Horizon Therapeutics Public Limited Company
Q4 2014 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to Horizon Pharma plc Fourth Quarter and Full Year 2014 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now turn the call over to your host, Bob Carey, Executive Vice President and Chief Business Officer. Please go ahead.

[Robert F. Carey:]

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today. We issued a press release earlier this morning that provides the details of Horizon Pharma plc's financial results for the fourth quarter and year ended December 31, 2014. 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; John Kody, Executive Vice President and Chief Commercial Officer, will then provide an update of the commercial performance of our 5 products

[Timothy P. Walbert:]

Thanks, Bob, and good morning, everyone. 2014 was another year of transformative growth for Horizon. During the first quarter, we launched VIMOVO, which we had acquired from AstraZeneca in November 2013. We also announced our acquisition of Vidara Therapeutics International plc, completing this transaction on September 19. The Vidara acquisition added ACTIMMUNE to our portfolio of products and enabled the formation of Horizon Pharma plc with our global headquarters in Dublin, Ireland. This provides us with a tax-efficient structure which supports our acquisition strategy by allowing us to better compete with other x U.S.-domiciled companies. Earlier this week, we announced the official opening of our new global headquarters in Dublin and our plans to add 60 highly skilled jobs at our headquarters in the next 3 years. ACTIMMUNE, a bioengineered form of interferon gamma-1b, is our first orphan disease product and is currently approved for treatment of chronic granulomatous disease or CGD and severe malignant osteopetrosis or SMO. In addition to these 2 indications, we recently submitted an investigational new drug application to the FDA. We expect to begin enrolling patients in the second quarter of 2015 and a Phase III registration study of ACTIMMUNE in Friedreich's Ataxia, a debilitating, life-shortening, degenerative, neuromuscular disorder that affects approximately 3,700 patients in the United States according to the Friedreich's Ataxia Research Alliance or FARA. If approved in FA, we estimate ACTIMMUNE could generate between $500 million and $1 billion of net sales in FA alone. In October, we announced the acquisition of the U.S. rights for PENNSAID 2% from Nuvo Research for a onetime payment of $45 million. PENNSAID 2% is indicated for the treatment of pain and osteoarthritis of the knees. It is available on a metered-dose, pump-dispensed topical NSAID, which complements our oral NSAIDs, DUEXIS and VIMOVO and fits well into our primary care organization. PENNSAID 2% has a user-friendly formulation and dispensing system and is used twice a day in contrast to the leading competitive topical NSAID, which is applied 4x per day. I'm pleased to say that PENNSAID 2% is off to a strong start with total weekly prescriptions in our second week of promotion exceeding the former licensee's peak week weekly prescriptions. In January this year, total new prescriptions were 5,602 compared to 3,760 in December last year, an increase of 49%. Total prescriptions also increased 24%. In the fourth quarter, we again drove record net sales, adjusted EBITDA and adjusted non-GAAP net income, capping off a record 2014 for the company. We finished 2014 with cash and cash equivalents of $218.8 million. Net sales for the fourth quarter were $103.8 million compared to $30.1 million in the fourth quarter of 2013, representing 245% year-over-year growth. Total net sales for the full year were $297 million compared with $74 million for the full year 2013, representing 301% year-over-year growth. Adjusted EBITDA in the fourth quarter of 2014 was $41 million and for the full year, adjusted EBITDA was $105.4 million, an amount we are proud to say, which is greater than our total net sales for 2013. We had a GAAP net loss of $31.6 million and $263.6 million for the fourth quarter and full year 2014, respectively. On an adjusted non-GAAP basis, net income in the fourth quarter was $35.5 million or $0.30 basic earnings per share and $0.27 diluted earnings per share. And for the full year, adjusted non-GAAP net income was $92.5 million or $1.10 per basic earnings per share and $0.95 diluted earnings per share. DUEXIS net sales in the fourth quarter of 2014 were $28.8 million, up 25% versus the fourth quarter of 2013 and RAYOS net sales were $6.1 million, up 91% compared to the fourth quarter of 2013. Net sales from VIMOVO in the fourth quarter were $43.3 million. For the year ended December 31, 2014, which marks our first full year of VIMOVO, net sales for VIMOVO were $163 million compared to approximately $20 million the last full year under AstraZeneca's control, demonstrating our ability to rapidly integrate acquisitions and drive sales growth. The fourth quarter of 2014 was the first full quarter we recorded sales for ACTIMMUNE. We've finished the year with 277 CGD and SMO patients receiving ACTIMMUNE, and we generated 20 point -- 22.2 -- $22.5 million, excuse me, in ACTIMMUNE sales in the fourth quarter. On October 3, the FDA granted Orphan-Drug Designation for ACTIMMUNE for the treatment of Friedreich's Ataxia. This Orphan-Drug Designation will give ACTIMMUNE 7 years of market exclusivity for FA, assuming FDA approval in this indication. Also, in October, investigators from the Children's Hospital of Philadelphia, or CHOP, presented positive Phase II data for ACTIMMUNE in the treatment of children with FA at the Annual Meeting of the American Neurologic Association. Treatment with ACTIMMUNE resulted a statistically significant changes in Patuxent protein levels in red blood cells, white blood cells and platelets, the primary outcome of the trial. The level of change in the clinical outcome measure in the Phase II trial with Friedreich's Ataxia Rating Scale score, or FARS, was highly statistically significant with a P value equal to 0.0078. FARS is a clinically validated measure of patient performance, and the mean change in FARS was 4.98, which is estimated to be equivalent to restoring 18 to 24 months of disease progression in these patients. The above data, in combination with the worsening of symptoms after patients’ terminated ACTIMMUNE treatment in Phase II trial, support our decision to rapidly advance ACTIMMUNE into a Phase III registration trial. After obtaining feedback from the FDA in our Phase III trial endpoint, on February 13 of this year, we announced that we submitted an investigational new drug application to the FDA for ACTIMMUNE in the treatment of FA as well as a request for Fast Track Designation. We expect to begin our Phase III trial in the second quarter this year in collaboration with FARA and the investigation -- investigators and clinics within the FARA's collaborative clinical research Network in FA. This is a crucial step forward in advancing the development of ACTIMMUNE as we continue to pursue additional indications beyond the currently approved indications in CGD and SMO. The 4 patient centers designated for enrolling into the Phase III FA trial are CHOP, University of Iowa, University of Florida and UCLA. Given that each patient requires intensive assessments during this study, we expect it'll take approximately 12 months to enroll the trial. The primary endpoint will be the change in the Friedreich's Ataxia Rating Scale modified neurologically exam score, which measures disease activity and correlates significantly with functional disability. In addition, we continue to evaluate other potential indications for ACTIMMUNE, including infectious complications of severe atopic dermatitis such as eczema herpaticum and methicillin resistant staphylococcus aureus along with cutaneous T-cell lymphoma and other forms of osteopetrosis. We're planning to advance one or more of these potential indications into a Phase II trial this year to establish proof-of-concept. Further, we are making progress on possible new formulations of ACTIMMUNE, which may lead to frequency of dosing improvement. In the fourth quarter, we began executing a program to accelerate the percentage of DUEXIS and VIMOVO prescriptions that flow to our Prescriptions Made Easy or PME program. Our PME activation program will continue throughout this year. For those who don't know already know, our PME programs ensure patients receive the prescription intended for them at the lowest out-of-pocket cost possible and minimizes the hassle factors physicians and their office staff face when managed care and pharmacy benefit managers deploy prior authorization step edits and potentially exclusion lists, which create substantial administrative work for the physician and the physician's office staff as well as blocking access to the medicines patients were intended to receive. We are highly focused on increasing the penetration of PME among physicians who treat a high percentage of commercially insured patients. Currently, approximately 57% of DUEXIS prescriptions are processed through PME, while over 38% of VIMOVO and 35% of PENNSAID 2% prescriptions are filled through our PME program. In aggregate, our objective remains to have approximately 60% of our prescriptions processed through the PME in 2015, and we are tracking well towards this goal. I would now like to spend a few minutes discussing early progress on 2015. As we've discussed in the past, the beginning of the year brings several challenges for branded products. Many patients have switched insurance plans or have high deductible plans, have challenges getting their medicines in affordable cost, particularly in the first quarter. We have seen this impact for our brands each year in the past. Beginning this year, we had the added challenges of 2 PBMs adding DUEXIS and VIMOVO to their exclusion list. We've previously stated that we expected first quarter 2015 net revenues for DUEXIS and VIMOVO to exceed first quarter 2014. So far this year, with the data we have, DUEXIS and VIMOVO are meeting our internal expectations. Prescriptions are exceeding our expectations, offsetting partially -- offset partially by increased discounts on prescriptions as they accelerate into PME, leaving us feeling very good about early progress this year. The increased investment in subsidizing scripts within PME is having the intended positive effect in driving prescriptions. As a result of this early progress along with a strong initial launch of PENNSAID 2%, today, we are increasing our full year 2015 net sales and adjusted EBITDA guidance. We are increasing our net sales guidance from $425 million to $450 million to now $450 million to $475 million in sales. We're increasing our adjusted EBITDA guidance from $160 million to $180 million to $170 million to $190 million range. At this point, I'll turn the call over to John to provide a commercial update.

[John J. Kody:]

Thanks, Jim, and good morning, everyone. As many of you are aware, we conducted a significant restructuring of the commercial organization since the completion of the Vidara transaction to prepare us to optimally execute our corporate strategy of driving organic growth and aggressively pursue the acquisition of incremental products and companies. We structured our commercial organization into 3 business units

[Paul W. Hoelscher:]

Thanks, John. I'll now walk through the fourth quarter and full year financials for 2014. Total net sales in the fourth quarter of 2014 were $103.8 million compared to $30.1 million in the fourth quarter of 2013, representing 245% year-over-year growth. Total net sales for the full year of 2014 were $297 million compared to $74 million for the full year 2013, representing 301% year-over-year growth. Gross profit margins were 69% of net sales in the fourth quarter of 2014 compared with 83% of net sales in the prior year. On a non-GAAP basis, gross profit margins were 94% of net sales in the fourth quarter of 2014 compared with 93% of net sales in the fourth quarter of 2013 after excluding depreciation, intangible amortization, amortization of inventory step-up and royalty remeasurement and accretion. Gross profit margins were 73% of net sales for the full year of 2014 compared with 80% of net sales for the prior year and on a non-GAAP basis, were 95% for the full year 2014 compared with 92% for the prior year. Total operating expenses were $62.2 million in the fourth quarter of 2014 compared with $30.6 million in last year's fourth quarter. Fourth quarter 2014 operating expenses included $3.2 million of transaction expenses related to the acquisitions of Vidara and PENNSAID 2%. Total operating expenses for the full year 2014 were $226.7 million compared to $102 million -- $102.2 million for the prior year. Full year 2014 operating expenses included $40.6 million of transaction expenses related to the acquisitions of Vidara and PENNSAID 2%. Adjusted EBITDA was $41.0 million in the fourth quarter of 2014 after excluding the impact of $29.4 million in costs associated with the induced conversion of a portion of our 5% senior convertible notes due 2018, $3.2 million of transaction expenses related to the acquisitions of Vidara and PENNSAID 2%, $3.1 million in share-based compensation along with other non-GAAP adjustments compared with an adjusted EBITDA loss of $0.1 million in the fourth quarter of 2013. For the full year 2014, adjusted EBITDA was $105.4 million after excluding the impact of $215 million in derivative securities reevaluation, $48.8 million in acquisition-related expenses, $29.4 million in losses associated with the induced conversion of convertible debt, $13.2 million in share-based compensation along with other non-GAAP adjustments, compared with an adjusted EBITDA loss of $28.3 million for the prior year. On a GAAP basis, net loss in the fourth quarter of 2014 was $31.6 million or $0.27 net loss on a basic and diluted share basis. For the full year 2014 on a GAAP basis, net loss was $263.6 million or $3.15 net loss on a basic and diluted per share basis. Adjusted non-GAAP net income for the fourth quarter of 2014 was $35.5 million or $0.30 basic earnings per share and $0.27 diluted earnings per share. For the full year 2014, adjusted non-GAAP net income was $92.5 million or $1.10 basic earnings per share and $0.95 diluted earnings per share. We generated $10.1 million in cash from operating activities in the fourth quarter of 2014. On an adjusted basis, after excluding cash payments related to the Vidara acquisition cost of $5.8 million and cash payments related to the induced debt conversion of $16.7 million, non-GAAP cash provided by operating activities for the fourth quarter was $32.6 million. We ended the year with $218.8 million of cash and cash equivalents compared to $80.5 million at December 31, 2013. During the fourth quarter of 2014, we induced conversion of a portion of our 5% senior convertible notes for an aggregate principal amount of $89 million, bringing the principal amount of the 5% senior convertible notes outstanding down to $61 million. Total principal amount of all outstanding debt was $361 million at December 31, 2014, compared to a total of $150 million at December 31, 2013. As of December 31, 2014, our total outstanding shares were approximately 124 million. Regarding income taxes, in addition to utilizing a portion of our net operating loss carryforwards in 2015, we will also benefit from lower tax rates in subsidiaries outside the United States due to our legal structure following the Vidara transaction. As a result, we are estimating an effective tax rate in the low single digits for 2015. Now I'd like to pass the call back over to Tim.

[Timothy P. Walbert:]

Thanks, Paul. As I said earlier, 2014 was a significant year for the company, the company's growth and execution of our strategy. Our focus for 2015 remains on maximizing shareholder value creation by continuing to drive strong organic growth and execute aggressive business development strategy. This morning, we increased our net sales guidance to $450 million to $475 million and our adjusted EBITDA guidance to $170 million to $190 million. We have grown from 2 to 5 products between late 2013 and January of this year, completing 3 acquisitions in the process. And our objective is to significantly expand our Commercial portfolio, so that we can achieve above shareholder returns -- above market shareholder returns. With our efficient corporate structure and strong financial performance, we believe we have the financial capacity to execute multiple transactions, and we expect to be aggressive on the acquisition front. Our investors continue to be rewarded by this strategy as well as our execution, with total shareholder return of 70% in 2014 and 48% so far this year, among the leaders in our peer group. We will continue to work hard to provide attractive returns for all of our shareholders. Thanks much for your time, and I'll now open it up for questions.

[Operator:]

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

[Annabel Samimy:]

So I wanted to talk about PME, of course, and you did roll it out to your broader sales force, I guess, in December. And I just want to -- the question that we get from investors mainly is how do you control the level of subsidies that you provide and have your targeting efforts played out the way that you had expected in terms of being able to control those subsidies? And also, if you could I guess detail a little bit about how the retail part of the PME program is going.

[Timothy P. Walbert:]

Thanks, Annabel. This is Tim. So as we look at the PME program, we see the ability to subsidize and do the right thing for the patients as a direct correlate with prescription. So what we have seen, and we saw it for the first 3 quarters and into the fourth quarter, is that physicians in PME prescribed about 80% more than physicians not in the PME program for DUEXIS and VIMOVO. And just since we started our PME activation program in December, even working through the challenges we discussed early in the first quarter, we've seen a 20% increase among these prescribers. So for the physicians that enroll into the PME program and where we do subsidize patients who are either switching insurance plans, have high deductibles and potentially are on exclusion lists, we've seen a significant increase in the prescriptions in the commercial lives by the same physicians. And as we saw last year, we expect that insurance cycling and that deductible reset issue to decline as the months move on as it did in 2014. So they are direct correlates and they're moderate -- that subsidization is moderated by increased prescriptions.

[Annabel Samimy:]

Okay. And for the retail component, does that increase exposure that you have to subsidies?

[Timothy P. Walbert:]

We don't see any of the programs increasing exposure, we see them as really designed to be a direct correlate to driving prescriptions in the commercial side of the business. So it's all been designed to ensure access as to the medicine and the physician intended the patient to get and as a result of doing the right thing for the patient, minimizing the administrative effort in the physicians' office, we're seeing greater prescriptions in the commercial, which offset that subsidization. So the strategy is working at this point.

[Annabel Samimy:]

Okay. And then on ACTIMMUNE, now that you've had it for a full quarter, are you finding that your patients support programs are improving, could possibly improve compliance? And are you implementing any education to improve diagnosis and possibly accelerate the patient adds on the labeled indications?

[Timothy P. Walbert:]

So what we stated today as we've increased to 277 patients, which at a roughly 70% compliance rate, it's a net 2 to 3 patients per month. So one of the things that we've done since closing the transaction with Brian Andersen, who runs our orphan group, is we've hired several new physicians in advocacy to really begin developing in CGD and SMO, a broader advocacy effort to -- and also increased our marketing team there to drive incremental education and advocacy efforts overall. So we expect to see those play out as the year goes on. These people have just been hired, but this is -- in these 2 indications, we expect to see that similar growth rate over time as we continue to work to find these patients, get them to their physicians and get them treated and then really focusing on dialoguing with the patients to ensure that they're complying and get the information they need to continue to take their medication. So the programs are just beginning to roll out, and we expect them to continue to drive the same growth rate in the primary indications.

[Operator:]

Our next question comes from Louise Chen with Guggenheim.

[Louise Alesandra Chen:]

So my first question is just how we should think about the quarterly sales and EBITDA progression, given some moving parts on the exclusion list. I know you gave some color there that it should be increasing year-over-year, but just curious the magnitude and how we should think about that. And then secondly, just wanted to ask you on PENNSAID. It looks like the prescriptions are going higher than we had expected, and I'm just curious what your growth gross-to-net might be on that. Is that in line with the rest of your products? Because if so, it seems like that product may be exceeding expectations in terms of sales potential.

[Timothy P. Walbert:]

Well, first on PENNSAID, because it was launched just as we're ramping up our PME program, we -- it's accelerated into then at about 35% of prescriptions are going through it. So we would expect the gross-to-net to be similar to our other NSAIDs. We're very pleased. Each week, we've seen record new prescriptions. And now it's 24% in total prescriptions versus December and even greater in new prescriptions. So that's progressing well. From -- as we look at the prescriptions on a year-over-year basis, each week in January we have about 6 weeks of data so far and we're seeing significant prescription growth on a year-over-year basis. And as we've guided, we expect to see strong year-over-year growth. We haven't commented on sequential growth. I will refer back to 2013 fourth quarter versus first quarter of 2014, where DUEXIS was $23 million in the fourth quarter of 2013 and $14 million in the first quarter and then that continued to accelerate through the year with over $28 million in the fourth quarter of 2014. So the first quarter is always a challenge as you have just normal patient switching insurance plans, high deductibles and as these things moderate we expect to see continued revenue growth for our brands.

[Louise Alesandra Chen:]

And then on the sales progression, how should we think about that?

[Timothy P. Walbert:]

That's what I just commented on, right? Can you be more specific?

[Louise Alesandra Chen:]

Okay. You have given some color I think of VIMOVO and DUEXIS, sorry, I didn't -- it was not specific enough. And that given the exclusion list, that you still expect them to be up year-over-year on a quarterly basis, so is there any sort of order of magnitude you could give us year-over-year? Is it $5 million, $10 million? Anything you could say at all?

[Timothy P. Walbert:]

Not giving you any specific guidance on the first quarter.

[Operator:]

Our next question comes from Marc Goodman with UBS.

[Marc Harold Goodman:]

So DUEXIS and VIMOVO, maybe you can just give us a little more flavor for what's happened in the first 2 months of this year just with respect to 60% of your prescriptions used to be going through those 2 PBMs who put you on the exclusionary list. So maybe just a little more color on behind the scenes and what's going on, what are the percentages, what's moved, what hasn't moved, is the pricing working exactly how you have forecasted and the prescriptions through that -- through those PBMs and the others. Just give us a sense of what's going on behind the scenes. And then second, just on the PME, can you give us a sense of how many new doctors have joined maybe in the past month or 2? Or just give us some type of framework on how much it's changed over the past couple of months or quarter-to-quarter or something.

[Timothy P. Walbert:]

Sure, Marc. So as we look at DUEXIS and VIMOVO, whether it's year-over-year or even sequentially what we've seen for physicians and -- that have gone into our PME program as we started the activation on December 5, we've seen a 20% increase among those physicians. So we don't have data that says what percent of our -- 57% for DUEXIS or 38% for VIMOVO are spread out among different PBMs or payers. We know that when physicians go in, they see the benefit of the program in enabling access for their patients. They have less administrative effort and, therefore, they prescribe more overall across their broader business. So we don't have data that shows how it's going on, on a PBM-by-PBM plan at this point. But on a -- we had expected and guided to on a revenue basis that other -- of the 81 products on product exclusions lists, we had seen about a 15% impact in prescriptions in the first 6 months, that's -- we're tracking right with what our expectations were there. We did take price in the beginning of the year. So each of the measures that we took, whether it's -- or guided, so expectations on prescriptions, penetration into PME, impacting price and ability to offset, all those things is working exactly as we had planned and prescriptions are slightly higher than our expectations and as they grow, you have increased co-pay buy-down and other expenses, which are a direct correlate. So everything is tracking as we expected in the first 6 to 8 weeks based on the data we have. So well on track.

[Operator:]

[Operator Instructions] Our next question comes from Ken Cacciatore with Cowen and Company.

[Ken Cacciatore:]

Just wanted to ask about business development. Your currency from a stock perspective continues to improve and you still have good debt capacity. So just wondering as we continue to progress and you continue to perform, can you just give us another view of the landscape here? Clearly, harder to do Vidara and ACTIMMUNE deals. And I know nothing is easy, but I'm sure there's more PENNSAID. But can you lay out for us maybe the mix between the 2 and your ability to continue to pursue the Vidaras over the PENNSAIDs? And not that we have to sacrifice one over the other, but just kind of lay out your opportunity set?

[Robert F. Carey:]

Sure, Ken. This is Bob Carey. We continue to see opportunities kind of across the different categories that we consider. So whether those are larger strategic transactions that are companies or smaller tuck-in acquisitions of products, and so we're in process on a number of different situations. Obviously, we'd like to prioritize the more strategic transactions and we continue to do that. Having a stock price that's trended upwards is helpful. But as we all know, so is the market and it's a bit of a balancing act, therefore, finding the situations that seem to continue to work. But we do see good opportunities and we're -- continue to be confident about the ability to execute on our acquisition strategy and we continue to be hopeful.

[Operator:]

Our next question comes from Liav Abraham with Citi.

[Liav Abraham:]

First question is just following on, on some of previous questions regarding pricing and volume. Can you comment on the net revenue per script for DUEXIS and VIMOVO that you've seen in the first couple of months of this year? And I understand that maybe 4Q isn't the most relevant comp just given that cyclicality of the business, but perhaps looking at it either on average of last year or first quarter of last year, just to give us a sense of how things are playing out on that front in the first couple of months of this year. And then secondly, any comments that you can make on pricing strategy for your products for the remainder of the year. You did take some significant pricing at the beginning of the year. Do you see additional opportunities going forward in 2015?

[Timothy P. Walbert:]

Well, I'll start on the pricing. We don't expect any significant pricing actions over the coming year. We will always monitor the situation and evaluate our decisions based on the movements in the market, but we don't have any significant plans at this point in time. Bob, can you comment on the net revenue per script?

[Robert F. Carey:]

Sure. We have -- as we had talked about when we were trying to help everybody understand what was possibly going to happen in the first quarter, we -- in the models that we had built and in the way that we were trying to predict what would happen in the first quarter, we were hopeful that we would see, on a net revenue per script basis, a quarter-over-quarter increase in that. And at this point, we're seeing that. So that part of the model is playing out. We've seen increased level of scripts and we've also seen that offset somewhat by the increased level of subsidization that's been taking place. But we think, given overall performance that, as Tim said, the investment in PME subsidization is working and we're seeing the behavior change in the physician's office through the increase in script writing that we had hoped for and because of the price increases in the way that we had managed that in relationship with the elimination of rebates, we are seeing that net price per script go up when you're -- when we're looking at VIMOVO and DUEXIS as a unit.

[Operator:]

Our next question comes from Oren Livnat with JMP Securities.

[Oren G. Livnat:]

If I could just follow up on that last answer. Just to confirm, did you actually -- told us the net value for per Rx for VIMOVO and DUEXIS combined is so far sequentially up in Q1 over Q4?

[Robert F. Carey:]

That's what we're seeing, Oren, yes.

[Oren G. Livnat:]

Okay, great. And I have maybe just other nitpicky question. On EBITDA, I think it's the first time, maybe I'm mistaken, correct me if I'm wrong, that you broke out sort of an adjusted EBITDA and adjusted EBITDA including royalties. Can you just clarify in your guidance, updated and prior, did those include or exclude the VIMOVO and ACTIMMUNE royalties? And are they apples-to-apples the old guidance and new guidance on EBITDA.

[Paul W. Hoelscher:]

The guidance is apples-and-apples to the old guidance. So it's the adjusted EBITDA line if you look at our non-GAAP reconciliation. So that number still excludes the royalty that would have been incurred on our sales in the quarter.

[Operator:]

Our next question comes from Donald Ellis with Avondale.

[Donald Bruce Ellis:]

First question is for Bob regarding M&A and your capacity for making additional acquisitions. What debt-to-total EBITDA ratio are you guys comfortable with as a maximum?

[Robert F. Carey:]

We are -- at this point, we'd say something in the -- on a longer-term basis, 4 to 5x adjusted EBITDA. And we look at situations that could possibly push us above that, but we'd like to trend back into that zone in a short period of time.

[Donald Bruce Ellis:]

Okay. With respect to total operating expenses fourth quarter 2014, is that a reasonable run rate to use for 2015?

[Timothy P. Walbert:]

Well, the one thing that's additional to that is our, all-in, about 100 people we've hired as part of the PENNSAID expansion, which sequenced in -- what Paul, in the December mostly? Outside of that, that's the only change.

[Paul W. Hoelscher:]

Right. I mean, some of the sales force was added January 1. So it's not fully loaded.

[Timothy P. Walbert:]

Not fully.

[Paul W. Hoelscher:]

And yes, otherwise, yes, if you take the operating expenses and pull out the nonrecurring non-GAAP adjustments that we made for things like the transactional expenses and those type of items, it would be a good gauge going forward.

[Donald Bruce Ellis:]

Terrific. Okay, last question. Do you guys have any position or any comments on this Inter Partes Reviews that we're starting see with other companies?

[Timothy P. Walbert:]

It's a good question. The IPR, as they're called, this was, this IPR thing was originally designed around -- by the technology interest for patent trolls and a way to kind of manage that and it's been picked up as a potential strategy in our space recently, you saw it with a couple of challenges of other products. As we look at it, the important aspects for each brand are to have -- using multiple patents and also, we want to make sure that all the relevant prior art has been included in the prosecution by the PTO, that there have been declarations made by key folks such as regulatory or clinicians. So as we look at our prosecution and across our brands, we've been very thorough to ensure that all the art that is involved in the space is included in the prosecution and reviewed by the PTO, so that there aren't any surprises. Because typically, the IPR will cite art that has not been -- or try to cite art that has not been prior -- on a prior basis review by the PTO and, therefore, use that to try to kind of take a flyer around the typical litigation process. So we don't see it as a significant risk to our business. So you do see if -- obviously, if there's companies that have products with one patent without a lot of prosecution history or have recently used Track 1 process without a lot of prosecution history, that there may be risk, but we don't see that in our case.

[Operator:]

Our next question comes from David Amsellem with Piper Jaffray.

[David A. Amsellem:]

Just a couple. So just on ACTIMMUNE, and you may have addressed this earlier, so I apologize if you have. Has the growth in volumes recently been primarily on label uses? And then what's the extent to which you think we could see off-label use in FA, given the data presented last year? And then secondly, regarding business development in terms of your interest in GP-focused assets, would additional acquisitions of sizable products by necessity require further expansion of the sales infrastructure?

[Timothy P. Walbert:]

So with ACTIMMUNE from a on label, we see the majority of the growth in CGD and SMO. I don't know what the patient numbers or what we have outside of the labeled indications. It's just not something we track. I think there, from when I attended the event in October of last year, the speaker from CHOP said there were a few patients that he had seen on FA, from his perspective from the trial that rolled over, but outside of that, I don't have the knowledge. So we don't expect to see any significant increase. We're focused on CGD and SMO, and we've continued to see a nice growth there. As we look at our business development focus on orphan versus specialty versus primary care, I would say the majority of what we're looking at right now are probably in the specialty and the orphan space. And opportunistically, we will, I'm sure, see more and more primary care, but really comes down to what's for sale at the individual times. As we look at infrastructure and sales, I think if it's adding something into the primary care side, I would say that -- and PENNSAID is a good example. If we were to buy that product without our infrastructure, we probably would have needed about 150-plus reps. We only added 75, so it's a partial add in that arena. If we buy a product on the specialty side, we probably need to more fully size a sales force, but sales force could come with the product. But overall, our goal is to be near-term accretive for any of those transactions.

[Operator:]

Our next question comes from David Risinger with Morgan Stanley.

[David Risinger:]

Questions upfront. The first one is could you please comment on the volume trends year-over-year for key products since the start of the year? And then second, with respect to the prescription counts that were referenced on the call, what is your source for those prescription counts? And could you remind us if IMS prescription counts exclude or include your PME prescriptions?

[Timothy P. Walbert:]

Thanks, David. I appreciate it. I'll start with the back-end. IMS, our understanding is that they capture most of our PME pharmacies. They project one of them. So there is some potential inefficiencies in the IMS data. We solely look at the IMS data. We stopped looking at and using the Wolters Kluwer data. About a year or so ago, we found IMS in our categories to be more accurate when you tie it back to revenues. So that's how we look at it. And from a volume growth basis, I'll just give you some reference for DUEXIS and VIMOVO. If you look at the average week in 2014, in 2014 across the first 4 weeks of the month it averaged about 4,200 prescriptions and to 4,400 prescriptions, depending on the week and for DUEXIS, we're averaging about 6,600 prescriptions per week based on IMS. And for VIMOVO, it probably averaged about 4,800 prescriptions, and we're probably averaging about 5,500 across the 4 weeks. So we've seen nice growth for those 2 products. PENNSAID sequentially was not launched in the first quarter of last year, but is up sequentially versus December, 24% in total prescriptions.

[Operator:]

Our next question comes from Difei Yang with Brean Capital.

[Difei Yang:]

Just a couple of quick ones. Would you remind us what's the inventory step-up adjustment associated with? I see a $9.5 million adjustment in Q4.

[Paul W. Hoelscher:]

Right. That was for ACTIMMUNE.

[Difei Yang:]

Okay. And then the next question is that DUEXIS performed extremely well in Q4. I'm wondering if you could share some observation in the marketplace what might be the driving forces behind this.

[Timothy P. Walbert:]

Well, if you look at the progression over the year, we did $14 million in the first quarter and just under $29 million in the fourth quarter and it was directly linked to strong accelerating prescription growth. As we launched our PME activation, if you recall, the second week in that program, prescriptions increased for DUEXIS 1,000 over the prior week on December 19 versus December 12. So we've seen strong acceleration in DUEXIS throughout the year and strong sequential year-over-year weekly growth in January and into February so far.

[Operator:]

Our next question is a follow-up from Oren Livnat with JMP Securities.

[Oren G. Livnat:]

So you mentioned a few times this 20% bump in prescriptions from docs after they are activated in PME. Do you have any visibility on what the total -- the increase in total prescriptions may be written by those docs are versus what's fulfilled? I think 20% is actual scripts filled. Do we know what the sort of -- the change in their actual writing patterns are after they go in there, meaning there's -- maybe lower hassle for them, so they're writing a lot more. But of course, there are some abandonment still offsetting that.

[Timothy P. Walbert:]

Well, the total prescriptions based on what they wrote is 20% increase. So we don't know what percent...

[Oren G. Livnat:]

But that's prescription...

[Timothy P. Walbert:]

That's 20% filled. We haven't -- we don't have an access to data around what wasn't filled. That data comes out in arrears by quite a bit. So we don't have at any access to that data yet.

[Oren G. Livnat:]

Right. So I'm trying to get a sense maybe over time, historically, on other products that have been in PB for a long time, just writing patterns, because obviously the hassle factor that you're taking off of doctors seems to be a huge differentiator versus not with your products before but other products competitively, right?

[Timothy P. Walbert:]

Historically, what we've seen is the -- obviously, the rejection rate goes away because we're subsidizing. But the abandoning rate goes down significantly versus what you would see in the retail arena because we're providing full access to patients at a low co-pay. So the fill rate as a percentage is much higher for physicians and patients who are flowing through the PME channel. So all of that -- you still probably have one of the areas where you pick up is, on the retail side, about 10% of all scriptures by a physician never make it to a pharmacy. And so by having that directly submit to PME, you can get that percentage that patients just typically walk away. So but anecdotally and historically, we have seen a higher fill rate.

[Oren G. Livnat:]

Do you look at it as an actual competitive advantage not just improving access, improving your own demand for your product as it stands on its own? But just for PENNSAID, for example, if Voltaren has prior off and you maybe don't because of the way your PME is structured, is that something that is a competitive advantage head-to-head?

[Timothy P. Walbert:]

Absolutely. If you're in a physician's office and you have the opportunity, and that's I think why we've seen acceleration of PENNSAID in just 6 weeks to 35% in PME. If you're having managed care challenges with a competitive product and you can put PENNSAID 2% through our PME channel, then we've done the right thing for the patients and minimized the hassle for the physician, which is what our effort is all about.

[Operator:]

I'm showing no further questions. I will now turn the call back over to Tim Walbert, Chairman, President and Chief Executive Officer, for final remarks.

[Timothy P. Walbert:]

Thank you very much. I appreciate all the questions and the time on the call today, and I look forward to keeping you updated over the coming months and thanks so much. Bye.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. And everyone have a great day.