Horizon Therapeutics PLC (HZNP) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Horizon Pharma plc third-quarter 2015 earnings call. As a reminder today's conference call 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, Kaylee. Good morning, everyone, and thanks for joining us. On the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer; Paul Hoelscher, Executive Vice President, Chief Financial Officer; Jeff Sherman, Chief Medical Officer and Executive Vice President Research & Development; George Hampton, Executive Vice President Global Orphan Business Unit and International Operations; John Kody, Executive Vice President, Chief Commercial Officer; and Bob Carey, Executive Vice President, Chief Business Officer.

As you are well aware, there has been a lot happening in the market as of late. This morning Tim will provide a high-level review of our exceptional third-quarter performance and also discuss our strategic and patient focused Company objectives.

Paul will provide additional detail on our financial performance including our new full-year 2015 guidance that we raised significantly this morning. And finally, Jeff Sherman will provide an update on our clinical development programs and our orphan business before turning the call back over to Tim for some closing remarks.

In addition, as we announced earlier this week, we are hosting an Investor Day this coming Monday, November 9 in New York beginning at 11:30 AM Eastern Time.

At this meeting we will provide an in-depth review of our orphan, primary care and specialty business units, including an overview of our patient support programs. We'll provide an update on development pipeline, we will review our Company financials and we will review our business development strategy. Our entire senior management team will be at this meeting.

If you are unable to attend in person the webcast of this event will be streaming live on the Investor Relations section of our website at www.HorizonPharma.com.

As a reminder, during today's call we will be making certain forward-looking statements, including financial projections, the expected timing and impact of future events, including a potential acquisition transaction, and the potential strategic and financial benefits of such a transaction, and our development and commercialization plans.

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 are cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligation to update such statements.

In addition, on today's conference call non-GAAP financial measures will be used to help investors understand Horizon's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today which are available on our Investor Relations website at www.HorizonPharma.com.

Also this conference call today does not constitute an offer to sell or the solicitation of any offer to buy any securities or a solicitation of any vote or approval. For more information about Horizon Pharma's solicitation of proxies and tender offer related to the proposed acquisition of Depomed, please refer to Horizon Pharma's filings with the Securities and Exchange Commission. And with that I would now like to introduce, Tim. Tim?

Thanks, John, and good morning, everyone. I am pleased to report that we reported another exceptional quarter that substantially beat Street expectations for sales, adjusted EBITDA and EPS. As a result today we are also increasing our guidance for the full year 2015 by about 13% in sales and about 30% in adjusted EBITDA.

Our business fundamentals are stronger than they have ever been and I'm extremely proud of the impressive results achieved by each of our more than 700 employees. Specifically, today we reported Q3 net sales of approximately $226 million representing year-over-year growth of more than 200%. Our third-quarter adjusted EBITDA of $131 million reflects year-over-year growth of nearly 500%.

In addition, adjusted EBITDA was approximately 58% of sales, a significant improvement from the first and second quarters of this year. Adjusted operating cash flow was once again very strong for the quarter, coming in at more than $100 million for the second consecutive quarter.

Our strong quarterly financial results certainly deserve a lot of attention, including our newly raised guidance for the full year as well as improving our balance sheet and steady cash flow generation. Our Company is performing at an extremely high level as we near the end of another transformative year.

To that end it is important to understand that our Company, as it continues to grow, diversify, evolve and as we advance our strategic financial, patient and centered goals and objectives we have a lot to cover.

As John mentioned, I will provide an overview of our business and address what's been happening in the market recently. Paul will then cover the financials for the quarter and Jeff will review the clinical development programs in our orphan business.

We believe there is significant unrealized value within our orphan business which is not fully contemplated in our current stock price. And that is without assigning any value to ACTIMMUNE for Friedreich's Ataxia or a potential clinical program for ACTIMMUNE in certain cancers. This is a topic we will address further in detail at our investor meeting on Monday.

So let me start at a high level. The Horizon Pharma of today looks quite different than it looked just a few short months ago, not to mention a year ago. Our current phase of rapid market leading growth is exciting, dynamic and has been rewarding for all of us. It represents greater financial flexibility for us to consider additional reinvestments in the business for external growth opportunities that further strengthen and diversify our Company.

Yet in the past week -- few weeks, one challenge particularly has been increasingly apparent to us and to our long-term shareholders. And that is our investment identity.

There has been a tremendous amount of noise in the marketplace and media recently about pharmaceutical companies, biopharmaceutical companies and so-called specialty pharmaceutical companies, how they operate and do business, the cost of their medicines and so on. There has been a lot of misinformation and misleading commentary provided by many incented to do so.

So given this new market uncertainty I would like to clearly articulate and remind folks of who we are, how we operate our business and what defines our investment identity. If you're a long-term holder you probably already understand this.

First and foremost, it is important to understand that at our very core we do put patients first. Patient access and affordability is at the heart of everything we do. It is a cornerstone of our Company culture and something that we talk with each of our employees.

In fact, I believe there is not a single company in our industry that has done a better job than Horizon in providing free medicines or medicines that greatly reduce costs to our end customers, the thousands of patients that we serve.

I know firsthand about the cost of medicine and the difficulties that patients can experience simply trying to get a prescription filled for a medicine prescribed by their personal physician for an FDA approved indication.

I believe our healthcare system is the best in the world, but to be honest it is complex and confusing and can be very frustrating for patients, doctors and for our companies trying to work within its vast framework, especially when there is misinformation in the marketplace.

I know this because I am a patient myself. I have suffered from several autoimmune diseases for the last 25 years. I have been fortunate enough to make Humira, an injectable biologic, to manage my disease and treat my symptoms. In dealing with my disease some days are better than others; it's kind of like the stock market.

Each day I also take one of our own medicines, DUEXIS, a combination of the anti-inflammatory NSAID ibuprofen and the GI protective agent famotidine. The reason I take DUEXIS is the same reason doctors prescribe it to thousands of their patients, for the clinical benefit it offers.

I myself have had many stomach ulcers from taking NSAIDs over the years. FDA approved clinical trials have demonstrated that DUEXIS can reduce NSAID caused ulcers associated with taking ibuprofen, which is an effective pain and inflammation reliever for both osteoarthritis as well as rheumatoid arthritis.

For anyone who doubts or doesn't understand the importance of GI protection, I would simply remind you that in the United States it is estimated there are more than 100,000 hospitalizations each year and more than 16,500 deaths each year from GI bleeding and related complications associated with taking NSAIDs chronically.

That is more people dying from taking their NSAID pain reliever than patients having opioid overdose in certain types of cancer. The bottom line is physicians believe that the value proposition of DUEXIS and VIMOVO is clear and compelling and as a result they prescribe it for their patients.

For anyone who questions the use of DUEXIS or VIMOVO as a proven treatment option, when we look at DUEXIS the facts are that it took seven years, two double-blind placebo controlled Phase 3 trials involving more than 1,500 patients and more than $100 million in investment capital to develop this novel treatment.

These are the two largest clinical studies ever completed for an NSAID with an H2 antagonist to reduce NSAID caused upper gastrointestinal ulcers. And it demonstrated a 50% reduction in the incidence of those upper GI ulcers versus taking ibuprofen alone.

So, yes, this is an important medicine with powerful clinical data to support its use by physicians to treat an unmet medical need in the marketplace. But it is also important to understand that just taking the two generics separately is rarely the solution.

In fact, physicians co-prescribe a GI protective agent less than 25% of the time when prescribing an NSAID. And on the rare occasion that a patient is co-prescribed a GI protective agent, after three prescriptions data shows that 60% of patients no longer take a GI protective agent. That is how I got the ulcers myself.

So, on a net basis, less than 15% of patients are potentially being protected against these upper gastrointestinal ulcers. This is what leads to the hospitalizations and more than 16,000 deaths every year which occur.

Those who say patients can just take the two generics separately are ignorant as to how these patients are treated in today's marketplace. Taking two generic agents has been possible for more than 20 years, yet we continue to still see significant hospitalizations and deaths each year associated with these GI bleeds and their complications.

Compliance is critical to clinical outcomes, similar to what we've seen in the evolution of treatment of HIV and hepatitis C. To say otherwise is to not understand how patients are treated today. So the bottom line is that DUEXIS and VIMOVO are innovative, patent protected medicines that meet significant unmet needs. Physicians believe in these clinical benefits and that is why they prescribe them.

As a patient I also understand the direct cost of medicine. And as a 25-year veteran of the pharmaceutical industry I also understand that the complexity of the healthcare system and the push to limit choices for patients and doctors driven by alternative profit motivations is difficult.

That is how our US free-market healthcare system works; it is far from perfect, but it still delivers, I believe, the highest quality, most comprehensive patient care in the world, albeit with some room for improvement on access and affordability.

It is for these reasons that our Company created a patient focused support program that puts patients first, ensuring that they get the medicines that their physicians have determined offer them the clinical benefit they need while limiting their out-of-pocket costs. And we take our responsibility to these patients very seriously.

Out-of-pocket cost to patients has been increasing dramatically over the last several years as other profit takers in the drug supply chain implement tactics to alter a physician's clinical decision.

Rather than facing the impediments, the limitations and complexity of the current system alone, we at Horizon offer a patient support program as an option to make it easy and affordable for patients to get the medicine that their doctors have specifically is prescribed for them based on their FDA approved clinical benefits.

The end result is straightforward -- physicians prescribed our medicines based on clinical need. The patient receives the medicine their physician intended that they receive. And most importantly, patients receive their medications at the lowest level of out-of-pocket cost and as fast and efficiently as possible because the patients matter.

Pharmacies that participate in our patient support programs play an important role in improving patient access. These pharmacies are not owned by Horizon Pharma; we do not have any type of ownership stake, we do not have any options to purchase them in the future. These pharmacies solely dispense the prescriptions that physicians prescribe and we work to ensure that patients receive what his or her physician has prescribed.

And these pharmacies are not involved in changing prescriptions or disrupting the healthcare system, that is a fallacy created in that market just -- to justify other's motivations. The pharmacies we work with are fully independent, full-service pharmacies that serve both retail and mail order pharmacies. These pharmacies are non-exclusive and also fulfill prescriptions for many other drug manufacturers.

Currently there are less than 10 independent pharmacies that participate in our patient support programs and they work every day to ensure patients get the medicine that their physician has prescribed.

We continue to work with additional pharmacies as we further diversify the number of participating pharmacies. In fact, no one pharmacy makes up more than approximately 13% of our net sales in our primary care and specialty businesses.

And for any pharmacy that uses this program we work diligently to ensure that they are meeting all of our strict compliance criteria and standards. If they don't, we quickly terminate participation and we have done so.

Furthermore, it is important to understand that these are independent businesses that operate in a very competitive and complex marketplace. There are nearly 70,000 pharmacies in the United States. So certain information about these pharmacies is confidential to their business and not available to us.

We realize that some of you are asking for additional information about these pharmacies that distribute some of our medicines based on what has been happening recently with certain other companies. Please understand that the information on these pharmacies is not our information to share, it is proprietary to them. So we will fully share the information and be fully transparent on what we have available to us.

In addition, these pharmacies primarily purchase our products directly from major wholesalers. One pharmacy purchased directly from us is in the process of moving to purchase product directly from a wholesaler.

We ship our products directly to these major wholesalers and book sales at that time. Our net sales are a result of taking deductions for rebates to managed care organizations, creating the access to patients I have referenced along with fees for wholesalers and other typical administrative costs.

Importantly our medicines are also available at traditional mass-market retail pharmacies throughout the United States as we understand that many patients prefer to go to their local pharmacy. And about 25% to 30% of patients who take our medicines do just that.

Finally, and most importantly, nearly all of the patients taking our primary care and specialty medicines, more than 96%, in fact, pay $10 or less out-of-pocket. And some patients receive medicines their physician has prescribed for no cost at all. That is our commitment to ensure the system doesn't subvert the physician's clinical decision for their own profits.

Our patient support programs are designed to subsidize part or all of a commercially insured patient's financial burden, whether it is a co-pay, a patient's co-insurance payment or a prescription that a commercial payer rejects in spite of the physician's clinical decision.

Have we been successful ensuring patients get the medicines physicians intended them to receive? Yes, we have and we are proud we are doing the right thing for these patients. We are ensuring that the patient gets what their physician prescribes based on their FDA approved clinical benefits, nothing more.

We have done an outstanding job executing in a highly competitive market by educating physicians on the FDA approved indications and benefits and risks of our medicines. Has it cost our Company significant dollars to manage this program? Well, obviously it has and we are proud of that spending.

In fact, we have invested approximately $670 million in our patient support programs through free medicine and co-pay support this year alone, a remarkable commitment for a Company of our size.

Expanding this program earlier this year wasn't without risk, despite the concept of using specific pharmacies that have been around for many years and as used by most major pharmaceutical and biopharmaceutical companies. Still it was a critical strategic decision for us to benefit patients to enable access for them to the medicines their physicians prescribed.

As a result patients get the medicines their physician intended at an affordable out-of-pocket cost, very quickly, typically within 24 hours. And that is an important part of the equation because patient compliance is critical to reducing these stomach ulcers.

Through our patient support programs commercially insured patients get the exact medicines that their physician prescribed based on its FDA approved clinical benefits. Those are the facts.

The results speak for themselves. Over the last seven quarters, or nearly two years through September 30 of this year, prescription growth for our primary care and specialty products has increased approximately 190% while our average net realized price has increased approximately 9% annually over the last two years, cumulatively 16%.

So, it is clearly that significant volume growth is driving our net sales, not price. This is an extremely important point that we want to make sure everyone understands. It is why we consistently and transparently discuss our gross and net percentages with you, our investors.

We have and we will continue to be transparent on all aspects of our business. We realize that we have to balance what we are doing for patients on the access and affordability side with what you, the investors, expect from us. It is an important balance that we owe to you as well as the patients we serve.

But it is one thing that we are managing well and we continue to execute commercially to drive significant volume growth that leads to exceptional net sales and adjusted earnings growth you have seen today.

While I have spent my time this morning clarifying our primary care business and specialty business, I want to comment on our orphan business which we have significantly built through acquisition of three highly valuable products: ACTIMMUNE, RAVICTI and BUPHENYL.

It is our belief that the value of our orphan business exceeds the combined value of our primary care and specialty businesses due to the long lives of these medicines, their higher contribution margins and lack of other approved therapies.

Jeff Sherman will discuss the most exciting part of this business, our clinical development investments in ACTIMMUNE, including the Phase 3 trial underway for Friedreich's Ataxia, a degenerative and crippling neurologic disease for which there are no approved therapies.

You will also hear more about our plans for our orphan business as well as our short- and long-term financial projections at our Investor Day on Monday. With that let me turn the call over to Paul who will review our financial results in more detail.

Thanks, Tim. Before I begin, as John referenced, this morning we provided information in our third-quarter earnings news release and on the Investors portion of our website that reconciles our GAAP results to certain non-GAAP financial measures. Therefore my comments will focus mainly on our non-GAAP or adjusted results which provide investors with a better picture of our ongoing business performance.

As Tim indicated, today we reported third-quarter net sales of $226.5 million, an increase of 202% versus the third quarter of 2014 and an increase of 31% sequentially versus the second quarter of 2015. Sales growth was driven by strong performance across all three business units.

Adjusted EBITDA for the third quarter was $131 million or 58% of sales, significantly exceeding our expectations. This was a significant improvement from the second quarter of 2015 when our adjusted EBITDA margin was approximately 44% of sales. The increase in EBITDA primarily resulted from higher net sales driven by both increased volume along with improvements in our gross to net percentage versus the second quarter of 2015 as we expected.

Based on the strong performance through the third quarter we are again increasing our full-year 2015 net sales and adjusted EBITDA guidance. We are raising our full-year 2015 net sales guidance to $750 million to $760 million from $660 million to $680 million previously, and are raising our full-year adjusted EBITDA guidance to $350 million to $360 million from $265 million to $280 million previously, increases of approximately 13% and 30% respectively.

Now I will walk through our P&L in more detail and, as I referenced, we will refer to non-GAAP or adjusted results. The third-quarter adjusted gross profit margin was 92.1% of sales and we expect our adjusted gross profit margin for the full year 2015 to be between 91% and 92%.

Total adjusted operating expenses were $77 million or 34% of sales in the quarter. Adjusted R&D expense in the third quarter was $8.9 million or 4% of sales and reflects our continued investments in ACTIMMUNE where, as Jeff will discuss, we continue to enroll patients in our Phase 3 trial for FA. As this trial progresses we continue to expect full-year adjusted R&D expense to be in the mid-single-digits as a percentage of sales.

Adjusted sales and marketing expenses in the quarter were $44.8 million or 19.8% of sales and G&A expense was $23.3 million or 10.3% of sales. We expect sales and marketing expenses to increase in the fourth quarter as the Company continues to expand its sales and marketing efforts to drive prescription growth of our medicines. We also anticipate a higher G&A expense in the fourth quarter as we continue to build out our infrastructure to support Horizon's growth over the long term.

Adjusted net income for the third quarter of 2015 was $117 million and adjusted diluted earnings per share were $0.70, representing an increase of 268% as compared to the third quarter 2014. The weighted average diluted shares outstanding used to calculate adjusted diluted earnings per share in the third quarter of 2015 were 166.8 million shares.

We expect our weighted average diluted shares outstanding for the fourth quarter to be approximately 172 million, which results in an estimated full-year weighted average diluted share count of approximately 159 million shares. These diluted share amounts are lower than previously estimated as the amounts will vary based on our share price.

Moving on to taxes, on a non-GAAP or adjusted basis we had a small tax benefit in the third quarter of less than 1%, reflecting a decrease in the cash taxes we estimate that we will pay for the year. For modeling purposes we continue to suggest that you assume an adjusted cash tax rate of less than 1% for the remainder of 2015.

Looking longer-term we expect our cash tax rate to be in the low-single-digits over the next few years, increasing to the high-single to low-double-digits in the 2018-2019 timeframe, and then moving into the mid-teens thereafter.

We continue to be aggressive in our pursuit of M&A. To that end, as we previously stated, future acquisitions may impact these forecasted rates and we will update our guidance as appropriate when that happens.

And finally, let me provide a few high-level comments on our third-quarter cash flow and balance sheet as of September 30, 2015. For the third quarter 2015 we generated $88.4 million of operating cash flow on a GAAP basis. After adjusting operating cash flow for transaction-related payments, adjusted operating cash flow was $100.8 million in the third quarter, our second consecutive quarter of more than $100 million.

While there were a number of moving parts within operating cash flow in the first and second quarters, we believe our third-quarter operating cash flow is a better reflection of the Company's normalized quarterly cash flow generation. We would estimate a similar level of non-GAAP operating cash flow in the fourth quarter.

Cash and cash equivalents were $684.3 million as of September 30. The total principal amount of debt outstanding was $1.274 billion as of September 30, which is comprised of $475 million in 6 5/8% senior notes due in 2023, $399 million in senior secured term loans with an initial interest rate of 4.5% due in 2021, and $400 million of 2 1/2% exchangeable senior notes due in 2022. This capital structure results in a weighted average cash interest rate of approximately 4.7%.

In summary, Horizon Pharma has never been in a better position financially. We generated another record quarter of sales and adjusted EBITDA and again raised our full-year 2015 guidance for both of these metrics.

Our operating cash flow generation is strong and we have significant flexibility on our balance sheet to continue to execute accretive, growth focused M&A. Our current net debt to the last 12 months adjusted EBITDA leverage ratio is strong at 2.1 times. Now I would look to the call over to Jeff.

Thanks, Paul, and good morning, everyone. I want to take the opportunity this morning to briefly discuss our pipeline and how we approach clinical development at Horizon.

As the Company has grown and become more diversified we have built a stronger commercial foundation that has allowed us to invest even more in our internal development platform. Our clinical development strategy is underscored by two primary goals: one, to address unmet medical needs; and two, to ensure that we are creating sustainable long-term value through the medicines that we bring to market.

We are working on programs that we believe have compelling clinical outcomes as well as the benefit/risk profile to facilitate regulatory approval and clinical use. Given the many challenges that exist in the drug development process we want to be smart about how we invest, so we are efficiently spending our clinical development dollars where we have the best opportunity and the highest likelihood of success.

At the same time we are actively engaging regulatory agencies, healthcare professionals and, most importantly, patient groups in this process to facilitate development activity. By engaging stakeholders early, drug development and regulatory approval can be very efficiently planned. This is critical particularly in the orphan and ultra orphan disease space where an increasing amount of our clinical development efforts are focused today.

Our internal clinical development program to evaluate ACTIMMUNE for the treatment of Friedreich's Ataxia, or FA, is a good example. ACTIMMUNE, or interferon gamma, is one of our orphan medicines that is indicated for chronic granulomatous disease, or CGD, and severe malignant osteopetrosis, or SMO, two rare genetic diseases that typically first occur in children.

In June we initiated our Phase 3 trial to evaluate ACTIMMUNE for FA, which, as Tim stated, is a debilitating, life shortening, progressive neurologic genetic disease. People with FA do not produce enough frataxin, which is an important protein that functions in the mitochondria, the energy producing factory of the cell.

Low levels of frataxin result in nerve cell death which in turn leads to the poor neuromuscular condition of these patients. Our decision to move forward with a Phase 3 trial to evaluate ACTIMMUNE in FA was based on the preclinical and clinical research completed with the product to date.

Preclinical data evaluated interferon gamma and found that in it increased frataxin levels in both cells and animal models of FA and, most importantly, improved neuromuscular function.

A subsequent open label Phase 2 trial demonstrated that interferon gamma improved neurologic function as measured by the FARS score, or Friedreich's Ataxia Rating Scale, with a highly statistically significant result. We also have FDA fast-track designation for ACTIMMUNE for FA, which allows us to submit sections of our dossier on a rolling basis and to be considered for priority review at the time of submission.

We have also worked very closely with the Friedreich's Ataxia Research Alliance, or FARA, to collaborate not only on the design of the trial but to also find the patients to enroll in the trial through the FARA registry. And the trial is more than one-third enrolled to date.

We are on track right in line with our expectations, which are to enroll all 90 patients by the middle of next year and to have data in hand by the end of 2016. We are targeting a first-quarter 2017 supplemental BLA submission with fast-track status we could potentially have approval by third quarter of 2017.

In addition to this Phase 3 registration trial we are beginning to evaluate ACTIMMUNE in combination with PD-1 and PD-L1 inhibitors in various forms of cancer including bladder and kidney cancer. Preclinical research has indicated that interferon gamma could potentially enhance the effects of PD-1 and PD-L1 inhibitors thus potentially improving cancer patient outcome.

Through a research collaboration with the Fox Chase Cancer Center we hope to gain a better understanding of this combination and we are targeting to start a Phase 1 dosing trial by the end of this year.

We are also making progress with RAVICTI. RAVICTI is approved and marketed in the United States for a rare genetic disease called urea cycle disorders, or UCD. And The European Medicines Agency, or EMA, recently adopted a positive opinion in its September meeting recommending marketing authorization in Europe as well. We expect formal approval in Europe before the end of this year.

In Europe RAVICTI would cover a broader range of UCD compared to currently marketed medicine and will also be available for patients greater than two months of age. In the US RAVICTI is available for patients greater than two years of age and we are targeting a second-quarter 2016 supplemental NDA submission for patients greater than two months of age.

As we do with all of the medicines we bring into the Company, we evaluate them for additional indications and are looking at both ACTIMMUNE and RAVICTI for a number of additional potential opportunity over the long-term.

I look forward to sharing more with about you a better clinical development plan as we advance our programs to meet unmet medical needs and as we speak with you more on Monday. I will now turn the call back over to Tim. Thank you.

Thanks, Jeff. In summary regarding our third quarter, I am very pleased with the team's overall performance in the third quarter and also year to date. We again far exceeded Street expectations for the quarter as we continue to drive strong commercial execution, expand prescription growth, deliver for our shareholders and ensure patient access.

We significantly raised our full-year 2015 net sales and adjusted EBITDA guidance ranges reflective of this strong growth. We're also delivering on our core principles: strong commercial execution, an aggressive and disciplined acquisition strategy, and expanding patient access while increasing affordability to our medicines.

Moving forward we will continue to drive and motivate our small but growing organization to deliver exceptional financial performance that creates market leading shareholder value. With that let's open it up for Q&A.

(Operator Instructions). Annabel Samimy, Stifel.

Congratulations on a great quarter. I have a few actually. First on RAVICTI, I wanted to know if you could talk a little bit about the penetration of the diagnosed population and the switch from BUPHENYL, as well as your thoughts on infrastructure expansion once you get EU approval and when you might expect that.

And then I wanted to talk a little bit about what seems to be pretty decent gross to net compression. And you have telegraphed this pretty well already that you have been able to renegotiate some fulfillment fees quite favorably. How sustainable is that going forward? What can we expect on that?

And then my last question is related to -- obviously we have seen the whole entire market reprice rightly or wrongly. You clearly haven't been spared. So given where your stock price is now how would you consider share buyback in this environment rather than large acquisition using equity, which could be more dilutive then you might want? And then are you hampered in any way at this point to continue other business development? Thanks.

Thanks, Annabel. I will start with the back first. We are not buying back shares.

Okay.

We believe that our capital on hand puts us in a great position, as we have guided, to complete or announce one to two transactions this year and we will continue to be disciplined in that manner. In fact we think as the asset valuations have come down it has increased the potential available opportunity for us to aggressively pursue.

When it comes to gross to net, as we have said, we have guided to 65% to 75% from the beginning of this year until now and what we did see is moderation in that number for several reasons.

And one is in negotiating wholesaler fees based on increased volume through our business, being aggressive in bringing down administrative costs related to managing our patient access programs, as well as just continued acceleration of commercial growth of the product.

And that put us across our primary care and specialty business at about 67% of our business with prescriptions going through our access programs and pharmacies we work with of about 69%. And that range is with -- I will just go through the numbers so everyone has them, DUEXIS is 68%, VIMOVO 68%, and PENNSAID 67%, RAYOS 50% gross to net. So those are the numbers.

And on a go-forward basis we continue to expect that the gross to net will fall within the range we have guided. And all this, as we have said, enables the prescriptions that are written by the physicians get to the patients and we continue to expect to see volume growth.

On RAVICTI, the patients in the quarter were 355 versus 295 on a year-over-year basis, a 19% increase. We continue to see penetration increase and on a net basis a number of anywhere from two to four new patients per month.

We had guided all along and have been making a strong effort to move patients in the retail channel for BUPHENYL into our reimbursement hub where the patients can be communicated with, help understand the benefits, get the product to them more efficiently.

And we have about 100 of those patients moved into our hub and we continue to supply BUPHENYL there and help these patients understand the benefits of RAVICTI. So that is on if not ahead of track.

On the overall integration of Hyperion, it is complete and we continue to expect $100 million in adjusted gross -- adjusted EBITDA for that business alone in 2016.

And the last one in terms of European infrastructure?

Oh, sorry, European infrastructure, we are going to do it on a very measured basis. George Hampton is building a small team of less than a handful of people right now to focus on really the market development, the health technology assessment and all the work that is required to get into individual countries.

But we are not going to build a broad infrastructure across each market as Europe is a slower penetrating market for all medicines including in the orphan space.

So you won't see significant infrastructure build, you will see that moderated. We've got a great partner with Sobi in Europe and BUPHENYL. So we will continue to leverage partnerships and efficient spend while we introduce RAVICTI to those markets.

Great, thank you so much.

Marc Goodman, UBS.

So you mentioned with the gross to nets where I was curious whether they were much different as far as the average on the quarter versus where you ended the quarter, just given how much of a change it is and you can comment on that.

Second, were there any inventory channel -- inventory sales changes in the channel? Just curious about that. Previously you had mentioned M&A; you had talked about getting some deals done potentially by the end of the year. I was curious how you were thinking about that. And then lastly, accounts receivable still seem to be moving up. Can you comment on that? Thanks.

I will take the first two, Bob will address M&A and Paul can address the accounts receivable. So if we look at gross and net through the quarter, I would say it was at the highest in July, and in August and September it moderated. So we have seen it flatten out in August and September and we expect it to continue to stabilize.

On inventory we have account control agreements, it always ranges between 17 and 24 days. We didn't have any significant difference in any quarter over the last two years on beginning and exit inventory in the channel. And in fact our inventories at the end of the third quarter were probably at very low levels relative to prior year.

So in fact we have lessened the inventory than historically we have had. But that all averages out over a quarter. But the key is that on the beginning and end of a quarter inventories don't change. And they're in a very narrow decline (technical difficulty) Bob can address the deals and timing.

Yes. So Marc, we continue to move ahead on several transactions and we are confident that by the end of the year we are going to be in the marketplace talking about one or two of those. So no change on that front, good progress on them.

And I think the last question was on AR, and maybe Paul can take that.

Yes, Marc, you know, we have explained this in the past but as we've said, AR is based on our gross sales because we sell to the customers at gross. And even with the high 60s gross to net, all of those deductions are sitting there as accrued expenses that have either been paid or they are in accrued expenses on the liability side.

So we have a great level of receivables based on our growth in gross sales, and we have a growing level accrued trade discounts and co-pays and so forth based on --.

Higher volume.

Higher volume too, yes.

So it is reflective of just the gross levels of bottles that are going out the door and the substantially increased volume that we have seen. Okay, next question.

David Amsellem, Piper Jaffray.

Thanks, just a couple. So in terms of your thinking on M&A, just because of the firestorm over specialty pharmacies, do you have now greater sensitivity to adding an asset or assets, a group of assets that you would run through PME, or is your thinking there unchanged?

Then secondly, just remind us what your deal capacity is in terms of additional leverage and the extent to which you would further lever up -- at the extent to which you would further lever up, but what is the upper end of the debt to EBITDA range that you think you could realistically go to in the near term?

And then lastly, just another M&A question. In terms of ex-US, is the goal with building the infrastructure to add more orphan assets ex-US, or is the idea to add orphan assets in the US and then try to bring them overseas? Just give us some color on your thinking there. Thanks.

I will start with the last one. We continue to look to expand our orphan business. From an ex-US standpoint, we are looking to add orphan assets into our European infrastructure to offset that expense and accelerate revenues efficiently. We are also continuing to look at orphan assets that fit into our US business.

When it comes to the type acquisitions that you first referenced in the US, we look at it very simply. If there are medicines that have clinical differentiation, long-life IP, we will always be committed to ensuring that the patient gets what the physician prescribes. We don't look at it as going to whether it is retail, mail-order, any other channel. It is simply is there clinically differentiated benefit; will doctors write it. And then our commitment is to ensure the patients get the product's lowest cost. So that is how we look at acquisitions.

We don't have any one pharmacy that has distributed our medicines with over 13% of net sales in primary care and specialty, and we continue to diversify that percentage with incremental pharmacies we work with.

But as I said, 30% of our business is also going to the retail channel. So, that this not affect how we move our business going forward. And then on leverage, Paul, maybe just touch on the leverage and capacity or --.

Yes, we have quite a bit of capacity right now, David. If you look at our -- if you take our guidance for this year now at the midpoint and use that, the 355 midpoint, with our $1.274 billion of debt we are only 3.6 times levered at this point, if you look at our total debt, and on a net basis only 1.7.

So, we have a lot of capacity. We've said we want to keep our leverage at 5 or below, but we would be willing to go up to 6 for the right transaction. But it has got to be the right transaction to really make sense. And then if we did that we would bring it down back under 5 pretty quickly within a -- 12 to 18 months.

And we have got almost $700 million on the balance sheet, as you saw. So, that gives us a lot of flexibility to bolt-on type transactions, which is -- I don't know maybe Bob can maybe speak to that.

Yes, and so we continue, David, too as Tim has talked about, look at assets that we believe we can generate additional growth with. We are not just buying pale assets or generic products, we are buying differentiated assets with clinical features and benefits that physicians will appreciate and therefore write scripts on. And if we can find those we are going to drop them into the overall portfolio and continue to diversify what we sell.

So the strategy has not changed. We understand there is a lot of controversy out there about specialty pharmacies and the way some companies have done business. But we don't believe that that applies to us. We have conducted ourselves in a very patient focused ethical manner and we will continue to do that.

And overall we expect our orphan business as a percent of our overall net revenue to rapidly accelerate over time. And as you have seen, as we move from the first quarter under 30% to this quarter, our EBITDA margins have rapidly accelerated. We think overall business as it is constructed can approached 50% EBITDA margins. And then over time obviously the success of our orphan business will dictate that. Next question.

Ken Cacciatore, Cowen and Company.

Just one specific question, then a general question. On the specific, can you just talk about the specialty pharmacies, how they get compensated, so we just understand how the mechanism in which they are compensated?

Then on the general question, the M&A environment clearly seems to be changing in terms of maybe who might even be participating and looking at orphans versus you. Can you just talk about your ability to secure these differentiated assets that you are describing?

It seems like a lot of folks would want to get their hands on the type of assets that you would as well in terms of orphan. Can you talk about maybe thought or why [better] finance companies may not be able to compete or you might be able to out-position them? Thank you.

Well, first, we think that from a capacity -- as Paul talked about, our leverage rate is in the low 3s, net below 2 and we have got strong balance sheet. So we think we have got lots of opportunities.

When it comes to how pharmacies are incented, retail pharmacies, mail order pharmacies are all incented through the system working with payers and PBMs and for filling prescriptions. That is it, nothing more to add.

And, Ken, on assets availability and an ability to access them, we had always planned for the market correcting itself. I mean, trees don't grow to the sky, it was going to happen at some point in time. And what we had done is to bolster our balance sheet when we could in the second quarter in anticipation of that happening.

That is why we have about $700 million in cash on our balance sheet, asset values have come in. And there are opportunities out there now that, because of the reset in pricing, have become more available to us. And so, we believe that we will be able to identify and execute on assets at prices that are more favorable.

And as to orphan assets, we've been successful, we've bought two different companies that have attractive orphan assets. And we will continue to look for additional products in the area. And that was in the face of significant competition for orphan assets at that point in time.

So, we acknowledge that they are scarce, but we think we have got a team that is astute in evaluating those and then experienced in being able to go out and execute on acquiring them.

Thanks, guys.

Louise Chen, Guggenheim.

So, first question here is on the ASP trend for your paying customers. Can you talk about how that has changed between today versus a year ago?

Secondly, on the Depomed consent process, just curious how that is progressing and your commitment to see that to an end.

And then last thing is just on your Investor Day, what should we be focused on here that you're going to cover on Monday? And what was the reasoning for the timing of the event next week? Thank you.

So, I will handle this, ASP trend I went through in my prepared remarks. Over the last seven quarters through September 30 we have had 189% growth in volume prescriptions that are written by the physicians. And the average annual price side of that is 9%, 16% cumulatively over seven quarters. So, obviously a rapid acceleration, almost 20 times the growth of volume versus prescriptions. And the Depo, Bob, do you want to take?

Sure, I mean there was a record date on the 29th, we continue to collect proxies from that record date. There is a second record date on the 13th. Our plan is in the back half of November is to submit those proxies and set a meeting date for the special meeting, which will occur most likely in the back half of January.

And so, we are on track for doing that. The process will play out in the December-January timeframe. So a lot will happen between now and then. And we will be monitoring closely moves in the marketplace and the price of our security as well as Depomed and we'll make the right decision at that point in time to pursue the transaction or not depending on what happens. So, we are committed to it at this point and we believe we can be successful.

And relative to Monday, John can -- summarized in his remarks. And I don't know if you would just kind of quickly summarize Monday again, John.

Yes, so on Monday we just plan to go through our overall plans for the business, give you a little bit more color on the various components of the business that you have been asking about, orphan in particular. Some M&A update opportunities, a financial summary and maybe a couple other things too.

So it will be two to three hours total with Q&A. There will be plenty of time in between our different sections for Q&A. And we are also going to have a couple of guest speakers to add some color so that all these different questions that have been coming up that we are answering here today, we'll just fill in some of the details on that for you.

And the reason we are doing it is there is just a lot of misinformation, misunderstanding in the market and I will walk through our business transparently and that will be it.

Okay and just really quickly, just back on the ASP, I just want to clarify a little bit. I was curious as to your ASP for paying customers versus nonpaying. Would you give any color there?

There is no such thing as ASP for paying versus not. ASP is an average selling price, it is an average of all the business and it is as I discussed.

Okay, thank you.

Donald Ellis, JMP Securities.

I just have a couple questions, I get a lot of questions back from institutional clients. Simply you deal with four to six specialty pharmacies. What percent of the prescriptions, for example for DUEXIS, are tracked by IMS? And are any of those four to six pharmacies being tracked, are they in the database for IMS or are they all outside of the IMS?

So, when it comes to -- we have over six, we have less than 10 pharmacies that -- and up to 70,000 US that actually distribute DUEXIS. So that is where the prescriptions are moved through. What was the second part of that?

How much is and IMS or what's the (inaudible).

We don't know specifically who IMS tracks versus not. If you'd look on a quarter-over-quarter basis or year-over-year for the third quarter prescriptions for DUEXIS were up 107%, 35% for VIMOVO, 467% for PENNSAID and over 149% for RAYOS.

So, it seems like there is a good capture rate. We don't know exactly which ones. Most of them seem to report. We have heard mix on a couple of them. But we think that is the prescription growth that you see on a quarter-over-quarter or year-over-year basis is reflective of -- and when you link it back to the substantial net sales growth it seems like there is a pretty accurate capture rate.

Okay, great. Next question I get a lot -- and I know for competitive reasons you are not going to disclose specific numbers for this, but it is also back to Louise's question about ASP versus AWP versus the number of free scripts going through.

Granted you are not going to disclose much of that, but investors would like to know are half of your prescriptions reimbursed at AWP and half are given away free or are those numbers significantly smaller than that? 5% may be reimbursed at AWP and 5% given away free? Can you give us some guidance on where those numbers come out?

So, we give less than 50% of our medicines away free and no one in the United States pays full postal acquisition costs.

Okay, all right, great. Thank you very much for taking the questions.

Irina Koffler, Benzinga Securities.

Congratulations on the quarter. So two questions. One, could you go through product by product and sort of dissect the price versus volume contribution?

And then the second question is just on a qualitative basis. In order to drive more growth in these primary care drugs do you need to penetrate the existing accounts further? Or are they basically fairly saturated at this point and you need to go out and acquire new territories, new clinics and that is why you need to maybe spend a little more in the fourth quarter? Thanks.

So, relative to spend, when we look at the third versus fourth quarter we have guided to approaching 50% EBITDA, it was 58% in the third quarter and that will probably average out. And it is more timing than anything. So there is no substantial change in spend profiles, it is just really about timing of when things occur.

Relative to driving incremental business, our sales force continues to -- every day -- we have 325 primary care representatives and they are out there driving and helping to educate physicians on the benefits/risks to the products and that continues to accelerate. So, get more out of the doctors you call on.

We are not greatly expanding the number of doctors that we call on, each rep has their prescribed audience and their job is to get them to write more. And that will continue to be our focus.

As far as our ASP, it is on our website and in our presentation. It is very similar data. I think the average selling price per product is listed there. I think it is on slide 18 of our corporate deck so you can look at that there.

And on the price volume, Irina, if you just look at the Q we filed this morning at [WMD&A] for DUEXIS, VIMOVO and RAYOS, we break out price versus volume. Those are the three products that have a price versus volume versus the prior year.

Thanks.

Operator, I think we have time for one more question, please.

David Risinger, Morgan Stanley.

So, I have three questions. First, could you just provide a -- sort of a rough framework for what percentage of the PME prescriptions are dispensed mail versus retail?

Second, I think that it was mentioned on the call that a pharmacy is switching to buy through a distributor rather than directly. Could you just explain why that is happening?

And then third, it would be helpful to just understand the gross to net adjustment. Obviously there is a lot of accounting scrutiny going on and if you could just maybe provide a framework for the math for gross to net adjustments, how much is estimated, how much certainty there is?

And then when you do -- when you take reserves and do reserve reversals, how much of a swing factor that is, just so that we understand that accounting for gross to net adjustments a little bit better. Thanks so much.

Sure. So relative to the gross to net, on a quarterly basis it is trued up to actuals. So, there is some variability relative to how much inventory is in the channel. And let's say we have 70% gross to net, then whatever is in inventory is applied against that as far as a reserve. So Paul can walk through some of the specifics.

I mean the majority of our gross to net is our patient support programs. And we are -- our co-pay vendor bills us weekly for that. So we have actual data for almost the entire quarter and before we close the books we have invoices for the full quarter. So, the actual co-pay and everything for the quarter is expensed --.

Which is the vast majority of our gross to net.

Right. And we use that current history to estimate the amount that we need to accrue for the inventory that is out there in the channel.

Probably well over 90% of the gross to net is actual what we get weekly and it is trued up before we close the quarter. So, it is true numbers, there is no games going on here.

The second part -- distribution. There was one of the pharmacies that was buying direct and they decided to buy from a wholesaler. That is their decision and you can ask them. When it comes to our pharmacies and mail versus retail, all the pharmacies that we work with are both retail and mail order. So they all do both.

And we don't have that data.

And anything beyond that is their own proprietary information.

Okay, thank you very much.

Okay, thanks. Thanks, Kaylee. That concludes our call this morning. A replay of the call will be available in approximately 2 hours by calling 1-855-859-2056, the pass code for the replay is 62744788.

In addition, we hope to see you all on Monday, November 9 beginning at 11:30 Eastern Time in New York, or you can listen to our event via webcast on the Investor Relations section of our website. Thanks for your interest in Horizon Pharma and for joining us today. Have a good day, weekend and we will see you Monday.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.