Horizon Therapeutics PLC (HZNP) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the 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.

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 the quarter ended March 31, 2015. The news release that 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 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 will 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 on our current report on Form 8-K, which was filed this morning. You're 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 will now turn the call over to Tim. Tim?

Thanks, John, and good morning, everyone.

The first quarter has certainly been a productive quarter for us, exceeding our expectations with significant progress, and 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 and VIMOVO, while launching PENNSAID 2%. Our warfarin business is making great progress as well, with the following of the IND, and the fast-track designation for ACTIMMUNE in Friedreich's Ataxia, as well as the acquisition of Hyperion, which we successfully completed yesterday.

We also continue 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; and this morning's announcement of the promotion of Brian Beeler to be our Executive Vice President and General Counsel.

We are very 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 $37.7 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. 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 were $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%], 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 discount 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 chronic 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 February, and remain on track to begin our pivotal Phase 3 trial in the second quarter this year in collaboration with the 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 analogue of ACTIMMUNE, improved 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 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 2,700 patients alone in the United States.

While these data are early, the findings are a critical step forward as we explore future treatment options and full clinical utility of ACTIMMUNE in these indications. We will work with external experts in 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's cash and debt.

The acquisition further diversifies our current portfolio of five products, by adding two complementary orphan disease products; RAVICTI, which is glycerol phenylbutyrate oral liquid, and BUPHENYL, which is a sodium version of phenylbutyrate tablets and powder. RAVICTI was first 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 two years of age who cannot manage their treatment with dietary protein restriction or amino acid supplementation alone.

RAVICTI poses several important attributes which strive to improve compliance and the quality of life for patients with this disease. As the only FDA-approved oral liquid treatment for UCDs, RAVICTI is taken three times per day. It is a significant improvement over BUPHENYL, which typically requires patients taking 20 to 40 pills per day.

RAVICTI has seen continued growth since first being made available to patients in March of 2013, generating $95.4 million in net sales in 2014, and $26 million in net sales in the first quarter of 2015, compared to $15.5 million in the first quarter of 2014. RAVICTI has orphan drug exclusivity out to 2020, with two method-of-use patents expiring in 2030 and 2032, respectively. BUPHENYL is offered in tablet or powder form, and is prescribed for patients with neonatal onset deficiency and 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 in adjusted EBITDA for the Hyperion business in 2016.

As a result of significant 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 increased our net sales guidance, now including RAVICTI and BUPHENYL for approximately eight months, from $450 million to $475 million, to now being $590 million to $610 million. And we increased our adjusted EBITDA guidance from $170 million to $190 million, to adjusted EBITDA, net of royalties, of $235 million to $250 million.

We also continued to strengthen our patent estate for VIMOVO, PENNSAID 2% and RAYOS. As you may have seen early this morning, we announced a settlement and license agreement with Perrigo Company plc and its subsidiary, Paddock Laboratories, to resolve pending patent litigation involving PENNSAID 2%. Under the settlement and license agreement, we granted Perrigo the non-exclusive right to market a generic diclofenac sodium topical 2% in the United States under Perrigo's ANDA application beginning January 10, 2029, or earlier under certain circumstances.

Additionally, in February, we announced the US patent and trademark office issued a VIMOVO patent, extending its patent life out to 2031. Further, last month we announced the PTO issued one notice of allowance covering RAYOS with patent life out to 2024, and two new patents covering PENNSAID 2% out to 2027.

I'll now turn the call over to John to provide a commercial update.

Thanks, Tim, and good morning, everyone.

I would like to reiterate Tim's comments regarding the performance of our primary care business so far this year. DUEXIS, VIMOVO and PENNSAID 2% exceeded 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 53,316 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 in large part by our acceleration of prescriptions flowing through our PME program in the first quarter of 2015. We have successfully grown through the seasonal effects, which occur 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 began 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 costs.

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.

And our orphan business unit, ACTIMMUNE, with CGD and SMO patients, have increased from 243 in the first quarter of 2014, to 280 in the first quarter of 2015, 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 began 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 six clinical science associates from Hyperion, which will bring the total to 14, who will represent each of our 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.

Thanks, John. I'll now walk through the first-quarter financials for 2015.

Total net sales in the first quarter of 2015 were $113.1 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 to 85% in the first quarter last year. And on a non-GAAP basis, were 91% in the first quarter of 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 the first quarter of 2014. The increase in operating expenses reflects 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 costs related to ACTIMMUNE and PENNSAID 2%; and general and administrative expenses, principally due to the buildout 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 conversions 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 to Vidara and Hyperion; compared with adjusted EBITDA of $12.1 million 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 a $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 $0.16 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 from the inability to recognize tax benefits on 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 the 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 $100 million in the second quarter. As result of the release of these valuation allowances, beginning in the second quarter we expect that GAAP income taxes will be highly variable, and range from no tax to significant benefits. Due to that variability, we recommend that an assumption of no tax be used 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 activities was $63.2 million. This outflow was 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 increase for VIMOVO and DUEXIS effective on January 1, 2015, along with new receivables at March 31 for PENNSAID 2%, representing an approximately one month's gross sales for that product.

Pre-paid expenses increased $42.7 million, primarily due to pre-funding estimated patient co-pays to our PME co-pay vendor. We do not expect these significant increases in working capital to repeat during the remainder of the year, and we expect the level of pre-paid 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 all outstanding debt was $728 million at March 31, 2015, compared to a total of $361 million at December 31, 2014.

Subsequent to the quarter end, we raised $475 million in aggregate proceeds of 6 5/8% senior notes due 2023; borrowed $400 million in senior secured term loans, with an initial interest rate of 4.5%; and repaid in whole our existing $300-million senior secured credit facility. These actions, as well as the issuance of the 2.5% exchangeable senior notes in March, and additional conversions of our 5% convertible senior notes due 2018, reduced our weighted average cash interest rate 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 as shares resulting from additional conversions of our 5% convertible senior notes due 2018, and other 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.

Thank you, Paul.

We continue to make considerable progress on expanding our commercial footprint, diversing our sources of revenues, and generating attractive organic growth, and acquiring complementary products and businesses. We are very pleased with the execution of our commercial organization in the first quarter of 2015, and anticipate continued attractive growth throughout the year.

As a 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'll now open it up for questions.

(Operator Instructions)

Annabel Samimy, Stifel.

Hello, guys. Thanks for taking my question, and congratulations on the strong execution. I want to understand the first quarter a little bit better.

It seems like -- I just want to know to what extent deductibles from the first-quarter SKU the net sales relative to the rest of the year. And with regard to the PME, if you continue to -- at what point do want to stop putting programs through the PME? Because it seems like the gross to net continues to go up. So at what point do you balance that out and decide that it's enough penetration? Thanks.

Thanks. And thanks 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 copay 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 towards 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, that we will have stabilization of the gross to net.

And certainly there are as we see year-over-year and in each subsequent first quarter, you have deductible resets, patients switching plans, along with the PBM effect. So some of those initial effects will obviously moderate over time. And then as the percentage of PME moderates more for -- less so for DUEXIS because it's [half the pay], but more moderation as we get to the peak for VIMOVO and PENNSAID, we'll see that gross to net moderate. So we're getting towards the top end of the ranges as we've seen that penetration occur rapidly over the first quarter.

But keep in mind, that penetration always comes 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, the most recent week ending with the data we got this morning was up 85% year-over-year in prescriptions. And VIMOVO up double digits year-over-year, same for RAYOS and certainly PENNSAID as well.

PENNSAID wasn't launched, so it's more sequential. So any increased penetration in PME drives a significant increase in prescriptions, and ultimately significant continued increases in net revenue.

Maybe I could just ask it a slightly different way. For the first quarter, would you say that the pattern of gross to net being higher in the first quarter, and then attenuating over the years still exists because of those deductibles?

It will exist as long as PME penetration is stabilized. So last year, we saw the gross to net for DUEXIS moderate through the year, because we had relatively stable PME penetration for the first three quarters, and it began to increase 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.

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

And the ramp was most significant the first quarter, which drove the significant sequential changes in gross to net. But that will obviously stabilize as we've hit the higher levels.

Do you have any timing for that stabilization? You seem to be almost there for DUEXIS.

Right, so I think that's fair. DUEXIS ran in at probably a high 50% range into the first quarter, and is getting towards the peak range. And so PENNSAID just -- we started January 2, and that's already in the 60%, 66% range. So we're definitely rapidly getting towards that range, so that will definitely impact that.

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

I think that as I stated in my remarks, we expect to see our 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 for PENNSAID. We had debt distinguishment costs, and also some infrastructure build as we've added the broader organization's capabilities, and one-time cost related to bonus, and other things. So we expect that EBITDA margin to continue to move throughout the year.

Okay. And then on royalty expense, 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 does right now because you account for it differently than other companies?

Well we reported, and Paul, maybe you can address this, but we had been reporting it with the royalties that are backed in based on from and accounting perspective. But we've decided to take them out, and we've reported them essentially both ways in how we report our guidance. So, Paul?

We have to follow this arcane accounting rule where we had to capitalize the estimated future royalty stream related to Actimmune and VIMOVO when we bought the products as a liability. And so the actual royalties we were incurring on the sales in the quarter were not reflected in our COGS. 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 the sales for the quarter. And going forward, that's the a number that we're going to be reporting each quarter, is an adjusted EBITDA and adjusted non-GAAP income that pulls out the royalty accretion and adds in the royalty expense that we would've booked if we were expensing royalties as other companies do as they are incurred.

Okay, great. I'll get back in the queue. Thanks.

Marc Goodman, UBS.

So first on the prescriptions that you all were reporting, can you talk about how those were just a little bit different than IMS? It seemed like they were a little bit lower than what we thought. I was a little confused on that.

Second, taxes. I just want to make sure I understand here. So there's a big NOL that you're taking upfront now. And so that's going 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 do about next year and the year after on the taxes?

And on PENNSAID, so just so I'm clear. What was the gross price and what was the average price that you're getting in the quarter, and where you expect that to be going?

On IMS, what you may be seeing is just a difference between adding weeklies versus the monthlies. We reported the monthly prescriptions. Sometimes there's a variance when you total weeklies versus the monthlies, but we reported the IMS national prescription audit monthly prescriptions. Paul, you want to address the taxes?

So on the tax side, we have -- before the Hyperion transaction, so at the end of March, we have a 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 a valuation allowance, so it nets to zero.

With Hyperion, we will be recording significant deferred tax liabilities which now will offset those deferred tax assets, and so there's 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's over $100 million of valuation allowances that will reverse as a one-time tax benefit.

Going forward, what we said and in my remarks and I'll repeat again, is that we expect that the -- you can't really look at a tax rate. Because it's going to be very up and down dependent 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.

(Multiple speakers) I've been saying the foreseeable future, because we expect to continue to make acquisitions. And every time we do an acquisition, it's going to have some impact on how the taxes are going to be going forward. So for the foreseeable future, until we have another acquisition, we expect to be in this situation with no tax or some level of tax -- of a tax benefit

He's asking on a non-GAAP basis.

The one time charge in the second quarter, we pulled out from our non-GAAP earnings. The regular monthly or quarterly tax benefit, I believe, we will keep in our non-GAAP. But we have to (multiple speakers).

On a percentage basis, on the out years of the -- ?

I can't give you any guidance on rate. Because, for example, we couldn't have earnings with a benefit, so it's going to end up being a negative rate if we end up in that situation. So rates are very difficult to talk about in this situation, now that Hyperion transaction has happened.

And then just to answer because your question, Marc. The WAC price for PENNSAID is $1,399 per bottle, and if you just calculate that net revenue divided by prescriptions, that would be a net revenue per prescription of $566.

So there was no inventory or anything strange, it was that simple as far as the situation.

It was. As far as inventory accrual?

No, just on the inventory, and build for the inventory just because of the new products per se. It really wasn't a new product, but I didn't know how the channel was looking.

Obviously, our inventory on our books is little bit higher than December, because we actually have some PENNSAID inventory which we didn't have any at the end of December.

I meant more in the distributor channel.

Yes, there's definitely a level of PENNSAID inventory in the channels, but it's --

It's in the normal range.

For DUEXIS and VIMOVO, and it's normally in the --

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

And as Tim said it earlier, the one impact we do have in the quarter is because we had no channel inventory at the end of December for PENNSAID, and now that we do have channel inventory at the end of March, we had to record a reserve for expected copay expenses to hit in future quarters for the channel inventory that sat there at March 31 for PENNSAID.

So how much was that in the quarter?

It was a little over $4 million.

So that's a hit to your sales?

Yes. So sales and EBITDA, it falls to the bottom line.

Yes.

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

And one other thing, DUEXIS and VIMOVO obviously excluded on the formulary with Caremark Express Group. So you can tease out like in the first quarter, what happened? Was it down significantly in that channel?

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

Thanks.

David Amsellem, Piper Jaffray.

Thanks. So on Actimmune, is there anything to read into regarding the pace and the patient adds? Is seems to be slower from the pace you cited in the back half of last year in the middle of last year. So that's number one.

Number two, on RAVICTI. Maybe give us some more color on your efforts to drive more switching away from Buphenyl and to drive adds for patients who are not on pharmacologic treatment. And specifically, is there anything you think you need to do differently from Hyperion in order to drive the product?

And then lastly, just on biz dev, I know you just completed a big acquisition, but in the near-term what can you do regarding deals? And are you looking at all at other primary care focused assets, or have you sort of moved on from that from a BD perspective? Thanks.

Thanks, David. On Actimmune, one of the things we saw in the beginning of the year, which we often see in the first quarter, is a slight decrease or increase in discontinuations. That was partially offset by a higher compliance rate. And the commercial team spent a lot of effort on increasing the compliance rate.

And let's say, since mid-last year the compliance has gone from 75% to 77% up into the low to mid 80%s. So we're seeing the compliance efforts improving. Earlier in the year, you see some discontinuation rates for various reasons, but nothing that -- we expect our growth rate and adding that net three patients per month to continue throughout the year as it has been.

From a RAVICTI standpoint, there were several things. First, we felt that Hyperion did an excellent job in driving the growth. We saw about $31 million in the first quarter 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 6 clinical science associates or representatives selling RAVICTI. In combining, as John mentioned, to with our 8, that we now have 14 clinical science associates who are selling both products. So we'll get broader reach and 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.

From a switching standpoint, from Buphenyl, that's a continued effort and it's a two-prong 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 taking the patient right when diagnosed as a neonatal. So certainly the opportunity for us is to gain an indication for the two-month to 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 see an opportunity to move the Buphenyl patients into our combined reimbursement hub that for both products. They're currently managed out in the retail space, so our goal will 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 40 pills per day, there's 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 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 time in the institutions and educate on how to earlier diagnose. And continuing to 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 it over to Bob can answer that.

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.

Okay. Just, if I may, sneak in a follow-up on RAVICTI. So you're submitting the filing on the younger patients, the infants, 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 forgive my ignorance here, but just maybe walk us through that.

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, 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 a matter of the timelines coming through and getting that submitted.

Thank you.

Donald Ellis, Avondale Partners.

Thank you, guys, and good morning. First question, regarding the royalty that was included in EBITDA. Can you quantify roughly what that was last year and in the first quarter? The second question, regarding Hyperion. Is there any seasonality in Hyperion sales, and what were the inventory channels levels there? And last question, regarding Actimmune, are you seeing any off label use in Friedreich's Ataxia? Thanks.

So I'll start at the last for Actimmune, and then off-label. I don't know. We don't measure that. We do know that as we've been preparing for preclinical trial, a couple of our investigators have mentioned that there's a few patients on drug. But beyond that, we don't have any awareness.

Hyperion inventory is in the range of what we have for a cross of our products, which is typically the 17 to 24 day range, so nothing of abnormal there. Remind me on the first question, Don?

It was on royalties.

So royalties, so Paul can answer that.

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've incurred based on the sales in the period were $5.196 million, and last year's first quarter was $3.349 million.

Great. Thank you very much.

Thanks. Don.

Louise Chen, Guggenheim.

Hello, thanks for taking my questions. I had a few here. So first question on the RAVICTI incremental sales opportunities in the EU, Canada and additional pediatric ages. Just curious how we should think about those opportunities.

Secondly on PENNSAID, it looks like probably doing a lot better than people expected. So 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 $235 million to $250 million or the $257 million to $272 million? Thanks.

So the EU Canada, and the two-month to two-year population. We are in process and doing our evaluation for the European market opportunity. The prevalence is similar to the US, so in the US you have about 2,100 patients. The application, we expect to be approved either late this year or early next year based on the progress that had been made by Hyperion going through the process with the CHMP. As we look at Canada, and we don't see that as a material opportunity at this point in time. With Actimmune, we probably have 6, 7 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. And I think when we first acquired the product, we had expectations that it could be over $100 million asset. But certainly that's changed with the success we've had so far in the first quarter. So we haven't given long-term, but certainly, we think it's well as we look at all the NSAIDs $250 million plus 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 million to $250 million. And simply, each quarter to get to the previous way it was measured via those arcane accounting rules is to add the royalty each quarter. So if you look at the first quarter is that $5.2 million. It will be reported on a quarterly basis, but we've guided to the $235 million to really take out that accounting irregularity.

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 it's the number that you should be focusing on.

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 a way to think about that?

Well if you look at Hyperion, I would say that the Hyperion -- the portion of the guidance that is 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.

Thank you very much.

Ken Cacciatore, Cowen.

Hey, guys. This is Sal in for Ken. Congrats on the solid quarter. Regarding the PENNSAID settlement, you were able get pretty significant duration on that asset. What context can you provide on the dynamics that led to being able to get that duration?

And then just where you stand with patent litigation on other assets? And what leverage do you have for potential settlements there? And specifically, just want to understand around the duration for RAVICTI.

Sure. So with PENNSAID, we've had -- originally when we did the acquisition, our understanding was there was a settlement with Apotex out to 2022. They were provided the information, which should've 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 [Hepatic] was a subsequent filer. And we've always viewed in our initial analysis is that patents go much stronger than the original settlement, and that's certainly reflected in where we netted out with Hepatic. 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 2%. So we feel very good about that, and we will continue to move through the process with other ANDA challengers.

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 infringement case against those 23 patents. We've gotten a number of incremental orange book listed patents on those 23 patents, and we believe materially that it improves our ability to win in 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 through 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 orphan exclusivity out to 2020, with patents out to 2030 and 2032. The challenge was by Par. And based on the court system and moving through the Texas courts, we expect their ANDA to be approved. And then they would have to wait until the 2020 expiration of orphan exclusivity, which would, in our estimation, require them to not be able to launch in the 75 day period that is required after an ANDA approval, which would and could jeopardize their ability to maintain first filer status. So from that standpoint, we'll always have dialogue with any parties about getting to certainty in the duration of all of our patents. But across each of them, we feel very good about our current place.

Thank you.

David Risinger, Morgan Stanley.

Hello, this is Neil Chen on for Dave Risinger. Just one quick question. What are the key formulary negotiations you're in for 2016? And when should we expect to hear updates, maybe around mid-2015 or not until fall 2015? And also how would that be communicated to us? Thank you.

Negotiations on what?

Key formulary negotiations for 2016.

We don't comment on formulary negotiations. Unless there's some material change, we would report that at the time. But otherwise, we don't communicate on that.

Okay, thank you.

Gregg Gilbert, Deutsche Bank.

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

Thanks, Gregg. We don't comment on the breakout of copay and coinsurance and fully bought down. We do see it as a stable level across the brands, which allows us to feel confident in 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 assure 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 copay. So we look at it as, what is the cost to patients and to ensure access on an ongoing basis.

And then I think that when you look at -- part of the rhetoric and discussion 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, need for transplants and preventing those liver transplants. So I think I would expect a balanced rhetoric that needs to be heard that speaks not only to the gross cost, but the net cost. What is the cost to the patient, how are companies enabling access to patients, and then ultimately 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're not involved in that equation. So to us it's about innovation and reducing the overall cost to the system with innovation, and doing the right thing for patients.

Thanks.

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

Thank you, Nuvo. And thanks, everyone, for joining the call. We feel great about our start 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.

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