Horizon Therapeutics PLC (HZNP) 2014 Q4 法說會逐字稿

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.

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 five products: ACTIMMUNE, DUEXIS, PENNSAID 2%, RAYOS -- known as LODOTRA outside the US -- and VIMOVO. Paul Hoelscher, Executive Vice President and Chief Financial Officer, will then discuss the financial highlights from the fourth quarter before turning the call back over to Tim for closing remarks. Also on the call this morning is Jeff Sherman, Executive Vice President, Research & Development, and Chief Medical Officer.

As reminder, during today's call we will be making certain forward-looking statements, including financial projections 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 that was filed this morning. You are cautioned not to place undue reliance on these forward-looking statements, and Horizon disclaims any obligation to update such statements.

Further, we will also discuss non-GAAP financial measures during this call to help you understand our underlying business performance. Reconciliations of these non-GAAP financial measures to the equivalent GAAP measures are provided in the press release which has been posted on our website. The reconciliation of non-GAAP financial measures is also available on our website.

I will now turn the call over to Tim.

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 ex-US-domiciled companies. Earlier this week, we announced the official opening of our new global headquarters in Dublin, and our plans to have 60 highly skilled jobs at our headquarters in the next three years.

ACTIMMUNE, a bio-engineered 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 two indications, we recently submitted an investigational new drug application to the FDA. We expect to begin enrolling patients in the second quarter of 2015 in a Phase 3 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 US rights for PENNSAID 2% from Nuvo Research for a one-time payment of $45 million. PENNSAID 2% is indicated for the treatment of pain and osteoarthritis of the knees. It is available in 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 four times 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 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 to 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 of 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 -- 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 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 for 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 finished the year with 277 CGD and SMO patients receiving ACTIMMUNE, and we generated $22.5 million 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 would give ACTIMMUNE seven 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 2 data for ACTIMMUNE in the treatment of children with FA at the Annual Meeting of the American Neurologic Association. Treatment with ACTIMMUNE resulted in statistically significant changes in frataxin 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 2 trial -- the 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 the Phase 2 trial, support our decision to rapidly advance ACTIMMUNE into a Phase 3 registration trial. After obtaining feedback from the FDA in our Phase 3 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 3 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 four patient centers designated for enrolling into the Phase 3 FA trial are CHOP, University of Iowa, University of Florida, and UCLA. Given that each patient requires intensive assessments during the study, we expect it'll take approximately 12 months to enroll the trial. The primary endpoint will be the change in the previous ataxia rating scale modified neurological 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 2 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 improvements.

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 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 creates 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 to our PME program. In aggregate, our objective remains to have approximately 60% of our prescriptions processed with 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 brand of products. Many patients who switch insurance plans or have high-deductible plans have challenges getting their medicines at an 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 two PBMs adding DUEXIS and VIMOVO to their exclusion list. We 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 the strong initial launch of PENNSAID 2%, today we are increasing our full-year 2015 net sales and adjusted EBITDA guidance. We're 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.

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 pursuing the acquisition of incremental products and companies.

We structured our commercial organization into three business units -- orphan, primary care, and specialty -- and we appointed experienced commercial leaders to head each of the respective units. This allows us to continue to drive growth in each of our business units as we integrate acquired products and businesses in a seamless manner, with less disruption to the other groups. We've successfully integrated ACTIMMUNE into the orphan business unit, while integrating PENNSAID 2% into the primary care business unit.

Let me begin by providing a prescription overview for the fourth quarter. DUEXIS prescriptions increased to 76,100 in the fourth quarter of 2014, versus 54,224 in the fourth quarter of 2013, an increase of 40%, and an increase of 8% versus the third quarter of 2014. RAYOS saw prescriptions increase to 4,380 in the fourth quarter of 2014, versus 2,796 in the fourth quarter of 2013, an increase of 57%, and an increase of 11% versus the third quarter of 2014.

VIMOVO prescriptions in the fourth quarter were 82,851, versus 69,998 in the fourth quarter of 2013, an increase of 18%, and an increase of 3% versus the third quarter of 2014. With ACTIMMUNE, CGD and SMO patients increased from 245, in the fourth quarter of 2013, to 277 in the fourth quarter of 2014 -- an increase of over 12%.

As Tim mentioned, the beginning of each year brings several challenges to branded products. Patients switch insurance plans, have high deductibles to meet, and, in 2015, we had two PBMs place DUEXIS and VIMOVO on exclusion lists. We feel very good with our progress so far this year. We continue to manage the situation closely to ensure that patients have access to DUEXIS and VIMOVO, when prescribed by their physicians, at affordable costs, and to minimize the administrative effort for physicians in doing so.

In December of 2015 -- in December of 2014, we initiated a territory-by-territory PME activation program with our primary care sales force. We divided our PME activation program into four rolling waves, which began in December and will continue throughout 2015. Initial results are encouraging, with PME-activated territories showing a 20% increase in DUEXIS and VIMOVO prescriptions versus prescription levels prior to initiation of the program. This, along with our price increases, taken January 1, have allowed us to meet our internal net sales expectations so far this year.

With PENNSAID 2%, we have made great progress since we acquired the US rights from Nuvo Research in October. PENNSAID 2% has been incorporated into our PME program to ensure patients have access to the product with minimal out-of-pocket costs. In addition, following the acquisition, we added 75 representatives to the primary care sales force, with all 325 representatives now selling all three of our primary care products -- DUEXIS, VIMOVO, and PENNSAID 2%, as of January 2015. New PENNSAID 2% prescriptions for the month of January 2015 increased 49% versus December of 2014.

Physician feedback indicates patients are responding well to PENNSAID 2%. Our research indicates the product profile of PENNSAID 2% is market leading for topical NSAID, with twice-per-day dosing versus four times per day for the leading competitive topical NSAID. We will continue to manage our PME program closely, and look forward to updating you as we move further into the year.

I will now turn the call over to Paul 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 with $74 million for the full year of 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 re-measurement 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 of 2014, compared with 92% for the prior year.

Total operating expenses were $62.2 million in the fourth quarter of 2014, compared to $30.6 million in last year's fourth quarter. Fourth quarter of 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 of 2014 were $226.7 million, compared to $102.2 million for the prior year. Full year of 2014 operating expenses included $40.6 million of transaction expenses related to the acquisitions of Vidara and PENNSAID 2%.

Adjusted EBITDA was $41 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 of 2014, adjusted EBITDA was $105.4 million, after excluding the impact of $215 million in derivative securities revaluation; $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 of 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 of 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 costs of $5.8 million and the 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 carry-forwards, 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.

Thanks, Paul. As I said earlier, 2014 was a significant year for 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've grown from two to five products between late 2013 and January of this year, completing three 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.

Thank you.

(Operator Instructions)

Annabel Samimy, Stifel.

Hi, thanks for taking my call. Congratulations on a good quarter. I want to talk about PME, of course. You did roll it out to your broader sales force in December. I want to know -- the question that we get from investors mainly is how do you control the level of subsidies that you provide? Have your targeting efforts played out the way that you had expected, in terms of being able to control those subsidies? Also, if you could detail a little bit about how the retail part of the PME program is going?

Thanks, Annabel. This is Tim. 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. What we have seen and we saw it for the first three 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. 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.

For the physicians that enroll into the PME program, 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 these same physicians. 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. They're a direct correlate, and their moderated -- that subsidization is moderated by increased prescriptions.

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

We don't see any of the programs increasing exposure. We see them as totally designed to be a direct correlate to driving prescriptions in the commercial side of the business. It's all been designed to ensure access to the medicine 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 physician's office, we're seeing greater prescriptions in the commercial, which offset that subsidization. The strategy's working at this point.

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

What we stated today is we've increased to 277 patients, which at a roughly 70% compliance rate it's a net two to three patients per month. One of the things that we've done since closing the transaction with Brian Anderson, who runs our orphan group, is we've hired several new positions in advocacy to really begin developing in CGD and SMO a broader advocacy effort -- and also increased our marketing team there to drive incremental education and efficacy efforts overall. We expect to see those play out as the year goes on.

These people have just been hired, but this is a -- in these two 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. The programs are just beginning to roll out, and we expect them to continue to drive the same growth rate in the primary indications.

Okay, great. Thank you.

Thanks, Annabel.

Louise Chen, Guggenheim.

Thanks for taking my questions. My first question is 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 curious the magnitude and how we should think about that? Secondly, I just wanted to ask you on PENNSAID, looks like the prescriptions are going higher than we had expected. I'm curious what your gross-to-net might be on that? Is that in line with the rest of your products? If so, it seems like that product may be exceeding expectations in terms of sales potential? Thank you.

Well, first on PENNSAID, because it was launched just as we're ramping up our PME program, it's accelerated into that, about 35% of prescriptions [or co eed], 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 -- 24% in total prescriptions versus December, and even greater in new prescriptions. That's progressing well.

From a -- as we look at the prescriptions on a year-over-year basis, each week in January -- we have about six weeks of data so far, and we are seeing significant prescription growth on a year-over-year basis. As we've guided, we expect to see strong year-over-year growth.

We haven't commented on a 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 continued accelerate through the year, with over $28 million in the fourth quarter of 2014. The first quarter is always a challenge, as you have just normal patients switching insurance plans, high deductibles. As these things moderate, we expect to see continued revenue growth for our brands.

On the sales progression, how should we think about that?

That's what I just commented on -- can you be more specific?

Okay. You had given some color, I think on VIMOVO and DUEXIS -- sorry, I was not specific enough -- that given the exclusion list that you still expect them to be up year over year on a quarterly basis. 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?

I'm not giving any specific guidance on the first quarter.

Okay, thank you.

Marc Goodman, UBS.

DUEXIS and VIMOVO, maybe you can give us a little more flavor for what's happened in the first two months of this year, just with respect to 60% of your prescriptions used to be going through those two PBMs who have put you on the exclusionary list. Maybe a little more color on behind the scenes on what's going on -- what are the percentages? What's moved, what hasn't moved? Is the pricing working exactly how you had 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?

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 two? Give us some type of framework on how much it's changed over the past couple months, or quarter to quarter, or something? Thanks.

Sure, Mark. As we look at DUEXIS and VIMOVO, whether that's year over year or even sequentially, what we've seen for physicians that have gone into our PME program since we started the activation on December 5, we've seen a 20% increase among those physicians. 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 and enabling access for their patients. They have less administrative effort, and therefore they prescribe more overall across their broader business. We don't have data that shows how it's going on a PBM-by-PBM plan at this point. On a -- we had expected and guided to on a revenue basis that other -- of the 81 products on prior exclusion lists, you had seen about a 15% impact in prescriptions in the first six months. That's -- we're tracking right with what our expectations were there. We did take price in the beginning of the year.

Each of the measures that we took, whether it's -- or had guided so expectations on the prescriptions, penetration to PME, impacting price and ability to offset, all those things is working exactly as we had planned. Prescriptions are slightly higher than our expectations. As they grow, you have increased co-pay, buy-down and other expenses which are a direct correlant. Everything's tracking as we expected in the first six to eight weeks, based on the data we have. So well on track.

(Operator Instructions)

Ken Cacciatore, Cowen and Company.

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

Sure, Ken. This is Bob Carey. We continue to see opportunities across the different categories that we consider, whether those are larger, strategic transactions that are companies, or smaller tuck-in acquisitions of products. 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. 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 continue to be confident about the ability to execute on our acquisition strategy. We continue to be hopeful.

Okay, thank you.

Thanks, Ken.

Liav Abraham, Citi.

Good morning. First question is just following on some of the 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? I understand that maybe 4Q isn't the most relevant comp, just given the cyclicality of the business. But perhaps looking at either an 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?

Secondly, any comments 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? Thank you.

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 valuate our decisions based on movements in the market, but we don't have any significant plans at this point in time. Bob can comment on the net revenue per script.

Sure. Liav, 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. At this point, we're seeing that. That part of the model is playing out.

We've seen increased level of scripts. 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. Because of the price increases and the way we had managed that in relationship with the elimination of rebates, we are seeing that net price per script go up when we're looking at VIMOVO and DUEXIS as a unit.

Thank you.

Oren Livna, JMP Securities.

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

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

Okay, great. I have maybe another nit-picky question. On EBITDA, I think this is the first time, maybe -- maybe I'm mistaken, correct me if I'm wrong -- that you broke out an adjusted EBITDA and adjusted EBITDA including royalties. Can you clarify in your guidance, updated and prior, did those include or exclude the VIMOVO and ACTIMMUNE royalties? Are they apples to apples, the old guidance and the new guidance on EBITDA?

The guidance is apples and apples to the old guidance. It's the adjusted EBITDA line, if you look at our non-GAAP reconciliation.

Okay.

That number still excludes the royalty that would've been incurred on our sales in the quarter.

All right, great. Thanks.

Donald Ellis, Avondale.

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?

We are -- at this point, we'd say something in the -- on a longer-term basis, four to five times adjusted EBITDA. 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.

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

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 -- December mostly? Outside of that, that's the only change.

Right. Some of the sales force was added January 1, so it's not fully loaded.

Not fully.

Otherwise, yes. If you take the operating expenses and pull out the non-recurring, 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.

Terrific. Okay, last question. Do you guys have any position or any comments on this inter-parties reviews we're starting to see with other companies?

It's a good question. The IPR, as they're called them -- this was -- as Oren was saying, was originally designed around -- by the technology interests for patent trolls, and a way to 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 the same multiple patents. Also, we want to make sure that all of the irrelevant prior art has been included in the prosecution by the PTO. I know that there have been declarations made by key folks such as regulatory or clinicians. As we look at our prosecution 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. Typically, the IPR will cite art that has not been -- or try to cite art that has not been on a prior basis reviewed by the PTO, and therefore use that to try to take a flyer around the typical litigation process.

We don't see it as a significant risk to our business. 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-one process without a lot of prosecution history, that there may be risk. But we don't see that in our case.

Thank you very much. That's helpful. Thanks.

David Amsellem, Piper Jaffray.

Thanks, just a couple. 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? Then what's the extent to which you think we could see off-label use in FA, given the data presented last year? Secondly regarding business development, in terms of your interest in GP-focused assets, would additional acquisitions of sizeable products by necessity require further expansion of the sales infrastructure? Thanks.

Hi, David. How are you? With ACTIMMUNE, from an 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 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 are focused on CGD and SMO, and we've continued to see 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. Opportunistically, we will I'm sure see more and more primary care; but it 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's a good example. If we were to buy that product without our infrastructure, we probably would've 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 a sales force could come with a product. But overall, our goal is to be near-term accretive for any of those transactions.

That's helpful. Thanks.

David Risinger, Morgan Stanley.

Thank you very much, and congrats on the financial performance. (technical difficulty) questions up front. The first one is could you please comment on the volume trends year over year for key products since the start of the year? Second, with respect to the prescription counts that were referenced on the call, what is your source for those prescription counts? Could you remind us if IMS prescription counts exclude or include your PME prescriptions? Thank you.

Thanks, David, 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. There is some potential inefficiencies in the IMS data. We solely look at the IMS data. We stopped looking at and using the Walters Kleuwers data about a year or so ago. We found IMS in our categories to be more accurate when you tied it back to revenues. That's how we look at it.

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 four weeks of the month it averaged about 4,200 prescriptions and to 4,400 prescriptions, depending on the week. For DUEXIS, we're averaging about 6,600 prescriptions per week based on IMS. For VIMOVO, it probably averaged about 4,800 prescriptions. We're probably averaging about 5,500 across the four weeks. We've seen nice growth for those two products. PENNSAID sequentially was not launched in the first quarter of last year, but is up sequentially versus December at 24% in total prescriptions.

Great, thank you.

Thanks, David.

Difei Yang, Brean Capital.

Good morning, and thanks for taking my question. Just a couple quick ones. Would you remind us what's the inventory step-up adjustment associated with -- I see $9.5 million adjustment in Q4?

Right. That was for ACTIMMUNE.

Okay, thank you. The next question is that DUEXIS performed extremely well in Q4. I'm wondering if you could share some of the reasons in the market place what might be the driving forces behind it?

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, into strong accelerating prescription growth as we launched our PME activation. If you recall, the second week in that program, prescriptions increase for DUEXIS 1,000 over the prior week on December 19 versus December 12. 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.

Okay, thank you.

Thanks, Difei.

Oren Livnat, JMP Securities.

Thanks for the follow-up. You mentioned a few times this 20% bump in prescriptions from docs after their 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 assume 20% is actual scripts filled. Do we know what the change in their actual writing patterns are after they go in there, meaning maybe lower hassle for them, so they're writing a lot more -- but of course there's some abandonment still offsetting that?

Well, the total prescriptions based on what they wrote is 20% increase.

Right, but that's prescriptions filled, right?

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

Right. I'm trying to get a sense maybe over time historically on other products that have been in PME 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 just your own products before, but other products competitively, right?

Historically, what we've seen is obviously the rejection rate goes away because we're subsidizing, but the abandonment 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. The fill rate as a percentage is much higher for physicians and patients who are flowing through the PME channel. All of that -- you still probably have -- one of the areas where you pick up is on the retail side. About 10% of all scripts written by physicians never make it to a pharmacy. By having that directly sending to PME, you can get at that percentage that patients just typically walk away. Anecdotally and historically, we have seen a higher fill rate.

But 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 -- 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?

Absolutely. If you're in a physician's office and you have the opportunity -- that's I think why we've seen acceleration of PENNSAID in just six 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.

Great. Well, thanks a lot.

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

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

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