Horizon Therapeutics Public Limited Company
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to Horizon Pharma plc First Quarter 2015 Earnings Call. As a reminder, today's conference is being recorded. I would now like to introduce and turn the conference over to John Thomas, Executive Vice President, Corporate Strategy and Investor Relations. Please go ahead, sir.

[John B. Thomas:]

Thank you, Nova. Good morning, everyone. And thank you for joining us today. We issued a news release earlier this morning that provides details of Horizon Pharma plc's financial results for quarter ended March 31st, 2015. The news release that 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 DUEXIS, VIMOVO, PENNSAID 2%, RAYOS, and ACTIMMUNE, Paul Hoelscher, Executive Vice President and Chief Financial Officer, will then discuss the financial highlights from the first quarter, before turning the call back over to Tim for closing remarks. Also on the call this morning is Bob Carey, Executive Vice President and Chief Business Officer. As a reminder, during today's call we'll be making certain forward-looking statements, including financial projections, the impact of the acquisition of Hyperion Therapeutics, Inc., 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 Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2014, subsequent quarterly reports on Form 10-Q and our current report on Form 8-K which 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 investors understand our underlying business performance. Reconciliations of these non-GAAP financial measures to the equivalent GAAP measures are provided in the news release, which has been posted as well on our corporate website. And with that I'll now turn the call over to Tim.

[Timothy P. Walbert:]

Thanks, John. And good morning, everyone. The first quarter is certainly been productive quarter for us exceeding our expectations with significant progress in executing our strategy to accelerate growth through strong commercial performance and targeted acquisitions. Our primary care business outperformed in Q1 successfully navigating through many managed care and seasonal headwinds for DUEXIS, VIMOVO, while launching PENNSAID 2%. Our orphan business is making great progress, as well with the filing of the IND in the fast track designation for ACTIMMUNE in Friedreich's Ataxia, as well as the acquisition of Hyperion which we successfully completed yesterday. We also continued to bolster our management team with the addition of Geoff Curtis as Group Vice President, Corporate Communications, John Thomas, Executive Vice President, Corporate Strategy and Investor Relations. In this mornings announcement of the promotion of Brian Beeler to be our Executive Vice President and General Counsel. We are pleased with our financial performance in the first quarter. Net sales for the first quarter were $113.1 million compared to $51.9 million for the first quarter of 2014, representing 118% growth. Adjusted EBITDA in the first quarter of 2015 was $27.7 million versus $11 million in 2014. EBITDA margin was 33.3% in the first quarter which we expect to continue to improve throughout the year. We had a GAAP net loss of $19.6 million for the first quarter of 2015, and on an adjusted non-GAAP basis, net income in the first quarter of 2015 was $27.9 million or $0.22 basic earnings per share and $0.21 diluted earnings per share. I will now walk through an update of each of our products and provide an overview of the Hyperion transaction that we recently closed. DUEXIS net sales in the first quarter of 2015 were $28.9 million, an increase of 108% versus the first quarter of 2014. RAYOS net sales for the first quarter was $7.2 million, up 118% compared to the same period last year. Net sales for VIMOVO in the first quarter were essentially flat at $33 million. The first quarter of 2015 was the first time we recorded sales for PENNSAID 2% since the acquisition in October of 2014. We are extremely pleased with the strong initial launch which led to net sales in the first quarter of 2015 of $18.2 million. In the first quarter of 2015 we increased the percentage of prescriptions of DUEXIS, PENNSAID 2% and VIMOVO being processed through our prescriptions made easy program or PME and we have now achieved penetration of 69%, 63% and 58% of prescriptions respectively. We continue to expect our primary care products will stabilize at 65% to 75% PME penetration. As we have communicated previously gross to net deductions will increase as we increase PME penetration and ultimately net sales will continue to increase as we continue to drive prescriptions. Moving forward we expect gross to net discounts for our primary care brands will stabilize at 65% to 75% upon achieving this expected PME penetration. We continue to see positive trends in prescription growth across our primary care products and DUEXIS and VIMOVO are now at weekly prescription levels in excess of those experienced in the fourth quarter of 2014. With our orphan business we finished the first quarter of 2015 with 280 granulomatous disease or CGD patients and severe malignant osteopetrosis, or SMO patients receiving ACTIMMUNE, representing growth of 15% over the first quarter of 2014 and generated $24.8 million in ACTIMMUNE sales. We submitted an investigational new drug application or IND for ACTIMMUNE in the treatment of Friedreich's Ataxia in the February and remain on track to begin our pivotal Phase III trial in the second quarter this year in collaboration with Friedreich's Ataxia research alliance and the investigators and clinics of FARA's collaborative clinical research Network in FA. In April we announced that the FDA granted fast track designation for ACTIMMUNE in the treatment of FA and if approved we estimate that ACTIMMUNE could generate between 500 million and 1 billion of annual net sales in FA alone. We also continue to pursue additional indications for ACTIMMUNE, pre-clinical data recently published in the Journal of Bone and Mineral Research showed treatment with murine interferon gamma an analog of ACTIMMUNE improves signs of disease severity in a mouse model of autosomal dominant osteopetrosis Type II or ADO2. ADO2 is a rare, inherited disease resulting from a gene mutation that despite n increased bone mass is characterized by a wide range of symptoms and severity including multiple fractures, impaired vision and osteomyelitis or bone infection. ADO2 is the most common form of autosomal dominant osteopetrosis with an estimated prevalence of approximately 2700 patients alone in the United States. While these data are early, the findings are critical step forward as we explore future treatment options and full clinical utility of ACTIMMUNE in these indications. We work with external experts and planning a pilot study in ADO2 to begin later this year. As mentioned earlier we announced the closing of the acquisition of Hyperion yesterday. The transaction was an all-cash acquisition valued at $1.1 billion with an enterprise value of approximately $944 million after adjustment for Hyperion cash and debt. The acquisition further diversifies our current portfolio of five products by adding two complimentary orphan disease products, RAVICTI, Glycerol Phenylbutyrate, Oral Liquid and BUPHENYL which is a sodium version of Phenylbutyrate tablets and powder. RAVICTI was firs approved by the FDA in February 2013 for use as a nitrogen binding agent for chronic management of urea cycle disorders or UCDs. For patients greater than 2 years of age who cannot manage their treatment with dietary protein restriction or amino acid supplementation alone. RAVICTI pose a several important attribute to strive to improve compliance and the quality of life for patients with this disease. It is the only FDA approved oral liquid treatment for UCDs, RAVICTI is taken three times per day. It is done a significant improvement over BUPHENYL which typically requires patients taking 20 to 40 pills per day. RAVICTI have seen continued growth since first been made available to patients in March of 2013, generating $95.4 million in net sales in 2014 and $26 million in net sale for the first quarter of 2105 compared to 15.5 in the first quarter of 2014. RAVICTI is orphan drug exclusivity out to through 2020 with two methods of use patents expiring in 2030 and 2032 respectively. BUPHENYL is offered in tablet powder form and is prescribed for patients with neonatal-onset deficiency in late onset disease. Yesterday Hyperion filed its Form 10-Q for the first quarter and reported $31.2 million in total net sales. We begin recording sales of RAVICTI and BUPHENYL as of today and look forward to updating you on further conference calls. As a reminder, at the time of the acquisition we guided to $100 million adjusted EBITDA for the Hyperion business in 2016. As a result of significant process in our primary care product – progress in our primary care product portfolio so far in 2015, along with the addition of RAVICTI and BUPHENYL, we announced this morning that we are increasing our full year 2015 net sales and adjusted EBITDA guidance. We have increase our net sales guidance now including RAVICTI and BUPHENYL for approximately 8 months from $450 million to $475 million to now being $590 to $610 million and we increased our adjusted EBITDA guidance from $170 million $190 million to adjusted EBITDA net of royalties of $235 million to $250 million. We also continue to strengthen our patent estate [ph] for VIMOVO, PENNSAID 2%, and RAYOS as you may have seen earlier this morning we announced a settlement and license agreement with Perrigo Company plc and its subsidiary Paddock Laboratories to resolve pending pattern litigation involving PENNSAID 2%. Under the settlement and license agreement we were granted – we granted Perrigo the non-exclusive right to market a generic diclofenac sodium topical 2% in the United States under Perrigo's and application beginning January 10 of 2029 or early on the certain circumstances. Additionally in February we announced the U.S. Patent and Trademark Office issued a VIMOVO pattern extending its pattern like out to 2031. Further last month we announced the PTO issued one notice of allowance covering RAYOS the pattern life also 2024 and two new patterns covering PENNSAID 2% out to 2027. I'll now turn the call over to John to provide a commercial update.

[John J. Kody:]

Thanks, Tim, and good morning, everyone. I would like to reiterate Tim's comment regarding the performance our primary care business so far this year. DUEXIS, VIMOVO and PENNSAID 2% exceed our expectations in the first quarter and drove the increase in our guidance for full year 2015. DUEXIS prescriptions were 77,341 in the first quarter of 2015 versus 55,316 in the first quarter of 2014, an increase of 45% and an increase of 2% sequentially versus the fourth quarter of 2014. VIMOVO prescriptions in the first quarter were 68,008 versus 69,434 in the first quarter of 2014. We continue to see attractive growth in prescriptions driven large by our acceleration of prescription slowing through our PME program in the first quarter of 2015. We have successfully grown through the seasonal effects which occurred in the first quarter each year and the inclusion of DUEXIS and VIMOVO on two PBM exclusion lists. Importantly, weekly prescriptions for both DUEXIS and VIMOVO in April are now at levels exceeding those seen in the fourth quarter of 2014, with PENNSAID 2% our commercial organization has significantly exceeded our expectations for launch which being in January this year. Following the acquisition of PENNSAID 2% in October last year for $45 million we added 75 representatives to our primary care sales force resulting in 325 representatives now selling all three of our primary care products. Further PENNSAID 2% was included into our PME program to ensure patients have access to the product with minimal out-of-pocket cost. Total PENNSAID 2% prescriptions for the first quarter were 32,285 versus 16,493 reported in the fourth quarter of 2014 reported by the previous owner an increase of 96%. New PENNSAID 2% prescriptions for January, February and March of 2015 have increased 49%, 53% and 55% versus the prior month respectively. This early performance has put PENNSAID 2% on a net sales run rate of over $100 million in 2015. In our orphan business unit ACTIMMUNE, with CGD and SMO patients they have increased from 243 in the first quarter of 2014 to 280 in the first quarter of 201 an increase of over 15%. We continue to see consistent month-over-month increases in new patients beginning on ACTIMMUNE. RAYOS prescriptions increased from 2,881 in the first quarter of 2014 to 4,330 in the first quarter of 2015, an increase of 50%. In April our specialty business begun a comprehensive PME activation effort to accelerate the percent of RAYOS prescriptions into our PME program, as a result average RAYOS weekly prescriptions for the four weeks ended April 24 increased 99% versus the weekly average for January. With the completion of the Hyperion acquisition yesterday, we are integrating RAVICTI and BUPHENYL into our orphan drug business unit, as a result we will be adding the sixth clinical science associates from Hyperion which will bring the total to 14 to represent each of orphan products ACTIMMUNE, RAVICTI and BUPHENYL allowing for deeper coverage of key US accounts. The new team will complete cross training of each product over the next few weeks. I will now turn the call over to Paul to review the financials for the quarter.

[Paul W. Hoelscher:]

Thanks, John. I'll now walk through the first quarter financials for 2015. Total net sales in the first quarter of 2015 were $133.1 million compared with $51.9 million in the first quarter of 2014, representing 118% growth. Gross profit margins were 74% in the first quarter of 2015 compared with 85% in the first quarter last year and on a non-GAAP basis were 91% in the first quarter 2015 compared with 89% in the first quarter last year. After excluding depreciation, intangible amortization, amortization of inventory step-up and royalty accretion but including royalties incurred based on VIMOVO and ACTIMMUNE net sales during the quarter. Total operating expenses were $79.5 million in the first quarter of 2015 compared with $42.7 million in first quarter of 2014. The increase in operating expenses reflect increases in research and development expenses principally related to ACTIMMUNE, sales and marketing expenses primarily due to the expansion of our sales force along with other cost related to ACTIMMUNE and PENNSAID 2% and general and administrative expenses principally due to the build out of infrastructure to support the company's growth. First quarter 2015 operating expenses also included $3.7 million of transaction related expenses related to the acquisitions of Vidara and Hyperion. Adjusted EBITDA was $37.7 million in the first quarter of 2015 after excluding the impact of $10.5 million in expenses associated with debt extinguishment and induced conversion of a portion of the 5% convertible senior notes due 2018, $6.7 million in share based compensation and $3.7 million of transaction expenses related Vidara and Hyperion compared with adjusted EBITDA of $12.1 in the first quarter of 2014. On a GAAP basis, net loss in the first quarter of 2015 was $19.6 million or $0.16 net loss on a basic and diluted per share basis, compared to a net loss of $206.3 million in the first quarter of 2014 or $3.07 net loss on a basic and diluted per share basis. Adjusted non-GAAP net income for the first quarter of 2015 was $27.9 million or $0.22 basic earnings per share and $0.21 diluted earnings per share, compared to adjusted non-GAAP net income of $11 million or $1.16 basic earnings per share and $0.13 diluted earnings per share in the first quarter of 2014. Weighted average shares used for calculating adjusted non-GAAP earnings per share in the first quarter of 2015 were 125.7 million and 138.2 million for basic and diluted earnings per share, respectively, compared to 67.1 million and 83.1 million for basic and diluted earnings per share, respectively, in the first quarter of 2014. During the first quarter of 2015 the company had income tax expense of $1.9 million despite having a net loss on a GAAP basis during the quarter. This tax expense resulted for the inability to recognize tax benefits and losses in the United States due to valuation allowances, along with reserving for net operating losses utilized in certain other tax jurisdictions during the quarter. During the second quarter we expect to recognize a significant one time tax benefit on a GAAP basis. Significant additional US deferred tax liabilities are expected to be recorded as part of the purchase accounting for our acquisition of Hyperion, which will result in a need to release our existing valuation allowances on US deferred tax assets. This is expected to result in a one time additional income tax benefit of over $1 million in the second quarter. As a result of the release of these valuation allowances, beginning during the second quarter we expect the GAAP income taxes will be highly variable and range from no tax to significant benefits. Due that variability we recommended an assumption of no tax to US for modeling purposes for the foreseeable future. During the first quarter we had an operating cash outflow of $70.7 million, adjusted for cash payments related to transaction expenses and the induced conversions, non-GAAP cash used in operating activates was $63.2 million. This outflow is primarily due to the growth in accounts receivable and the pre funding of estimated patient co-pays to our PME co-pay vendor. Accounts receivable increased $53.4 million during the first quarter due to the 35% WAC price increases for VIMOVO and DUEXIS effective on January 1 2015, along with new receivables at March 31 for PENNSAID 2% representing in approximately 1 month gross sales for that product. Prepaid expenses increased $42.7 million primarily due to pre funded estimated patient co-pays to our PME co-pay vendor. We do not expect the significant increases in working capital to repeat during the remainder of the year and we expect a one more prepaid funding to patient co-pays to decrease during the second quarter due to negotiated changes in the funding arrangement. The company had cash and cash equivalents of $544.2 million as of March 31, 2015, an increase of $325.4 million from December 31, 2014, which includes the net proceeds of approximately $387.3 million from the offering of 2.5% exchangeable senior notes completed in March 2015. Total principal amount of outstanding debt was $728 million at March 31, 2015, compared to total of $361 million at December 31, 2014. Subsequent to the quarter end we raised $475 million in aggregate proceeds of 6.625% [ph] senior notes due 2023, borrowed 4 million in senior secured term loans with an initial interest of 4.5% and repaid in whole our existing $300 million senior secured credit facility. These actions as well as the issuance of 2.5% - of the 2.5% exchangeable senior notes in March an additional conversions of our 5% convertible senior notes due 2018 reduced our weighted average cash interest rates significantly from 7.7% in the third quarter of 2014 to approximately 4.7% for the balance of 2015. Taking these changes into account, the total principal amount of the outstanding debt as of today is $1.289 billion. As of March 31, 2015 our total outstanding ordinary shares were approximately 133.3 million, taking into account the 17.65 million ordinary shares issued in our April equity offering, as well shares resulting from additional conversions of our 5% convertible senior notes due 2018, another equity activity our total ordinary shares outstanding as of May 1 were 154.5 million. Based on current ordinary shares and other potentially dilutive securities outstanding we estimate total weighted average shares outstanding of approximately 165 million, 172 million and 175 million for the third, fourth, and fourth quarters of 2015 respectively. Now I'd like to pass the call back over to Tim.

[Timothy P. Walbert:]

Thank you, Paul. We've continued to make considerable progress in expanding our footprint, diverse in our sources of revenue and generating attractive organic growth and acquiring complimentary products and businesses. We are pleased with the execution of our commercial organization in the first quarter of 2015 and anticipate continued attractive growth throughout the year. As result of the financings Paul mentioned, as well as our expected future cash flow generation we believe we have the financial capacity to continue our aggressive business development strategy. Further we continue to see attractive opportunities to expand through acquisition of products and companies. Our focus remains on maximizing shareholder value creation and we will continue to work diligently to provide attractive returns for our shareholders by driving organic growth and executing on our business development strategy. Thank you for your time and I will now open it up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Annabel Samimy from Stifel. Your line is open.

[Annabel Samimy:]

Hi. Thanks for taking my question. Thanks for taking my question. Congregations on the strong execution. I wanted to understand the first quarter a little bit better. It seems like, I just wanted to know to what extent deductibles from the first quarters SKU [ph] the net sales relative to the rest of the year. And with regards to the PME if you continue to – I mean, at what do you want to stop putting the programs to the PME existing like the growth, so that continues to go up, so at what point do you balance that out and to that its an up penetration? Thanks.

[Timothy P. Walbert:]

Thanks. And maybe I'll speak to the – if you look at the first quarter, one of the biggest factors there is related to PENNSAID where we had two out of three months of receivables since we started the quarter and also we had a one time accrual inventory charge for expected co-pay for PENNSAID in the quarter. The question related to PME penetration, I think we expect it to be in the range of 65% to 75% and DUEXIS is already at the – towards to the higher end of that range. So we are beginning to get towards the peak of our expectations. And we do expect that as that PME level stabilizes we will have stabilization of the gross to net. And certainly there are you know, as we see here over here and each subsequent first quarter, you have deductible resets, patients switching plans, long list in the PME fact. And so some of those initial effects will obviously moderate overtime and then as the percentage of PME moderates more for – less for DUEXIS because at the peak. But more moderation as we get to the peak for VIMOVO and PENNSAID we'll see that gross to net moderates. So we're getting towards path end of the range as we've seen that, that penetration occur rapidly over the first quarter. But keep in mind that penetration always come with a significant increase in prescriptions and that’s where we've seen, for DUEXIS on a year-over-year basis, if you look at any average week, in fact most recent week ending with the data we got this morning was up 85% year-over-year in prescriptions and for VIMOVO up double-digits year-over-year, same for RAYOS and certainly PENNSAID as well. So PENNSAID wasn’t launch but more sequential. So any increase penetration in PME drives significant increase in prescriptions and ultimately significant continued increases in net revenue.

[Annabel Samimy:]

Okay. And maybe I could just ask a slightly different way for the first quarter, would you set in the pattern of gross to net being higher in the first quarter and then returning over the year because of those deductibles?

[Timothy P. Walbert:]

It will exist as long as PME penetration is stabilized. So last year we saw the growth in that for DUEXIS to moderate to the year, because we had relatively stable PME penetration for the first three quarters and it begin to increase to throughout the fourth quarter of last year. So we would expect that to stabilize as we hit the –and stay at the consistent peak levels of PME.

[John J. Kody:]

Annabel, I think what will happen is that the effect of PME probably overrides the seasonal effect at this point. So that’s why you are seeing the trends that are there. It just has a stronger effect overall.

[Timothy P. Walbert:]

And the ramp is more significant in the first quarter.

[John J. Kody:]

That’s right.

[Timothy P. Walbert:]

What's drove the significant sequential changes in gross to net, but that will obviously stabilize as we hit the higher levels.

[Annabel Samimy:]

Do you have any kind of timing for that, that stabilization I mean, you seem to be almost there for DUEXIS…

[Timothy P. Walbert:]

Right, so – yes, I think that’s fair, DUEXIS ran in at probably a high 50% range into the first quarter and it’s at the high – getting towards the peak range. And so PENNSAID just you know, we started January 2nd, and that’s already in the – into the 50%, 66% range. So we're definitely rapidly getting towards that range, so that will definitely impact that.

[Annabel Samimy:]

Okay. And if I could just ask a question on expenses, I guess, where we are reaching a point where you had – I know I feel like you should be able to see some operating leverage from the programs that are you starting to add, or the products that you are starting to acquire. So at what point do you start seeing some EPS leverage or operating leverage in your model?

[Timothy P. Walbert:]

Well, I think as I stated in my remarks, we expect to see EBITDA margin continue to accelerate throughout the year and if you look at the percentages you see in our overall guidance versus the first quarter typically you have the most pressure. We also added 100 employees as we expanded the primary care sales force. PENNSAID we had debt extinguishment cost and also some infrastructure build as we've added the broader organizations capabilities and one time cost related to bonus and other thing. So we expect that EBITDA margin to continue to move throughout the year.

[Annabel Samimy:]

Okay. And then on royalty expenses, is it fair to now assume you're going to add back the royalty expense during the quarter. How should we be thinking about royalty expense right now, because your accounts were differently than other companies?

[Timothy P. Walbert:]

Well, we report, and Paul maybe you can address it, but we have been reporting it with the royalties had backend based on – from an accounting perspective, but we decided to take them out and we reported them essentially both ways in how we report our guidance. So, Paul?

[Paul W. Hoelscher:]

Yes, I mean, we have to follow this kind of our keen accounting rule where we had to capitalize the estimated future royalty stream related to ACTIMMUNE and VIMOVO when we bought the product as a liability. And so the actual royalties we were incurring on the sales in the quarter were not reflected in our COGS. I mean, we backed that royalty accretion and last quarter we started reporting a second number for adjusted EBITDA to add back what the royalties would have been if we accrued royalties based on sales for the quarter. And going forward, that’s the number that we're going to reporting each quarter as, you know, and adjusted EBITDA and adjusted non-GAAP income that pulled out the royalty accretion and adds in the royalty expense that would have booked if we were – expense in royalties as other companies do, as they are incurred.

[Annabel Samimy:]

Okay. Great. I'll back in the queue. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Marc Goodman of UBS. Your line is open.

[Timothy P. Walbert:]

Hey, Mark. Mark, are you there?

[Marc Goodman:]

Can you hear me?

[Timothy P. Walbert:]

Yes.

[Paul W. Hoelscher:]

Now we can.

[Marc Goodman:]

I am sorry about that. Yes, good morning. So first on the prescriptions that you all were reporting, can you talk about those are just a little bit different than IMS. I mean, it seems like they were a little bit lower than what we've thought, I was more confused on that second factors. I just want to make sure I understand your, so there is a big NOL that you are taking upfront now and so that’s going to cause the second quarter to have on a GAAP basis obviously this big one timer. But on a non-GAAP basis, once we're through this and actually for the second quarter, third, fourth quarter, what type of tax should we be using or are you basically saying there will be no tax basically this year and what do we about next year and the year after on the taxes? And on PENNSAID, so just I am clear, just also what's the gross price and what was the average price that you are getting in the quarter and where do expect that to be going?

[Timothy P. Walbert:]

So on IMS what you maybe seeing is just a difference between adding week leaves versus the month leaves. We reported the monthly prescriptions, sometimes there is a variance when you total week leaves versus the month leaves. We reported the IMS national prescription audit monthly prescriptions. Paul you want to address the taxes?

[Paul W. Hoelscher:]

Yes. So on the tax side, we have before the Hyperion transactions at mid of March, we have significant level of deferred tax assets in the US that a lot of that came from NOLs from prior years and under accounting rules we end up having those deferred tax assets 100% reserve with the valuation allowance, so that’s to zero. With Hyperion we will be recording significant deferred tax liabilities which now will offset those deferred tax assets and so there is no longer a need for the valuation allowances and under GAAP rules we have to take the reversal of that allowance – valuation allowance into our tax provision all at once when that happens. And so in the second quarter there is over $100 million of valuation allowances that will reverse as a one time tax benefit. Going forward, what we said, in my remarks and I'll repeat again, is that we expect that the – you can't really look at our tax rate because its going to be very up and down depending on the earnings and these possible benefits we may have. And it’s going to be at worse, it’s going to be no tax and very likely we could have some tax benefits, but it’s hard to predict because every quarter is going to be somewhat variable. And so our suggestion is to model zero tax for the foreseeable future.

[Timothy P. Walbert:]

And then going forward…

[Paul W. Hoelscher:]

At the same foreseeable future because we expect to continue to acquisitions and every time we do an acquisition it’s going to have some impacts on how the taxes are going to be going forward. And so, foreseeable future until we have another acquisition we expect to be in the situation with no tax or some level of tax – of the tax benefits.

[Timothy P. Walbert:]

These are some of the non-GAAP basis?

[Paul W. Hoelscher:]

Well, I mean the one time charge in the second quarter we pulled out from our non-GAAP earnings. The regular month – quarterly tax benefit I believe we will keep in our non-GAAP but we have to do that going that forward…

[Timothy P. Walbert:]

On a percentage basis on the out years of the…

[Paul W. Hoelscher:]

Percentage. I can't give you any guidance on rate, because for example we couldn’t have earnings with a benefit and so it’s going to be in a negative rate if we end up in that situation. Rates are very difficult to talk about in this situation now that the Hyperion transaction is happened.

[Timothy P. Walbert:]

And then just to answer your question Marc, the WAC price PENNSAID is 1399 [ph] per bottle, and if you just calculate that, that level divided by prescriptions that would be net revenue per prescription of $566.

[Marc Goodman:]

So there was inventory or anything strange, I mean, it was that simple as far as your calculation?

[Timothy P. Walbert:]

It was. As far as the inventory accrual?

[Marc Goodman:]

No, just I mean, inventory any build for the inventory just because of the new products per se, really wasn’t a new product, but I didn’t know how the channel was looking?

[Paul W. Hoelscher:]

Well, I mean, obviously our inventory on our books is little bit higher than this time because we actually have some PENNSAID inventory which we didn’t have any – at the end of December…

[Marc Goodman:]

And that more into distributor…

[Paul W. Hoelscher:]

I mean, there is definitely a level of PENNSAID inventory in the channels, but its…

[Timothy P. Walbert:]

But in the normal range…

[Paul W. Hoelscher:]

We have for DUEXIS, VIMOVO and it’s normally in the…

[Timothy P. Walbert:]

17 to 24 days ranges across all that products, based on our agreements with the wholesalers.

[Paul W. Hoelscher:]

And as Tim said earlier, I mean, we did – the one impact we do have in the quarter is because we had no channel inventory that’s been in December for PENNSAID and now that we do have channel inventory it is for March, we had to record a reserve for expected co-pay expenses to hit in future quarters for the channel inventory that sat there at March 31 for PENNSAID.

[Marc Goodman:]

And how much…

[Timothy P. Walbert:]

PENNSAID had dedication.

[Paul W. Hoelscher:]

It was a little over $4 million.

[Marc Goodman:]

So that’s a hit to your sales?

[Paul W. Hoelscher:]

Yes, so sales and EBITDA, it falls to the bottom line. And so for other products the only – the impact in the quarter is as our sales grown and we have higher balances of channel then you end up with a higher accrual for that channel and you have some normal amounts hitting your net sales for just the growth in your business. But this is kind of one time to create the reserve to begin with in the first quarter year sales.

[Marc Goodman:]

And other thing DUEXIS, VIMOVO obviously excluded on the formulary with Caremark Express Scripts. So can you tease [ph] out like in the first quarter like what happened, like was it down significantly in that channel?

[Timothy P. Walbert:]

I think as we stated, when you look at each of those plans about a third of their lives that they manage or controlled or managed with – the fall under the exclusion formulary. So that would be the percentage impacted in that channel. So nothing more or less than we expected.

[Marc Goodman:]

Thanks.

[Operator:]

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

[David Amsellem:]

Thanks. So on…

[Timothy P. Walbert:]

Hi, David.

[David Amsellem:]

Hi. On ACTIMMUNE is anything to read into regarding the patients and patents adds, it seems to be slower from the pace you sighted in the back of last year, the middle of last year. So as one, now that you are on RAVICTI, maybe give us more color on your efforts to drive more switching or it could be BUPHENYL and to drive adds from patients who are not on pharmacologic treatment and specifically is there anything you think you need to differently from Hyperion in order to drive product. And then lastly, just [indiscernible] I know you just completed the acquisition, but in the near term what can you do regarding deals and are you looking at all other primary care focused assets is – have you sort of moved on from that from BD perspective? Thanks.

[Timothy P. Walbert:]

Thanks, David. On ACTIMMUNE, one of the things we saw in the beginning of the year which we often see in first quarter is a slight decrease or increase in discontinuations that was partially offset by a higher compliance rate the commercial team spend a lot of effort on increasing the compliance rates. And let’s say since the mid-last year the compliance has gone from 75% to 77% up into the low to mid-80. So we’re seeing the compliance efforts improving, early in the year you see some discontinuation rates for various reasons. But nothing that we – we expect our growth rate and adding that net 3 patients for month who continue throughout the year as it has been. From a RAVICTI standpoint there are several things. First, we felt that Hyperion done an excellent job in driving the growth, we saw about $31 million in the first quarter versus in net revenue versus, I think expectations were around $29 million. So strong growth there. Some of the things that we see our ability to impact is they had six clinical science associates or representative selling RAVICTI and combining as John mentioned to with our 8, we now have 14 clinical science associates we’re selling both product. So we’ll get broader reach in frequency with less time traveling for these representatives. The overlap in key centers is extremely high. So we think our reps will just have more time and more ability to focus on the key institutions to continue to drive new patients. And from certain standpoint from BUPHENYL that’s a continued effort and it’s a two pronged effort. The first challenge you have is that RAVICTI is approved from two years on from when patients are diagnosed and for BUPHENYL they can be taken the patient right when diagnosed as a neonatal. So certainly the opportunity for us is to gain an indication for the two month or two year population. We expect to submit that in the second quarter of next year. So that will definitely make a difference. And additionally we've seen opportunity to move the BUPHENYL patients into our combined reimbursement hub that that for both products they’re current managed out in the retail space. So our goal would be to bring those patients into our reimbursement hub where we can have a dialogue with them and help them understand the benefits of going from those 20 to 24 pills per day, there are significant odor issues, taste issues. So we think that will help improve our ability to switch those patients to RAVICTI. And then the last piece is our ability to – about half of these patients are diagnosed and about two-thirds of the diagnosed are treated. So that additional one-third is going to be impacted via having more timing institutions and educate on how to earlier diagnose and continue into improve upon guidelines and understanding of when to start and now get on BUPHENYL as soon as possible and then switch to RAVICTI. And then from a BD perspective I’ll turn over to Bob who can answer that.

[Robert F. Carey:]

Sure, thanks David. The amount that we think we can fund up our balance sheet right now is probably in the neighborhood of $0.5 billion and then obviously it depends on what the EBITDA would be of the asset we’re buying. So we continue to believe that we’ve got sufficient capacity to execute on our plan right now. And hope to continue to be active in the marketplace.

[David Amsellem:]

Okay. Just if I may sneak in a follow-up on RAVICTI, so you’re submitting the filing on the younger patients intense in the second quarter of next year, is there any additional – can you walk us through what the clinical work will be between now and then or is that something that’s largely done and forget my ignorance here, but just maybe just walk us through that?

[Robert F. Carey:]

I think the clinical work is ongoing and we would expect to get that wrapped up by the end of the year and the submission in the second quarter. So that work had been well underway by Don and the team at Hyperion and we’ve taken a look at it, it was well done and it’s just matter of, the timelines coming through and getting that submitted.

[David Amsellem:]

Okay. Thank you.

[Operator:]

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

[Donald Ellis:]

Thank you, guys and good morning. First question regarding the royalty that was included in EBITDA. Can you quantify refer with that, that was last year and in the first quarter. Second quarter regarding Hyperion is there any seasonality in Hyperion sales and what were the inventory channel levels there. And last question regarding ACTIMMUNE are you seeing off label use and fringe in Friedreich's Ataxia? Thanks.

[Timothy P. Walbert:]

So I'll start with the last for ACTIMMUNE and off label, I don’t know. We don’t measure that. We do know that as we’ve been preparing for preclinical trial, couple of our investigators have mentioned that there is a few patients on drug but beyond that no we don’t have any awareness. Hyperion inventory is in the range of what we have for cost of our which is typically the 17 to 24 day range, so nothing abnormal there. Remind me on the first question Don.

[Donald Ellis:]

It was on royalty.

[Timothy P. Walbert:]

Royalty so Paul can answer that.

[Paul W. Hoelscher:]

So that’s actually in the press release if you look at the non-GAAP tables in the back. So for this year for the quarter the actual royalties we would have incurred based on the sales in the period were $5.196 million and last years first quarter was $3,349.

[Donald Ellis:]

Okay. Thank you very much.

[Timothy P. Walbert:]

Thanks, Don.

[Operator:]

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

[Louise Chen:]

Hi, thanks for taking my questions. I had a few here. So first question on the RAVICTI incremental sales opportunities in the EU, Canada an additional pediatric ages, just curious how we should think about those opportunities. Secondly on PENNSAID it looks like product did a lot better than people expected, so I was just curious what you think the peak sales potential is or if you could help us think through how to get to the peak sales? And then last one is just because there’s been some confusion on the EBITDA and the adjusted EBITDA, just curious what would you like us to comp our models to, would it be the 2.35 to 2.50 or the 2.57 and 2.72? Thanks.

[Timothy P. Walbert:]

So the EU Canada and the two month to two year population as we are in process in doing our valuation for the European market opportunity. The prevalence is similar to the US, so US you’ve got 2100 patients. The application we expect to be approved either late this year or early next year based on the progress that have been made by Hyperion going with through the process with the CHMP. As we look at Canada we don’t see that is material opportunity at this point in time, it’s with ACTIMMUNE that we’ve probably six, seven patients that we’re treating on a regular basis and sometimes that fluctuates down and then goes back up and we don’t see a huge upside opportunity. But Europe is one that we haven’t factored into our expectations, but we expect to complete our work over the coming months and also the two month to two year population will really be a way to avoid having to switch many of these initial patients from BUPHENYL and getting them right on to RAVICTI. So that would enhance our ability to accelerate the month over month rate. From a PENNSAID and a peak revenue basis, I think when we first acquired the product we had expectations that it could be over to $100 million asset, but certainly that’s changed with the success we’ve had so far in the first quarter. And so we’ve haven’t given long-term, but certainly we think it’s well as we look at all the NSAIDs 250 plus million per year opportunity at peak across each of those primary care assets. And then on EBITDA, essentially you can just by looking at our press release quarterly we’re guiding to the 235 to 250 and simply it’s quarter to get to the previous way it was measured, those are keen accounting rules is to add the royalty each quarter. So if you look at the first quarter is at $5.2 million it will be reported on a quarterly basis, but we’ve guided to the 235 to really take out that accounting irregularity.

[Paul W. Hoelscher:]

Right, and going forward we’re going to report only adjusted EBITDA net of the royalty and that’s what we’re going to report on and the number that you should be focusing on.

[Louise Chen:]

Okay. Thanks. And then just one more question here, on the guidance raise that you gave how much is attributed to the base business and how much to Hyperion is there way to think about that?

[Timothy P. Walbert:]

Well, if you look at Hyperion I would say that the Hyperion the portion of the guidance that’s related to Hyperion is in the range of what the original guidance that Hyperion had provided for the full year and beyond that is the significant growth above our expectations in the base business.

[Louise Chen:]

Thank you very much.

[Operator:]

Our next question comes from the line of Ken Cacciatore of Cowen. Your line is open.

[Unidentified Analyst:]

Hey, guys. This is Allan for Ken. Congrats on the solid quarter.

[Timothy P. Walbert:]

Thank you.

[Unidentified Analyst:]

Just regarding PENNSAID settlement you were able to get pretty significant duration on that asset what context can you provide on the dynamics that led to – do you able to get the duration. And then just where do you stand with patent litigation on other assets and what leverage do you have for potential settlements there and specifically kind of just want to understand around the duration of our RAVICTI?

[Timothy P. Walbert:]

Sure. So with PENNSAID we’ve had originally when we did the acquisition OUR understanding was there was a settlement of the [Indiscernible] out to 2022. They have provided the information which were – should have enabled them to be first filer. We found it very fortunate for us that they were not the first filer and Watson ultimately was and so Paddock was a subsequent filer and we’ve always viewed in our initial analysis is that you know the patents go much stronger than the original settlement and you know that’s certainly reflected in where we netted out with Paddock. Also importantly in that is we’ve got two additional allowances that we announced over the last few weeks which we think materially improved the patent state for PENNSAID to present. So I feel very good about that and you know we’ll continue move to the process with other end challengers. You know on VIMOVO we originally had patents out to 2023 which were part of original; most of them were part of the original Markman hearing on validity that AstraZeneca successfully navigated through back in 2013. Dr. Reddy’s filed a infringements case against those 23 patents. We've have gotten a number of incremental large book listed patents on those 23 patents and we believe materially improves our ability to win and litigation and then subsequent to that we had a whole new family of patents on VIMOVO allowed and issued out to 2031, so significant increasing our expected duration of the VIMOVO patent life. With RAYOS, last year we had a Markman hearing. We had three original filers, two of them withdrew and one remains and we had a successful Markman hearing in the fourth quarter and we’ll move to that process but feeling very good about our status. With RAVICTI, as we have reviewed I think on our call when we did the deal, they have often exclusivity out to 2020 with patents out to 2030 and 2032. The challenge was by par and based the support system and moving through the Texas courts, we expect their ANDA to be approved. And then they would have to wait until the 2020 exploration work and exclusivity which would in our estimation require them to not be able to launch in the 75 day period that is required after an ANDAs approval which would and could jeopardize their ability to maintain first filer status. So you know from that standpoint we’ll always have dialogue with any parties about getting to certainty and the duration of all of our patents, but across each of them we feel very good about our current place.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

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

[Unidentified Analyst:]

Hi, this is Leo Shannon [ph] for David Risinger. Just one quick question. What are the key point negotiations you have for 2016 and when should we expect to hear updates, maybe around its 2015 or not until the fall of 2015, and also how would that be communicated to us? Thank you.

[Timothy P. Walbert:]

Negotiations on what?

[Unidentified Analyst:]

Key formulary negotiations for 2016.

[Timothy P. Walbert:]

We don’t comment on formulary negotiations unless there is some material change we would report that at the time, but otherwise we don’t communicate on that.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

The next question comes from the line of Greg Gilbert of Deutsche Bank. Your line is open

[Greg Gilbert:]

Thank you. I was wondering if you could share what portion of VIMOVO scripts are either unprofitable or marginally profitable for you. And then Tim maybe with your company had on as well as your new trade association had, to what degree do you expect pricing rather to pick up as elections approach and how do you frame that debate offensively? Thanks.

[Timothy P. Walbert:]

Thanks, Greg. We don’t comment on the breakout of co-pay and you know co-insurance and fully bucked down. We do see it as a stable level across the brands which allow us to feel confident and you know the civilization of our gross to net. Your comment relative to pricing in general, we look at – and our philosophy is always to do the right thing for the patient and to serve patient access with VIMOVO and our primary care brands. We target patients having zero out of pocket to ensure they get access to the medicines their physicians prescribed and our PME program goes a long way to ensuring the doctor can prescribe what they believe is the best agent for their patients and as a result well over 90% of all of our patients receive our products at little to no co-pay And so we look at it as what is the cost to patients and to ensure access on a ongoing basis. And I think that when you look at part of the rhetoric and discussion you know that is propagated in the media is around headline cost versus what is the ultimate cost of the requisite adverse event or survival or in the case of hep-c, knee transplants and preventing those liver transplants. So you know I think you know I would expect a balance rhetoric that needs to be heard you know that speaks not only to the gross cost, or the net cost what is the cost to the patient, how are companies enabling access to patients and then ultimately you know what is the value that’s being brought to the system. And when PBMs are talking about cost, they don’t get and don’t speak to the ultimate clinical benefit because they are not involved in that equation. So you know its less, it’s about innovation and reducing the overall cost of the system with innovation and doing a right thing for patients.

[Greg Gilbert:]

All right.

[Operator:]

Thank you. I would now like to turn the conference back to Tim Walbert, Chairman, President and Chief Executive Officer for final results.

[Timothy P. Walbert:]

Thank you, Nova. And thanks everyone for joining the call. We feel great about our start to the year and very excited with our updated and increased guidance and look forward to continuing to report organic growth, continued business development activity and thanks so much for your time.

[Operator:]

Ladies and gentlemen, this does conclude the conference. Thank you for participating. Have a wonderful day. You may now disconnect.