Horizon Therapeutics PLC (HZNP) 2018 Q4 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the Horizon Pharma Fourth Quarter and Full Year 2018 Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations.

Thank you, Amanda. 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; Shao-Lee Lin, Executive Vice President, Head of Research and Development and Chief Scientific Officer; Bob Carey, Executive Vice President, Chief Business Officer; and Vikram Karnani, Executive Vice President and Chief Commercial Officer.

Tim will provide a high-level review of the fourth quarter and full year results and an update on the business. Paul will provide detail on our financial performance and 2019 guidance; and Shao-Lee will discuss the clinical development program for our rare disease medicines. After closing remarks from Tim, we will 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, 2018, and our earnings press release, which were 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 press release and other filings from today that are available on our investor website at www.horizonpharma.com.

I will now turn the call over to Tim.

Thank you, Tina, and good morning, everyone. 2018 was a highly successful year for Horizon. In addition to record financial results, we made tremendous progress executing on our strategy to build a robust and differentiated pipeline and maximize the growth of our flagship medicine, KRYSTEXXA. We enrolled our teprotumumab Phase III clinical trial ahead of schedule and anticipate top line data this quarter. We hope to bring to market the first-ever therapy for thyroid eye disease to thousands of patients who are suffering without a treatment option. We also delivered on our full year 2018 net sales growth target of 65% for KRYSTEXXA. This is a direct result of having doubled our commercial organization, which we started roughly 1 year ago.

We continue to invest in KRYSTEXXA to help many more patients suffering from uncontrolled gout, a very painful and often disfiguring disease. In fact, more than 100,000 patients underwent gout-related amputations over the last 5 years. We believe KRYSTEXXA can certainly help prevent this type of last-resort measure.

Our focused execution results in a strong financial performance. We increased full year net sales 14% to $1.21 billion, a record for the company and achieved $451 million in adjusted EBITDA, well above our guidance.

The successful year was capped off by a strong fourth quarter with orphan and rheumatology segment net sales of $238 million. This segment makes up nearly 70% of our total net sales, reflecting the value of our rapid evolution into a company focused on rare and rheumatic diseases. Driving the segment's 33% growth in the quarter was the 90% increase in KRYSTEXXA net sales to $83 million. This is impressive performance when you take into account that KRYSTEXXA was first approved 9 years ago, and we have quadrupled its annual sales in the 3 years since we acquired the medicine in 2016.

The investments we are making are working. During 2018, we opened 620 new KRYSTEXXA accounts, representing an increase of 25% compared to total KRYSTEXXA accounts at the end of 2017. And vials from existing accounts increased 30% year-over-year. We continue to expect double-digit growth for KRYSTEXXA for the full year 2019.

Net sales of our orphan medicines, RAVICTI and PROCYSBI, grew 16% and 21%, respectively, in the fourth quarter. Demand remained strong for both medicines, driven by patient growth and improved compliance. Both medicines are benefiting from the updates we made to their labeled indications, which have served to increase physician confidence in the clinical profile for the medicines for treating younger treatment-naïve patients.

Our commercial success in 2018 was mirrored by key developments and progress in R&D. We built out our R&D leadership team, beginning with the addition of Shao-Lee Lin early in the year, and then with the new leadership team she brought into enhance the organization's capability. This is all in support of our strategy, which is to bring new medicines to patients and maximize the benefits of our current medicines. Shao-Lee will discuss our R&D progress in more detail, and I'll highlight a few milestones now.

With teprotumumab, we enrolled our Phase III clinical trial well ahead of schedule and expect top line results this quarter. Teprotumumab is our fully human monoclonal antibody, IGF-1 receptor inhibitor in Phase III development for thyroid eye disease or TED. We continue to anticipate a midyear 2019 BLA submission assuming positive clinical data. And if approved, teprotumumab would be the first and only approved treatment for TED.

We are also investing in KRYSTEXXA to maximize its value and enable more patients who suffer from uncontrolled gout to benefit from the medicine's impressive efficacy in reducing serum uric acid. Our initiatives include MIRROR, our immunomodulation trial underway, which is evaluating the impact of combining KRYSTEXXA with methotrexate, the immunomodulator most commonly used by rheumatologists.

We are currently advancing MIRROR to support the potential registration and continue to expect the (inaudible) trial to begin in the second quarter.

Today, we announced plans to initiate a KRYSTEXXA trial in the second half of this year that demonstrates the efficacy of KRYSTEXXA in reducing serum uric acid levels in kidney transplant patients with uncontrolled gout. Kidney transplant patients have more than a tenfold increase in the prevalence of gout compared to the general population, which makes this an important patient population to evaluate. We estimate it's about 30,000 patients with a little over 1/3 as an addressable patient population for us.

In 2019, we expect our orphan and rheumatology segments to continue to drive our growth, supported by our durable base of rare disease medicines and KRYSTEXXA. In addition, the $960 million in cash in our balance sheet allows us to pursue external opportunity to expand our pipeline.

Looking to the future, our 2 high-growth opportunities, KRYSTEXXA and, if approved, teprotumumab, can more than double our current net sales, which -- each expected to generate more than $750 million in peak net sales.

Finally, with continued strong growth of KRYSTEXXA expected for many years to come, the additional potential growth from teprotumumab beginning in 2020 and the potential acquisition opportunities to augment our pipeline, we believe we are in an excellent position to deliver long-term growth, margin expansion and shareholder value.

I'll now turn it over to Paul.

Thanks, Tim. My comments this morning will primarily focus on our non-GAAP results unless otherwise noted.

Fourth quarter net sales of $355.5 million were driven by continued strong growth in our orphan and rheumatology segment. This segment generated net sales of $237.6 million in the quarter, an increase of 33%, and generated segment operating income of $84.8 million, an increase of nearly 40%.

As we've discussed previously, we significantly increased our investment in 2018 in both our pipeline and our KRYSTEXXA commercial efforts. With the increase in KRYSTEXXA sales and continued growth from our orphan medicines and RAYOS, fourth quarter segment operating margin improved 130 basis points year-over-year. For the full year, the orphan and rheumatology segment generated net sales of $831.5 million and segment operating income was $290 million, increases of 22% and 20%, respectively.

Net sales for the primary care segment were $117.9 million and segment operating income was $66.2 million. For the full year, the primary care business generated net sales of $376.1 million and segment operating income of $160.4 million. We delivered improved segment operating income from primary care, which we continue to invest back into our orphan and rheumatology's segments.

Our non-GAAP fourth quarter gross profit ratio was 89.1% of net sales.

Non-GAAP operating expenses were $165.8 million for the fourth quarter. This included GAAP R&D expense of $18.7 million, reflected investment in teprotumumab as well as our rheumatology pipeline programs. Non-GAAP SG&A expense was $147.1 million.

Adjusted EBITDA was $151.1 million for the fourth quarter.

Non-GAAP income tax expense for the fourth quarter was $10.4 million.

Non-GAAP net income and non-GAAP diluted earnings per share were $116.8 million and $0.67, respectively.

The weighted average shares outstanding used to calculate fourth quarter 2018 non-GAAP diluted EPS were 174.2 million shares. And non-GAAP operating cash flow was $115.1 million.

As of December 31, cash and cash equivalents were $958.7 million, which gives us significant flexibility to manage our business.

The total principal amount of our debt outstanding was $1.993 billion, and we have a long runway to our first debt maturity, which is not due until 2022.

Net debt was $1.034 billion, and our net debt to last 12 months' adjusted EBITDA leverage ratio was 2.3x compared to 3.3x at the end of 2017.

Moving now to our outlook for 2019. This morning, we provided 2019 full year net sales guidance of $1.23 billion to $1.25 billion, underscoring our expectation of another year of commercial execution driven by our orphan and rheumatology segment. In 2019, we continue to project double-digit full year net sales growth for KRYSTEXXA. Our full year net sales guidance also incorporates the divestiture of 3 of our medicines outside the United States: RAVICTI; AMMONAPS, known as BUPHENYL in the U.S.; and LODOTRA, known as RAYOS in the U.S. Therefore, beginning with the first quarter, we will no longer recognize RAVICTI and AMMONAPS net sales outside of North America and Japan or net sales of LODOTRA, which in 2018 represented about $12 million in the divested markets.

With regards to primary care, our 2019 guidance assumes a single-digit year-over-year decline in net sales for the segment with no price increases this year. We will continue to deploy the strong cash flows from primary care to support investment in our orphan and rheumatology segment.

Our 2019 full year adjusted EBITDA guidance of $440 million to $455 million reflects continued investment in our key growth drivers, including an increase in spend to prepare for the potential U.S. launch of teprotumumab, assuming positive Phase III data. It also incorporates continued investments in our KRYSTEXXA and uncontrolled gout pipeline programs, including 2 new KRYSTEXXA studies in 2019: our MIRROR registration immunomodulation trial, and our KRYSTEXXA trial with kidney transplant patients. We expect our non-GAAP gross profit ratio to be approximately 90%.

Non-GAAP R&D expense as a percentage of sales is projected to be in the high single-digits for 2019, a significant year-over-year increase driven by KRYSTEXXA and our uncontrolled gout pipeline programs. We anticipate a year-over-year increase in non-GAAP SG&A expense, which primarily reflects the investments we are making to prepare for the potential teprotumumab U.S. launch.

We expect full year non-GAAP net interest expense to range between $90 million and $95 million.

We expect a full year non-GAAP tax rate in the low to mid-teens. As we see every year, we anticipate variability in our non-GAAP tax rate on a quarterly basis.

We estimate that our cash tax rate will be in the low- to mid-single digits in 2019, increasing to the mid- to high teens over the next several years. As always, this projection could change significantly as a result of any acquisitions or divestitures made by the company or any changes in tax laws.

We expect our full year 2019 weighted average diluted share count to be higher than 2018, ranging between 172 million and 177 million shares.

And finally, for the first quarter, we expect double-digit growth for both net sales and adjusted EBITDA. We expect total net sales to be approximately 20% of our full year 2019 net sales, in line with prior years. As we discuss every year, first quarter net sales are generally the lowest of the year, impacted by seasonality as patient deductibles reset or patients experienced changes in their health insurance coverage. In addition, for KRYSTEXXA, as expected, we will see an impact from 340B pricing as well as seasonality. We expect the first quarter KRYSTEXXA net sales to be a similar percentage of full year net sales as we saw in 2018 or approximately 18%. We continue to expect full year double-digit net sales growth for KRYSTEXXA.

We expect first quarter adjusted EBITDA to be in the low double digits as a percentage of our full year 2019 adjusted EBITDA. This is in line with first quarter adjusted EBITDA contributions in prior years.

With that, I'll turn the call over now to Shao-Lee Lin.

Thank you, Paul, and good morning, everyone. We continued to make strides in the fourth quarter on our strategy to expand our pipeline, advance our current research and development programs and maximize the benefits of our on-market medicines.

I'll begin today's update with teprotumumab, our fully human monoclonal antibody IGF-1 receptor inhibitor in the development for the treatment of thyroid eye disease or TED. We are particularly enthusiastic about this program given that there are no approved treatments for TED despite the thousands of patients impacted by this debilitating disease. Based on the data from the Phase II study, we believe that teprotumumab may demonstrate a disease-modifying effect and, therefore, has the potential to be the first approved therapy for TED. In 2018, we achieved 2 significant milestones for teprotumumab. One, we presented additional Phase II data in the fourth quarter that demonstrated durability of response almost a full year post-treatment for both proptosis or bulging of the eyes, and diplopia or double vision. And secondly, we enrolled OPTIC, our Phase III confirmatory trial ahead of schedule.

We expect 2019 to be an exciting year as we anticipate top line Phase III data results in the first quarter and continue to expect a mid-2019 BLA submission, assuming positive data.

Ahead of the Phase III data readout, I'd like to provide a brief overview of TED and several key points about the Phase III trial. In patients with TED, the IGF-1 receptor is over-expressed on orbital tissues resulting in local inflammation, orbital fibroblast proliferation and tissue swelling, which in turn causes proptosis. Patients may experience discomfort simply closing or even blinking their eyes, which can lead to poor sleep patterns and result in painful ulcers on the surface of the eye itself. Proptosis can result also in diplopia or double vision.

Overall, the morbidity that patients experience with TED can be highly detrimental to activities of daily living, such as the ability to drive a car, read or even walk downstairs. In some instances, pressure on the optic nerve from proptosis can even result in blindness.

Therefore and importantly, reduction in proptosis is the primary endpoint of teprotumumab's Phase III confirmatory trial. It is objective physical measurement that was agreed upon with the FDA to be the primary outcome measure. The design of OPTIC is similar to the Phase II trial. Teprotumumab and placebo are infused once every 3 weeks over a course of 24 weeks. The enrollment criteria for Phase III match those of Phase II, and 8 of the 13 clinical trial investigators are also the same. These 8 investigators enrolled 80% of the 83 patients in OPTIC.

We are also conducting an extension study, OPTIC-X, that will allow up to an additional 24 weeks of teprotumumab treatment. Data from OPTIC-X will inform as to whether nonresponders from the initial 24 weeks of treatment during OPTIC would benefit from longer treatment and if patients who lose response off drug after the initial 24 weeks of treatment would benefit from retreatment.

Moving now to our uncontrolled gout programs and KRYSTEXXA. A core component of our clinical strategy for KRYSTEXXA is to maximize its benefit for patients given that it is the only FDA-approved treatment for uncontrolled gout.

In the KRYSTEXXA pivotal Phase III trial, 42% of patients achieved complete response, maintaining a serum uric acid level of less than 6 milligrams per deciliter over 6 months. Our goal is to increase the number of patients who can achieve a complete response with KRYSTEXXA, and we are investigating ways to do this. There is evidence that the addition of the immunomodulators to biologic therapies can reduce the formation of antidrug antibodies and, therefore, has the potential to improve response rates.

As we discussed last quarter, we are conducting the MIRROR study to evaluate the effect on the response rate of KRYSTEXXA with coadministration of methotrexate. Based on a positive case series presented by external investigators at the Annual College of Rheumatology meeting in the fourth quarter, we are in the process of adapting the MIRROR study to support the potential for registration. We expect to begin enrollment in the adapted MIRROR trial as a randomized and placebo-controlled study in the second quarter of 2019. And as we've shared today, we are also initiating a clinical trial in the second half of 2019, evaluating KRYSTEXXA in kidney transplant patients. These patients were excluded as part of the original pivotal trial for KRYSTEXXA. However, they have more than tenfold increase in the prevalence of gout when compared to the general population. And literature also suggests that high serum uric acid levels are associated with organ rejection. Managing uncontrolled gout is, therefore, both a common and significant unmet need of kidney transplant patients. This trial will also serve as an opportunity to further inform nephrologists as to the use and effectiveness of KRYSTEXXA and its potential benefit for chronic kidney disease patients with uncontrolled gout.

Finally, our pipeline includes 3 preclinical programs designed to enhance and sustain our leadership position in uncontrolled gout. Two of the programs are next-generation biologics, which we continued to advance in 2018. These programs are exploring the use of optimized uricase technology as well as optimized PEGylation and PASylation technologies to potentially improve the half-life of the molecule and enhance response rate. We are targeting subcutaneous formulations for both programs.

The third program which we recently announced is a long-term discovery collaboration with HemoShear Therapeutics that provides us with the capability to explore novel targets for lowering serum uric acid levels in chronic gout and treating acute gout flares.

As always, I look forward to updating you on our continued progress. I'll now turn the call over to Tim for his concluding remarks.

Thank you, Shao-Lee. In summary, 2018 was a year of continued transformation for the company. We made significant progress in building a robust pipeline of differentiated medicines and maximizing KRYSTEXXA to enhance our leadership in uncontrolled gout. We generated double-digit growth rates from both our record net sales of $1.21 billion and adjusted EBITDA of $451 million. Our diversification strategy is working, with 70% of our total net sales now generated from our rare and rheumatic disease medicines. We're building on that momentum in 2019, continuing to drive strong commercial execution and pipeline expansion. We expect continued growth from our orphan and rheumatology segment with KRYSTEXXA net sales growing double digits. And we are looking forward to the Phase III teprotumumab top line data readout this quarter. Assuming positive data, we intend to submit our BLA by midyear and begin our launch preparation. We will also continue to advance uncontrolled gout programs to enable more patients to benefit from KRYSTEXXA, including the MIRROR registrational trial and our new KRYSTEXXA trial in kidney transplant patients that have uncontrolled gout.

It's a really exciting time for Horizon, where we are well on our way towards our goal of being a leading rare disease biopharma company, delivering innovative therapies for patients and generating sustainable long-term growth and value for our shareholders.

With that, we'll open it up for questions, Tina.

Amanda, go ahead.

(Operator Instructions) Our first question comes from the line of Dana Flanders of Goldman Sachs.

My first question, Tim, maybe you can just speak to how you see the margin profile evolving for your business the next several years. It seems like to me, '19 is a low point given the 340B impact on KRYSTEXXA and then the tepro prelaunch spend, and just that you have a really powerful margin expansion story as you grow the orphan business. So maybe just curious where you think you can take the O&R margins over time. And then secondly, just on M&A. Maybe just some comments on what you're seeing out there in the landscape. And I know your leverage profile continues to tick down. How are you balancing bringing that leverage profile down relative to orphan peers and deal flow?

Bob, maybe address how we view our gross debt and the deal environment, and then Paul can address how we look at margins. But certainly 2019 is a significant investment year for teprotumumab, and we continue to be excited by that. So Bob?

Sure. So Dana, thank you. We continue to see good opportunities out there. As we've talked about, the focus has changed from buying large transactions that would incur debt to bolt-on acquisitions that would -- or licenses that would build our development-stage pipeline. And as a result of that, we've been very careful about managing our debt levels. We've been able to reduce overall debt and leverage ratios through cash flow. And we've got this group of aspirational peers that we keep focused on that are the leading rare disease medicines companies. And so as we move forward, that's the goal that we set for ourselves is to look more like those companies out into the future. So it's fair to assume that as we move forward that that's the trend that we will pursue to move that direction. And we think we can manage that through being smart about the transactions that we pursue as well as being smart about how we manage the overall debt levels and deployment of cash. Paul?

Dana, your comments on margin were pretty much spot on. '19 is an investment year, as indicated by our EBITDA guidance. So assuming we have positive data from tepro, we are going to be ramping up spend significantly on the preparation for the commercial launch for that product. And as we look into 2020, we don't expect to have a full year of sales for tepro. That will ramp up throughout the year. And so I think it's really, as you move into 2021, you're going to see a significant change in the margin profile as we leverage both KRYSTEXXA and tepro sales as we move into '21.

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

Just a couple. So first on KRYSTEXXA. It sounds like you're further expanding the focus on other populations. I just wanted to get some further detail on other gout subgroups you may consider exploring beyond kidney transplant patients? And secondly, is the rationale there that these are patients who are already on immunosuppressive agents, so KRYSTEXXA would, therefore, sync pretty well? In other words, they're already on an underlying immunomodulatory agent, so that combination is fairly intuitive? And then, lastly, at the risk of sort of beating this over the head, once again, can you talk about any new thoughts, if any, on strategic options for the primary care segment?

I'll take the primary care. We see it's best managed by us. It's stable, driving significant cash flow and we have no intentions of doing anything with that business other than continuing to expect strong cash flow generation. Shao-Lee, maybe address the first one.

Yes. So I can speak to the kidney transplant population. And as we've said, these are patients that were excluded from our pivotal trials. And so in addition to that, they are really some of the patients that have the most severe forms of gout, both through chronic kidney disease as well as some of the medications that they are on. So as a rheumatologist, I can tell you that these patients when I saw them at consults in the hospital, really had rip-roaring gout. So it's really unfortunate that we weren't able to treat them previously with KRYSTEXXA. I think that you've been spot on in terms of the fact that they're also on chronic immunosuppressive -- heavy immunosuppressive therapies because of their organ transplant. And interestingly, the literature suggests out there that high serum uric acid levels really can contribute to organ rejection. So as nephrologists, we think that they understand that there is a high urgency to treat this disease state because of its systemic nature. We think that going back and taking up this population potentially for the KRYSTEXXA label ultimately also gives nephrologists an opportunity to get more experience with KRYSTEXXA and learn how to use it effectively.

What about other gout populations that you mentioned?

I don't have -- we don't have any other to share at this time. But certainly, we're always thinking about ways to maximize the benefit of KRYSTEXXA for gout patients.

And as I said in my remarks, we see the kidney transplant population with [concurrent] uncontrolled gout is about 30,000 patients, of which over 1/3 are addressable as a refractory and chronic gout outpatient. So we see that as a significant near-term opportunity that we can leverage, as Shao-Lee went through.

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

I just wanted to ask about teprotumumab. I was wondering if you could frame expectations around the trial outcome. We have been getting a lot of questions about what is considered a successful trial. Do you have a specific response rate threshold that would be considered clinically relevant or is it simply statistical significance that you're looking for? So maybe you can help us -- help qualify that for us. And a certain response rate change, the commercial opportunity in your mind? And separately, on KRYSTEXXA, I just wanted to understand the dynamics within nephrology a little bit. It looks like starting this trial in kidney transplant can be good to help nephrologists understand the capabilities of the drug. I'm just wondering right now with penetration in the segment, how has that gone given nephrologists' kind of entrenched capabilities not necessarily being infusion centers? And does that even matter given that these patients may just be referred back to rheumatologist or other tertiary centers for treatment?

So I'll take the first relative to expectations. The Phase III program was designed as a confirmatory trial. Again, looking at proptosis with a greater than 2-millimeter reduction or resetting of the eye back into the socket. And if you look at the design of the Phase II and Phase III programs, greater than 2 millimeters was determined by the community to be clinically significant for their patients, with nothing ever having had efficacy in this population before. So our goal is to confirm the data and we're excited to get that over the next month. So with that, maybe move over to KRYSTEXXA.

Yes. And I think on KRYSTEXXA, it is important to understand nephrology is performing right in line with our expectations. To your point about entrenched capabilities for nephrologists, it almost doesn't matter because the patient is either referred to a rheumatologist or to another site of care that may be, perhaps, in the hospital or in the community. And even though they may not have experience with infusion themselves, they do partner with other institutions in their community to make sure that patients do get the care that they need.

Our next question is from the line of David Steinberg of Jefferies.

Two questions. First, when you bought KRYSTEXXA, I think you indicated you'd expect initial competition in 2020. It seems like that probably will not occur. What's your current thinking about your first competitive threat there? And how are you thinking about the competitive landscape over time? And then secondly, with regards to teprotumumab, given that if you get approval, you may launch next year. Could you give us some color on the cadence for the launch? With some orphan drugs, all the patients are well known and peak sales are reached pretty quickly. In others, they always find new patients. I'm just curious, how many years do you think it will take to get to peak approximately for that product?

Thanks, Dave. Relative to competition, I think you said it well. When we bought KRYSTEXXA, we expected a competitor in 2020 and the timing has delayed. So our forecast of double-digit growth in 2019 and greater than $750 million in peak sales include having a competitor on board and nothing has changed there. Relative to teprotumumab, we're not going to be providing forward-looking guidance. We have to get the data, file the BLA and get hopefully the medicine approved. And at that time, we'll provide guidance on teprotumumab.

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

Just my questions around teprotumumab. I believe, I may be wrong, it's the first time I've heard you refer it to as disease-modifying. So just wondering, and obviously we're waiting for the date and hopeful it's successful. But can you talk about potentially the ability to use it earlier? I know you're studying it in OPTIC-X for maybe longer. And how that may have implications in terms of kind of the ultimate size, pricing decisions, anything that you can kind of frame around maybe how the utilization may change beyond the Phase III study. And then also on MIRROR. Just wondering, with its success, can you frame for us maybe how that might alter the equation in terms of your peak sales for KRYSTEXXA.

So relative to the population for teprotumumab, we don't see it as early or late. There is no medicines that work. The disease is categorized as active versus fibrotic. So for those patients within the first 3 years that have active disease, we would -- again if data is confirmed and the medicine is approved, see teprotumumab as the right agent for patients with active disease. And that population we estimate to be between 15,000 and 20,000 patients annually. At this point, we're not going to comment on what pricing may be. That would be more appropriate if the medicine is approved. I think the second question was relative to KRYSTEXXA. The MIRROR trial and the results that we saw from ACR around the methotrexate combination data, we did not have built into our peak sales. And should we confirm that data, we would update peak sales opportunity at that point in time. But we still are confident with the business as it is and the fact that physicians are getting continued positive response. We get stories every day around patients avoiding some of those 100,000 amputations that we've seen over the last 5 years. So we're excited about the opportunity.

Our next question is from the line of Louise Chen of Cantor.

So first question I had was on tepro. Just curious if you think there is a bolus of patients that would benefit from the treatment? And how fast do you think the uptake would be for this product? And then secondly, on M&A, just curious how much capital you have to deploy towards this. And what you are interested in? Are there any new therapeutic areas or would you build on existing areas? What's more interesting to you, commercial or pipeline assets?

Louise, relative to uptake and bolus of patients and, obviously, assuming data is positive, our prelaunch efforts would focus on identifying these patients. One thing we know is that -- from our research is that there isn't difficulty in diagnosing these patients, which we believe is helpful. But as far as guidance and time to peak sales, we're not providing that guidance at this point in time. Maybe Bob can address the second question around M&A environment.

Sure. Louise, so with a little over $950 million on our balance sheet we need, for working capital purposes, on the order of $150 million. So somewhere in the neighborhood of $800 million is the capacity that we have to deploy at this point. And the objectives that we've got are to stay within rare orphan diseases. We first look in the areas that we play today, which are rheumatology and metabolic diseases. We also have spent a considerable amount of time looking at immunology because of the expertise of the people that have joined the R&D team. And then there is white space opportunities that we continue to look at. The objective is to build out the pipeline. So it's more likely -- much more likely to be development-stage assets as opposed to commercial assets at this point. We think that's the greatest return on capital for us at this stage. And so that's the outline of how we view the world and how we're planning to allocate capital as we move forward.

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

My first question is regarding the tepro Phase III primary end point. And could you give us some indication of -- regarding the greater than 2-millimeter reduction in proptosis. How subjective or objective is that endpoint? And my second quick question is regarding the tax rate. I wanted to make sure I heard the 2019 guidance correctly. Did I hear mid-single digits? That's it.

So the tax question first.

Yes. Mid-single digits is what we expect from a cash tax rate standpoint, so actually cash out the door. On a non-GAAP tax rate, we said low to mid-teens.

And with regard to the teprotumumab Phase III primary endpoint, that's an objective measure. It's actually measured with a specific device that is effectively a fancy ruler.

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

I have a couple of questions, please. First, with respect to 2019 KRYSTEXXA, I think previously you had said that there would be a 25% reduction as a result of the 340B adjustment. Just wondering if that is still the expectation. And with respect to operating cash flow to adjusted net income, it declined in 2018 versus 2017. Just hoping to get your expectations for 2019 adjusted -- or, sorry, operating cash flow to adjusted net income.

Relative to KRYSTEXXA, our expectation continues to be for double-digit growth over 2018. So nothing has changed.

And on the cash flow, as we look at the full year '18 versus '17, the decrease was primarily due to what we talked about last year. With the change to the PBM contracts, we had a onetime kind of cash flow benefit as we entered those contracts and did not pay a full year of rebates because of some of them still being owed still at end of the year. So we had a onetime benefit from that in '17. Going forward, we don't give operating cash flow guidance, but what we've said is that if you look at EBITDA and adjust for cash taxes and cash interest and then some growth in working capital due to the growth in sales, that can give you good proxy for operating cash flow.

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

On KRYSTEXXA, do you have a little more on the adapted protocol for the MIRROR trial so that it can qualify as a registration study? How big will it be? And when would you expect to have data and when might you be able to file for an updated label? And will there be any other data from the TRIPLE or RECIPE trial this year in use with other immunomodulators? How are those studies going?

So with regards to the MIRROR adapted trial, it's a trial that we're actually going to have a conversation with the FDA about in terms of ultimately what they will find acceptable for registration in terms of the design. So we'll be better able to update you on the specifics of the design after that conversation. That said, we fully expect it to be KRYSTEXXA plus or minus methotrexate. And it will be 6 months in duration, most likely, but it will be a couple of years before we are ready to evaluate any data.

And then on TRIPLE -- yes, yes. Go ahead.

Oh, go ahead. Oh, yes. TRIPLE and RECIPE.

Yes, the TRIPLE and RECIPE. Yes.

So in terms of RECIPE, our understanding for those investigator-initiated trials is that RECIPE is moving along nicely. There actually hasn't been the uptake for TRIPLE that we had hoped for or that we're seeing, and so ultimately we're no longer funding that study.

Our next question is from the line of Irina Koffler of Mizuho.

Just wanted to go back to KRYSTEXXA. When can we expect the product to get to its $750 million target? And I wanted to clarify that it doesn't include any upside from MIRROR or from any of these additional kidney trials. And then the second question I had was, as you sort of start to decline the primary care segment, is there still opportunities to improve operating margins in that business?

If you look at 2018, we had essentially flat sales in primary care and increasing margins. And across our business, we continue to look for efficiencies. So we're very pleased with how that is operating. As far as KRYSTEXXA, we expect $750 million in peak sales, and we haven't guided to when that will occur. And you are correct in your assumption relative to MIRROR and the kidney transplant study in uncontrolled gout patients.

And at this time, there are no further questions. I'd like to turn the conference back over to Ms. Tina Ventura for the closing remarks.

Thank you, Amanda. That concludes our call this morning. A replay of this call and webcast will be available in approximately 2 hours. And thank you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.