Horizon Therapeutics PLC (HZNP) 2017 Q2 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the Horizon Pharma Second Quarter 2017 Earnings Conference Call. As a reminder, today's conference is being recorded.

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

Thank you, Nicole. 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; Jeff Sherman, Executive Vice President, Research and Development and Chief Medical Officer; Dave Happel, Executive Vice President, Orphan Business Unit; Vikram Karnani, Senior Vice President, Rheumatology Business Unit; and George Hampton, Executive Vice President, Primary Care Business Unit.

Tim will provide a high-level review of the second quarter and an update on the business. Paul will provide additional detail on our financial performance and guidance. And Jeff will provide a brief update on our clinical development programs for our rare disease 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 statements about 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 Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2016, subsequent quarterly reports on Form 10-Q and our earnings news release, which was issued this morning. You're 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 other documents 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 second quarter results.

And with that, I will now turn the call over to Tim. Tim?

Thank you, Tina, and good morning, everyone. This morning, we reported second quarter net sales of $289.5 million and adjusted EBITDA of $127 million, both above our expectations. This was driven by significant growth of KRYSTEXXA and RAVICTI as well as a strong execution within our primary care business.

As a result, we are increasing both our full year net sales and adjusted EBITDA guidance. Our increased net sales guidance is now $1.01 billion to $1.045 billion, up from the previous range of $985 million to $1.02 billion. Our increased adjusted EBITDA guidance is now $340 million to $375 million, up from the previous range of $315 million to $350 million. Paul will cover our financial performance and guidance in greater detail shortly.

Second quarter net sales for our rare disease medicines increased 70%. And our strategy is to accelerate organic growth of our market medicines and continue our disciplined business development approach, while expanding our focus to include building a rare disease portfolio of development-stage medicines.

During the quarter, we made substantial progress in executing this strategy. We initiated the expansion of our KRYSTEXXA commercial organization where we expect to nearly double the group by year-end. Our significant progress since relaunching KRYSTEXXA a year ago has given us confidence to increase our expectations for peak annual net sales to more than $400 million.

Our peak sales expectation is underscored by new data presented in June at the EULAR Congress that showed a more than 400% increase in gout hospitalizations since 1993 at an annual cost of $43 billion. With our expanded commercial organization, we have a significant opportunity to market this highly effective medicine to many more physicians and their refractory chronic gout patients.

We also announced in the second quarter that we divested the rights to PROCYSBI and QUINSAIR in Europe, Middle East and Africa. The reason for this divestiture of this business was the alignment of resources to high-priority, high-return businesses, and we received net proceeds of $72 million.

We also accelerated our strategy to add development-stage rare disease medicines with the acquisition of teprotumumab, a late-stage biologic medicine. We anticipate beginning the confirmatory Phase III trial by year-end. And teprotumumab is in development for thyroid eye disease or TED, a debilitating and painful condition for which there are no approved therapies. With Fast Track, breakthrough therapy and orphan drug designations as well as impressive Phase II results published in New England Journal of Medicine, teprotumumab marks an important step in our strategy of assembling a portfolio of development-stage clinical candidates. We believe peak annual net sales for teprotumumab in the United States could exceed $250 million.

Last week, we expanded our Board of Directors with 2 experienced senior executives: Pascale Witz and James Shannon. Pascale was most recently head of Sanofi's global diabetes and cardiovascular business. And before that, she ran GE Healthcare's medical diagnostics business. James is a former Chief Medical Officer at GlaxoSmithKline and, prior to that, held several senior leadership roles at Novartis, including the global head of pharmaceutical development. They both bring a depth of expertise and experience that will be invaluable in guiding our continued growth and transformation.

I'll now review our business unit results. Our orphan business unit generated $120.4 million in net sales in the quarter, an increase of 64% year-over-year.

RAVICTI sales for the quarter increased 20% year-over-year to $47.2 million. This was driven by continued conversion of patients from older-generation nitrogen-scavenger therapies as well as an increase in treatment-naïve patients. Active shipping patients increased more than 25% in the second quarter compared to last year. This was partially driven by new commercial patients following the FDA's approval in late April of RAVICTI's expanded indication in children 2 months of age to 2 years of age and older. We expect to continue double-digit net sales growth for RAVICTI in 2017, with room for additional uptake as we identify more undiagnosed and untreated urea cycle disorder patients. In addition, we continue to expect the second half 2017 launch of RAVICTI in Europe in partnership with SOBI.

PROCYSBI net sales in the quarter were $36.7 million, an increase of 17% compared to second quarter 2016 sales of $31.4 million under Raptor. Driving this growth was demand from patients converting from older-generation therapy as well as from treatment-naïve patients, resulting in a year-over-year increase in global active shipping patients of more than 15%. The differentiated profile of PROCYSBI was reinforced with new clinical data this quarter, highlighting its improved side effect profile, including a reduction of body odor and bad breath, important quality-of-life issues for patients living with nephropathic cystinosis. As a reminder, we expect the divestiture of European rights to result in a reduction of approximately $15 million to our second half net sales, the vast majority of this from PROCYSBI.

Second quarter net sales for ACTIMMUNE were $28.8 million, an increase of 10% sequentially from the first quarter of 2017. This was due in part to the evolution of our commercial strategy to establish the role of ACTIMMUNE in a broader range of CGD patients, including those awaiting bone marrow transplants. We expect ACTIMMUNE growth this year in the low single digits, driven by year-over-year growth in the second half. Jeff will review our oncology pipeline opportunities with ACTIMMUNE in more detail as well.

In our rheumatology business unit, which includes both KRYSTEXXA and RAYOS, second quarter 2017 net sales increased 56% to $51.7 million. KRYSTEXXA generated net sales of $38.3 million and a strong vial growth continued, showing year-over-year growth of more than 40% and sequential growth in the high teens. We expect continued strong demand for KRYSTEXXA moving forward.

As background, when we acquired the medicine in early 2016, KRYSTEXXA was minimally resourced and lacked a viable clinical and commercial strategy. Physician and patient feedback from the success of being treated with KRYSTEXXA gives me great confidence in our ability to drive continued acceleration in a number of patients taking this medicine. Our goal last year was to revitalize KRYSTEXXA by optimizing the commercial strategy, educating physicians about its impressive clinical data and driving it towards the potential we knew it had.

Our projected annual -- peak annual net sales at that time were more than $250 million. And as we've made significant progress towards this initial goal more rapidly than we expected due to the execution of our commercial organization, we therefore announced in May that we have seen greater net sales potential and we would significantly increase our investment in KRYSTEXXA. We now project peak annual net sales of more than $400 million. And we are on track to nearly double the commercial organization, which we expect to be complete by year-end.

Primary care second quarter net sales were $117.4 million, a sequential improvement from first quarter 2017 and ahead of our expectations. This result of better-than-expected demand as well as an increase in average net realized price or ANRP.

With that, I will now turn the call over to Paul.

Thanks, Tim. My comments this morning will primarily focus on our non-GAAP results unless otherwise indicated. I will begin with second quarter financial results and then move to guidance.

Net sales totaled $289.5 million, an increase of 12% versus the second quarter of 2016, driven by continued strong growth from the company's orphan and rheumatology business units. Our non-GAAP gross profit ratio was 90.6% of net sales in the second quarter.

Total non-GAAP operating expenses were $135.2 million. Non-GAAP R&D expense was $12.7 million and included clinical investments in RAVICTI, KRYSTEXXA and teprotumumab. We expect non-GAAP R&D expense to increase beginning in the third quarter due to the preparation for, and initiation of, the teprotumumab Phase III trial.

Non-GAAP SG&A expenses were $122.5 million, an increase of $15.4 million versus the second quarter of 2016. This was principally due to the increased commercial investments in KRYSTEXXA and expenses related to the Raptor business we acquired in October of 2016.

Second quarter adjusted EBITDA was $127 million. The income tax rate in the second quarter of 2017 on a GAAP basis was 0.8% and 32.2% on a non-GAAP basis. The non-GAAP tax rate was lower than our projected rate for the quarter, primarily due to the tax treatment of the River Vision acquisition, which was different than anticipated at the time of our first quarter earnings call.

Non-GAAP net income and non-GAAP diluted earnings per share in the second quarter of 2017 were $68.3 million and $0.41, respectively. The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share for the second quarter of 2017 was 165 million shares.

Moving now to cash flow and balance sheet for the second quarter. Our GAAP operating cash flow was $47.9 million, and non-GAAP operating cash flow was $86.4 million. At June 30, cash and cash equivalents were $554.3 million.

The total principal amount of our debt outstanding at June 30 was $2.023 billion, and net debt was $1.469 billion. Our net debt to the last 12 months adjusted EBITDA leverage ratio was 3.2x. Based on our current guidance and cash generation expectations, we expect our net debt-to-adjusted EBITDA leverage ratio at year-end to remain below 4x, assuming no additional M&A this year. Our current capital structure results in a weighted average cash interest rate of approximately 5.4% based on current LIBOR rates.

Moving on now to guidance. This morning, we increased our guidance for both our net sales and adjusted EBITDA as a result of better-than-expected second quarter performance. Our revised net sales guidance range is $1.01 billion to $1.045 billion. The adjusted EBITDA guidance range, which is in line with our increase to net sales, is now $340 million to $375 million.

Our revised net sales guidance range incorporates the following assumptions: full year net sales percentage growth for the orphan business unit in the mid-50s, full year net sales percentage growth for the rheumatology business unit in the mid-30s and full year net sales to exceed $350 million for the primary care business unit.

Our orphan business unit guidance reflects the reduction of approximately $15 million in net sales resulting from the divestiture of PROCYSBI and QUINSAIR rights in EMEA. Our rheumatology business unit guidance assumes continued strong KRYSTEXXA vial growth, driven by increased demand for this medicine.

At the same time, we are now assuming a lower KRYSTEXXA average net realized price beginning in the second half, primarily based on our assumption that the U.S. Government's Health Resource and Services Administration's final rule on 340B drug ceiling price is implemented on October 1, as currently scheduled. Unlike our other medicines, KRYSTEXXA is infused and a portion of our vials are sold to certain hospitals that participate in the government's 340B program. This potential impact is incorporated into our 2017 guidance and growth assumptions and our peak annual net sales estimate of more than $400 million.

Our primary care business unit guidance reflects the performance of the first 6 months of the year as well as conservative assumptions for the rest of the year. Our other guidance metrics remain unchanged.

To recap, we continue to expect full year non-GAAP gross margin to be approximately 89% to 90%. We expect second half operating expenses to be modestly higher than the first half of the year as a result of higher second half R&D expenses related to teprotumumab. We expect full year net interest expense to range between $105 million and $110 million based on current LIBOR rates. We continue to expect a non-GAAP tax rate for the full year in the low 30s. The year-to-date non-GAAP tax rate of 18.2% results in an expected non-GAAP tax rate in the mid-40s in the second half. We continue to project our full year 2017 cash tax rate to be in the low single digits. Our full year 2017 weighted average diluted share count is expected to be roughly 165 million shares.

With that, I'll now turn the call over to Jeff.

Thank you, Paul. We have begun to expand our internal clinical development pipeline to drive Horizon Pharma's long-term growth. We are working on programs that we believe will result in compelling clinical outcomes to bring first-in-kind therapies to market such as teprotumumab as well as optimizing currently marketed medicines through further scientific study such as KRYSTEXXA. Our key focus is to acquire development-stage medicines through our business development efforts.

Teprotumumab is a fully human monoclonal antibody that is in late-stage development as a treatment for moderate to severe thyroid eye disease or TED. TED is a rare, debilitating and very painful autoimmune disease that occurs when the body's immune system attacks the back of the eye and causes inflammation in the eye muscles and fatty tissue behind the eye, which can cause the eyes to bulge, a condition known as proptosis. Or technically stated, TED is caused by immunoglobulins that activate an increase in Insulin-like Growth Factor-1 receptor, IGF-1R, activity, which results in growth of orbital tissue. Inhibiting IGF-1R attenuates the elevated hormone activity that leads to TED.

TED can occur in patients with Graves' disease, a thyroid disorder that causes hyperthyroidism in which the thyroid gland produces excess hormones. TED has no FDA-approved therapy. And with an estimated population of approximately 10,000 moderate to severe TED patients in the U.S. alone, it represents a significant unmet need. Orphan designation for teprotumumab has been granted by the FDA for this indication.

The teprotumumab Phase II clinical trial was from the largest-ever multicenter trial completed in TED. It was a double-blind, randomized, placebo-controlled trial involving 88 patients and lasting 24 weeks with an infusion of drug administered every 3 weeks for a total of 8 infusions. The primary endpoint of the Phase II trial was the response of the study eye to find us a reduction in the Clinical Activity Score, or CAS, of 2 points or more and a reduction of proptosis of 2 millimeters or greater at 24 weeks.

The Phase II trial demonstrated significant clinical efficacy in the treatment of the disease. The study results, which were published in The New England Journal of Medicine in May, showed that for the intent-to-treat study population, 69% of the study participants receiving teprotumumab demonstrated a statistically significant response compared to 20% of the placebo group at week 24, with a P value less than or equal to 0.001. In addition, the therapeutic effects were rapid, with 43% of the teprotumumab patients demonstrating a response versus only 4% of the placebo group at week 6. Other efficacy measures were significant as well.

We remain on track to begin confirmatory Phase III trial by year-end. It will be a similar design to the Phase II trial, allowing us to leverage the key learnings from that study. Furthermore, with Fast Track and breakthrough therapy designations from the FDA, we will be able to submit sections of the biologics license application, or BLA, on a rolling basis as well as be considered for priority and expedited review.

Regarding KRYSTEXXA, our strategy is to help key opinion leaders and community practitioners better understand the efficacy and safety of this medicine. Our clinical development program is focused on addressing immunogenicity, both from a safety and efficacy perspective, through the investigator-initiated TRIPLE trial. This adaptive design study is progressing well and continues to enroll patients with more than 65 enrolled, and we hope to have more data to share at future medical meetings. Furthermore, we are looking at additional strategies to address immunogenicity, including immunomodulation.

Another way we are investing in the medicine is to expand awareness of KRYSTEXXA among rheumatologists through scientific data presentation. The burden of doubt on patients and the health care system is significant and not fully appreciated or adequately addressed. KRYSTEXXA can and is helping to address this problem. New KRYSTEXXA data presented at the recent EULAR Congress in June showed, among other things, that KRYSTEXXA demonstrated significant clinical benefits in both patients with and without clinically apparent tophi. They have rapidly resolved tophi in patients considered responders by substantially lowering and maintaining serum uric acid levels.

With ACTIMMUNE, our interferon gamma medicine in development in oncology, preclinical research indicates that interferon gamma can potentially enhance the effect of PD-1 and PD-L1 inhibitors and improve cancer patient outcome. We are investing in 2 investigator-initiated combination therapy trials with PD-1 inhibitors, one with the Fox Chase Cancer Center and the other with the National Cancer Institute.

The Fox Chase study is evaluating whether ACTIMMUNE enhances the effect of a PD-1 inhibitor OPDIVO in a Phase I oncology dose-escalation trial. The trial continues to progress well. Preliminary data in the first 3 cohorts of the study appear to indicate that the combination therapy is safe and well-tolerated. Patients are currently being enrolled in the fourth cohort, and we expect to have dosing level results by the end of the year, informing the decision for proceeding to the next phase of the study.

The National Cancer Institute-supported program plans to evaluate ACTIMMUNE in combination with KEYTRUDA, a PD-1 inhibitor to treat cutaneous T-cell lymphoma patients. This Phase II study remains on track to begin later this year.

A third cancer combination study is also underway at the Moffitt Cancer Center. It is evaluating ACTIMMUNE with Taxol, Herceptin and Perjeta to determine the optimal dosing in certain advanced breast cancer patients. While in the very early stages, the study underscores the high level of interest on the part of several academic and clinical institutions in studying ACTIMMUNE as combination therapy in certain cancers.

I will now hand the call back to Tim for his final comments before question and answers.

Thank you, Jeff. The second quarter was encouraging for us. We delivered strong second quarter financial results and continued to execute on our rare disease medicine growth strategy, growing rare disease sales 70%; adding teprotumumab, a late-stage development program, to our pipeline; and significantly invest -- increasing our investment in KRYSTEXXA's commercial efforts to drive the upside potential we see for this important medicine. We are well-positioned to continue our growth strategy, and we remain focused on driving the business forward.

At this point, we'll open up the call for questions.

(Operator Instructions) Our first question comes from the line of Marc Goodman of UBS.

I guess, 2 things. Maybe you can give us a little more flavor on the primary care business. You didn't talk much about it on the call. And obviously, there was some upside there, and it just looks very strange in the guidance for the year. It almost looks like the second quarter benefited a lot, but the rest of the year may not benefit nearly as much. So just give us a little flavor there. And then on the orphan side, can you talk about the number of patients on some of the drugs like you normally do?

All right, I'll take the first question and then hand it over to Dave for the second. Relative to our primary care business, we had lower first quarter for a number of reasons, as we discussed, relative to average net realized price and seasonality. We did see good improvement in the co-pay cost as well as a reduction in fully brought down expenses, and we definitely saw that flow through. But also, we saw significant increase in the demand generation by our sales force, which was especially impressive given that we had reduced it by about 1/3 at the beginning of the quarter. So it really had been around strong growth from a demand standpoint. We saw about 1/3 improvement in the average net realized price from the first quarter. As we look forward, certainly, we're being conservative. And I think you've seen us, as we approach the primary care business, it's a core driver of cash flow. Our focus is driving our rheum and orphan business and stabilizing primary care, but we're still being what we believe is appropriately conservative as we see the next several months and quarters continue. So Dave, I'll let you handle the second.

Sure. So for the individual orphan products, we haven't provided specific patient numbers, but we have provided market shares. RAVICTI came in at 47% this quarter, up from 37% from a year ago. PROCYSBI was at 53% of the diagnosed patient population versus 48% from a year ago. And ACTIMMUNE came in at just under 20% of the diagnosed CGD patient population, which was essentially flat from the same period last year.

And we did see, as we went through in the prepared remarks, a significant increase in active shipping patients year-over-year, 25% for RAVICTI and over 15% for PROCYSBI. So strong on both sequential and year-over-year growth.

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

Just wanted to ask on that primary care business now that we're getting into the contracting period for next year, maybe the sustainability of that portfolio or maybe some comments into 2018. And then also, last quarter, there was talk of potentially selling that business. Can you just discuss kind of strategic thoughts around primary care?

Sure. Well, it's been core to the company in driving strong cash flows. We haven't made any decisions on the business. We will always consider all strategic opportunities. But the business is driving significant cash flow for the company. Relative to the selling season and custom lines in 2018, we're not giving 2018 guidance. We -- what we've seen is our contracts are continuing to mature sequentially, and we're seeing good growth within the existing contracts we have. As far as broad adoption of custom clients, that's not built into our forecast and our internal models or guidance. And we don't have any specific read on 2018 as yet, but we feel good about the progress of the business and ability to stabilize it. The point from where we go here forward in 2018 is to be conservative, focus on the growth of our rheum and orphan business and really drive consistent, stable cash flow out of the primary care business.

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

Just want to talk a little bit about KRYSTEXXA. Obviously, you took some of the infrastructure from primary care and reinvested it into orphan drug, and I think KRYSTEXXA sales force was expanded. Can you talk about, I guess, the target audience that you're looking at now? Is it strictly in rheumatology or finding new physician targets to expand the indication? And then separately, on business development, it looks like you're making greater investments in R&D. How should we think about business development? Or are you looking primarily at now development-stage assets going forward?

I'll let Vikram take the first, and then Bob can handle the business development. Vikram?

Thank you. So as we've expanded the business and grown the business last year, we've realized there is a significant more opportunity for KRYSTEXXA that we intend to tap into as we continue to expand the team. The opportunity in rheumatology is larger than we previously thought. We've only penetrated about 50% of the rheumatologists thus far and intend to grow that to more than 75% with the expansion. There is significant market opportunity in nephrology, which is almost as large as the opportunity in rheumatology. And then, of course, there is significant market opportunity within primary care. There are a lot of patients, gout patients with high serum uric acid levels that exist in primary care that need to be treated via referral over to a specialist. We've conducted some small pilot programs in certain geographies around the country, calling on both nephrologists as well as primary care physicians, helping create a referral network, and it has worked really well.

Yes. And the size of the commercial organization is on track to almost double by year-end, and that includes our specialty account managers, patient access managers, medical scientific liaisons. And as Vikram talked about it, we were a touch of hitting about 50% of the target rheumatologists. That's going to grow to hitting 75%; and then with the expansion, looking to hit about 75% of key prescribing nephrologists. So significant increase in our ability to penetrate the prescribing audience. Bob, do you want to take the second?

Maybe not.

Bob might be on mute. So I'll just talk through it. So when we look at our strategy from a business development standpoint, we continue to look for on-market assets that can complement our efforts in the rheumatology business as well as in the rare disease business. From the standpoint of development-stage assets, that is certainly part of our ongoing strategy with teprotumumab being the first. We're very excited about the opportunity that, that offers with the derisked molecule, great Phase II data. So we are going to look to expand our effort and bring in a significant increase in number of development-stage assets focused on rare disease or supporting our rheumatology effort, while continuing what has been a successful business development strategy for accretive commercial assets. So it's not stopping one and starting the other. It's really adding and evolving from our current successful business development strategy to more adding the pipeline and building towards long-term value creation.

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

First, on KRYSTEXXA, could you just explain more about the expected change in ANRP that you talked about? How much that will be? And will it affect any other products in the portfolio? And then do you plan on making any changes to the selling and promotional efforts behind any of the orphan drugs like you did with KRYSTEXXA? If you think that will help accelerate growth of those products.

Well, we think we are appropriately resourced on the RAVICTI and PROCYSBI as well as ACTIMMUNE. Dave and Eric Mosbrooker built a very solid team of leaders there, and that's not a business that significantly increased in promotional dollars or people is what drives it. It's continued generation of bringing new patients on from older therapies and now finding new patients. Relative to KRYSTEXXA, again, we continue to expect strong growth in vials. We do expect an increase in the ANRP -- or a reduction in the ANRP, which is an increase in gross to net to account for what could be a change relative to 340B. We've been effective and seeing what's occurring down at D.C. where there have been 3 delays throughout the year, implementation of that rule. We're being conservative at this point, but the key thing is we're going to continue to drive significant vial growth in both '17 and beyond and feel confident in the outcome of long-term prospects for that business.

Okay. And that change wouldn't affect any of the other orphan drug...

No, that's just related to KRYSTEXXA.

Okay. And then just one quick follow-up. Just, Tim, review your confidence level on the overall IP situation for RAVICTI. There's obviously some noise out there, so if you could clarify some of that. And if you think the new patent that was just issued will be difficult for generics to get around.

Well, we feel very good about the long-term prospects for RAVICTI. And we follow a similar playbook that we do for all of our medicines, where it's not just the IP that is in place when we acquire them, but a significant prosecution history, we have confidence that just like we did with VIMOVO and PENNSAID recently where the additional patent prosecution and elucidation of the innovation of those medicines only allowed us to win those cases in court. With RAVICTI, we recently got another patent, the 197 patent that extends out to 2030. It's part of a completely different patent family than the 559 patent that was referenced over the last few weeks. And it's related to different dosing decision criteria and is unaffected by any decision on the 559. But importantly, we also have a number of additional patents that are being prosecuted through the Track One system with the PTAB and feel confident in our long-term strategy well-beyond the orphan exclusivity of 2020.

Our next question comes from the line of David Amsellem of Piper Jaffray.

Just a couple. So first, on KRYSTEXXA, just a follow-up question. I wanted to get a sense of how much pre-infusion prophylaxis has helped drive volumes, in other words, doctors being educated on what to administer prior to infusion to prevent reactions. I know there was some data presented, I believe, last year on that. So maybe you could talk to that. And then secondly, on PENNSAID, you had mentioned earlier this year that one of the headwinds was the generic availability of Voltaren or multiple generics and step edit. So I wanted to get a sense from you on how much of a headwind you think that's going to be going forward. Do you see PENNSAID volumes sort of stabilizing? It looked like the, just from the IMS data, year-over-year volumes still are kind of soft. So maybe you can talk to that dynamic as well.

I'll address the first part of KRYSTEXXA. One of the key things we believe that the educational effort has helped understand is not just where do the right patients and how to use KRYSTEXXA but also when to stop. So one of the most important things for safety with any medication like this is to identify what are the right stopping rules and that is any patient that has a serum uric acid that pops above 6. So it's regularly monitoring these patients, if they do have a pop in their serum uric acid levels, get them off the medicine. So it's really educating appropriate patients who use the medicine and then went to stop. The other has been the continued results from our TRIPLE trial, which is in an iterative investigator-initiated trial where we have over 65 patients currently on it, which is approximating the size of our Phase III clinical program where we have seen differential results from what was seen in the clinical program by increasing the dose frequency from every other week for the first 3 weeks to once a week for 3 weeks. And Jeff, I don't know if you want to comment further on the results.

Yes. We're looking to obviously having those presented in a future scientific conference. But as Tim said, one of the ways to work around the immunogenicity issue is through tolerization, which is increasing the frequency of dosing as well as looking at adjusting the dose as well. In addition to that, we're looking at immunomodulation. The data you're referring to in terms of premedication, it looks like methylprednisolone may be more effective. But the key here is really the close monitoring, as Tim mentioned, of serum uric acid and then looking to discontinue that if the serum uric acid rises above 6 in 2 consecutive doses.

And one of the things relative to immunomodulation is that we are planning later this year to begin an investigator-initiated trial with several key investigators to understand if adding immunomodulators to KRYSTEXXA in addition to what we've seen with tolerization can further enhance the safety and efficacy of the medicine. So more to come on that.

Our next question comes from the line of Louise Chen of Cantor Fitzgerald.

I had a few here. So first question I had is just on KRYSTEXXA and how we should think about the EBITDA margin. Just based on what you've publicly disclosed, our math gets us to something sort of in the 20% range. And I'm wondering if that could go to what we see for similar types of drugs in the industry at 50% to 60% over time. And I'm not sure if my math is correct, I'm just running that by you. Secondly is just on your cash tax rate. If you think the single-digit cash tax rate will persist for the foreseeable future, how should we think about that? And then last question here is just, if there were a change of control, I'm not suggesting that there would be, just curious of the mechanics of it, for Horizon, how does that affect your deal with Express Scripts, if at all?

Okay. So first, I failed to answer, I think, David's other question on PENNSAID relative to the generic -- entrance of generic of PENNSAID 1.5%. That has definitely enabled some managed care plans to put incremental step edits in. And we think we're managing through it and have been able, at least over the rolling 13-week-over-week basis from IMS and also data we get from more than 100 HorizonCares pharmacies that administer or distribute PENNSAID, is that we're seeing good growth and we expect that to continue. But those headwinds are, for all medicines, especially the primary care arena, are things we constantly look to fight through. From a margin perspective with KRYSTEXXA and our rheumatology group, we don't break it out by business unit or medicine. Clearly, we are in launch mode with KRYSTEXXA. Our strategy was, last year, was to significantly increase promotion and see if that was going to get it on a strong trajectory, and we saw that working. And what we did earlier this year then is, okay, now that we've proven our strategy works now, let's really fully invest into the launch of -- relaunch of KRYSTEXXA from both rheumatology now into nephrology. So we're in a launch mode, and that has a significant increase in costs, but that's what's going to drive long-term value of this. So lower EBITDA margins in the short term, but over the next few years, we do see KRYSTEXXA moving to really standard EBITDA margins for similar orphan medicines. The last sort of tax rate, I think Paul can address that.

Yes, on cash taxes, I think we've said this before. As we utilize NOLs, we would expect over the next 4 to 5 years that the tax rate will gradually increase into the low double-digit, mid-teen range by the time we get out to the out 4 or 5 years.

And what was your last question, Louise, again?

Yes, about a change of control. If there was a change of control for Horizon, let's just say the company were acquired, I'm not suggesting that it should be, how would the Express Scripts deal change, if at all?

We're not going to get into the specifics of the contract at this point in time.

Our next question comes from the line of Donald Ellis of JMP Securities.

I have 3 questions. The first one for Vikram. A couple of months ago, there was some data presented on a competitor -- a potential competitor for KRYSTEXXA. Can you give us your thoughts on the competitive position of KRYSTEXXA? And next question is for Paul. Where do you stand with the share repurchase program? And last question is for Dave regarding RAVICTI. What's driving the growth here, and how long do you think that can continue?

Okay. So regarding KRYSTEXXA, we're excited about KRYSTEXXA's growth potential. We have a really good plan in place. I think Tim spoke about it earlier that we're already executing on to improve immunogenicity. I think the product you are referring to -- or the company you're referring to is Selecta, which has a product in development called SEL-212. SEL-212 is a combination of pegsiticase with an immunomodulator, in this case, rapamycin. And I think what we alluded to earlier in the call is that we have a strategy, we have a two-pronged strategy. We've already discussed TRIPLE, but we are also investigating the use of an immunomodulator with KRYSTEXXA. One thing to point out about rapamycin, which is the product being used with the -- in the case of Selecta, it is fairly limiting to a rheumatologist. Rheumatologists today rarely use rapamycin. It's likely given the [blastoffs] morning for infection, the lymphoma associated with the product. Therefore, our strategy is more of an open strategy. We'd like to give rheumatologists the option to use other immunomodulators, which they are much more familiar with, like methotrexate, like CellCept, like azathioprine, and there are other options as well. So in other words, I guess we are -- we've already seen very strong growth of KRYSTEXXA. We expect that by the time this Selecta product comes into market, which should be several years from now, we will have a very strong position as we're already seeing with the trajectory of this brand. Physicians are feeling much more confident with the educational efforts and the support efforts such as our patient access managers that are contributing to the growth of KRYSTEXXA, and we don't expect that to stop.

There's a second question, I think.

Yes, on share repurchase, we did purchase a very modest amount during the quarter. We had a lot of discussions. We got feedback from both our equity shareholders and our debt investors in the quarter. And in general, we think M&A continues to be the better use of our capital for the long term and don't believe it's prudent to use our cash at this time, given our leverage to buy back a significant amount of shares.

Okay. And then the last question on RAVICTI, we remain really bullish on the future of RAVICTI. As Tim indicated, we grew 25% in terms of active shipping patients for this particular quarter over the same period last year. We expect that kind of growth to continue in the foreseeable future. It's largely driven by a base of patients that are still on other nitrogen scavengers that are continuing to convert to RAVICTI as well as those patients that are becoming diagnosed and moving to RAVICTI. And then finally, I would say that we've had a strong increase in the number of very young patients in the 2-month to 2-year range as a result of the change in labeling that has driven a significant number of patients to come on to RAVICTI as well. And we expect all of those metrics to continue to support the brand and grow it for the foreseeable future.

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

So I have 2 questions for Tim and 1 for Paul. Tim, could you just talk about the formulary success recently, meaning just go into some more detail on how prescriptions are better reimbursed in the second quarter and what your expectations are for the third quarter. Should we expect your primary care revenue to be up sequentially in the third quarter of this year versus the second quarter that you just reported? Second, if you could talk about the EBITDA beat and the guidance raise. So in terms of the numbers, you beat the consensus EBITDA by $62 million. You raised guidance by only $25 million. So if you could talk about that in some detail. And then, Paul, if you could speak to whether there was any rebate reserve adjustments of any note in the second quarter for any products.

So relative to second quarter in primary care, the sequential improvement was driven threefold. That was the lowering of out-of-pocket costs as patients meet their deductibles. And certainly, we've seen sequential improvement in that. Also, as the contracts that we have in place mature, we're getting a lower sequential amount of prescriptions that we fully buy down along with what has been very strong demand for the -- just driving the business on a sequential second quarter versus first quarter. I'm not giving any specific guidance relative to third quarter. We did up the guidance to over $350 million for the year. We're being conservative, and we want to see how things play out. Relative to the EBITDA guidance, what you saw is the top and bottom, both were increased by $25 million, which is based on our expectations of year-over-year growth in the rheumatology, orphan business as well as our more conservative guidance on the primary care side. So Paul, want to comment on this?

Yes, there was nothing really -- no significant rebate adjustments in the quarter. We did have -- if you look at the Q, we do note one minor adjustment for PROCYSBI that was applied back against the opening balance sheet, but nothing significant into the P&L.

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

Can you comment briefly on the profitability of your primary care business? Was it profitable in Q2? And any thoughts around profitability for the remainder of the year? And any quantitative details around this would be helpful. And then secondly, on teprotumumab, I'd be interested in any initial comments that you have on Phase III trial design, including maybe more -- some more specifics on timing and when we could see headline data there.

All right, so relative, it is a -- primary care is a profitable business and has been for the last, I would say, over 3 years. We don't break things out specifically or manage our business on a segment level. It's about 35% of sales and a similar percentage of our EBITDA, and it generates significant profit and cash flow. Relative to teprotumumab, we do expect -- as this is a confirmatory trial, the Phase II trial was an 88-patient trial with substantial results versus placebo, so we need to confirm those results. So it will be as a result of similar size and similar design to the Phase II trial, and we're finalizing that. And as we announce it, we will get into more specifics. As far as timing, once we announce the initiation of it, we will get into more details of when that data. So typically, you have over a year of enrollment and then last patient in has another 6 months. So from time of enrollment, you would typically have 18 to 24 months depending on how things go. It's a similar size as Phase II. It's not having to upsize, so that should be helpful. The important thing, as far as timelines, is that you have significant unmet need here. In many autoimmune diseases where there hasn't been another approved treatment, people use steroids and/or rituximab. In this case, neither steroids nor rituximab have shown any material benefit in reduction of proptosis or any of the aggregate scores. So with no approved therapies, nothing you've been -- that they're using today working, we would see that there being opportunity assuming confirmation results to rapidly move this to the regulatory authorities.

Our last question comes from the line of Irina Koffler of Mizuho.

Was there any inventory stocking in the primary care or orphan business this quarter? It's the first question. And the second question is on quarterly spend in SG&A. I think on the first quarter call, we heard that spending was going to be similar to first quarter and then this quarter was a bit lower. So can you help us think through the next couple of quarters in terms of the numbers, is it going to be closer to first quarter or second quarter?

Well, on the first, no. On the second, relative. Paul went through in his remarks that we expect it to increase in the second half due to the initiation and efforts of the teprotumumab Phase III program.

Great. Thanks, Irina. And Nicole, go ahead.

And with that, I'll hand the call back over to Ms. Tina Ventura for any closing remarks.

Great. Thanks, Nicole. That concludes our call this morning. A replay of this call will be available in about 2 hours by calling 1 (855) 859-2056, and the passcode for that replay is 45942068. Thanks so much for joining us today.

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