Horizon Therapeutics PLC (HZNP) 2016 Q3 法說會逐字稿

Good morning and thank you for standing by. Welcome to Horizon Pharma PLC third-quarter 2016 earnings conference call. As a reminder, today's conference call is being recorded.

I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations.

Thank you, Vince. Good morning everyone and thank you 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; Bob Carey, Executive Vice President, Chief Business Officer; Dave Happel, Executive Vice President, Orphan Business Unit; George Hampton, Executive Vice President, Rheumatology and Primary Care; and Dr. Jeff Sherman, Executive Vice President, Research and Development and Chief Medical Officer.

Tim will provide a review of our third-quarter results and an update on the business. Paul will provide additional detail on our financial performance and Jeff will provide an update on our clinical development program for our orphan medicines. Tim will then provide closing remarks and we will take your questions.

As a reminder, during today's call we will be making certain forward-looking statements including financial projections and the expected timing, outcomes 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, 2015, subsequent quarterly reports on Form 10-Q and our earnings news release which was issued 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. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today that are available on our investor website at www.horizonPharma.com.

We have also posted an investor presentation to our website that summarizes our third-quarter results.

I will now turn the call over to Tim.

Thank you, Tina, and good morning, everyone. Today we reported record sales results for the third quarter 2016 that were in line with the updated guidance we provided in October. Non-GAAP adjusted net sales were $273.7 million representing year-over-year growth of 21%. Adjusted EBITDA was $141.2 million representing almost 52% of adjusted non-GAAP net sales.

As we have stated in the past, our long-term strategy is to build a more diversified sustainable biopharmaceutical company anchored by a greater mix of orphan medicines and we are doing that well.

Our rare disease medicines, RAVICTI, ACTIMMUNE, KRYSTEXXA and BUPHENYL represented 35% of our total non-GAAP adjusted net sales in the third quarter compared to 29% of net sales in the third quarter last year. We have made several strategic decisions this year to put Horizon Pharma on a strong path forward including completion of two significant acquisitions in rare diseases as well as securing formulary status with two major PBMs.

Last month we completed the acquisition of Raptor which adds two new rare disease medicines, PROCYSBI and QUINSAIR, and further diversifies our total Company portfolio to 11 medicines with over half in rare diseases. In fact, on a combined basis including PROCYSBI and QUINSAIR through the first nine months, our rare disease medicines now represent 44% of our total non-GAAP adjusted net sales.

As we announced at the end of September, we completed a second major PBM agreement with Prime Therapeutics. In addition to our CBS Caremark agreement, we now have formulary status secured for approximately 35% of covered lives in the United States. We remain in active discussions and negotiations with other PBMs and payers with a goal of further increasing access to our medicines.

This morning we also confirmed our full-year non-GAAP adjusted net sales guidance of approximately $1.045 billion to $1.050 billion which includes between $20 million to $25 million of estimated Raptor sales for the last two months of this year. We also confirmed our adjusted EBITDA guidance of approximately $450 million to $460 million. Year-over-year growth at the midpoint of our guidance ranges are 38% for non-GAAP adjusted net sales and 26% for adjusted EBITDA.

I will now walk through our third-quarter in more detail beginning with our orphan business unit and the recent acquisition of Raptor which is a significant step forward in our goal to build a leading rare disease business. I'm also pleased to announce that several of the commercial leaders at Raptor will be joining the Horizon team.

Dave Happel, who is Raptor's Chief Commercial Officer, has been appointed Executive Vice President of our Global Orphan Business Unit. At Raptor, Dave had responsibility for leading all global commercial activities for PROCYSBI and QUINSAIR. He brings more than 25 years of experience in biotech and pharma and importantly led the development of commercialization of ACTIMMUNE a number of years ago in his career. As we continue to build a leading rare disease business at Horizon, we are very pleased to have Dave leading this business.

In addition, Eric Mossbrooker joins us from Raptor to lead the orphan business in the Americas and Asia-Pacific and [Prinswasta Kraker] joins us from Raptor to lead the orphan business in Europe, Middle East and Africa.

As we noted in our 8-K this morning, net sales in the third quarter for PROCYSBI were $35.2 million and net sales for QUINSAIR were $1.7 million. PROCYSBI is indicated for the treatment nephropathic cystinosis, a rare life-threatening metabolic disorder that causes amino acid 15 to accumulate in the tissue and organs in the body causing irreversible damage. PROCYSBI is a strong strategic fit within our existing orphan business unit as an important treatment option for many new patients as we further penetrate this market.

PROCYSBII in many ways is very similar to our rare disease medicine, RAVICTI, which also treats rare pediatric metabolic disease. PROCYSBI has been the primary growth driver for Raptor and we believe it offers significant long-term potential with estimated global peak sales potential of more than $300 million per year.

Raptor also brings us the orphan medicine QUINSAIR for cystic fibrosis which is proprietary inhaled formulation of levofloxacin, approved in Europe and Canada for the management of chronic pulmonary infections due to Pseudomonas aeruginosa in adult patients with cystic fibrosis. QUINSAIR is off to a strong start in Europe and is expected to launch in Canada by the end of this year. QUINSAIR is not approved in the United States and given its current status, we did not describe or ascribe any value for US approval in the acquisition model. As we evaluate the development and regulatory pathway for QUINSAIR in the US, its potential approval would be upside to our valuation.

In our orphan business in the third quarter which includes ACTIMMUNE, RAVICTI and BUPHENYL, sales increased 8% year-over-year. Year-to-date our orphan business has generated 51% growth. Given the relatively low market penetration of each medicine, we have a significant opportunity to help many more patients over time and drive sustainable long-term growth for these critical orphan medicines in their currently approved indications.

RAVICTI sales were $42.2 million in the quarter and we have exceeded our goals for new patient starts this year and continue to improve compliance and persistency rates. This is being driven by physicians' preferences to prescribe RAVICTI over other nitrogen scavenger medicines based on their positive clinical experience. The team has done a terrific job understanding the needs of patients living with urea cycle disorders which typically occur in young children and in many cases can be life-threatening. By continuing to educate physicians, patients and their caregivers about the importance of tight ammonia control, we continue to expand the universe of patients who can benefit from RAVICTI.

On the commercial side, we have also enhanced our analytics and refined our sales organization to improve our targeting efforts.

Following a RAVICTI SNDA submission in June, we continue to expect a 10-month FDA review to potentially expand the current age range for RAVICTI in the United States from two years of age -- from patients two years of age and older to patients two months of age and older. Outside the US, we announced the commercial launch of RAVICTI in Canada last week and we expect to launch in Europe in 2017.

There are approximately 100 Canadian patients living with UCBs that could benefit from RAVICTI therapy.

ACTIMMUNE sales were $24.9 million in the quarter. Sales were primarily impacted by the discontinuation of discretionary use patients as well as a lower number of net new CDG patients added in the quarter. We expect a discretionary use portion of the business to continue to become smaller over time.

Similar to our approach with RAVICTI, we continue and enhance our analytics to support ACTIMMUNE and refine the focus of our sales organization to improve our position targeting efforts. Our goals are to continue to identify and initiate new patients who can benefit from ACTIMMUNE therapy and increase adherence to patients currently receiving ACTIMMUNE.

We are also investing in additional clinical account managers who will now have responsibility for large institutions, academic centers and CGD thought leaders. This will allow the existing commercial team to identify new targets and new patients to support further growth of ACTIMMUNE in CGD.

In May we completed enrollment in our Phase 3 trial for ACTIMMUNE for the treatment of patients living with the rare neurologic disease, Friedreich's Ataxia or FA. If this data is positive, it will be a transformational opportunity for the estimated 3700 people diagnosed with FA in the United States. These patients many of whom are children and young adults currently have no treatment options.

We continue to estimate that peak US sales in FA could be $500 million to $1 billion annually and assuming positive data at the end of the year, we plan to submit a supplemental biologic license application for ACTIMMUNE by the end of the first quarter next year.

As we discussed when we updated our 2016 guidance on October 11, we have pulled forth some additional investment spending to ensure we are in the best possible position to launch ACTIMMUNE successfully for FA assuming positive data.

We only get one chance to successfully launch a medicine so we are going to ensure we have sufficient planning in place to do it right. We also want to ensure patients have access to our medicine so we have started planning now for patient expanded access protocols in the United States. The intent of this program is to bridge the gap between completion of the Phase 3 clinical program and marketing of the medicine. There are currently no FDA approved treatments for FA therefore this program would only include patients with advanced disease that may not be eligible for other FA trials.

This study would begin soon after receiving data from the Phase 3 trial assuming it is positive.

We are also investing in additional pipeline opportunities for ACTIMMUNE in combination with PD-1 checkpoint inhibitor in both kidney and bladder cancer. Phase 1 investigator initiated trial was at Fox Chase Cancer Center. The first six patient cohort was completed in May, the second six patient cohort was completed in September and the third cohort is now enrolling. Data from this Phase 1 trial will be submitted to a medical meeting for potential presentation next year if accepted.

Next, our rheumatology business unit which includes KRYSTEXXA for refractory chronic gout and RAYOS, our delayed release prednisone. RAYOS net sales increased 15% in the third quarter driven by continued steady prescription volume growth. This resulted in continued improvement in commercial execution during the quarter and broader coverage of the rheumatology market by our salesforce.

KRYSTEXXA generated $25.6 million in net sales in the quarter, a sequential improvement of 29% versus the second quarter of 2016. KRYSTEXXA is a highly effective orphan biologic medicine and the only FDA approved treatment that is indicated for refractory chronic gout which is a population we estimate to be about 40,000 to 50,000 patients. It is still early in our efforts with the full commercial effort beginning in May of this year but the commercial and clinical investments we begin in the first half have started to build strong momentum driven by steady growth in benefits investigations which is a leading indicator for new patient starts.

Benefit investigations are up more than 50% year-over-year which is driving steady growth in KRYSTEXXA vials. And as a result, we have seen strong increase in patients infused. To support the long-term growth of KRYSTEXXA following the Crealta acquisition, we continue to invest in additional marketing, medical education and commercial infrastructure to support its long-term growth. This includes new patient access managers who are responsible for providing support to new accounts and for helping new patients and physicians navigate through the infusion process as well as the related reimbursement process.

We continue to anticipate that KRYSTEXXA peak annual sales will exceed $250 million and our experience today gives us further confidence in the ultimate long-term potential of this important treatment option for refractory gout patients.

At The American College of Rheumatology meeting this November, we look forward to presenting two abstracts on KRYSTEXXA and one on RAYOS. It has been three years since KRYSTEXXA data has been discussed at any major medical meeting and this ACR meeting is an excellent opportunity to position KRYSTEXXA the right way to key gout stakeholders including key opinion leaders and community rheumatologists who are beginning to better understand the true value of this important medicine.

The investigator initiated TRIPLE trial continues to enroll patients and has been expanded to also evaluate patients with increased weight. The goal of the TRIPLE trial is to help further expand the clinical profile of KRYSTEXXA and assess a reduction in immunogenicity following an increase in the frequency of dosing or now the amount of dose versus dosing in the original clinical program.

Given the adaptive nature of this trial as well as the expansion of the trial to include additional patients, the investigators intend to gather the complete data set and submit it to a future medical meeting.

We see meaningful opportunity ahead to accelerate the treatment of patients who suffer from painful refractory chronic gout.

In our primary care business unit, third-quarter sales increased 10% year-over-year driven by continued strong performance of PENNSAID 2%, our topical NSAID medicine which is sold about our primary care and rheumatology salesforces. Sales of PENNSAID 2% were $80.2 million in the quarter, an increase of 83% year-over-year. Our gross to net sales percentage for our primary care medicines for the third quarter is approximately 76% and was in line with our previous full-year gross to net guidance range of 75% to 80%.

Finally, let me update you on our discussions with PBMs and payers. As we have discussed over the last several months, our mission has always been to secure and ensure broad patient access to our primary care medicines. To that end we have put significant focus on securing formulary access for our primary care medicines with PBMs and key payers as well as making investments required to expand and strengthen our managed care organization.

Going into 2017, our goal was to secure at least one major PBM agreement for our primary care medicines. To date we have secured formulary access with both CVS Caremark and Prime Therapeutics. These agreements combined represent approximately 35% of total covered lives in the United States. In addition, these two contracts provide durability for our primary care medicines going forward and most importantly, significantly improve access to our medicines for potentially thousands of patients.

These new agreements and any others we are able to complete further strengthen our ability to deliver sustainable net sales while enhancing the ability of physicians to get the medicine they prescribed into the hands of their patients.

We continue to be in active discussions with other PBMs and payers and we will communicate any updates as we receive them.

With that, let me turn the call over to Paul to review our financial results for the quarter in more detail. Paul?

Thanks, Tim. This morning we provided information in our third-quarter earnings release and on the investor portion of our website that reconciles our GAAP results to certain non-GAAP financial measures. My comments will mainly focus on our non-GAAP results. Please review our earnings release for reconciliations to the GAAP results.

Third-quarter non-gap adjusted net sales were $273.7 million, an increase of 21% versus the third quarter of 2015. Sales growth was driven by strong performance across each of our business units. Third-quarter adjusted EBITDA was $141.2 million representing 51.6% of non-GAAP adjusted net sales.

We are also confirming our full-year 2016 non-GAAP adjusted net sales guidance and adjusted EBITDA guidance. We expect non-GAAP adjusted net sales of approximately $1.045 billion to $1.050 billion which includes the expected contribution from Raptor Medicines of between $20 million and $25 million for the last two months of 2016. We are also confirming full-year 2016 adjusted EBITDA guidance of $450 million to $460 million which includes the impact of Raptor for the last two months of 2016 as well as expected higher operating expenses related to additional investments in KRYSTEXXA, ACTIMMUNE in FA and our managed care organization as we noted in our updated guidance on October 11.

Now I will review the operating section of the income statement in more detail. Third-quarter non-GAAP gross profit margin was 91.6% of non-GAAP adjusted net sales and we continue to expect our non-GAAP gross profit margin for the full-year 2016 to be in the range of 91% to 92%. Total non-GAAP operating expense was $109.2 million or 40% of non-GAAP adjusted net sales in the quarter.

Non-GAAP R&D expense in the third quarter was $10.4 million or 3.8% of non-GAAP adjusted net sales. This was due to a higher level of investment as expected related to the ongoing Phase 1 dosing trial for ACTIMMUNE in certain cancers and continued clinical investments in KRYSTEXXA. We continue to expect a higher level of investment in the fourth quarter as we will be conducting ACTIMMUNE in FA Phase 3 data analysis and preparing for the initiation of the ACTIMMUNE expanded access program as Tim referenced.

We continue to expect full-year 2016 non-GAAP R&D investment to be in the mid-single digits as a percent of non-GAAP adjusted net sales. Non-GAAP sales and marketing expenses in the third quarter were $65.7 million or 24% of non-GAAP adjusted net sales and non-GAAP G&A expense was $33.1 million or 12.1% of non-GAAP adjusted net sales.

Next I will turn to income taxes. As noted last quarter, we modified the method of calculating our non-GAAP income tax expense to align with revised non-GAAP guidance issued by the SEC on May 17. The non-GAAP tax rate was 9% in the third quarter and 14.6% through the first nine months. We continue to expect a non-GAAP tax rate in the midteens for the fourth quarter and full-year of 2016.

Non-GAAP net income and non-GAAP diluted earnings per share in the third quarter were $115.5 million and $0.70 respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share in the third quarter of 2016 were 154.9 million shares. For 2016, we expect our weighted average diluted share count to be approximately 166 million shares outstanding.

Now let me provide a few high-level comments on our cash flow and balance sheet as of September 30, 2016. Regarding cash flow, GAAP operating cash flow was $128.8 million in the third quarter of 2016 and we generated $230.3 million of GAAP operating cash flow for the first nine months of 2016. Non-GAAP operating cash flow was $133.8 million in the third quarter and we generated $259.8 million of non-GAAP operating cash flow for the first nine months of 2016. This represents a more than 50% year-over-year increase in cash flow generation as compared to the $167.2 million of non-GAAP operating cash flow in the first nine months of 2015.

Cash and cash equivalents were $549.3 million as of September 30. On October 25, 2016, we issued $675 million of new debt composed of a private offering of senior notes and incremental term loans under our existing senior secured credit facility and used the net proceeds to partially fund the acquisition of Raptor as well as related fees and expenses.

Following the issuance of this new debt, our new total principal amount of debt outstanding is $1.945 billion composed of $770 million of senior secured term loans due in 2021, $475 million of 6 5/8% senior notes due 2023, $300 million of 8.75% senior notes due in 2024, and $400 million of 2.5% exchangeable senior notes due in 2022. We estimate our total debt the last 12 months adjusted EBITDA leverage ratio is approximately 4.3 times.

As we did following the acquisition of Hyperion last year, we expect to rapidly delever over the next 12 to 18 months. Our capital structure following the issuance of a new debt results at a weighted average cash interest rate of approximately 5.6% based on current LIBOR rates.

I will now turn the call over to Jeff.

Thank you, Paul, and good morning, everyone. I will provide an update on our clinical development program for our orphan medicine and upcoming milestones. Let me begin with RAVICTI which is indicated for urea cycle disorders or UCD an orphan disease that impacts about 2000 people in the United States, primarily children. As we noted last quarter, we submitted to the FDA a supplemental new drug application or SNDA for RAVICTI to expand the age range for patients two years of age and older to patients two months of age and older. We continue to anticipate a typical ten-month review.

In addition, in the first quarter of 2018, we expect to submit an SNDA to expand the RAVICTI age range to also include patients from birth to two months of age.

Next, let's move on to ACTIMMUNE which is in Phase 3 development for Friedreich's Ataxia or FA, a debilitating neurological disease with no FDA approved treatment. We completed enrollment in our Phase 3 STEADFAST trial in May and continue to expect to have topline data in late December of this year.

Let me take a few moments to review some specifics including the trial design, patient population, primary endpoints and other important details of this study.

STEADFAST is a randomized, double-blind placebo-controlled Phase 3 trial that enrolled a total of 92 patients as of May 5 at four top FA centers across the country. We worked closely on the design of the trial with the Friedreich's Ataxia Research Alliance or FARA and the principle investigator, David Lynch, from the Children's Hospital of Philadelphia, or CHOP, and reviewed the trial design with the FDA. Patients are dosed with either ACTIMMUNE or placebo at a dose up to 100 micrograms per meter squared. This is double the dose of the Phase 2 trial which was 50 micrograms per meter squared. The dose was increased in the Phase 3 trial based on reports from Europe of improvement in treatment effect in FA with a higher dose.

In the Phase 3 trial, the dose was titrated upward and administered at night to minimize the possibility of flu-like side effects. Based on the inclusion criteria, patients enrolled in the trial are between the ages of 10 and 25 and they have disease rated greater than Stage 1 and less than Stage 5 of FA. This was to target patients that were neither too early on in their disease or too severe to better assess frequent effect.

The primary endpoint is the modified Friedreich's Ataxia rating scale or FARS-mNeuro, which measures the disease progression score at six months of treatment. The FARS-mNeuro is an objective validated measure that assesses functional parameters such as speech, ability to swallow, upper and lower limb coordination, gait and posture from a baseline measure. This modified endpoint removes components viewed by the FDA to be more subjective such as the peripheral nerve assessment. The trial is sized conservatively based on the Phase 2 trial results and possible placebo effect based on other FA studies in terms of the projected FARS score difference in standard deviation to achieve a conventional 80% power at a 0.05 significant level for an approximately 3 point difference in FARS score.

Working with FARA, we rigorously train the physicians conducting efficacy and safety assessments to help ensure high consistency in valuation across the sites in the study. The physicians who are conducting efficacy assessments do not conduct the safety assessment. This helps to further reduce potential bias. With the last patient enrolled in the trial on May 5, and with a six-month treatment endpoint and two-week follow-up period, we expect the database will be locked in early December. To date, 99% of the -- 92 patients have completed the six-month treatment and we expect 100% completion this week. From there, data will be analyzed and we expect to have topline data available late December.

Assuming positive results, we anticipate a late first quarter 2017 SBLA submission. If we receive a priority review with our fast-track status, we could potentially have approval by the end of the third quarter of 2017. We would know if priority review was granted approximately 60 days following our SBLA submission.

In addition, all patients from the Phase 3 pivotal trial have the opportunity to roll into the extension study evaluating the long-term safety of ACTIMMUNE for FA for an additional 28 weeks. To date, 95% of the patients have decided to enroll into the open label extension.

As Tim mentioned, we want to ensure patients have access to our medicine so we have started planning now for an ACTIMMUNE expanded access protocol program for patients with advanced disease that may not be eligible for other FA trials. We are working with the FDA and FARA now on this protocol so that we can start it as soon as possible if the Phase 3 data are positive.

ACTIMMUNE is also being evaluated in a Phase 1 trial in combination with a PD-1 inhibitor medicine in various forms of cancer including bladder and kidney cancer. Preclinical research has indicated an interferon gamma could potentially enhance the effect of PDL-1 inhibitors thus potentially improving cancer patient outcomes. Through our research collaboration with the Fox Chase Cancer Center, we hope to gain a better understanding of this combination.

The first and second six patient cohorts are completed and the third six patient cohort is now enrolling. As Tim mentioned if the data are accepted in an abstract submission, we could be in a position to present data from the Phase 1 trial next year. In addition to Fox Chase, we have received interest from other institutions to evaluate ACTIMMUNE in other oncology treatment settings.

Finally, regarding KRYSTEXXA, we will have two abstracts at the American College of Rheumatology or ACR meeting later this month in Washington DC. The first abstract is a retrospective analysis of data from two pivotal randomized KRYSTEXXA clinical trials. It concludes that refractory chronic outpatients defined as nonresponders in the trials still achieve significant clinical benefit with KRYSTEXXA treatment including reduction in tophi and improvements from baseline in their patient global assessment, tender and swollen joints, pain and other measures.

The second abstract is a retrospective review of KRYSTEXXA treated gout patients who completed at least three infusions and compared two corticosteroids, methylprednisolone or hydrocortisone, used to prevent infusion reactions. The results indicates that methylprednisolone infusion therapy may allow for longer KRYSTEXXA therapy duration compared to hydrocortisone. ACR will be the first medical meeting in three years where KRYSTEXXA will have a significant clinical presence which will continue to expand the awareness of KRYSTEXXA as an important treatment option for refractory chronic gout sufferers.

The investigator initiated TRIPLE trial continues to enroll patients. It is evaluating immunogenicity as it relates to KRYSTEXXA both from a safety and efficacy perspective. As we have discussed, it is an adaptive design and the investigators have added new patient subpopulations. This includes the recent expansion to evaluate patients with increased body weight by giving them a higher dose of KRYSTEXXA for the first week versus the standard eight milligram dose. The addition of other patient subpopulations to the TRIPLE trial depending on study data will help to more fully characterize patient response.

Given that the trial is still enrolling patients, following trial completion, the investigators plan to submit the full dataset to a future scientific meeting.

I look forward to sharing more with you about our clinical development programs as they advance. With that, I will now turn the call back over to Tim.

Thanks, Jeff. To summarize the quarter, strategically we made significant progress this quarter and also this year executing against our long-term strategy as well as our short-term goals. We secured two major PBM agreements that further strengthen the durability and sustainability of our primary care business and we completed two acquisitions in rare disease as we continue to transition our Company to be a leading rare disease organization.

We continue to track toward our full-year 2016 net sales and adjusted EBITDA guidance. We continue to deliver on our core principles, our strong commercial execution, clinical expansion of our existing medicines for patients in need, and broad patient access that ensures our medicines are affordable and accessible.

Moving forward, we will continue to drive and motivate our rapidly growing organization with goals of continuing to deliver exceptional financial performance.

With that we will now open it up for questions. Tina?

Thank you, Tim. Vince, we will take our first question.

Stephan Stewart, Goldman Sachs.

Good morning. Thanks for the questions. Just firstly on the primary care business with the express settlement now out of the way, maybe can you provide some greater updates on how that discussion is going as we move into the year-end?

With Express Scripts, we have completed our discussions and we are waiting to hear results of their decision relative to the 2017 formulary decisions for our primary care medicines and we would hope to hear a decision on that by the end of the year.

Got it. And on Raptor, hoping maybe you can provide some more refined synergy assumptions now that the deal has closed or at least on timing and when we would expect to see some of these synergies come through?

We expect to see them continue to flow through throughout 2017 with the adjusted EBITDA margin being accretive to our existing EBITDA margin by the fourth quarter and continuing to be accretive to our adjusted EBITDA margin and beyond -- from 2018 and beyond.

I don't know, Paul, if you wanted to get into any other specifics?

At this time, we are estimating approximately $50 million of synergies that as Tim said we expect to be by the end of 2017 having those fully achieved. So 2017 will be less than that but by the end of the fourth quarter we will achieve most of those synergies on a run rate.

Great, thanks.

Marc Goodman, UBS.

Yes, good morning. A few questions. First, can you comment on the tax rate in the quarter and why it was unusual? Second, ACTIMMUNE seemed a little weak in the quarter. Talk about the trends there. And third, during the pre-announcement, you spoke about increasing people and patient access people and just can you give us more color on what has happened so far and what the plan is for the rollout? Thanks.

Sure, I will take the second two and then Paul can take the tax question. Relative to ACTIMMUNE, there were two impacts in the quarter. We had lower discretionary patients that the majority of the ones that continue to decline were IPF patients and for every one IPF patient that goes off medicine, it takes two CGB patients to make up for that lost patient. So that has an incremental impact in the quarter. In addition, when you lose a commercial discretionary patient, it increases your gross to net because you have a higher percentage of Medicaid patients.

We have had one of the strongest months since we acquired the medicine in October so we are pleased with how the business continues to accelerate.

Relative to the second question around people, we are making good progress in hiring, I think we have completed the hiring of the patient access managers for ACTIMMUNE. We are moving well through the hiring of the incremental folks in the managed-care organization and we continue to drive activities from a spend standpoint to prepare for the launch of ACTIMMUNE as well as preparations in hiring a CRO, getting agreement with FDA on the expanded access program for ACTIMMUNE should we get positive data. And Paul, do want to take the tax question?

Sure. So on a quarter-by-quarter basis we will have fluctuations Marc, because of just the way GAAP taxes are calculated and non-GAAP too. So we had a few discrete items this quarter but it is primarily due to looking at your full-year rates and when you get to the third quarter if your full-year estimate changes by a percent or two and you flow that through for your full nine months of earnings and have that hit just in the third quarter, it can skew the rate.

The other thing that is unusual or that impacts us is if you start with a fairly low either positive or negative GAAP net income when you flow through the non-GAAP adjustments, the rate can be distorted in any one quarter fairly easily. So we try to focus on the year-to-dates and where we think the year is going to come out and there will be fluctuations from quarter to quarter.

Annabel Samimy, Stifel.

Thanks for taking my questions. I have a view. With regard to ACTIMMUNE, I'm not saying this is going to happen but in any event that the Friedrichs Ataxia trial doesn't work out, how much additional growth do you feel that you have from the current labeled indications specifically I guess for CGD where it seems like you are placing a little bit more emphasis on?

On Raptor, I want to know about how you are going to prioritize your investment in R&D? They had a number of programs there. I don't think that are pursuing all of them so maybe you can give us some color there.

And then on the primary care business, what kind of new commercial initiatives are you pursuing to take advantage of the increased access you have at least with CVS and Caremark and prime? Thanks.

Sure Annabel. So with ACTIMMUNE, the focus is on CGD given that it is about 2000 patients versus a little over 100 for SMO. So that definitely is the focus and we continue to see acceleration of patients and it is an individual patient by patient fight. We have added new key account managers to focus on the opinion leaders and key institutions so that our existing clinical science associates can focus on driving new patients through the existing prescribing base. And the biggest opportunity is when you look at the trends in treating CGD, there are a number of patients that go on to get bone marrow transplants and it is ensuring that if a patient does go on to bone marrow transplant that ACTIMMUNE is a bridge to that transplant similar to what is done in SMO. So we see an opportunity to be used before bone marrow transplant and if that transplant is not successful to reinitiate therapy on ACTIMMUNE. So we expect to have continued strong growth there over time.

With Raptor from an R&D perspective, the Huntington's and Nash programs were discontinued and put on hold pending incremental external investment and we are continuing to evaluate those. When it comes to studying in [bronchiectasis] or BE, we are currently evaluating that as we evaluate cystic fibrosis and feedback from FDA on what is the most appropriate next step forward. So we will have further announcements on that as we complete our analysis.

From a primary care standpoint, we continue to expect strong execution from our salesforce. We are also adding incremental national and regional account managers to really leverage the fact that we have PBM contracts in place. If you look at PBM contracts, about 40% of the prescriptions they adjudicate, they manage the formulary and the other 60% there is an opportunity to contract directly with those payers and get incremental access for our primary care medicine. So those national and regional account managers will be focus on driving incremental formulary access where the PBMs will only adjudicate prescriptions.

Louise Chen, Guggenheim Securities.

Thanks for taking my questions. I had a few here. So the first question I had here was we have gotten a lot of questions of what type of pricing you are getting on the additional formulary coverage that you have been receiving? So any color you can provide there even if it is qualitative would be helpful.

Secondly, there has been a lot of concerns about pricing headwinds in primary care but are there any concerns that you may have on the orphan drug side? It is something that people have brought up, so just curious what you think there?

And then last thing here is just for ACTIMMUNE sales, when do you think the sales decline should stabilize here and how should we think about the franchise going forward without FA just as a standalone basis for ACTIMMUNE? Thank you.

Sure. From a pricing standpoint, it is really when we look at gross to net we expect these contracts to be neutral to gross to net with additional opportunity in the retail space where our commercial organization can continue to drive new prescription growth and ensure patients have that access.

From a headwind, when we look at our primary care organization we have had net average net realized price increases of about 2.5% to 3% annually which is consistent with what we are seeing across the industry of an average net realized price increase of 2.8% in 2015.

In the orphan side, we have had low to mid single-digit average net realized price increase in looking at the orphan space, it is less than 5% of total drug spend and we haven't seen that increase significantly over time. So the critical thing for us is we are dealing with PROCYSBI, with RAVICTI, genetically identified rare diseases in children with populations of less than 2000. And we expect access to continue to be provided for those patients.

Relative to ACTIMMUNE, we have seen about a 20% decline in the amount of discretionary use since we acquired ACTIMMUNE with IPF going for about 21% to about 7%. So as IPF continues to decline as a percentage and that being a higher dose, we expect the impact of that to decline. And as I said earlier, we have seen one of our strongest months in October post acquiring ACTIMMUNE and we see significant incremental opportunity to leverage our new key account managers so that our existing clinical scientist associates can drive incremental prescriptions and the target physicians they have been calling on.

So continued steady growth in a month-over-month basis. With positive FA obviously a separate organization that will focus on prelaunch and launch activities.

David Steinberg, Jefferies

Thanks very much. I know a few months ago you repurchased global rights to ACTIMMUNE ex-US and I was just wondering if you could give us some color on your regulatory and clinical strategy ex US?

And then secondly assuming you launch in other countries in Europe or other territories around the world, could you give us a sense of the magnitude of the opportunity? I know you said $0.5 billion to $1 billion dollar peak sales opportunity. But what sort of magnitude and is there a possibility of repricing the asset? I know you have approval for an older indication.

Thanks, David. As far as the regulatory strategy, we are continuing to evaluate that. We expect the acquisition to close either by the end of the year or in the first quarter. That would put the MAA in our hands where we can continue to provide access for CGD patients. When it comes to the ex-US market as a whole, we see it as being a greater than $100 million opportunity with a separate opportunity that you had referenced the $500 million to $1 billion in the US.

Gary Nachman, BMO Capital Markets.

Good morning. If you could give us the actual number of patients on ACTIMMUNE, RAVICTI, and KRYSTEXXA how those have changed that would be helpful. And then ACTIMMUNE for FA, if 95% of patients are enrolling into the expanded access open label, anything to read into that in terms of how these patients may be doing?

Sure, I will take the first. When it comes to patients on medicine, there is about 385 to 390 on RAVICTI; 280 to 285 on ACTIMMUNE. We don't have an actual number on KRYSTEXXA that is just based on vials sold. So we haven't disclosed that number and don't have an actual number.

When it comes to the ACTIMMUNE trial with 95% enrolling, when you look at the first six month pivotal trial that was a double-blind controlled trial 45, it was designed to have 45 on placebo, 45 on ACTIMMUNE. The second six months all patients would receive ACTIMMUNE. So for patients who got placebo, they have the opportunity to then go on active drug so that has certainly increased the continuation there.

And as far as 95%, I think that is really a result of the fact there is no other treatment and patients and families working with FARA have estimated the importance of staying on these trials, getting the best results possible so that when we do get the ultimate data they can provide the fullest answer to the FA community.

As far as reading into results, we won't know until we know. We will get the data in late December and our current plans are to put that out as soon in the new year as possible and no way to read into it other than that.

David Amsellem, Piper Jaffray.

Thanks. So on PROCYSBI, can you talk about the biggest challenges of getting patients converted to the drug? That is number one.

And then on QUINSAIR in the US, can you talk about when you are planning to meet with the FDA, what is your general level of expectation of what you were going to have to do to get that market in the US is indeed what you are looking to pursue? Thanks.

I will take the QUINSAIR question and then Dave Happel is on, he can take what the effort has been to convert patients.

In the US, we really look at evaluating all the data available, continue to meet with opinion leaders and look at incremental analysis that can be done so that we fully understand the efficacy, continue to work with FDA. I don't think there is another meeting required with the FDA. It is just us completing incremental analysis now that we are a combined company and then really finalizing plans on what it would take to submit with the existing data and what an advisory committee would or wouldn't look like. And then when you look at typical scenarios like QUINSAIR as you saw with [Serept] and others, the typical approvals are Subpart H which require follow-on clinical results. So really trying to upfront define what that follow-on clinical confirmation would look like.

So we've got more work to do and we are going to finalize that over the coming weeks and then make a decision on what our next steps are as far as a US NDA submission.

Dave, do want to take the PROCYSBI question?

Sure. Thanks, the growth on PROCYSBI has been strong. We continue to convert a number of patients that were previously on immediate release (inaudible) as well as those patients that are naive or considered naive to treatment. The hurdles are really on a patient-by-patient basis and being able to identify those that fall into one of the two categories, that is those that were previously on immediate release and those that were previously undiagnosed. The efforts will really take place at the field level and we still have a significant way to go to capture all of these patients. So we expect the growth to continue for the foreseeable future, and as Tim pointed out with the $300 million or roughly thereabouts market opportunity.

Donald Ellis, JMP Securities.

I am going to go back to a previous question and get a little more details. ACTIMMUNE and FA, Phase 2s you said were dosed at 58 micrograms per meter squared, Phase 3 double the dose to 100 micrograms per meter squared. I mean is it suggested that when you double the dose, you still had 95% of the patients wanting to enter into the long-term trial that there aren't any real side effect issues there? And are you planning on looking at any doses higher than 100 micrograms per meter squared?

Sure, let me just correct that. I think I may have said we are going to release data in the first quarter. Our plan is to continue to release data by the end of the year. I think the plans would be to continue to increase incremental data from the Phase 3 trial as we complete those analyses. When we look at the Phase 2 trial, the original intent there was to use the approved dose to see if there was a clinical signal and as we continued to evaluate the Phase 2 results and looked at this disease in particular, a decision was made to scale up to the 100 microgram. And as far as side effects, the dosing in the trial was similar to what our commercial organization has done with CGD is to dose it at night with appropriate treatments like Tylenol to help overcome flu like systems which is predominant adverse event that is noticed. So we don't have adverse events, results as yet to understand that more fully. But typically the medicine on the market for 20 years, we don't expect anything related to the flu effect to be different than the commercial effort.

I think that was the final question? We do not have any plans for higher doses than 100 microgram at this point.

Ken Cacciatore, Cowen and Company.

Just wanted to work back to the primary care products real quick. Just wondering as you switch from a PME as you continue to hopefully secure more managed care, what is the logistics in that going back to kind of a retail pharmacy model? Is there anything we should be aware of as you work through those logistics?

Secondly, as you work through the negotiations with Express and others, is there a deadline that those negotiations have to complete that would make it difficult for them to switch for January 1 to have you have access? I don't know if you can work all the way up to December 29 -- 30 I mean. Can you just talk about when this needs to be complete to be able to have access in January? Thank you.

Sure, Ken. As far as the transition from Horizon Cares to managed care contracts, we expect to get north of 70% under contract as we complete the year. In that case essentially you will have less prescriptions going through the Horizon Cares Program and more going through traditional pharmacies. We have had access to RAYOS and PENNSAID and also for (inaudible) to be dispensing about 20,000 pharmacies in the US this year. So from a logistics standpoint, it really would be no different for the average patient other than the difference is less significantly less will be going through the Horizon Cares program.

As far as negotiations with these payers or PBMs, we are continuing negotiations with one of them and as far as them announcing those decisions, we don't understand the specifics of when they will let us know but we would expect that as we get into toward the end of the year they can make the decision. Most of this is all electronic so I don't think there would be an issue in pushing this out toward the holidays. But we don't have any insight into the specific timing of when we would be informed.

Irina Koffler, Mizuho.

Thanks. So the 528 average net realized price this quarter, is that a good way to think about pricing without the contracts? And then is this price going to go down after contracting or I know you said it was going to be neutral to gross to net.

Then in terms of the volumes of scripts going through the contracts, so if you are saying 70% is going to be under contract by the end of the year, should we expect 70% of the scripts to be contracted or can more still persist in the Horizon Cares?

My last question is on promotional investment and expenses. So it sounds like you are still hiring some of your staff but around fourth-quarter should we expect that to be a reasonable run rate in terms of spend for 2017 to model that forward? Thank you.

As far as the average net realized price from a 2016 versus 2015, it looks like it will be in the 2.5% to 3.5% increase on average and we expect that rough increase to be in the low, pushing toward the mid-single digit. So not substantially changing into 2017.

Relative to volume, the 70% would be volume of prescriptions that would be under contract assuming that we are able to secure the PBM contract with BSI. As far as promotional investments, we expect those as we announced in our updated guidance to be in place here in the fourth quarter. We are not commenting specifically on run rate for 2017 but assuming positive FA, we would have nine months of investing in that launch next year which without sales occurring until the fourth quarter, so we would expect incremental investment in that case.

David Risinger, Morgan Stanley.

Thanks very much. I just have two questions. So both are financial. The first is with respect to SG&A, Paul, could you remind us what expenses if any associated with patient assistance or co-pay programs or other assistance to patients go into SG&A versus get subtracted out of net revenue?

The second question is when should we expect you to provide 2017 financial guidance? Thank you.

We will give financial guidance in the first quarter for 2017.

On patient assistance, it all comes out of gross to net. And so if you look in our 10-Q, we have a table for the quarter and the year that lays out the walk of gross to net and shows the co-pay and patient assistance coming out of our net sales.

That concludes our call this morning. A replay of this call will be unavailable in approximately two hours by calling 1-855-859-2056. And the passcode for that replay is 98231038. Thank you for your interest in Horizon Pharma and for joining us today.