Horizon Therapeutics PLC (HZNP) 2016 Q4 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the Horizon Pharma PLC fourth-quarter 2016 earnings conference call. As a reminder, today's call is being recorded. I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations.

Thank you, Chanel. 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; and Jeff Sherman, Executive Vice President, Research and Development and Chief Medical Officer.

Tim will discuss our 2016 results, and our outlook for 2017, Paul will provide additional detail on our financial performance, and Jeff will provide a brief update on our Clinical Development program for our orphan medicines. Tim will then provide closing remarks, and we'll take your questions.

As a reminder, during today's call, we will be making certain forward-looking statements including financial projections, our business strategy, and the expected timing and impact of future events. These statements are subject to various risks that are described in our filings made with the SEC, including our Annual Report on Form 10-K for the year-ended December 31, 2016 filed this morning, subsequent Quarterly Reports on Form 10-Q and our earnings news release, which was also 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've also posted an investor presentation to our website that summarizes our 2016 performance and outlook for 2017. And with that, I'll now turn the call over to Tim.

Thank you, Tina and good morning, everyone. This morning, we reported our fourth quarter and full-year 2016 results, delivering another year of exceptional financial performance for our shareholders. We also achieved an important milestone for our Company, surpassing $1 billion in adjusted net sales following our rapid growth and transformation over the last five years.

For perspective, in 2011 we generated just $7 million in net sales in our first year as a publicly traded Company. We have accomplished a great deal over this time frame, executing on our organic growth opportunities, evolving our business model, and completing six acquisitions that have diversified our Company from two medicines to 11. Led now by our fast-growing orphan medicines, we are very well positioned to continue to deliver on our top tier growth expectations over the long term.

For the full year of 2016, we met or exceeded expectations for both net sales and adjusted EBITDA. Our full-year 2016 non-GAAP adjusted net sales of a $1.046 billion increased 38% over 2015, driven by growth in each of our three business units. Our adjusted EBITDA of $471 million increased 30%.

We also generated very strong adjusted operating cash flow of $193 million in the fourth quarter, and $453 million for the full year. We ended the year with a cash balance of $509 million. In addition to delivering strong financial performance, we made significant progress against our strategy to build a more diversified and durable high growth biopharmaceutical company, anchored by great mix of orphan medicines.

We completed two strategic transactions in 2016, bringing us three new orphan medicines: Krystexxa, Procysbi, and Quinsair. We expect Krystexxa and Procysbi to be meaningful long-term growth drivers for our Company, that combined, we believe, will exceed $550 million in peak year sales.

A core strength of Horizon Pharma is to improve the growth trajectory of the assets we have purchased, and Krystexxa is the most recent example. Following the acquisition of Crealta in January of 2016, we implemented the right commercial strategy, and invested in the right growth initiatives, and in just nine months, increased the average number of monthly Krystexxa vials sold by nearly 40%.

In 2016, we also delivered on our commitment to secure greater formulary access for our primary care medicines, with the goal to provide better access for Pennsaid 2%, Duexis and Vimovo for the millions of patients that are prescribed NSAIDs in the United States. With the Express Scripts agreement announced in December, we've secured contracts with three leading pharmacy benefit managers, or PBMs. We're evolving our primary care business model to include this broader contracting strategy, with the goal to generate durable net sales for our primary care medicines over the long term, and most importantly, to enhance the ability of physicians to get the right medicine into the hands of the right patients.

So we enter 2017 as a stronger Company, one that is well-positioned to continue to generate robust cash flows and deliver strong net sales and adjusted EBITDA growth. To that end, this morning we announced our full-year 2017 net sales guidance of $1.24 billion to $1.29 billion, representing year-over-year growth of 19% to 23%. Our adjusted full-year 2017 EBITDA guidance of $525 million to $575 million represents year-over-year growth of 12% to 22%. Our adjusted EBITDA margin range represents approximately 43.5% of net sales at the midpoint.

As we evaluate our adjusted EBITDA margin percentage versus peers, we are at the high end of our peer group, based on current mix of our primary care and orphan medicines, and we continued to invest across our orphan portfolio to generate strong and steady growth over the long term. Our 2017 sales and adjusted EBITDA guidance ranges reflect conservative assumptions for our primary care business as we enter this year.

Our PBM payer contracting strategy is an important one for us, and we are confident it will enhance the durability of our primary care business. It is early in the year and until we have more visibility regarding the full effect of this strategy, we are reflecting more conservative assumptions for this business in our 2017 guidance. We have limited data to date on the level of rebates and discounts under this new strategy, with invoices received on a monthly to quarterly basis.

In our rheumatology and orphan business units, we anticipate that our six orphan medicines, Krystexxa, Ravicti, Procysbi, Actimmune, Buphenyl, and Quinsair will approach 50% of our 2017 total net sales, and increase more than 50% in 2017, as compared to 2016. Evidence we are making substantial progress towards our goal of continuing to accelerate our orphan business.

Paul will provide more detail on our 2016 results and 2017 expectations, but first, let me provide a brief overview of our 2016 performance. Our orphan business unit generated full-year 2016 net sales of approximately $300 million, reflecting a year-over-year increase of 44%.

Our acquisition of Raptor, completed in October, brought our total number of rare disease medicines to 6 of 11 total. Our growth medicines in this business unit are Ravicti, Procysbi and Actimmune, and we have a significant opportunity to drive steady and sustainable performance well into the next decade, as we continue bringing these medicines to many more patients around the world.

First, with Ravicti, we had full-year 2016 net sales of $151.5 million, representing growth of 74%. In the second half of 2016, which was not impacted by a favorable acquisition comparison, reflects the two performance of our efforts. Sales were $75 million, growing 11%, compared to the second half of 2015.

Approximately 2,000 patients in the US have urea cycle disorders, or UCDs which typically occur in young children and could be life threatening. Approximately half of UCD patients are currently diagnosed, and Ravicti has achieved approximately 40% market share among those diagnosed patients today. The number of Ravicti active shipping patients grew nearly 20% for the full year 2016, driven by conversion to Ravicti from other nitrogen scavengers, and adoption by treatment naive patients living with UCDs.

We continue to educate physicians, patients and their caregivers about the importance of tight ammonia control to help identify many more undiagnosed and untreated patients, who can benefit from Ravicti. We are awaiting approval from our Supplemental New Drug Application with the US FDA, to potentially expand the age range for chronic management of UCDs from two years of age and older to two months of age and older, allowing patients to begin treatment earlier in their life.

We launched Ravicti in Canada in October of 2016, and expect to launch in Europe, in partnership with Sobi in 2017. As we look to 2017, we continue to expect strong growth for Ravicti.

With Actimmune, we had full-year 2016 net sales of $104.6 million, down modestly versus full year of 2015, driven by a decline in discretionary use of the medicine. However, we saw an uptick in new patient starts in the fourth quarter, which continued into the beginning of 2017. Actimmune is indicated for chronic granulomatous disease, or CGB, which causes severe life-threatening bacterial infections and affects about 1,600 people in the United States.

In the second half of last year, we evolved our commercial strategy to establish the role of Actimmune in a broader range of CGB patients, including those patients waiting for a bone marrow transplant. So our growth strategy for Actimmune is twofold: Increase the awareness of CGD, and partner with clinicians and institutions to use Actimmune as a bridge to transplant therapy.

As we look to 2017, we expect a return to modest growth for Actimmune. We also continue to explore additional pipeline opportunities for Actimmune, with development efforts in oncology that Jeff will discuss in a moment.

Procysbi net sales for the partial fourth quarter were $25.3 million. As a reminder, we completed the acquisition of Raptor on October 25 last year. For the full year of 2016, under both Raptor and Horizon Pharma, Procysbi total sales were $129 million, which represents year-over-year growth of 36%.

Procysbi is indicated for the treatment of nephropathic cystinosis, a rare and life threatening metabolic disorder. The commercial execution under Raptor for Procysbi was outstanding, and we expect it to continue. Procysbi has achieved nearly 70% market share in the US in the three-year period since they launched the medicine.

Similar to Ravicti, a significant opportunity remains for physician and patient preference of Procysbi over other older-generation medicines. We're also making steady progress in expanding it into new markets in Europe and Latin America. As we look to 2017, we expect continued double digit sales growth for Procysbi.

The second orphan medicine acquired from Raptor, Quinsair, is approved in Europe and Canada for the management of chronic pulmonary infections, for patients with cystic fibrosis. Quinsair net sales for the partial fourth quarter were $1 million.

For the full year 2016, under both Raptor and Horizon, Quinsair total sales were $4 million. Approximately nine-months post launch, Quinsair is experiencing strong physician and patient demand, and the adoption rate is comparable to the European launch of Gilead's Cayston in 2010.

Next, I'll go through our rheumatology business unit which generated significant growth in 2016, with net sales of $142.7 million. This business unit includes our main growth driver, Krystexxa, for refractory chronic gout, and Rayos, our delayed release prednisone medicine. Krystexxa sales in the fourth quarter were $29.5 million, an increase of 16% sequentially compared to the third quarter of 2016.

Krystexxa is the only FDA-approved treatment that is indicated for refractory chronic gout, which is a population we estimate to be upwards of 40,000 to 50,000 patients. In 2016, we invested in an additional marketing medical education and commercial infrastructure to support Krystexxa, including new patient access managers to focus on account support of additional Krystexxa treatment sites, which we expect to continue into 2017.

We also relaunched the brand at the American College of Rheumatology meeting last Fall to improve awareness of the value and benefits of this important medicine to key opinion leaders, and community rheumatologists. We have seen significant acceleration of this business since we began the full commercial effort last May, as evidenced by a steady increase in the average monthly vials sold, and net sales over the last three quarters. Krystexxa is tracking to exceed our $250 million peak sales expectation, as a result.

Rayos net sales for the full year were $47.4 million, representing an increase of 17% year-over-year. We have seen continued steady prescription volume growth and continued improvement in commercial execution by our rheumatology sales force.

Finally, in our primary care business unit, full-year net sales were $604.1 million, representing year-over-year growth of 20%. This was driven by strong performance of our topical NSAID, Pennsaid 2%, which exceeded $300 million in sales. As I mentioned, as we enter 2017, we are approaching our primary care business with a level of conservatism.

We have a new managed care team in place that is building relationships both nationally and regionally with PBMs and payers, to execute on our new contracting strategy and ensure our medicines have strong access across the country. As we've learned earlier this year, this effort takes time.

We want to better understand the managed care environment as we continue to drive volume for our primary care medicines. This is an evolving strategy for the Company, but one we believe will provide long term durability for these medicines.

Most importantly, our primary care business generates significant and robust cash flows, strong margins, and adjusted EBITDA. It allows us to continually execute on our disciplined, aggressive and highly successful M&A strategy, and continue to transition our business to higher value, differentiated long-duration assets focused on rare diseases, as well as clinical stage development programs, to shape the long-term future of the Company.

Our balance sheet is healthy, and we have one of the lowest net debt to adjusted EBITDA leverage ratios in our peer group at three times. We have the flexibility to execute on additional transactions this year, and generate long-term value creation for our shareholders, as we've successfully done since becoming a public company in 2011. With that, let me turn the call over to Paul.

Thanks, Tim. This morning, we provided information in our fourth-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 primarily focus on our non-GAAP results. Please review our earnings release for reconciliations to the GAAP results.

Fourth-quarter net sales were $310.3 million, an increase of 27% versus the fourth quarter of 2015. Sales growth was driven by strong performance across each of our business units, orphan, rheumatology and primary care. Fourth-quarter adjusted EBITDA was $136.4 million.

Full-year 2016 non-GAAP adjusted net sales were $1.046 billion, an increase of 38% versus full-year 2015 net sales. And full-year 2016 adjusted EBITDA was $471 million or 45% of sales, exceeding our full-year guidance range. For the full year of 2017, our net sales guidance range is $1.24 billion to $1.29 billion, representing year-over-year growth of 19% to 23%. We expect full year 2017 adjusted EBITDA of $525 million to $575 million, representing year-over-year growth of 12% to 22%, or approximately 43.5% of sales at the mid point.

Now, I'll review the operating section of the income statement in more detail. As a reminder, I'll refer to non-GAAP results with the reconciliations to the GAAP results provided in our earnings news release. Our non-GAAP gross profit margin was 91.9% of net sales for the fourth quarter, and 91.6% for the full year of 2016.

We expect our non-GAAP gross profit margin for the full year 2017 to be approximately 90%. Total non-GAAP operating expenses were $147.7 million, or 47.6% of net sales in the quarter.

Non-GAAP operating expenses exclude $66 million for the impairment of in-process R&D and other wind down costs associated with the discontinuation of development of Actimmune in Friedrich's Ataxia, along with acquisition-related costs primarily related to Raptor. Non-GAAP R&D expense in the fourth quarter was $17.4 million. This includes costs for the Actimmune in FA Phase III study, investment in the ongoing Phase I dosing trial for Actimmune in certain cancers, continued clinical investments in Krystexxa, and the expansion of Ravicti to a younger age range.

Non-GAAP sales and marketing expenses in the fourth quarter were $85.5 million or 27.6% of net sales. And non-GAAP G&A expense was $44.7 million, or 14.4% of net sales. As we've discussed, this includes additional commercial investments that we have made to expand our managed care organization to account for our broader contracting strategy with PBMs and payers, as well as additional investments in marketing, medical education, and commercial infrastructure to drive the long term growth of Krystexxa.

As we look ahead at full-year 2017 operating expenses, we expect the modestly higher level of operating expenses as a percentage of sales compared to 2016, with a higher level of spend in the first half of 2017 compared to the second half. As we've discussed previously, we expect to capture synergies related to the Raptor acquisition as we move through the year.

The non-GAAP tax rate was 5.9% in the fourth quarter and 12.2% for the full year of 2016, slightly lower than our mid-teens guidance range. On a cash tax basis, as you can see in the supplemental cash flow information in our 10-K, our full-year 2016 cash taxes paid equates to a rate in the low single-digits. For 2017, we expect a non-GAAP tax rate in the low 20s following the acquisition of Raptor. As we have said before, future acquisitions may impact our forecasted non-GAAP tax rate, and we will update our guidance as appropriate, as we have following the acquisition of Raptor.

Non-GAAP net income and non-GAAP diluted earnings per share in the fourth quarter were $106.1 million and $0.64 respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share in the fourth quarter of 2016 were $165.1 million. For 2017, we expect our weighted average diluted share count to be between 165 million to 170 million shares outstanding.

Before I move on to our balance sheet and cash flows, let me briefly comment on our quarterly expectations for 2017, which we have provided in our earnings news release this morning. As we have discussed in the past, and as we see every year along with other pharmaceutical companies, we expect a sequential decline in net sales from the fourth quarter to the first quarter, given annual managed care plan changes and higher patient deductibles at the beginning of the year.

We also expect the first quarter of 2017 to have the highest operating expenses as a percent of sales for the year, with leverage building as we move through the year. This would result in a lower adjusted EBITDA margin in the first quarter, which we expect will increase as we move through the year. We expect first-quarter 2017 net sales to be 18% to 20% of our full-year net sales.

We expect first quarter 2017 adjusted EBITDA to be 12% to 14% of full-year adjusted EBITDA. These ranges are well within the first quarter sales and adjusted EBITDA ranges that we have seen over the past three years. We also expect our second quarter to be in a similar range as years past. We expect second-quarter 2017 net sales to be 22% to 24% of full-year net sales, and we expect second-quarter adjusted EBITDA to be 22% to 24% of full-year adjusted EBITDA.

Now I'll provide a few high-level comments on our strong cash flow generation and our balance sheet. We generated $139 million of operating cash flow on a GAAP basis in the fourth quarter, and $369 million for the full year. Our non-GAAP operating cash flow was $193 million in the fourth quarter, and $453 million for the full year. Cash and cash equivalents were $509 million at the end of the year.

As of December 31, our total principal amount of debt outstanding was $1.94 billion, composed of $769 million of senior secured term loans due in 2021, $475 million of 6.625% senior notes due 2023, $300 million of 8.75% senior notes due in 2024, and $400 million of 2.5% exchangeable notes due in 2022. As of December 31, our net debt leverage ratio was 3 times our last 12-months adjusted EBITDA.

As we did following the acquisition of Hyperion, we expect to rapidly delever over the next 12 to 18 months through cash flow generation and growth in adjusted EBITDA. Our current capital structure results in a weighted average cash interest rate of approximately 5.6%, based on current LIBOR rates. With that, I'll turn the call over to Jeff.

Thank you, Paul, and good morning, everyone. Today I will provide a brief update on our clinical development programs, and upcoming milestones as we look ahead to 2017. I will start with Ravicti, which is indicated for urea cycle disorders or UCDs, an orphan disease that primarily impacts children.

Ravicti is currently marketed in the US and Canada, and as Tim mentioned, we expect to launch Ravicti in Europe in 2017 in partnership with Sobi. As a reminder, Sobi is also our partner today in Europe for Buphenyl, known as Ammonapps in certain markets.

As we noted last quarter, we submitted to the FDA a supplemental New Drug Application or sNDA for Ravicti to expand the age range from patients two years of age and older to patients two months of age and older. Data used to support this two-month to two-year sNDA will be presented in a poster session at the American College of Medical Genetic and Genomics, ACMG, annual clinical genetics meeting at the end of March in Phoenix.

The data show that Ravicti was safe and effective in UCD patients two months to two years of age, demonstrating short and long term control of ammonia and glutamine levels, and decreased frequency of hyperammonemic crises, compared to what was seen in older patients. We are also studying patients with Ravicti from birth to two months of age, and remain on track to submit an sNDA to further expand to this age range in the first quarter of 2018.

Moving on to Actimmune, we are evaluating this medicine to enhance the effect of a PD-1 inhibitor in a Phase I oncology dose escalation trial with the Fox Chase Cancer Center. Preclinical research indicates that interferon Gamma could potentially enhance the effect of PD-1 and PD-L1 inhibitors, thus potentially improving cancer patient outcomes. Initial data from the Fox Chase trial was presented at the American Society of Clinical Oncology, Society for Immunotherapy of Cancer meeting last week.

Investigators presented preliminary safety data and correlative peripheral blood immune activation findings from the first two cohorts of the study, evaluating Actimmune in combination with the PD-1 inhibitor nivolumab in solid tumors for certain cancers. Data that was presented from the first two cohorts with advanced solid tumors who had progressed after initial prior therapy.

Patients were treated with one-week induction of Actimmune, followed by a combination phase with Actimmune and nivolumab for three months. Patients with clinical benefit could then remain on nivolumab alone for up to one year.

The preliminary data showed that combination therapy with Actimmune and nivolumab was safe and well-tolerated in the first two cohorts. The third cohort of patients receiving the combination is still under study.

The data also showed statistically significant activation of certain monocytes, or white blood cells in peripheral blood, which demonstrates that Actimmune is having the desired effect of stimulating immune cells. These are very early results, and the information being analyzed will inform the decision to proceed into the next phase of study.

There is also a great deal of information to be gleaned from the multiple biomarkers and histopathology from tumor samples that will assessed at a later time point, and we look forward to additional data being made available in the coming months. In addition to Fox Chase, a number of other academic and clinical institutions have expressed interest in studying Actimmune as combination therapy in certain cancers, and we are evaluating additional investigator-initiated trials that could begin in 2017.

Next, regarding Krystexxa, as we have highlighted before, the investigator-initiated TRIPLE trial continues to enroll patients. It is evaluating immunogenicity as it relates to Krystexxa in studying a number of different subsets, including patients at an increased body weight.

Following trial completion, the investigators plan to submit the data set to a future scientific meeting. We had, as Tim mentioned, a significant clinical presence at the American College of Rheumatology ACR meeting in November, where we presented Krystexxa clinical data and expanded the awareness of Krystexxa as an important option for patients suffering from refractory chronic gout.

To wrap up on Quinsair, after evaluating regulatory options, and based on feedback from the FDA, we have decided to discontinue efforts to pursue Quinsair approval in the US for chronic pulmonary infections in patients with cystic fibrosis. As a reminder, we did not ascribe any value for US approval of Quinsair for any indication, when we acquired Raptor.

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

Thank you, Jeff. 2016 was another exceptional year of performance for Horizon Pharma, where we meet or exceeded our expectations, delivering 38% non-GAAP adjusted net sales growth, 30% adjusted EBITDA growth, and generating non-GAAP operating cash flow of $453 million.

We enter 2017 with a balanced and diversified portfolio of medicines, and we are well positioned to continue to generate robust cash flows, strong net sales and adjusted EBITDA growth, as well. While we are incorporating conservative assumptions for our primary care business in our 2017 guidance, our 2017 net sales and adjusted EBITDA guidance ranges represent top tier growth of 19% to 23% and 12% to 22% respectively.

We have proven acquisition capabilities that deliver shareholder growth through our ability to rapidly transform and maximize the trajectory of the medicines we acquire. With significant cash flow and adjusted EBITDA generation, we are well-positioned to continue to execute on M&A opportunities, with the intent to start also pursuing development stage pipeline acquisitions.

And finally, we are executing against our goal to build a leading rare disease focused Company over time, as evidenced by our expectations that our six orphan medicines will approach nearly 50% of sales in 2017, growing more than 50%. With that, I'll turn it back to Tina.

Thanks, Tim. Chanel, please open the call for questions.

(Operator Instructions)

Our first question comes from the line of Marc Goodman of UBS.

Just on the SG&A line, previously you've talked about the increased spending, but the last time you really addressed all this was before the FA disappointment. So can you help us understand in 2017 versus 2016 what's changing in the SG&A line? Where are we increasing, where are we decreasing? And the focus obviously, you mentioned a little bit of Krystexxa earlier, but include that.

And then also Ravicti seemed to be a little weak in the quarter. Can you just address that in a little more color? Thanks.

Sure, with Ravicti, I'll answer in the beginning, and pass it to Paul and then Dave, and Dave will talk about the growth of Ravicti in patients in the fourth quarter. When it comes to SG&A and expected year-over-year changes, Krystexxa will continue to get significant investment, as we leverage the acceleration of that business. Paul can comment.

Right, and then we talked about the investment on the Managed care side too, so that happened really in the fourth quarter last year and will continue on comparable versus the prior year in the first nine months of this year. And then the other significant change for SG&A would be the Raptor business being folded in.

And on the sales and marketing side, that will be all-incremental. The Sales and Marketing expenses behind Procysbi will be incremental into the Company. And on the G&A side, we would see that decreasing over time as we reap some of the synergies from the Raptor business.

Dave, do you want to comment on maybe just Ravicti and also the orphan business, as a whole? Sequential growth?

Sure. Thanks, this is Dave. Regarding Ravicti and the overall business, we saw, as Tim indicated, great growth for Ravicti year over year, and particularly over the second half of 2016 versus 2015, up 74% year-over-year, 11% for the second half of last year versus 2015. We saw 20% growth in active shipping patients over the year, and we were over 100% for the second half of 2016 versus 2015.

With that background, it is common, particularly in orphan medications, we see variability in ordering patterns. And in this particular case with Ravicti, we saw a couple of very significant orders come in at the very end of the third quarter, which impacted the fourth quarter pretty significantly, and artificially deflated the revenue number. So that's why I think over the course of looking at a period of time, it's a more important measurement of performance.

And as indicated at the end of 2016, the last half versus 2015 was, we saw great growth for the brand. We expect to see that going forward. We expect to see a nice bounce back in the first quarter of this year, which would be very similar to virtually every orphan brand that I've worked on in the last 15 years or so. For the overall business, for Ravicti, Actimmune, and Procysbi, we saw great demand as a reflection of patient growth for all three brands, and we expect that to continue for the foreseeable future.

So on a net basis, the fourth quarter had good growth in average shipping patients inventory, and orders led to some variability. The other thing we saw early this year is that over 50% decline in discretionary patients taking Actimmune for Friedreich's Ataxia, which with the strong start we've seen in new CGD patients so far this year, its been more than offset. So very strong start of the year with Actimmune in CGD, offsetting the expected decline in discretionary FA patients. So the orphan business continues to grow nicely.

Our next question comes from the line of Annabel Samimy of Stifel.

I just wanted to go back to a couple of the orphan drugs, Actimmune and Ravicti specifically. Do you still see these as growth products? And I'm a little bit confused about your comments with regard to Ravicti, because the ordering patterns I would imagine you would have seen a huge uptick in third quarter and this has been a pretty consistent grower, since you've gotten this drug, so I'm a little bit confused about the ordering patterns that you're talking about? And then separately, you've stopped talking about SMO for Actimmune, so do you see this as a product that can return to growth, as it had been growing before? Thanks.

So with Ravicti, the active selling patients increased in the fourth quarter versus third quarter, and we just had a low level of inventory at the end of the year with Ravicti, so we expect it to continue to grow in active selling patients, and it was really around ordering patterns. With Actimmune, we do expect it to grow. As I mentioned, we've had a very strong start to the year with new CGD patients more than offsetting the decline in FA patients, which we expected to decline post the trial results in December.

When it comes to SMO, there are less than 160 patients in the United States, and only a few centers that actually prescribe Actimmune. So they continue to use it, but it's not really material to the results for Actimmune, so we don't discuss it in detail. But with our new strategy with Actimmune to focus on not only getting new CGD patients diagnosed, but also as a bridge to transplant therapy, we've seen a reacceleration of growth based on execution in the fourth quarter, and this new strategy as we move into this year.

If I could just follow-up on one other question. You have three PBM contracts right now, and you're still being a little bit conservative about the outlook, given some uncertainties on how the market is going to shape up. I expected the PBM contracts to give you a little bit more visibility than that. Can you just help us understand the lack of clarity that you have?

Sure, so based on what we know so far, our prescriptions are tracking ahead of our expectations, and rejection rates are tracking also above our expectations, which generally offset. And really what we're waiting for is getting more detail. We have about six weeks in, but very little data.

We don't get PBM invoices. We get them either one -- or every one month or once a quarter, and then it takes several weeks for them to be gone through and reconciled. So we just have lack of information to really give us the full detail we need, but we're executing well from a prescription standpoint.

There are greater rejections than we expected, but we don't have the full transparency on invoices from the PBMs, so we're reflecting that conservatism. We expect, as we have every year, to continue to execute that business extremely well, but we're also reflecting that there's a substantial change in the business and being conservative until we get much more facts, but we expect to continue to execute.

Okay, great, thank you.

Our next question comes from the line of Ken Cacciatore of Cowen and Company.

A quick question, just operationally on that point, on the primary care products. Just still trying to understand as you move from the specialty pharmacy model more back to retail, just the logistics in all of this, is that a bit of a complicating factor in terms of [how patients now] get the prescriptions and either calling or going to the retail pharmacy?

I know it may be a naive question. Just trying to understand if there's some logistics in how that changes?

And then secondly on Business Development, Crealta clearly, and Krystexxa was a fantastic acquisition. Just wondering how many more of those are out there, that we just aren't aware of. You did mention about looking maybe now at development stage pipeline candidates, but wondering are we missing that there could be other type of acquisitions like Crealta available?

I'll take the first and Bob can take the second. One, we never use specialty pharmacies in the primary care business. Our primary care medicines were prescribed in over 10,000 pharmacies last year, so really no expected change there, whatsoever. The biggest difference was in the retail space, where there were rejections because of lack of formulary. Patients can now get covered, so we would expect an increase in prescriptions there, which we are seeing.

If you look at the rolling four weeks it would show about 7% aggregate prescription growth. There is some benefit of holidays, so net of that it's probably in the 2% to 3% range, which is ahead of our expectations for really what is always a volatile January and February. So we're feeling good about the prescription side of it, and looking to learn more and more about the full picture on getting invoices and rebates, and further clarifying that business. But from a demand standpoint, we feel good about where the business is today, and we haven't seen any major change in where prescriptions are filled. Bob?

Yes, and Ken, on the M&A front, we continue to see a good flow of opportunities with regard to commercial products, and so we continue to evaluate those and try to find transactions where we can take advantage of what we think we can create value, versus what we have to pay for those products. And so no lack of opportunities there. But we're also, as we've talked about, going to begin the process of putting a pipeline behind the commercial programs, and you should expect to start seeing some activity on that front in 2017.

Thank you.

Our next question comes from the line of Gary Nachman of BMO Capital Markets.

On Krystexxa, could you provide more detail on what have been some of the promotional initiatives to accelerate sales? Why are you more optimistic about the peak for that product? And on use of cash, I know the focus has been M&A, but with the stock at current levels, would you actually consider doing a share buyback at this point?

I'll handle the first On a share buyback, no. We don't expect to use it. We have continued to show that the value that we can generate with our cash flow and acquisitions far exceeds the benefit of a share buyback. Paul, anything to add to that?

No.

On Krystexxa, to your specific question, there's been a number of things that have occurred. I think that its been a sequential process of getting the right type of resources in place, as well as the right messaging. So we had to overcome initially four years of really not the right messages and the right population, or confusing messages.

And second, not the right level of promotion prior to us acquiring the medicine. So our first step was to get the resourcing right and we went from about 15 specialty reps selling it to over 80. We added patient access Managers, and then we relaunched the brand in the May/June time frame, with the full sales force aligned with medical liaison support, and patient access manager support to ensure that sites that had not prior infused Krystexxa were well prepared, and could shepherd through reimbursement process.

So we've seen just a strong coordinated commercial effort, and then relaunching the brand in October at the Annual Rheumatology Conference, really helping rheumatologists understand that all gout is tophaceous, that if you actually do ultrasound and look at patients, that there are microcrystals that lead to significant damage and tophi creation and damage and morbidity in these patients, and that with these chronic refractory gout patients, treating with Krystexxa can make a significant difference in these lives.

So it's really been what you expect to do; increase the amount of promotion with the right messages, and ensure patients are getting the medicine on the commercial side at very low out of pocket costs. So we expect to see that continue to grow and exceed our expectations.

Okay, and one quick follow-up on primary care. What were the gross to nets in the fourth quarter? Do you expect them to stay at that level? I know you're being conservative, but just tell us what's factored in terms of the gross to nets in the 2017 guidance. Thanks.

Sure, so we're no longer discussing gross to net. We think a better measure to look at the business moving forward is average net realized price. When you look at 2015 and 2016 combined, the average net realized price declined 6%.

It declined 2% in 2016, so we grew that business 20% with the negative 2% price. So strong volume growth again in 2016. Moving forward in 2017, we expect that business to be flat in average net price.

Thank you.

Thank you. Our next question comes from the line of David Amsellem of Piper Jaffrey.

So first, going back to gross to nets or average net realized price. I guess the question here, maybe put another way, has anything changed regarding your thinking regarding price? And this is bearing in mind that when you executed on the contracting, you had said that it would be largely gross to net neutral, so I'm just trying to understand if there's been any changes to your expectation regarding that color from then to now?

And secondly, regarding acquisitions, particularly pipeline-focused acquisitions. Maybe provide a little bit of color on what your thinking is here. Are you primarily looking at orphan markets, are you looking at specialty non orphan markets or something else? Just provide a little bit of color on how you're thinking about R&D focused assets? Thanks.

Sure, I'll take the first, and Bob can take the second. When it comes to ANRP, we expect a similar sequencing to the year, where just like in 2016, the lowest ANRP will be seen in the first quarter, and then sequentially growing throughout the year. I would say that based on what we know today, we expect a similar pattern. It was down 6% for two years, 2% in 2016, and we expect it to be flat in 2017. So it's -- based on the information we have today, we see it as similar to our expectations, but as I mentioned, scripts are growing nicely, rejection rates are also up higher than we expected, and we want to really get the full picture before we get into more specifics beyond that.

And on the second question, the split between orphan and specialty and focused, as we move forward, we're looking at both, we're looking at opportunities actually across the business units, but we prioritize orphan and specialty and primary care in that order, and -- but we continue to look for good places to put capital to work, that have the returns that we hope to generate, David.

Thanks.

Our next question comes from the line of Louise Chen of Guggenheim Securities.

It's Brandon Folkes on for Louise. Firstly, just on Pennsaid was there any stocking during the quarter? And then secondly, on Procysbi, what was the actual number of patients on therapy at the end of 4Q? And then secondly, what are the biggest challenges or hurdles to converting the patients to Cystagon? Thank you.

On Pennsaid, 2% for the quarter. Actually, inventory declined in the fourth quarter versus the third quarter, so there was no increase in inventory whatsoever. There was actually less inventory on a sequential basis. With Procysbi, I'll let Dave answer that.

So the two questions, regard to patient numbers and the challenges in converting Procysbi to Cystagon. With regard to patient numbers, we haven't really reported those. What we have said is that we have 70% market share of those on cystine-depleting therapy and other measurements that reflect performance.

Important to remember in orphan diseases, that most of these drugs are weight-based dosing so as the patients age and grow, the dose increases, and Procysbi has a reflection of growth and performance, performed very well and has over the last couple of years, growing significantly in sales, in market share, in number of patients on drug. And also the amount of drugs shipped to patients.

To your question about the challenges of converting the remaining Cystagon patients over to Procysbi, it's really just a matter of time. We continue to bring more and more patients and convert more and more patients from Cystagon to Procysbi. The number of Cystagon patients still represents the largest number of patients on cystine-depleting therapy for growth for Procysbi, and it's just really a question of time.

Next question comes from the line of Irina Koffler of Mizuho.

With regard to the price increases taken in December, can you break out how much net you expect to keep in both primary care and the orphan business? And then, just clarifying about this higher amount of prior authorization rejections than you expected. So does that mean we shouldn't really trust the volume growth that we see in the prescription data, if it's somehow offset on the back end with more PA rejections? Thanks.

So we didn't take any price increases in December. I assume you meant the ones that we took January 1. When we look at, and I'd answer that question prior, we expect average net realized price to be flat in the primary care business in low single-digits overall.

And then what was the second question? Was relative, okay. So far as I mentioned earlier, we see prescriptions in aggregate of about 7% on a rolling four-week basis, and that's in excess of our expectations, and also rejection rates are in excess of our expectations.

So we expect to continue to drive our business and execute. We are being conservative right now, until we get more information.

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

I have a couple questions. First, with respect to the rejection rates that you just mentioned being higher than expected, how is that possible, given the new contracts? I thought the new contracts would have eliminated the rejections?

And then second, if you could talk a little bit more broadly about the Washington political outlook, and what you expect going forward. I know that some pharmaceutical companies are advocating for lower list prices, and that would be offset by lower rebates paid to PBMs. And just wanted to get your thoughts more broadly on the Washington pricing outlook, and then specifically on that topic, that I think Pfizer's CEO has been suggesting might be a solution. Thank you.

Sure, David. So any medicine, whether on formulary or not will have rejection rates. If you look at PBMs, they have various levels of formularies, some which one would exclude, would call their exclusion lists, where they have the strongest formulary management. So it really depends on what part of the business you are looking at.

If you look at Express Scripts, they have a exclusion piece that they manage on behalf of their clients, and then about two-thirds of the business is where they adjudicate prescriptions, and you're dealing with the formularies of individual plans. So you would see, depending on the controls they have, varying levels of rejection rates. So what we've said is we see increased prescriptions versus expectations, and increased rejection rates, and we expect to continue to execute there.

From a politics standpoint, and I don't think I or anyone has a crystal ball, so to really project where everything from ACA to tax and other reforms is really, it's just not valuable at this point in time. For us, as I mentioned, we expect over the last two years, we've had a negative 6% average net price in our primary care business while rapidly increasing volume, and we expect an average net realized price flat to low single-digits across the entire business, so that's all I can comment on. What happens politically, we will monitor it, as everyone else does.

Great and just one follow-up please. Would you just explain a little bit more about how investing in managed care rebates increases the SG&A? I think there was a comment about how you were investing in managed care relationships, and that was causing the SG&A to go up recently.

So what we had said was we were going to increase and add national and regional account managers so people increase SG&A expense, so that was it. So increasing the number of people to call on a broader range of managed care plans, so if a PBM, 60% of it's prescriptions they manage are just adjudication, you deal with those plans directly, and you need a team to call on those plans and to pull through additional rebates and formulary coverage. So that's what we are referring to.

Okay, thank you.

Chanel, it looks like we've got time for one more question, please.

Our next question comes from the line of Liav Abraham of Citi Investment Research.

Just a couple of quick questions. Firstly, I was hoping you could comment on the gross margin. If I remember correctly in your prepared remarks, you talked about a gross margin of 90% for 2017. Correct me if I'm wrong, and if that's correct I think that's slightly lower than gross margins over the past couple of years. So any commentary on gross margin or gross margin projection, and the factors affecting that going forward would be helpful. And then secondly, how should we be thinking about the tax rate over the next few years? Thank you.

Paul?

So on the gross margin, it's really a couple things. All of our products have similar margins, but it is a slight decrease based on the expected mix of products in sales in 2017, plus we're making some investments in some tech transfer, and just normal things that happen over time, where you move production of products or do a back up supply or whatever to have some costs that we have factored into our plan for 2017.

And should we expect that 90% to be the normalized rate beyond 2017, as well?

In that ballpark. We were at 91% this year, 90% next year, it will be that same general ballpark going forward.

Thanks.

And then can you just repeat the tax question?

Just how should we be thinking about your effective tax rate in 2017 and over the next few years?

So for 2017 we said low 20% as a percent of the non GAAP side. We expect that -- previously we had said the high teens, and that difference is really again just the mix of earnings. When we bring in Raptor, there's more US earnings and it tweaks that up. And then we would expect over the next few years, assuming no changes in tax laws, that would temper back down into the high teens over time.

Great, thank you.

Thanks, Chanel, and that concludes our earnings call this morning. A replay of this call will be available in approximately two hours by calling 1-855-859-2056, and the passcode for that replay is 57707260. Thanks so much for your interest in Horizon Pharma, and for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.