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Edited Transcript of HZNP earnings conference call or presentation 6-Nov-19 1:00pm GMT

Q3 2019 Horizon Therapeutics PLC Earnings Call

Dublin Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Horizon Therapeutics PLC earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy Pasternak

Horizon Therapeutics Public Limited Company - Executive VP & Chief Business Officer

* Paul W. Hoelscher

Horizon Therapeutics Public Limited Company - Executive VP & CFO

* Shao-Lee Lin

Horizon Therapeutics Public Limited Company - Executive VP, Head of Research & Development and Chief Scientific Officer

* Timothy P. Walbert

Horizon Therapeutics Public Limited Company - Chairman, President & CEO

* Tina E. Ventura

Horizon Therapeutics Public Limited Company - SVP of IR

* Vikram Karnani

Horizon Therapeutics Public Limited Company - Executive VP & Chief Commercial Officer

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Conference Call Participants

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* Annabel Eva Samimy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Chen Yuan Yang

Morgan Stanley, Research Division - Research Associate

* Dana Carver Flanders

Guggenheim Securities, LLC, Research Division - Senior Analyst

* David A. Amsellem

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* David Michael Steinberg

Jefferies LLC, Research Division - Equity Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Jason Matthew Gerberry

BofA Merrill Lynch, Research Division - MD in US Equity Research

* Kenneth Charles Cacciatore

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. Welcome to Horizon Therapeutics plc Third Quarter 2019 Earnings Conference Call. As a reminder, today's conference is being recorded.

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

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Tina E. Ventura, Horizon Therapeutics Public Limited Company - SVP of IR [2]

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Thank you, Katherine. Good morning, everyone, and thank you for joining us. On the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer; Shao-Lee Lin, Executive Vice President, Head of Research and Development and Chief Scientific Officer; Paul Hoelscher, Executive Vice President, Chief Financial Officer; Vikram Karnani, Executive Vice President, Chief Commercial Officer; and Andy Pasternak, Executive Vice President, Chief Business Officer.

Tim will provide a high-level review of the third quarter and an update on our business. He will also discuss in greater detail our prelaunch preparations for teprotumumab, our first-in-class biologic under FDA review for thyroid eye disease, or TED. Shao-Lee will provide a review of our R&D programs, and Paul will discuss our financial performance and guidance, followed by closing remarks from Tim. We'll then take your questions.

As a reminder, during today's call, we'll 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; subsequent quarterly reports on Form 10-Q; and our earnings press release, which we 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 press release and other filings from today that are available on our investor website at www.horizontherapeutics.com.

I will now turn the call over to Tim.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [3]

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Thank you, Tina, and good morning, everyone. We generated another strong quarter with our orphan and rheumatology segment up 14% driven by KRYSTEXXA growth of 42%. We increased the midpoint of our full year adjusted EBITDA guidance range as well. Excluding our significant teprotumumab launch investment, year-over-year adjusted EBITDA growth would be double digits at the midpoint. This underscores a significant margin expansion we are driving from our underlying business.

We reached several key milestones during the third quarter. We submitted our BLA for teprotumumab and received Priority Review designation with a March 8, 2020, PDUFA date. We also presented additional Phase III trial data at several medical meetings, while making significant progress in our prelaunch activities.

With KRYSTEXXA, in addition to the quarter's strong commercial performance, we continued enrolling our MIRROR placebo-controlled registration trial and launched the PROTECT trial to evaluate the use of KRYSTEXXA in kidney transplant patients with uncontrolled gout. We also expect to have data from our MIRROR open-label pilot trial in early 2020.

We reduced our gross debt and brought our capital structure in line with our profitable biopharma peers. With net leverage of 1.1x and a cash position of $884 million, our balance sheet has never been stronger and provides us with the flexibility to continue to invest in the growth of the company.

Also, we welcome Sue Mahony as a new director on our Board as well as having Andy Pasternak join us as Chief Business Officer. I am also pleased to report findings of a recent Aon analysis conducted on our behalf, which showed that Horizon demonstrates gender and ethnic pay equity throughout the organization, which is critical in today's marketplace, where we are competing for the best talent. In fact, we ranked in the top 5 of all companies Aon has studied in this regard. This aligns with the value we place on diversity and equality at Horizon.

We're also selected for the fourth consecutive year by FORTUNE as one of the 2019 Best Medium Workplaces. We ranked 8th out of 100 other medium-sized companies, which underscores our commitment to our employees and further helps us recruit top talent.

I'll now recap our third quarter financial results as well as discuss our teprotumumab prelaunch activities.

We generated third quarter net sales of $335 million and adjusted EBITDA of $130 million. Orphan and rheumatology quarterly net sales of $250 million represent approximately 75% of our total net sales. Demand for our orphan medicines remains strong driven by both improved compliance and patient growth.

Average shipping patients increased mid-single digits across ACTIMMUNE, RAVICTI and PROCYSBI, combined for the quarter. With the expanded indications for PROCYSBI and RAVICTI, many new patients are younger, starting treatment on lower doses, which will increase as they grow older. Our orphan growth strategy is driven by patient identification, diagnosis and ongoing support of patients throughout their treatment journey.

As I said earlier, KRYSTEXXA is again the major driver of performance with net sales increasing 42% driven primarily by vial growth of more than 30%. Based on strong performance throughout the third quarter, we now expect KRYSTEXXA full year net sales growth of more than 25%. We have opened a significant number of new accounts over the last 12 months. We're particularly excited to see a great deal of growth coming from existing accounts, where vial growth is up 30% in the first 9 months of this year compared to last year, with significant opportunity remaining.

Today, the majority of existing physician practices use KRYSTEXXA with 1 or 2 patients. Our goal is to help many more patients with uncontrolled gout benefit from KRYSTEXXA and transform these 1 or 2 patient practices into what we term, Centers of Excellence, where they're regularly treating their chronic gout patients with KRYSTEXXA. We're doing this through continued education and the positive clinical experience KRYSTEXXA provides to patients.

I'll share an example of a multi-physician practice in Ohio, where last year, this practice had only 1 patient on KRYSTEXXA. We helped physicians at this practice better understand the systemic impact of urate burden, therefore enabling them to more effectively identify patients in need and elevate the urgency to treat as well as educated them on the importance of monitoring uric acid levels to help predict response. These efforts have turned out to be very successful. And so far, this year, 10 patients in this practice have begun treating their patients with KRYSTEXXA. One interesting note about this example is that the first of these 10 new patients was referred by a nephrologist. At 60 years old, the patient had disease so severe that his hands were deformed from the tophi associated with this chronic uncontrolled gout. He was a complete responder to KRYSTEXXA, and his success helped lead to the identification of more patients within the practice.

We continue to see accelerating uptick from nephrologists and expect the start of our PROTECT trial to demonstrate our commitment to further understand KRYSTEXXA in the nephrology space.

With a nearly $100 million KRYSTEXXA net sales quarter driven by continued strong volume growth and business fundamentals, we are well on track towards our peak U.S. annual KRYSTEXXA net sales target of more than $750 million. Our ability to change KRYSTEXXA's growth trajectory underscores the success of our commercial strategy, which is driven by 3 factors: first, deeply understanding the medicine, the disease and the market dynamics; building both the right team to execute positions and the required infrastructure and spend to support our patients; and investing in clinical studies and clinical data analyses that improve the understanding of the disease and its treatment.

We're applying the same principles to teprotumumab in thyroid eye disease, which is a serious, progressive and vision-threatening autoimmune disease. Today, there is no approved medicine for TED, and therefore, no defined treatment path. We've been learning a great deal from the many communities involved with TED patients, including advocacy groups, patient groups and health care providers. We have much deeper understanding of how we can serve their needs, which includes support for patients over their entire journey from diagnosis to treatment and beyond. We are hopeful that a highly efficacious first-in-class biologic prescribed for a relatively short 6-month course of therapy may represent a dramatic advance in the care of TED. We're making significant investments to advance the standard of care and support the community as well as prepare and educate the market. And critical to our success with teprotumumab is ensuring patients who need treatment will be able to access this medicine.

I'll now walk through some of our progress. Our 100-person teprotumumab team is now in place. It includes sales representatives, patient educators, reimbursement specialists, site-of-care specialists and medical liaisons. Our sales representatives have been meeting with our physician targets. These are mainly ophthalmologists and their subspecialties such as oculoplastic surgeons and neuro-ophthalmologist as well as endocrinologists. To date, as part of our prelaunch efforts, our sales force has called on the majority of our 5,000 physician targets, including the vast majority of our top-tier targets, we're about -- which are about 1,700 in total.

Turning to our outreach, we are gathering information on the number of TED patients that they see. As we've previously discussed, we estimate 15,000 to 20,000 active TED patients are eligible for teprotumumab each year, and the initial feedback from physicians targeted has confirmed that these numbers are similar.

In addition, given that teprotumumab is an infused therapy, we've learned a significant amount about their infusion capabilities or infusion referral network. While many physicians know where they would refer their TED patients for infusion, many others need to be educated on how this process works. This is important because ophthalmologists and endocrinologists have minimal experience with infusions. This is why outreach to infusion centers is a critical part of our strategy.

Our goal is to ensure that there's a comprehensive infusion network so that treating physicians will have viable options to successfully refer patients to an appropriate site of care for their treatment. Over the last few months, our site-of-care specialists have met with nearly 200 of the major infusion service providers to understand their capabilities in standing operating procedures as well as educate the infusion center staff about TED. We received very positive feedback. Many have told us how impressed they are with the groundwork we're doing, something they rarely see before launch.

An effective reimbursement strategy will also support access for TED patients. Our managed care team has been in dialogue with payers to educate them on TED, and the feedback from these initial interactions has also been positive.

When reviewing the data, what is particularly compelling is not only teprotumumab short course of therapy, but that the majority of patients in our Phase III clinical trial responded to therapy, with 82.9% meeting the primary endpoint in our Phase III program.

In addition, like all newly approved infused therapies, at approval, teprotumumab will receive temporary reimbursement coding or miscellaneous codes, which are needed to bill for drug usage. The reimbursement process under temporary code is manual, requiring a case-by-case review that can take between 60 and 90 days. If teprotumumab is approved by the end of March 2020, we will be eligible for a permanent J-Code in January of 2020, and that is when the reimbursement process will become more efficient for providers of care.

We're making great progress in developing the treatment path, building the infrastructure and establishing referral networks to ensure patient access and success with treatment.

Equally important is our interaction with ophthalmologists and endocrinologists to build a greater understanding of TED and the urgency to identify and treat the disease. We have invested significantly in these efforts, presenting teprotumumab clinical data and have a significant presence at 7 medical meetings so far this year. The response has been tremendous. Our October presentation at the American Society of Ophthalmic Plastic and Reconstructive Surgery, or ASOPRS, was standing room only with about 1,000 people attending. We're seeing very strong interest at the conferences we attend, with more than 1,200 physicians visiting our booth at ASOPRS, the American Academy of Ophthalmology meeting and the American Thyroid Association meeting with 350-plus physicians attending our TED Symposium.

Furthermore, our data was selected for an oral presentation at the American College of Rheumatology meeting next week. Given rheumatologists' significant experience and comfort with infusion biologic medicines, they may be a key referral option for TED-treating physicians. All this points to the tremendous excitement teprotumumab is generating and is a major reason we are driving a significant prelaunch work now to be prepared for a successful launch. We're excited for the possibility of truly changing lives of many people living with TED.

I'll now turn it over to Shao-Lee to provide an update on our development activities.

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Shao-Lee Lin, Horizon Therapeutics Public Limited Company - Executive VP, Head of Research & Development and Chief Scientific Officer [4]

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Thank you, Tim, and good morning, everyone. I'll begin with teprotumumab, our fully human monoclonal antibody, insulin-like growth factor 1 receptor, or IGF-1 receptor inhibitor.

As Tim discussed, teprotumumab is under Priority Review with a March 8, 2020, PDUFA date. In line with the agency's guidelines for new molecular entities, the FDA will convene an advisory committee for this submission. Our leadership team has extensive advisory committee experience, and we are in the process of preparing for that meeting.

The results from both the Phase II trial and OPTIC, the confirmatory Phase III trial, were impressive, demonstrating statistically and clinically meaningful improvements across multiple facets of this debilitating, vision-threatening and disfiguring disease.

Furthermore, teprotumumab was generally well tolerated with few treatment discontinuations and a consistent safety profile across both trials. The primary endpoint of OPTIC was a clinically meaningful reduction in proptosis of 2 millimeters or more. Proptosis, which is bulging of the eye, is a primary driver for TED morbidity. It is painful and can be vision-threatening. Teprotumumab patients in OPTIC demonstrated after 24 weeks of treatment an 82.9% response rate versus 9.5% in placebo, with a p-value of less than 0.001. This corresponded to a mean reduction in proptosis of 3.32 millimeters in the teprotumumab-treated group as compared to 0.53 millimeters for placebo.

Diplopia or double vision can occur with TED. It can seriously impact patients' lives, making it difficult for them to perform everyday tasks and can prevent them from working. In addition, due to the changes TED makes to their appearance, many patients feel socially isolated. We were therefore pleased to present important Phase III secondary endpoint data at ASOPRS last month that showed that 68% of teprotumumab patients had an improvement of at least 1 grade in double vision versus the placebo group at 29%. One grade of double vision can be the difference between experiencing double vision constantly versus intermittently. The teprotumumab group was -- also saw a significant improvement in quality of life, which was measured by the Graves' Ophthalmopathy Quality of Life scale for which a change of 6 points is considered clinically significant. Teprotumumab patients had a mean change of 13.79 points compared with 4.43 points for placebo patients, a clinically and statistically significant result, particularly impressive given how difficult it is typically to achieve statistical significance with a quality-of-life endpoint. The Clinical Activity Score, or CAS, also showed significant improvement for the teprotumumab patients. The CAS is a measure of pain, redness and swelling as is characteristic for active TED, and 59% of teprotumumab patients achieved a CAS value of 0 or 1 versus 21% for placebo patients, with a score of 0 representing no disease activity. The totality of the primary and secondary endpoint data supports our conviction that teprotumumab offers considerable patient -- potential benefit to patients with active TED.

While we move toward approval, we were also pleased to be able to initiate our expanded access program for eligible active TED patients during third quarter. This program developed in partnership with the FDA is designed to provide patients access to teprotumumab, while the BLA is under review.

It was also a quarter of progress for KRYSTEXXA. We continue to advance our efforts to maximize the benefit that KRYSTEXXA offers patients with uncontrolled gout through the work we're doing with our 2 MIRROR trials. Both are designed to determine if methotrexate, an immunomodulator used commonly by rheumatologists, can help dampen the immune response to KRYSTEXXA, and thereby, increase the response rate to KRYSTEXXA.

The first trial is an open-label pilot study that began in the third quarter of last year, in which 14 patients were treated with KRYSTEXXA and methotrexate. We expect to release data from our open-label study early next year.

The second is our double-blind, placebo-controlled, registrational MIRROR trial that began in June and is also evaluating the co-administration of KRYSTEXXA with methotrexate. Positive results could mean multiple benefits to patients. First, it will further increase the confidence that rheumatologists have in KRYSTEXXA, thereby enabling them to prescribe KRYSTEXXA to more patients in their care. Additionally, it will allow patients to stay on therapy longer, thus deriving the full benefit from the medicine. We've been encouraged by the consistency of positive data we've seen from investigator-initiated trials, administering KRYSTEXXA with methotrexate.

First is the positive data from a case series conducted by 2 external investigators, which resulted in 10 sequential, uncontrolled gout patients completing their course of therapy and achieving a positive response, which was defined as more than 80% of serum uric acid levels being maintained at least at less than 6 milligrams per deciliter during the observation period.

Results of a new clinical case series conducted by another independent rheumatologist will be presented next week at the ACR meeting. This clinical case series also evaluated the co-administration of KRYSTEXXA with methotrexate in 10 uncontrolled gout patients. While 3 patients were still actively on KRYSTEXXA and responding at the time of the abstract submission, 5 of the 7 remaining patients had completed the course of therapy and were complete responders. We look forward to seeing these full results next week. We will present our own data at ACR, describing the inflammatory impact of uric acid on other organs, including the liver and kidney, in line with our efforts to reinforce that gout is a systemic disease in which uric acid crystals can deposit throughout the entire body, not just in the joints. We are also stressing the urgency of appropriate evaluation and treatment to effectively control all implications of the disease.

Another KRYSTEXXA milestone in the quarter was the initiation last month of the PROTECT trial, our 20-patient, open-label study evaluating KRYSTEXXA in kidney transplant patients with uncontrolled gout. Kidney transplant patients have more than a tenfold increase in the prevalence of gout when compared to the general population, and their chronically elevated levels of serum uric acid are associated with organ transplant rejection. This study as well as our participation this week at the American Society of Nephrology meeting supports our strategy to expand the use of KRYSTEXXA among nephrologists by providing additional data about the effectiveness of KRYSTEXXA in treating uncontrolled gout through its kidney-friendly mechanism.

Finally, in the coming weeks, we will be opening a new facility in South San Francisco, primarily for our R&D and manufacturing organizations. This state-of-the-art facility will have lab space that will enable formulation and process development for manufacturing as well as bioanalytical method development and other R&D functions. Given that South San Francisco is an R&D talent hub, our presence there will further enhance our ability to attract talent to support our expanding capability and pipeline.

In conclusion, we continue to make significant progress on teprotumumab, KRYSTEXXA and our other development programs. We are closer than ever to making teprotumumab available to patients living with the debilitating effects of thyroid eye disease, and we continue to work to help more patients living with uncontrolled gout benefit from KRYSTEXXA. We are rapidly advancing toward our goal of being a leading R&D organization, addressing patient needs through the development of innovative therapies, and I look forward to updating you on our continued progress next quarter.

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

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Paul W. Hoelscher, Horizon Therapeutics Public Limited Company - Executive VP & CFO [5]

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

Third quarter net sales of $335.5 million were driven by 14% growth of our orphan and rheumatology segment. Operating income for orphan and rheumatology was $89.8 million, representing an operating margin of 36% in line with our expectations, primarily reflecting our significant investment in both R&D and SG&A for teprotumumab as well as our uncontrolled gout R&D programs.

Net sales for the inflammation segment were $85.1 million, with segment operating income of $39.6 million. We continue to reinvest the cash flow generated from this segment into the orphan and rheumatology business.

Our non-GAAP third quarter gross profit ratio was 90.7% of net sales. Non-GAAP operating expenses were $174.7 million, this included non-GAAP R&D expense of $19.6 million and non-GAAP SG&A expense of $155.1 million. Third quarter adjusted EBITDA was $130.4 million. The non-GAAP income tax rate for the third quarter was negative 7.5%, resulting in a tax benefit of $8.7 million. Non-GAAP net income and non-GAAP diluted earnings per share were $124.1 million and $0.64, respectively. The weighted average shares outstanding used to calculate third quarter 2019 non-GAAP diluted EPS were 194.2 million shares. Non-GAAP operating cash flow was $96.5 million in the third quarter.

Our cash balance as of September 30 was $884 million, which includes the net cash outflow of $66 million in July as part of our refinancing. At that time, we issued $600 million of new 5.5% senior notes due 2027 and used the net proceeds along with cash on hand to repay $625 million of our outstanding debt. As a result, as of September 30, our net debt was $534 million, with a net leverage ratio of 1.1x, down from 2.9x a year ago.

Our refinancing and debt reduction initiatives have resulted in a capital structure more in line with our profitable biopharma peers, a year-over-year decrease of our annualized cash interest expense of more than 40% and an extended maturity of our term loans and senior notes by 2 to 4 years. S&P recently recognized our efforts, upgrading our senior unsecured notes from B plus to BB minus.

Moving to our outlook for 2019. We continue to expect full year 2019 net sales to range between $1.28 billion and $1.3 billion, and we expect full year net sales growth for KRYSTEXXA to be more than 25%. We continue to expect the full year net sales for the inflammation operating segment to be roughly similar to 2018.

Full year adjusted EBITDA is now expected to be in the range of $465 million to $475 million versus the previous range of $460 million to $475 million. We continue to project our non-GAAP gross profit ratio to be approximately 90%.

For operating expenses, we continue to expect non-GAAP R&D expense as a percentage of net sales to be in the mid- to high single digits for the full year, and expect both R&D and SG&A expense to step-up in the fourth quarter compared to the third quarter, primarily as a result of our investment in teprotumumab launch preparations and the KRYSTEXXA MIRROR and PROTECT programs.

As we look to next year and our expected first quarter teprotumumab launch, we anticipate 2020 operating expenses to be somewhat higher than the annualized fourth quarter 2019 operating expenses. We continue to expect a full year non-GAAP tax rate in the low to mid-teens, with a higher non-GAAP tax rate in the fourth quarter to bring the full year rate in line with our expectations.

As we have said and consistent with prior years, we anticipate quarterly variability in our non-GAAP tax rate. And as always, this projection could change significantly as a result of any acquisitions or divestitures or any changes in tax laws.

We expect full year non-GAAP net interest expense to be approximately $65 million, considerably lower than our initial guidance of $90 million to $95 million as a result of our capital structure improvements. We continue to expect our full year 2019 weighted average diluted share count to be approximately 190 million shares.

With that, I'll turn the call over to Tim for concluding remarks.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [6]

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Thank you, Paul. We delivered strong third quarter performance and achieved important milestones. We have transformed Horizon into a fast-growing profitable biopharma company. We're advancing teprotumumab, our first-in-class biologic candidate, for the treatment of thyroid eye disease with a March 8, 2020, PDUFA date. We're aggressively preparing for the potential U.S. launch with our teprotumumab commercial and medical teams fully in place. We continue to estimate teprotumumab peak annual U.S. net sales of more than $750 million. We continue to deliver on the promise of KRYSTEXXA. We're now working to maximize this potential through our MIRROR immunomodulation trials as well as with PROTECT, our recently initiated trial for kidney transplant patients with uncontrolled gout.

We substantially improved our capital structure to align with our profitable biopharma peers. Our balance sheet has never been stronger, giving us the flexibility to invest in our growing pipeline. We continue to expand our leadership, welcoming Dr. Sue Mahony to the Board and bringing Andy Pasternak on as our Chief Business officer.

Finally, we have demonstrated that we are a company that drives strong ongoing performance while being recognized as a great place to work and one that values diversity with gender and ethnic pay equity.

With strong business fundamentals and financial position, we believe we are very well positioned for continued future growth and that we represent one of the best long-term growth opportunities in our space. We continue to execute our strategy, which we believe will not only provide significant value to the many patients who benefit from our medicines, but also to you, our shareholders.

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

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Tina E. Ventura, Horizon Therapeutics Public Limited Company - SVP of IR [7]

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Katherine, go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from David Amsellem with Piper Jaffray.

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David A. Amsellem, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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So I wanted to ask a couple of questions on KRYSTEXXA. Seems like you're navigating the 340B impact quite well. So wondering if you can talk to what's happening there. Is the outperformance strictly a function of volume? Or is it also mix? In other words, non-340B versus 340B business. So help us understand that. And then secondly, in talking about the latest ACR abstract and the retrospective chart review, in particular, which I thought was quite interesting, I'm just wondering if with the growing body of data on the MTX-KRYSTEXXA combo, if other centers are being emboldened to use the combo, maybe talk to what you're seeing in the field about methotrexate, KRYSTEXXA use, how common it is. And also, should we see more of these kinds of posters at other meetings in 2020?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [3]

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David, it's Tim. The answer is yes to, I think, all of your questions. And I'll let Vikram talk...

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Vikram Karnani, Horizon Therapeutics Public Limited Company - Executive VP & Chief Commercial Officer [4]

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Yes. Thanks, David, for the questions. Yes, as it relates to the Q3 performance for KRYSTEXXA, it's driven by both strong demand growth. As we said earlier, more than 30% growth in vials alone, which signals strong demand. We've also seen a continued improvement in our mix, and that is driven by growth from community rheumatology accounts where a significant amount of our business and our growth comes from. Both those factors are driving growth in our Q3 net sales for KRYSTEXXA.

To your second question around the use of methotrexate, or for that matter, immunomodulators, what are we hearing in the field. We do hear especially after the ACR abstract from last year where Doctors Botson and Peterson showed their abstract 9 out of 9 response -- responders. We have heard anecdotally from a lot of physicians, lot of accounts that they are considering it. They have tried it. I think we still estimate that the overall use is specifically low in the single digits, if you will. But that actually is what gave us the confidence to go ahead and initiate the MIRROR trial, which we hope was -- is -- could give us enough evidence to get an ordered label and maybe Shao-Lee can add to that.

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Shao-Lee Lin, Horizon Therapeutics Public Limited Company - Executive VP, Head of Research & Development and Chief Scientific Officer [5]

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Yes, thanks for that, Vikram. So I think that revisiting that sequence is exactly right. We had started our MIRROR open-label study exactly to evaluate whether or not adding methotrexate could dampen the immune response to KRYSTEXXA and sort of as we were initiating that trial had the good fortune of seeing the Botson/Peterson data come out last October at ACR.

It's really interesting that the Albert's abstract now at this ACR is coming out with, at least so far, what appears to be very consistent data. We'll obviously see the rest of that data set of the full 10 patients next week at ACR. But I think if that continues to play out, then we'll have sort of 2 external data sets that may end up quite consistent with one another and potentially our own open-label data that we hope to be able to provide some insight into in early 2020. So really shaping up that this may be an important way to modulate immune response to KRYSTEXXA in a way that ultimately will provide patients with the opportunity to stay on the drug longer and in a way that modifies their potential for side effects.

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Operator [6]

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Our next question comes from Annabel Samimy with Stifel.

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Annabel Eva Samimy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [7]

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Great progress. I'm going to ask the obvious here, you set your guidance on KRYSTEXXA assuming, one, that there'll be a competitor in 2020; two, that there is a 3-month treatment duration; and three, that there's no patient expansion beyond the 100,000 that you identified between kidney and rheumatology. And all of those assumptions have now changed. So what do you need to see to -- for increased comfort in adjusting that peak sales? And then the second really quick one on tepro, when you were given your PDUFA date, it seemed like the next regulatory catalyst would be a preview of the label or a label discussion. On what occasion has the FDA done that before? They gave a very explicit date for that. Are we actually going to see that? And when have you seen that? And why would they do that?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [8]

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So I'll take the first one there. Typically, you would get initial label to begin negotiations 4 to 6 weeks before your action date as we indicated in our press release when we announced Priority Review for teprotumumab that it would be by the end of the year, which gives us -- makes us feel very happy that those time lines are accelerated to begin label negotiations. So that's all we know at this point. And from our perspective, we continue to prepare for the advisory committee meeting and receipt of a label. And we've also made very good progress in all the preapproval inspections, whether that be manufacturing or investigators and other. So everything is on track to meet our expectations there.

With the first question, you pointed out quite well, we've had continued progress in the underlying growth of KRYSTEXXA along with the immunomodulation strategy, which we've seen from several data sets, a strong incremental response as much as almost double of what we saw in the original clinical program. So we continue to feel very confident that we can grow substantially with KRYSTEXXA. And as we continue to grow, we'll continue to look at our long-term guidance. But it's well said by you.

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Operator [9]

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Our next question is Dana Flanders with Guggenheim.

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Dana Carver Flanders, Guggenheim Securities, LLC, Research Division - Senior Analyst [10]

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Congrats on all the progress. My first one here is just on margin expansion. It seems like you're making nice progress with the orphan and rheum business, although arguably still just heavily underearning your peers. So can you just speak to how you expect the orphan and rheum business to evolve as you get into 2021 and tepro and KRYSTEXXA top line growth just continues to ramp and you're able to just better leverage the investments you are making today? And my second question is just on biz dev. I know you have some new leadership there. So maybe just speak to the philosophy, if that's changed at all? And I know you have a lot on your plate, but with net leverage only 1x, maybe just speak to just how you're viewing the landscape and opportunity set into next year?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [11]

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Thanks, Dana. As I said in my remarks, ex our teprotumumab spend this year, we see double-digit accretion from our base business. And Paul, maybe you speak to how you see it going long term?

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Paul W. Hoelscher, Horizon Therapeutics Public Limited Company - Executive VP & CFO [12]

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Yes. So as Tim noted, the last couple of years have been heavy investment years, both in the expansion of KRYSTEXXA, commercial efforts and the heavy spend on teprotumumab, both from the R&D side and from the prep for a potential launch next year.

As we look at 2020, we'll continue to have heavy investment behind teprotumumab, and we will not have a full year of sales as sales will ramp through the year. And so we do not expect any significant margin expansion next year. But as we move into 2021, as we have a -- we'll have a full year of growing teprotumumab sales, continued growth in KRYSTEXXA, we expect significant margin expansion driving from that orphan and rheum segment.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [13]

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And Andy, do you want to talk about maybe strategy?

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Andy Pasternak, Horizon Therapeutics Public Limited Company - Executive VP & Chief Business Officer [14]

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Sure. Thanks for the question, Dana. First, let me just say that I'm thrilled to be here and part of this team. And while this is technically my first week at Horizon, I have actually worked pretty closely with the team in recent years. So let's say this is an informed move.

So just to put your question in the context, I think that this team has made great progress in transforming Horizon into a profitable biopharma company. And I think we're going to accelerate -- continue and accelerate that journey, which means deepening our presence in rare diseases as well as attractive areas in rheumatology, nephrology, ophthalmology and endocrinology, which are all areas where we have increasingly strong capabilities. And what that means from a BD perspective is we're focused on building a clinical stage pipeline or continuing to build and enhancing a pipeline against those areas. I think -- I don't think that's a significant change in philosophy, and we are seeing attractive opportunities. And you're absolutely right that we're in a position of strength in terms of the strong cash position, the limited leverage and then just the strong ongoing cash flow of the business.

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Operator [15]

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Our next question comes from Jason Gerberry with Bank of America.

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Jason Matthew Gerberry, BofA Merrill Lynch, Research Division - MD in US Equity Research [16]

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Just a few on tepro. So can -- maybe can you talk is the OPTIC long-term follow-up data, which you get in first half '20, is there any interplay with those data and how you'll approach a pricing decision on tepro? My second question is just, if we don't get an update on ADCOM in the next week or so, is it safe to assume there won't be an ADCOM for tepro, just given the timing dynamics there and the notice period provisions? And then lastly, just any updates on the European orphan drug designation for tepro as it pertains to treatment of thyroid eye disease?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [17]

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Sure. OPTIC-X is the rollover study from our Phase III program, where patients can roll over from placebo to get a full treatment of teprotumumab or any patients that didn't respond, which was a small number given the 83% response rate, would be eligible for retreatment. We don't see that study having any impact in our pricing decision. We're finalizing our work, looking at various aspects of value. The number needed to treat here is extremely low, which indicates strong value. So we continue our work, and we'll communicate our pricing after we are approved. With the ADCOM, as you noted, the register is publishing dates up to December 10. At this point in time, based on early this morning, there will be an ADCOM. We don't see any likelihood for that to not occur, and we would expect the date to be announced shortly. Finally, on European orphan drug designation, our strategy is to secure U.S. approval and then continue that dialogue. So more updates to follow post-approval there.

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Operator [18]

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Our next question is Ken Cacciatore with Cowen.

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Kenneth Charles Cacciatore, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Just wondering on the tepro early access program. Are we actually getting patients on use so you do have IV -- some of the IV logistics squared away? And then maybe to that point, as we start thinking about next year, and you're talking about -- talking to the 200 major centers, can you kind of set expectations for us about how long it will take you to start getting those centers up and running and feel that the logistics are working so that patients start flowing through the system as we start thinking about modeling out into next year? And then lastly, on KRYSTEXXA, just wondering where we are in terms of accumulating new accounts? So it sounds as if, and you gave great anecdotal feedback on how broadening some of these accounts, but are there still -- are we still penetrating new accounts? Can you give us a sense of where we are on that? Are we getting to the end stages of that? And then maybe just going back and now focusing on broadening use within accounts? Just any perspective on that would be great.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [20]

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Sure, Ken. On the EAP program, as we've said in the past, there's been strong interest, and we have a number of patients in the queue to be infused shortly. We expect that interest to continue to grow and all the patients that get put on the EAP, we will provide full cost for the course of treatment regardless of when we're approved. From the major centers and that I referenced our site of care specialists are calling on, a lot of that is building those networks. But building of the networks we don't see as the rate limiter. The real rate limiter is you model uptake and look at this and Part B medicines, as Vikram and I have discussed on many occasions, is we will have initial temporary J-Codes, temporary C-Codes on the commercial side, where each patient is managed on a case management case-by-case basis. And that process takes upwards of 60 to 90 days plus in that initial phase until we would get a permanent J-Code, which based on a March 31 submission would occur January 1. So as you look at Part B launches, it's that -- a patient-by-patient approval process on a case-by-case basis, which drives that slower uptake initially. The infusion centers in site of care, we think, we'll be in a good place as we've done well with that -- with KRYSTEXXA.

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Tina E. Ventura, Horizon Therapeutics Public Limited Company - SVP of IR [21]

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And Vikram, I think you were going to talk about...

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Vikram Karnani, Horizon Therapeutics Public Limited Company - Executive VP & Chief Commercial Officer [22]

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Yes. Yes, I think your last question was about new accounts and where the growth is coming from KRYSTEXXA. As you would imagine, at this stage of the relaunch having now gone through several years of adding new accounts and bringing new physicians on, we're starting to see a transition where a lot of our growth is coming from existing account growth. In fact, in this quarter alone, we've seen almost 30% of our growth coming from existing accounts, where -- which speaks to the level of confidence that physicians are having on an increasing basis in the medicine as they see more and more of their patients benefit.

We're also -- on the new account where we should see growth, and we anticipate that as a future in nephrology. As we've talked about before, we have now an increasing focus on nephrology over the course of the last few months, almost a year now, and that interest continues to grow. And we'll comment on that as that business continues to evolve. But we should expect a lot of our growth continuing to transition into existing accounts, and that's what we're seeing happen as we speak.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [23]

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And one just note of clarification, our permanent J-Code will be January 1, 2021. I think I may have said 2020.

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Operator [24]

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Our next question comes from David Risinger with Morgan Stanley.

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Chen Yuan Yang, Morgan Stanley, Research Division - Research Associate [25]

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This is Charlie for David. Just got 2 things. One is, I know you've mentioned about that the business development -- how a real focus already, but I just want to see if you have any kind of additional comments on that in terms of a near-term prospect? And number two is kind of what product sales are expected to be lowered in kind of 2019 since your guidance have maintained the total revenue and raised the KRYSTEXXA?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [26]

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So for 2019, on a year-over-year basis, we expect strong growth across our rheum orphan business and similar year-over-year sales from our inflammation business. Relative to near-term BD prospects, we're not going to get into what we may or may not be looking at this point in time. We are aggressively pursuing and evaluating a number of different opportunities. And we feel confident that we've got the flexibility in our balance sheet, and we will be very selective and disciplined as we have over the last year or so.

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Operator [27]

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Our next question comes from Gary Nachman with BMO Capital Markets.

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [28]

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First on tepro, regarding the ADCOM, what do you anticipate the focus of the panel will be? The data seemed really clean, but any possible safety concerns even if remote that you'd think the FDA will want to get comfortable with? Are you anticipating A REMS potentially with this product? And then on KRYSTEXXA, regarding the PROTECT trial in kidney transplant, what are you looking for before you would be able to progress into a bigger Phase III? Will you look at a different dosing regimen? And what about a combo arm with methotrexate?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [29]

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So with -- on the second, we don't anticipate doing a Phase III program. It's already included within our current label. And we wouldn't be using methotrexate in nephrology population. They use other immunomodulators.

Relative to the ADCOM, we see this as a statutorily required meeting for a new chemical entity with a new mechanism of action, and we expect it to be a general efficacy and safety review. And we have very well-characterized safety across both of our studies, both pivotal studies that have been conducted.

As far as REMS, there's not something that jumps out to us. But that all is part of the label negotiation, and we'll see how that plays out. But nothing of major concern going into the ADCOM. For us, it's a matter of opportunity to present the compelling efficacy and generally well-understood safety profile, and we look forward to the meeting.

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Operator [30]

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Our last question comes from David Steinberg with Jefferies.

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David Michael Steinberg, Jefferies LLC, Research Division - Equity Analyst [31]

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I just wanted to revisit your peak sales estimates for KRYSTEXXA again. I think you said $750 million. But you posted $100 million this quarter, so you're already over halfway there in pretty short order. And so I know you haven't talked about methotrexate vis-à-vis those peak estimates. So just assuming the MIRROR trial is successful, any thoughts on what the potential new peak sales estimates would be adding methotrexate? And then I know, Tim, you said you've had increased payer discussions regarding tepro. I think the range -- it's a pretty broad range. The company has thrown out of $100,000 to $300,000 per course of therapy. Any further refinement of that range? And then finally, just on BD, the company hasn't made any acquisitions in a while and -- versus in the past, the company is pretty much a serial acquirer. Is this because valuations are too high? Or just that realistically, you don't need to do anything for the next couple of years to enhance your growth outlook?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [32]

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Sure. Well, first on BD, we look at our business with KRYSTEXXA and teprotumumab and the peak sales expectations as more than doubling our current sales. So we're very well positioned with our base business and our existing pipeline. We have been very disciplined over the last year or so to get our capital structure in line with a strong balance sheet, strong cash position, low leverage. And we think we now have the flexibility to be very disciplined as we look at deals in that mid- to late 2020 time frame.

Relative to pricing, we have not put any $100,000 to $300,000 or any numbers out there. There's been sell-side commentary on price. So we have not indicated any price range at this point in time. We continue to do our work there.

I think when you -- your commentary around KRYSTEXXA and peak sales, it's heard, and we are increasingly confident in our current expectations. And as you said, the data with methotrexate, what we've seen from both the Botson/Peterson data last year at ACR, the Albert's data, we're going to see -- that's public now, but we'll see at this year's ACR and other data that's being generated, we see a significant opportunity with KRYSTEXXA plus methotrexate. And at this point in time, we are highly confident in our trajectory. And as we continue to see that, we'll reconsider when we put out incremental peak sales.

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Tina E. Ventura, Horizon Therapeutics Public Limited Company - SVP of IR [33]

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And Katherine, that wraps us up. And it concludes our call this morning. A replay of this call and webcast will be available in approximately 2 hours. Thanks for joining us.

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Operator [34]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.