating non-GAAP operating cash flow of $453 million. We entered 2017 with a balanced and diversified portfolio of medicines and we are well positioned to continue to generate robust cash flows, strong net sales and adjusted EBITDA growth as well. While incorporating conservative assumptions for primary care business in our 2017 guidance, our 2017 net sales and adjusted EBITDA guidance ranges represent top tier growth of 19% to 23%, and 12% to 22% respectively. We have proven acquisition capabilities that deliver shareholder growth to our ability to rapidly transform and maximize the trajectory of the medicines we acquire. With significant cash flow and adjusted EBITDA generation, we are well positioned to continue to execute on M&A opportunities with the intent to start also pursuing development-stage pipeline acquisitions. And finally, we are executing against our goal to build a leading rare disease focused company over time as evidenced by our expectations that our 6 orphan medicines will approach nearly 50% of sales in 2017 growing more than 50%. With that, I’ll turn it back to Tina.

[Tina Ventura:]

Thanks, Tim. Shenille, please open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Marc Goodman of UBS. Your line is now open.

[Marc Harold Goodman:]

Morning.

[Timothy Walbert:]

Hi, Marc.

[Marc Harold Goodman:]

Just on the SG&A line previously you’ve talked about the increased spending, but the last time you really addressed all those was kind of before the FA disappointment. So can you just help us understand like 2017 versus 2016, what’s changing in the SG&A line, where are we increasing, where are we decreasing, and the focus, obviously, you mentioned a little bit of KRYSTEXXA earlier but included that? And then also RAVICTI seem to be a little weak in the quarter. Can you just address that, a little more color? Thanks.

[Timothy Walbert:]

Sure. With RAVICTI - I’ll answer in the beginning and then pass it to Paul and then Dave. And Dave will talk about the growth of RAVICTI in patients in the fourth quarter. When it comes to SG&A and expected year-over-year change as KRYSTEXXA will continue to get significant investment as we leverage the acceleration of that business. Paul can comment on…

[Paul Hoelscher:]

Right. And then, we talked about the investment on the managed care side too, so that happened really in the fourth quarter last year, will continue on comparable versus prior year in the first nine months of this year. And then the other significant change for SG&A would be the Raptor business being folded in. And on the sales and marketing side that will be all incremental, the sales and marketing expenses behind PROCYSBI will incremental to the company. And on the G&A side, we’d see that kind of decreasing over time as we reap some of those synergies from the Raptor business.

[Timothy Walbert:]

Dave you want to comment on - and maybe just RAVICTI and also the orphan business as a whole sequential growth.

[Dave Happel:]

Sure. Thanks, Marc. This is Dave. Regarding RAVICTI and the overall business, we saw as Tim indicated great growth for RAVICTI year-over-year and particularly over the second half of 2016 versus 2015, up 74% year-over-year, 11% for the second half of last year versus 2015. We saw 20% growth in active shipping patients over the year, and we were over 100% for the second half of 2016 versus 2015. With that background, it is common particularly in orphan medications we see variability in the ordering patterns. And in this particular case with RAVICTI, we saw a couple of various significant orders come in at the very end of the third quarter which impacted the fourth quarter pretty significantly and artificially deflated the revenue number. But - so that’s why I think over the course of looking at a period of time, it’s more important measurement of performance, and as indicated, the end of 2016, the last half versus 2015 was - we saw great growth for the brand. We expect to see that going forward. We expect to see a nice bounce-back in the first quarter of this year, which would be very similar to virtually every orphan brand that I’ve worked on the last 15 years or so. For the overall business, for RAVICTI, ACTIMMUNE and PROCYSBI we saw a great demand as a reflection of patient growth for all three brands. And we expect that continue for the foreseeable future.

[Timothy Walbert:]

So on a net basis, fourth quarter had good growth in average shipping-patients inventory and orders led to some variability. The other thing we saw early this year is that, over 50% decline in discretionary patients taking ACTIMMUNE for Friedreich’s ataxia, which with the strong start we’ve seen in new CGD patients so far this year it’s been more than offset, so very strong start of the year with ACTIMMUNE in CGD offsetting the expected decline in discretionary FA patients. So the orphan business continues to grow nicely.

[Tina Ventura:]

Thanks, Marc. Next question, please.

[Operator:]

And our next question comes from the line of Annabel Samimy of Stifel. Your line is now open.

[Annabel Samimy:]

Hi, guys. Thanks for taking my question. I just wanted to go back to a couple of the orphan drugs, ACTIMMUNE or RAVICTI specifically. Do you still see these growth products? And I guess, I’m a little bit confused about your comments with regard to RAVICTI, because the ordering patterns, I would imagine, you would have seen a huge uptick in third quarter. And this isn’t a pretty consistent grower since you’ve gotten this drug. So I’m a little bit confused about the ordering patterns that you’re talking about. And then, separately, you stopped talking about I guess SMO for ACTIMMUNE. So do you see this as a product that can return to growth as it had been growing before? Thanks.

[Timothy Walbert:]

Yes. So with RAVICTI, the active selling patients increased in the fourth quarter versus third quarter, and we just had a low level of inventory at the end of the year with RAVICTI. So we expected to continue to grow in our active selling patients. And it was really around ordering patterns. With ACTIMMUNE, we do expect it to grow. As I mentioned, we’ve had a very strong start to the year with new CGD patients more than offsetting the decline in FA patients, which we expected to decline post the trial results in December. When it comes to SMO, there are less than 160 patients in the United States and only a few centers that actually prescribe ACTIMMUNE, so they continue to use it. But it is not really material to the results for ACTIMMUNE. So we don’t discuss it in detail, but with our new strategy with ACTIMMUNE to focus on not only getting new CGD patients diagnosed, but also as a bridge to transplant therapy. We’ve seen a reacceleration of growth based on execution in the fourth quarter in this new strategy as we move into this year.

[Annabel Samimy:]

Okay.

[Tina Ventura:]

Oh, go ahead.

[Timothy Walbert:]

Go ahead, Annabel.

[Annabel Samimy:]

If I could just follow-up on one another question, you have three PBM contracts right now. And you’re still being a little bit conservative about the outlook, given some uncertainties on how the market is going to shape up. I guess, I expected the PBM contracts to give you a little bit more visibility than that. Can you just help us understand the lack of clarity that you have?

[Timothy Walbert:]

Sure. So based on what we know so far, our prescriptions are tracking ahead of our expectations and rejection rates are tracking also above our expectations, which should generally offset. And really, what we’re waiting for is getting more detail. We have about six weeks in, but very little data. We don’t get PBM invoices. We get them either one or - every one month or once a quarter. And then it takes several weeks for them to be gone through and reconciled. So we just have lack of information to really give us the full detail we need. But we’re executing well from a prescription standpoint. There are greater rejections than we expected, but we don’t have the full transparency on invoices from the PBMs. So we’re reflecting that conservatism. We expect as we have every year to continue to execute that business extremely well, but we’re also reflecting that there is a substantial change in the business and being conservative until we get much more facts. But we expect to continue to execute.

[Annabel Samimy:]

Okay. Great. Thank you.

[Timothy Walbert:]

Thanks, Annabel.

[Tina Ventura:]

Next question.

[Operator:]

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

[Ken Cacciatore:]

Hey, guys. I just have a quick question. Just operationally kind of on that point on the primary care products, just still trying to understand as you move from the specialty pharmacy model in a more - I guess, back to retail, just the logistics and all of this, is that a bit of a complicating factor in terms of [Technical Difficulty] get the prescriptions and either calling or going to the retail pharmacy, maybe an naïve question. Just trying to understand there’s some logistics and how that changes. And then secondly on business development, Crealta clearly in KRYSTEXXA was a fantastic acquisition. Just wondering how many more of those are out there that we’re just not aware of. You did mention about looking maybe now a development stage pipeline. Can they - but wondering, are we missing that there could be other type of acquisitions like Crealta available. Thank you.

[Timothy Walbert:]

I will take the first and Bob can take the second. One, we never use specialty pharmacies in the primary care business. Our primary care medicines were prescribed in over 10,000 pharmacies last year, so really no expected change there, whatsoever. The biggest difference is in the retail space where there were rejections, because of lack of formulary. Patients can now get covered, so we would expect to increase in prescriptions there which we are seeing. If you look at the rolling four weeks, it would show about 7% aggregate prescription growth. There is some benefit of holidays, so net of debt it’s probably in the 2% to 3% range which is ahead of our expectations for really what is always a volatile January and February. So we’re feeling good about the prescription side of it and looking to learn more and more about the full picture on getting invoices and rebates and further clarifying that business. But from a demand standpoint, we feel good about where the business is today and we haven’t seen any major change in - where prescriptions are filled. Bob?

[Robert Carey:]

Yes. And Ken on the M&A front, we continue to see a good flow of opportunities and with regard to commercial products. And so we continue to evaluate those and try to find transactions where we can take advantage of what we think we can create value versus what we have to pay for those products. And so no lack of opportunities there. We’re also as we’ve talked about going to begin the process of putting a pipeline behind the commercial programs. And you should expect to start seeing some activity on that front in 2017.

[Ken Cacciatore:]

Thank you.

[Tina Ventura:]

Thanks, Ken. Next question, please.

[Operator:]

And our next question comes from the line of Gary Nachman of BMO Capital Markets. Your line is now open.

[Gary Nachman:]

Hi, good morning. On KRYSTEXXA, could you provide more detail on what have been some of the promotional initiatives to accelerate sales? Why you’re more optimistic about the peak for that product? And on use of cash, I know the focus has been M&A, but with the stock at current levels would you actually consider doing a share buyback at this point?

[Timothy Walbert:]

I will handle the first. On the share buyback, no, we don’t expect to use it. We have continued to show that the value that we can generate with our cash flow in acquisitions far exceeds the benefit of the share buyback. And, Paul, anything to add to that?

[Paul Hoelscher:]

No, exactly that.

[Timothy Walbert:]

On KRYSTEXXA, to your specific question, there has been a number of things that occurred. I think it’s been a sequential process of getting the right type of resources in place as well as the right messaging. So we had to overcome initially four years of really, first, not the right messages in the right population or confusing messages; and second, not the right level of promotion prior to us acquiring the medicine. So our first step was to get the resourcing right and we went from about 15 specialty rep selling it to over 80. We added patient access managers and then we re-launched the brand in the May-June timeframe with the full sales-force aligned with medical liaison support, patient access managers support to ensure that sites that had not prior infused KRYSTEXXA were well prepared and can shepherd through reimbursement process. So we’ve seen just a strong coordinated commercial effort. And then re-launching the brand in October at the rheumatology, annual rheumatology conference, really helping rheumatologists understand that all gout is tophaceous, that if you actually do ultrasound and look at patients that there are micro crystals that lead to significant damage and tophi creation, and damage and morbidity in these patients. And that by with these chronic refractory gout patients treating the KRYSTEXXA can make a significant difference on these lives. So it’s really been what you expected, to increase the amount of promotion with the right messages and then insured patients are getting the medicine, on the commercial side at a very low out-of-pocket cost. So we expect to see that continue to grow and see exceed our expectations.

[Gary Nachman:]

Okay. And one quick follow-up on primary care, what were the growth to net in the fourth quarter? Do you expect them to stay at that level? I know you’re being conservative. But just tell us what’s factored in terms of the growth to net in the 2017 guidance. Thanks.

[Timothy Walbert:]

Sure. So we’re no longer discussing growth to net. We think a better measure to look at the business moving forward is average net realized price. When you look at 2015 and 2016 combined, the average net realized price declined 6%, it declined 2% in 2016. So we grew that business 20%, with a negative 2% price, so strong volume growth again in 2016. Moving forward in 2017, we expect that business to be flat in average net price.

[Gary Nachman:]

Okay. Thank you.

[Operator:]

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

[David Amsellem:]

Thanks. Just a couple. So, first, just going back to gross to net or average net realized price, I guess, the question here maybe put another way, has anything changed regarding your thinking regarding price? And this is bearing in mind that when you executed on the contracting you said that it would be largely gross to net neutral. So I’m just trying to understand, if there has been any changes to your expectation regarding that color from then to now? And then secondly, regarding acquisitions particularly pipeline focused acquisitions, maybe provide a little bit of color on what you’re thinking is hear are you primarily looking at orphan markets, are you looking at specialty non-orphan markets or something else? Just provide a little bit of color on how you’re thinking about R&D focused assets. Thanks.

[Timothy Walbert:]

Sure. I’ll take the first and Bob can take the second. When it comes to NRP, we expect a similar sequencing to the year. We are just like - in 2016, the lowest NRP will be seen in the first quarter, and then sequentially, growing throughout the year. I would say that that based on what we know today, we expect a similar pattern. It was down 6% for two years to present in 2016, and we expect it to be flat in 2017. So it’s - based on the information we have today, we see it as similar to our expectations. But as I mentioned, scripts are growing nicely, rejection rates are also better than we expected. And we want to really get the full picture before we get into more specifics beyond that.

[Robert Carey:]

And the second question, the split between orphan and specialty and focus as we move forward. We are looking at both. We are looking at opportunities actually across the business units. But we prioritize orphan, then specialty and primary care in that order. And what we continue to look for good places to put capitals at work that have the returns that we hope to generate, David.

[David Amsellem:]

Okay. Thank you.

[Timothy Walbert:]

Thanks, David.

[Tina Ventura:]

Great. Thanks, David. Next question, please.

[Operator:]

And our next question comes from the line of Louise Chen of Guggenheim Securities. Your line is now open.

[Unidentified Analyst:]

Hi, it’s [Brent Alex] [ph] on for Louise. Firstly just on PENNSAID, was there any shocking during the quarter? And then secondly on PROCYSBI, what was the actual number of patients on therapy at the end of 4Q? And then secondly, what are the biggest challenges or hurdles to you converting the patients still on Cystagon. Thank you.

[Timothy Walbert:]

On PENNSAID 2% for the quarter actually inventory declined in the fourth quarter versus the third quarter. So there was no increase in inventory whatsoever. There is actually less inventory on a sequential basis. With PROCYSBI, I’ll let Dave answer that.

[Dave Happel:]

Yeah. So the two questions regard to patient numbers and the challenges of converting PROCYSBI to Cystagon. With regard to patient numbers we haven’t really reported those. What we had said that there is - that we have 70% market share of those on cysteine-depleting therapy, and other measurements that reflect performance. Important to remember in orphan diseases, that most of these drugs are weight-based dosing, so as the patients age and grow over the dose increases. And PROCYSBI, as a reflection of growth and performance, performed very well and has over the last couple of years growing significantly in sales, in market share, in number of patients on drug, and also the amount of drug shipped to patients. To your question about the challenges of converting the remaining Cystagon patients over to PROYCSBI, it’s really just a matter of time. We continue to bring more and more patients, and convert more and more patients from Cystagon to PROCYSBI. The number of Cystagon patients still represents the largest number of patients on cysteine-depleting therapy for growth for PROCYSBI and it just really a question of time.

[Tina Ventura:]

Great. Operator, next question, please.

[Operator:]

Next question comes from the line of Irina Koffler of Mizuho. Your line is now open.

[Irina Koffler:]

Hi, thanks for taking the questions. With regard to the price increases taken in December, can you break out how much net you expect to keep in both primary care and the orphan business? And then, just clarifying about this higher amount of prior authorization rejections than you expected, so does that mean we shouldn’t really trust the volume growth that we see in the prescription data if it’s somehow offset on the backend with more PA rejections? Thanks.

[Timothy Walbert:]

So we didn’t take any price increases in December. I assume you meant the ones that we took January 1. When we look at what - and I’d answer that question, prior we expected average net realized price to be flat in the primary care business in low-single-digits overall. And then the - what’s the second question - was relative, oh, okay. So far as I mentioned earlier, we see prescriptions in aggregate of about 7% on a rolling four-week basis. And that’s in excess of our expectations and also rejection rates are in excess of our expectation. So we expect to continue to drive our business and execute. We’re being a conservative right now until we get more information.

[Tina Ventura:]

Great. Thanks, Irina. Next question, please.

[Operator:]

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

[David Risinger:]

Yes. Thanks very much.

[Timothy Walbert:]

Hi, David.

[David Risinger:]

I have a couple questions. Hello. I have a couple questions. First, with respect to the rejection rates that you just mentioned being higher than expected, how is that possible given the new contracts? I thought the new contracts would have eliminated the rejections. And then second, if you could talk a little bit more broadly about the Washington political outlook and what should we expect going forward? I know that some pharmaceutical companies are advocating for lower list prices and that would be offset by lower rebates paid to PBMs. And just wondering, get your thoughts, I guess, more broadly on the Washington pricing outlook and then specifically on that topic that I think Pfizer CEO has been suggesting might be a solution. Thank you.

[Timothy Walbert:]

Sure, David. So any medicine whether on formulary or not will have rejection rates. If you look at PBMs, they have various levels of formulary, some which one would call their exclusion list where they have the strongest formulary management. So it really depends on what part of the business you’re looking at. If you’re looking at Express Scripts, they have an exclusion piece that they managed on behalf of their clients. And then that up to two-thirds of the business is where they adjudicate prescriptions and you’re dealing with the formularies of individual plans. So you would see depending on the controls they have, varying levels of rejection rate. So what we’ve said is we see increased prescriptions versus expectations and increased rejection rates. And we expect to continue to execute there. From a politics standpoint, I don’t think I or anyone has a crystal ball so to really project where everything from ACA to tax and other reforms is really is just not valuable at this point in time. For us, as I mentioned, we expect - over the last two years we’ve had a negative 6% average net price in our primary care business while rapidly increasing volume. And we expect an average net realized price flat to low-single-digits across the entire business, so that’s all I can comment on. What happens politically, we’ll monitor it as everyone else does.

[Tina Ventura:]

Thanks, Dave.

[David Risinger:]

Okay, great, and just one follow-up, please. Could you just explain a little bit more about how investing in managed care rebates increases the SG&A? I think there was a comment about how you were investing in managed care relationships and that was causing the SG&A to go up recently.

[Timothy Walbert:]

So what we have said was we are going to increase national and regional account managers, so people increase SG&A expense. So that was it. So increasing the number of people to call on a broader range of managed care plan, so it’s a PBM, 60% of prescriptions they manage are just adjudication. You deal with those plans directly and you need a team to call on those plans and to pull through additional rebates and formulary coverage, so that’s what we were referring to.

[Tina Ventura:]

Got it?

[David Risinger:]

Got it. Okay, thank you.

[Tina Ventura:]

Shenille, looks like we’ve got time for one more question, please.

[Operator:]

Okay. And our next question comes from the line of Liav Abraham of Citi Investment Research. Your line is now open.

[Liav Abraham:]

Good morning. Thanks for squeezing me in. Just a couple of quick questions. Firstly, I was hoping you could comment on the gross margins. If I remember correctly, in your prepared remarks you talked about gross margin of 90% for 2017. Correct me if I am wrong. And if that’s correct, I think that’s slightly lower than gross margins over the past couple of years. So any commentary on gross margin and gross margin projection and the factors affecting that going forward would be helpful. And then secondly, how should we be thinking about the tax rate over the next few years? Thank you.

[Timothy Walbert:]

Paul?

[Paul Hoelscher:]

Yeah. So on the gross margin, I mean it’s really a couple of things. I mean, all of our products have similar margins. But there’s a slight decrease just based on the expected mix of products in sales in 2017, plus we are making, I guess, some investments in some tech transfer and just kind of normal things that happen over time where you move production of products or do a backup supplier whatever that has some costs that we have factored into our plan for 2017.

[Liav Abraham:]

And should we expect that 90% to be the normalized rate beyond 2017 as well?

[Paul Hoelscher:]

In that ballpark, I mean, there is not a great - and we were just over - we were 91% kind of this year, 90% next year. It will be that same general ballpark going forward. And then, can you just repeat the tax question?

[Liav Abraham:]

Just how we should be thinking about your effective tax rate 2017 and on the next few years?

[Paul Hoelscher:]

Right, so, for 2017 we said low-20s as a percent on the non-GAAP side. We expect that - previously, we’ve said the teens. But I think that difference is really just, again, the mix of earnings. When we bring in Raptor, there is more U.S. earnings and kind of tweaked that up. And then we’d expect over the next few years, assuming no changes in tax laws that that would temper back down into the high teens over time.

[Liav Abraham:]

Great. Thank you.

[Tina Ventura:]

Great. Thanks, Liav. Thanks, Shenille. And that concludes our earnings 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 57707260. Thanks so much for your interest in Horizon Pharma and for joining us today.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.