Horizon Therapeutics Public Limited Company
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Horizon Pharma plc Third Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce and turn the conference over to Elizabeth Higashi, Vice President of Investor Relations.

[Elizabeth M. Higashi:]

Thank you, Nicole. Good morning, everyone. We issued a press release earlier this morning which provides the details of Horizon Pharma plc's financial results for the third quarter and 9 months ended September 30, 2014, as well as a summary of our updated net sales and adjusted EBITDA guidance for 2014 and 2015. The press release we will reference on today's call is available on the Investor Relations Events section of our website at www.horizonpharma.com. Leading the call today will be Tim Walbert, our Chairman, President and Chief Executive Officer, who will provide a corporate overview and update of the commercial performance of ACTIMMUNE, DUEXIS, RAYOS and VIMOVO, as well as our recent acquisition of the U.S. rights for PENNSAID 2%. Paul Hoelscher, our Executive Vice President and Chief Financial Officer, will discuss the financial highlights from the third quarter, before turning the call back over to Tim for Q&A. Also on the call this morning are Bob Carey, Executive Vice President and Chief Business Officer; Jeff Sherman, Executive Vice President of Research and Development and Chief Medical Officer; Brian Andersen, Group Vice President and General Manager of our Orphan business unit; Terry Evans, Senior Vice President, Managed Care and Trade and General Manager of Primary Care business; and Ben Bove, Senior Vice President, Commercial Strategy and Our Prescriptions Made-Easy Organization. As a reminder, during today's call, we will be making certain forward-looking statements, including financial projections and the expected timing and the 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, 2013, subsequent quarterly reports on Form 10-Q, and our current report on Form 8-K that was filed this morning. You are cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligation to update such statements. Further, we will also discuss non-GAAP financial measures during this call to help you understand our underlying business performance. Reconciliations of these non-GAAP financial measures to the equivalent GAAP measures are provided in the press release, which has been posted on our corporate website. I will now turn the call over to Tim.

[Timothy P. Walbert:]

Thank you, Elizabeth, and good morning, and we're here in our new corporate headquarters in Dublin. So good afternoon, anyone over here. And for us, the third quarter was transformational for the company. As you know, on September 19, the company completed the acquisition of Vidara Therapeutics International plc and completed the resulting formation of Horizon Pharma plc headquartered here in Dublin. The Vidara acquisition was transformational for the company and to prepare us to optimally execute our corporate strategy of continuing to drive organic growth, as well as aggressively pursuing the acquisition of incremental products and/or companies, we restructured our commercial organization into 3 business units

[Paul W. Hoelscher:]

Thank you, Tim, and good morning, everyone. As Tim outlined, our third quarter net sales improved threefold to $75.1 million compared to last year's $24.1 million, and we generated net income of $2.1 million, a milestone for us, compared with a loss of $5.5 million last year. On a GAAP basis, net income per basic share was $0.03 and $0.02 on a diluted basis. On an adjusted basis for the third quarter, adjusted non-GAAP net income was $25.3 million versus a loss of $2.1 million last year. Adjusted EBITDA increased to $28.1 million in the quarter compared to just $571,000 in the third quarter of last year. Adjusted non-GAAP income per share was $0.32 basic, versus a loss of $0.03 in the prior year, with diluted adjusted non-GAAP income per share at $0.24 versus a loss of $0.03 last year. Weighted average shares outstanding for the third quarter were 78.4 million for basic compared to 64.6 million shares last year. Please keep in mind that the basic weighted average shares outstanding for the third quarter only reflects the 31.35 million shares issued in the Vidara transaction for 12 days. Diluted weighted average shares for the third quarter were 85.7 million. As of November 3, 2014, our ordinary shares outstanding were 118.9 million, reflecting both the 31.35 million shares issued in the Vidara transaction and the 12.9 million shares issued in October in connection with the induced conversion of a portion of our convertible senior notes. If we include all of the ordinary shares that could be issued upon the exercise of outstanding stock options and warrants, divesting of outstanding RSUs, and the conversion of the remaining convertible senior notes, there would be approximately 150 million ordinary shares outstanding. Since Tim has already covered net sales by product, I'll focus now on the rest of our financial highlights for the quarter. Gross profit margins were 81.8% compared to 86.7% last year. Excluding depreciation, intangible amortization, amortization of inventory step-up from ACTIMMUNE and royalty accretion, non-GAAP gross margins were 95.7% versus 92.7% last year. Total third quarter operating expenses in 2014 were $73.4 million versus $23.6 million last year. Sales and marketing expenses increased $15.5 million to $31.1 million this year. The largest portion of the increase was related to salaries and benefits, which increased nearly $9 million due to the expansion of our sales force. You may recall that our sales organization has more than doubled from what it was at this time last year, as we had not yet acquired VIMOVO. We also incurred about $5 million of additional marketing and commercialization expenses in the quarter, again, primarily related to VIMOVO. General and administrative expenses increased $32.2 million compared with the third quarter of 2013, primarily due to $28.3 million of transaction expenses related to the Vidara acquisition, as well as increased salaries and benefits resulting from additional support staff. Interest expense increased $1.6 million to $5.2 million during the third quarter compared with $3.6 million last year, primarily due to higher debt balances in the current year. Foreign exchange loss was $2.8 million compared to a foreign exchange gain of $1.1 million in last year's third quarter. This was primarily attributable to a weakening of the Euro against the U.S. dollar during the current quarter. Our Horizon Pharma AG subsidiary has intercompany balances and intercompany transactions that are denominated in U.S. dollars. We also recorded a bargain purchase gain of $22.2 million in the quarter, representing the excess of the estimated fair value of the net assets acquired over the acquisition price of Vidara. Other expenses were $3.2 million during the quarter, and represented commitment fees that were incurred prior to the funding of the senior secured credit facility on September 19. We recorded a benefit for income taxes of $3 million in the third quarter compared to an expense last year of $265,000. This was attributable to a reduction in our net deferred tax asset position during the quarter. The inclusion of additional deferred tax liabilities in connection with our merger with Vidara resulted in our ability to reduce our existing deferred tax valuation allowance. We generated $1.5 million in cash from operating activities for the third quarter. On an adjusted basis, after excluding cash payments related to the Vidara acquisition cost of $20 million and the post-closing payment of certain Vidara transaction costs that we assumed in the merger of $14 million, non-GAAP cash provided by operating activities was $35.6 million for the third quarter. During the third quarter, we also paid out $179.2 million in cash, net of the cash acquired, for the acquisition of Vidara. We funded the acquisition by drawing $300 million on our senior secured credit facility at an interest rate of 9%. We ended the quarter with $248.8 million of cash and cash equivalents, and net debt of $165 million. These September 30 balances do not reflect approximately $60 million of cash outflows in October related to 2 transactions. As Tim mentioned earlier, on October 17, we paid $45 million in cash for the U.S. rights to PENNSAID 2%. In addition, in late October, we induced holders of an aggregate principal amount of $69.4 million of our convertible senior notes to convert issuing 12.9 million ordinary shares and making an aggregate cash payment of $14.6 million. The aggregate principal amount of the convertible senior notes remaining after these transactions is $80.6 million. Tim outlined our guidance for 2014 and 2015. Again, we are raising our guidance on net sales for 2014 to $280 million to $290 million and adjusted EBITDA to $90 million to $100 million. For 2015, our revised guidance as for net sales of $425 million to $450 million, and adjusted EBITDA of $160 million to $180 million. Regarding income taxes, in addition to utilizing a portion of our net operating loss carryforwards, we also expect to benefit from lower tax rates in subsidiaries outside the United States in the fourth quarter and next year, due to our new legal structure following the Vidara transaction. As a result, we are estimating an effective tax rate in the low single digits for both the fourth quarter of 2014 and full year 2015. We estimate weighted average shares outstanding of 84 million for basic and 106 million for diluted for the full year 2014, and 121 million for basic and 143 million for diluted for 2015. These share estimates include the impact of the shares issued for the Vidara transaction and the induced conversion of a portion of the convertible senior notes in October, but assume no other issuances of shares in the future, other than estimated ordinary course issuances and exercises of outstanding equity grants. Now I'd like to pass the call back to Tim.

[Timothy P. Walbert:]

Thanks, Paul. We continue to make progress in executing our strategy in the third quarter. We had strong organic growth of our base business, and continued our business development strategy with the acquisitions of Vidara and PENNSAID. Our pursuit of new products continues unabated. Our PENNSAID 2% transaction is a direct result of our strategy to identify interesting opportunities, which complement our business and are attractively valued. We're engaged in the pursuit of multiple additional product acquisitions and our emphasis remains on seeking out products within each of our 3 business units. Our strategy of layering growth through acquisitions on top of our attractive organic growth is successfully advancing the development of our commercial critical mass and establishment with ACTIMMUNE of the late-stage product development product -- pipeline. We moved from 2 commercial products 1 year ago to 5 products as of January 2015 and soon-to-be initiated Phase III program and the large unaddressed market opportunity for Friedreich's ataxia with ACTIMMUNE. We have aspirations to grow our commercial product portfolio significantly, and judiciously explore development of additional indications for ACTIMMUNE. Thank you for your time, and I'll now open it up to questions.

[Operator:]

[Operator Instructions] Our first question comes from line of Annabel Samimy of Stifel.

[Annabel Samimy:]

I wanted to talk to you about some of your strategies to deal with the exclusion list. One of the strategies you mentioned was that you are going to focus your PME plan on finding the high access patients. So I guess, I'm curious, how is that going? So I think you probably would've started that strategy by now. And how much of a sense do you have of whether that could -- that you could actually target these patients? Maybe you can just give us a little bit of color on that. And then I have a follow-up on ACTIMMUNE.

[Timothy P. Walbert:]

We don't have a strategy to target high access patients. Our strategy is to target the physicians who treat those patients by significantly increasing our penetration of PME, and our PME organization has begun this month an activation program on a district-by-district basis to continue to add new target physicians who are over weighted towards seeing patients who have coverage with the 2 PBMs that we're referencing. The way we -- outside of our traditional PME program, are able to offset potential impact of this exclusion list is through our new PME program that we're rolling out on a retail basis, which allows a patient who has not been seen a physician who's in the PME program, happens to go to a pharmacy, processes their prescription, and if it were to be rejected by one of the PBMs, it'll automatically be processed as if we were processing it through our traditional PME program, which would entail that patient getting the product at a very low out-of-pocket co-pay and the physician, the pharmacist and everyone involved to see that the patient, in fact, was reimbursed for the product.

[Annabel Samimy:]

Okay. So of the increased penetration you have at PME in your respective products, do you feel that the weighting to those physician practices in geographies is what you're intending?

[Timothy P. Walbert:]

Yes. It's tracking right at our expectations. And the retail PME program is really one that covers physicians and patients who fall outside of our direct PME program.

[Annabel Samimy:]

Okay, great. And then on ACTIMMUNE, it looks like there were 26 patients out in the quarter, is what you said, which seems pretty nice clip. And that's essentially, was still 1 week in your hand. So what do you think you can do in terms of adding patients for ACTIMMUNE, once it's in sort of your system in your hands? Do you have sort of an idea of the number of patient adds or the rate that you can add at that, now that you've got it in your hands?

[Timothy P. Walbert:]

I think what the -- thank you, Annabel, for the question. What our target has been to average roughly 7 to 8 patients, and we're on track with that and we expect that rate to continue. One of the things we love about Friedreich's ataxia is that you've got 2,400 patients in a registry. What you don't have for CGD is when you look at those 1,600 patients, we have 270 on drug. There isn't a well-formed advocacy group similar to FARA to provide a registry to access them. So the real work is at a grass roots advocacy level to help identify physicians who see these patients, help identify patients through various nonpersonal programs like website and other avenues, as the Vidara team and Brian Andersen's organization has been executing against. So with CGD and SMO, our target is to continue to add 7 to 8 patients per month. We exceeded our expectations in the third quarter on a full quarter basis, pro forma basis, and we continue to expect that. With incremental upside coming, obviously, as we move through the process with Friedreich's ataxia, and we did take a recent price increase in October 16, which we think moves the pricing of ACTIMMUNE more similar to its peers relative to incidence and prevalence. So with the combination, we feel confident that we can continue to drive growth in the brand.

[Annabel Samimy:]

Okay. One more on ACTIMMUNE, if I may. How should we think about the off-label sales? I think on -- the last time, when we saw you about 65% of the 270 -- the 270 patients represented about 65% of unit sales. So can you help us think about how we should sort of factor in these 35% off-label sales? Is it the same volume use, or maybe you can give us a little bit of guidance on that?

[Timothy P. Walbert:]

Sure. So we see about the same percentage, so 270 on label with CGD and SMO. We don't obviously market the product and don't have a lot of transparency into the off label aspect of it, and we see it across a number of different diseases. We don't forecast it at this point. We basically apply it, the patient's times are typical compliance, which is in the 70% range. And it's hard to forecast it beyond there. That's the -- one thing we do expect is that percentage of on-label to continue to increase as we drive these incremental patients on-label with CGD and SMO.

[Operator:]

Our next question comes from the line of Ken Cacciatore of Cowen and Company.

[Ken Cacciatore:]

I just wanted to ask about when you plan on having your end of Phase II meeting on ACTIMMUNE? And give us maybe a tighter sense of when the Phase III will start? And the second question is, when we ask some companies, are they open to transformational transactions, clearly, depending on the market cap, the options can be limited. But in your situation, your current cap, first are you open to transformational-type transactions? What would it ideally look like if you saw one? And how many of them exist? Can you give us some sense or quantification of the opportunities that may be out there?

[Timothy P. Walbert:]

I'll answer the first, and for fun, I'll let Bob answer the second. On the first, we've already gotten the feedback on our Phase II program from the FDA. We reported that in my comments, where basically, everything we had asked for, we felt very comfortable with. We are working through final details now with the Friedreich's Ataxia Research Alliance, GenPharma, as well as with David Lynch from CHOP, who we expect to be the PI of the study. And so as based on the feedback we've gotten and our continued discussions, our guidance continues for the second quarter of next year to initiate that trial. I'll comment on the first part of your second question, that is, are we are open to transformational deals. I think our history is evidence that we are. So the answer is, yes. As far as availability of them. Bob?

[Robert F. Carey:]

Ken, we continue to see good opportunities, whether it's bolt-on acquisitions like we just executed with PENNSAID 2%, or looking at larger, interesting transactions that may be a little bit outside the box. So we've got several of those in the pipeline that we are working on. But as we all know, there's no way to predict what the outcome will be on any one of those.

[Timothy P. Walbert:]

So we're open to them and -- if they are there, and we'll aggressively pursue them as we have in the past. And the third quarter is really representative of that, where we had one transformational acquisition with the Vidara ACTIMMUNE and the bolt-on with PENNSAID. So that would be fair to look at that as what we're trying to do on a go-forward basis.

[Operator:]

Our next question comes from the line of Donald Ellis of Avondale Partners.

[Donald B. Ellis:]

A quick question on -- a follow-up on Friedreich's ataxia and ACTIMMUNE. After the Phase II meeting with the FDA, do you have any additional color on the -- roughly, the number of patients you're going to need for that trial, and the length that trial is expected to take?

[Timothy P. Walbert:]

I think based in our feedback, it's similar to what we guided, less than 100 patients in a 6-month period to accurately assess the drug working in these FA patients. Our initial trial was in 3 months, and we think that 6 months is appropriate in less than 100 patients, and that guidance continues.

[Robert F. Carey:]

But the conversations with the FDA continue. So there's nothing that's been agreed to at this point, Dan.

[Donald B. Ellis:]

Okay. Do you think you guys are seeing any off-label use in FA to date?

[Timothy P. Walbert:]

I think we do have some patients. I actually have no idea how many, I don't even look. So I think there are some, but it's not something we look at or measure.

[Operator:]

Our next question comes from the line of Louise Chen of Guggenheim.

[Louise Alesandra Chen:]

So I only have 2. So when you talk about PME, can you talk us through the profitability for your prescriptions? We've done pushback at the CVS, and expect the prices that are on exclusion but pushback to PME and those scripts are not profitable? And then after that, if you can quantify the capacity of deals you can do post the close of Vidara?

[Timothy P. Walbert:]

Sure. So the first question was profitability. You saw an aggregate about 40% of our prescriptions and currently going through, if you aggregate all products and highly profitable quarter, with $28 million adjusted EBITDA on $75 million. So we do -- as we move into the program, we expect to see an increase in our net revenue per prescription as we move forward on a quarter-over-quarter basis and in roughly similar ranges, we may see an increased gross to net as a result of incremental capturing those patients that would've been rejected and that's offset by increased price and prescriptions. Bob, the second question?

[Robert F. Carey:]

Yes. Well, I think on that also, Louise, it's the interplay between price per script and the volume of scripts that are out there. So giving up or no longer having to pay the rebate, and then also, having free scripts. Even with both of those trends in place, we expect to see an increase in the net sales per script. So we talk about profitability, we see it as our profitability on a per script basis going up, as opposed to going down. I don't know what...

[Timothy P. Walbert:]

Yes. And then relative to our appetite and availability to finance incremental acquisitions, there's 2 pieces that we look at is our existing accelerating adjusted EBITDA, coupled with the EBITDA of the assets we acquired, and with our current debt of $300 million-plus, about $370 million total debt, you have -- we have an accordion feature built in that allows us to go in secured debt, I think 4.5x, and unsecured up to 5.5x. So we believe that with our growing adjusted EBITDA, along with acquired adjusted EBITDA, that we have flexibility to do the size deals we're contemplating.

[Louise Alesandra Chen:]

And one last question. As -- have you talked about your pricing strategy for PENNSAID? How you think the market is and then what sort of price arbitrage you can kind of take for that product?

[Timothy P. Walbert:]

No, we expect the price is in line with our other NSAIDs.

[Operator:]

Our next question comes from line of Oren Livnat of JMP Securities.

[Oren G. Livnat:]

I know you don't want to get bogged down in gross to net conversations. But obviously, there's a lot of moving parts here and you talked about sort of the net result being -- it going up. I guess, my first question is, is that going to happen immediately? Are these rebates and contracts gone as of them telling that you're excluded or does that kick in, in January? So are we going to get that sooner than later, that impact? And also, I guess, are you hearing any comments on just, in general, a size of exclusion just changes in the trends on co-pays and coinsurance rates from your other partners because -- for example, I know that personally, I now need to pay the difference between a branded drug and a generic all out-of-pocket, if there is, in fact, a generic alternative, which I know there is isn't explicitly for your products. Can you just talk about the overall trends in the pushback you're seeing? And then just separately, I noticed your 2015 guidance, you raised revenue $45 million, EBITDA only $10 million, at the midpoint. And I'm just wondering if there was any intentional implication of lower EBITDA margins on, maybe, the incremental PENNSAID business, or overall or if this is just ranges are ranges, and your current EBITDA margin should apply going forward?

[Timothy P. Walbert:]

So I'll start with the last. So we expect our current EBITDA margins to continue, and I'd recommend you get different insurance. But besides that, or -- I think, what we've seen on a year-over-year basis is an increase of 4%, 5%, 6% of increased coinsurance to patients, and an increase in the average rebate to patients. We don't expect a material amount to impact us, relative to when these things go into effect. In January, we would expect that the impact of the exclusion lists occurs immediately and the impact of rebates occurs immediately.

[Oren G. Livnat:]

Have your wholesalers mentioned anything about de-stocking or anything like that ahead of expected lower volumes in Q1 of next year?

[Timothy P. Walbert:]

If we expected significant volumes, we would expect something from wholesalers, and that's not the case.

[Operator:]

Our next question comes from the line of David Amsellem of Piper Jaffray.

[David A. Amsellem:]

Just a couple. So business development question. I know you've talked a lot about adding primary care focused assets with leverage of the sales organization. But given how much fragmentation we see in pain and neuro, CNS broadly, is that an area you could want to focus on as well in terms of bizdev, how do you think about that?

[Timothy P. Walbert:]

Thanks, David. Certainly, from business development standpoint, well, even with our base business, we now have 3 NSAIDs covering the osteoarthritis space and rheumatoid arthritis and some other indications, making up a substantial portion of our business. So we're definitely focused on that area, and with RAYOS incrementally to that. So if we see products that are in the pain in the neuro space that fit alongside what we're doing, then we'll definitely leverage that. But I think as we've said all along, we're looking for assets that fit into any of our 3 business units; the orphan, the Primary Care or the Specialty. So we're looking to fit within those, but ultimately, if transformational opportunities exist to add an additional business unit or geographic expansion opportunistically, then we'll pursue it.

[David A. Amsellem:]

And then just switching gears on ACTIMMUNE. I know you had the pricing action recently. Can you talk about the extent to which you can continue to take price on that product?

[Timothy P. Walbert:]

Well, I think as we look at it, David, the prices right now on an annualized patient basis, it's approximately $395,000. As we look at other products with similar incidence and prevalence, it ranges from our price up to a little over $600,000 with Solaris. So there's a broad range, and we are priced at that $395,000 and comfortable with where that is, and we'll evaluate that over time.

[Operator:]

[Operator Instructions] Our next question comes from line of Difei Yang of R.F. Lafferty.

[Difei Yang:]

Just a quick one. I have to ask one question on the business development. So now that you guys are Ireland-based, the company, and given the disconnect between -- on some of the assets between the European products versus the U.S. products, are you interested in potentially acquiring something in Europe and build up a sales force there?

[Timothy P. Walbert:]

So the question was, what is our appetite for geographic expansion? We're not actively pursuing geographic expansion as you've seen that with a number of our specialty pharma peers. We are focused on really putting products into our existing business units, or adding business units in the U.S. Opportunistically, if there's an opportunity for a platform in Europe or Latin America or other markets, we'll certainly look at that. But it's not our primary focus.

[Difei Yang:]

And then the next one is an easy one, just a data issue. So would you recommend -- I have looked at the ACTIMMUNE data that was captured on Bloomberg. It's clearly not correlated with IMS [ph] sales, would you or -- how should I think about that?

[Timothy P. Walbert:]

Well, I think what you saw in Bloomberg is a disconnect between when we gave our $270 million, $280 million guidance, that was assuming we close the transaction by July 1. We closed it 10 weeks later. So we had 1 week of revenues which was $2.7 million, and for the month of -- the last month and for the quarter, we had exceeded our internal expectations for patients. So any difference between that is just inaccuracy in the updated models to reflect the time the deal closed.

[Robert F. Carey:]

That, and also, I'd like to say that the services, IMS and others, really don't capture the per script data for ACTIMMUNE. So it's opaque to the outside world, what is happening on a week-to-week basis.

[Difei Yang:]

Okay. So we should just. . .

[Timothy P. Walbert:]

It'll catch up in the next quarter when people have full quarter numbers and forward. Because the product is through specialty pharmacies, IMS retail is not going to estimate our revenues.

[Operator:]

I would now like to turn the call back over to Tim Walbert, Chairman, President and Chief Executive Officer, for any closing or final remarks.

[Timothy P. Walbert:]

Just want to thank everyone again for joining us this afternoon here in Dublin or back in the U.S. A great quarter for the company and excited about the business moving forward and -- the rest of this year and into 2015. Thank you.

[Operator:]

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