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Edited Transcript of HZNP earnings conference call or presentation 26-Feb-20 1:00pm GMT

Q4 2019 Horizon Therapeutics PLC Earnings Call

Dublin Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Horizon Therapeutics PLC earnings conference call or presentation Wednesday, February 26, 2020 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

* Elizabeth Thompson

* Paul W. Hoelscher

Horizon Therapeutics Public Limited Company - Executive VP & CFO

* 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

* Dana Carver Flanders

Guggenheim Securities, LLC, Research Division - Senior Analyst

* David A. Amsellem

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* David Michael Steinberg

Jefferies LLC, Research Division - Specialty Pharma Analyst & Equity Analyst

* David Reed Risinger

Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst

* Gary Jay Nachman

BMO Capital Markets Equity Research - Analyst

* Graig Suvannavejh

Goldman Sachs Group Inc., Research Division - Executive Director & Senior 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 the Horizon Therapeutics plc Fourth Quarter and Full Year 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, Michelle. Good morning, everyone, and thank you for joining us. On the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer; Liz Thompson, Group Vice President, Clinical Development and External Search; 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 review our 2019 performance and 2020 guidance. Liz will then provide a review of our R&D programs, followed by Paul, who will discuss our financial performance. After 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, 2019, 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'll 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. Our fourth quarter results capped off another year of tremendous progress for Horizon. I'll review the highlights and then provide more detail on our performance.

We achieved record full year net sales of $1.3 billion, driven by 32% KRYSTEXXA growth and adjusted EBITDA of $483 million, which included our significant investment in TEPEZZA launch preparation. Excluding this investment, our underlying business generated strong double-digit adjusted EBITDA growth for the year.

TEPEZZA is our new biologic for thyroid eye disease, or TED, and was approved on January 21, nearly 2 months ahead of the PDUFA date. This was followed the next day by the New England Journal of Medicine publication of our Phase III trial results. We've seen incredible level of excitement and demand for TEPEZZA in the first month on the market. I'll share more shortly.

With KRYSTEXXA, our uncontrolled gout biologic and other key growth driver, we announced top line results from our MIRROR open-label trial that demonstrated a 79% complete response rate when used with methotrexate. This result is roughly double the 42% rate seen with the KRYSTEXXA in its Phase III program and was the third consistent data set with a complete response rate of 79% or better. Based on expectations for continued adoption of KRYSTEXXA with methotrexate, continued growth of new and existing accounts and further penetration in nephrology, we increased our KRYSTEXXA peak U.S. net sales estimate to more than $1 billion earlier this year. We also increased the peak U.S. net sales estimate for TEPEZZA to more than $1 billion.

We significantly improved our capital structure in 2019, paying down $575 million of gross debt, extending our debt maturities and reducing our annualized net interest expense by more than 40%. Our strong balance sheet puts us in a great position to acquire or in-license medicines to expand our development stage pipeline.

And this morning, we issued full year 2020 guidance of $1.4 billion to $1.42 billion in net sales and $485 million to $500 million of adjusted EBITDA. Paul will go through this in more detail.

As we look to 2021 and beyond, we expect to generate significant operating margin expansion, driven primarily by the growth of TEPEZZA and KRYSTEXXA. We believe our double-digit net sales growth and strong double-digit earnings growth targets over the 2020 to 2023 time frame will make Horizon one of the fastest-growing companies in our space.

I'll now provide additional commentary on our key medicines, beginning with TEPEZZA. Last year was certainly a landmark year for TEPEZZA. It began with the February release of our Phase III trial results, with a primary outcome of 83% of patients achieving a dramatic improvement in proptosis versus 9% for placebo. We submitted our BLA in July, ahead of expectations. And following a highly successful FDA advisory committee meeting in December, we received early FDA approval on January 21. We are pleased to be the first company to provide thyroid eye disease patients an approved medicine to treat this rare vision-threatening and disfiguring disease.

Our launch is off to a strong start. The patient and physician feedback we've received exemplifies our vision at Horizon to go to incredible lengths to make health care priority not just a privilege. In fact, 1 TED patient was scheduled for his strabismus surgery, which is a complex eye alignment surgery, and [we're] following our first physician education program, this surgeon decided TEPEZZA would be a better option. And there are many more stories like that.

It's also a momentous stay for us on February 5 when the first TEPEZZA patient started treatment less than 2 weeks after approval. This substantial interest certainly reflects the promise of TEPEZZA. It's also due to the significant market education efforts we started well before approval. Our 100-person TEPEZZA team has been in the market since last July, building key relationships and educating key stakeholders.

Our strategy for TEPEZZA is focused in 4 key areas: first, establish the market structure and simplify the patient journey, which has been long, poorly defined and was very frustrating given there were no approved medicine or even standard of care; second, educate all stakeholders on TED and TEPEZZA, including physicians, patients, patient advocacy organizations, sites of care or infusion centers as well as payers; third, support the launch with our comprehensive high-touch patient-centric model; and fourth, facilitate access to TEPEZZA by establishing infusion site-of-care referral network, which is so important for this medicine.

While still very early in our launch, about a month in, we've made excellent progress. Since approval, our team has called on over 75% of our 1,300 top-tier physician accounts. We now have more than 500 patient enrollment forms, or PEFs, in the queue, which has far achieved our expectations at this early date. PEFs are similar to prescriptions or benefit investigations and are an indication of this strong initial demand.

Importantly, about 10% of the PEFs we've received are from physicians that are not our priority targets, which reflects a significant interest in the broader TED community for TEPEZZA. The vast majority of the physicians submitting PEFs are oculoplastic surgeons or from ophthalmology subspecialties. While this PEF number indicates very strong demand, conversion remains subject to payer and reimbursement dynamics, including up to a 60-, 90-day delay to infusion, while we have -- wait for commercial policy decisions and formularies as well as temporary J-Code and formulary access across both commercial and government plans.

Like all Part B infused medicines, we launched TEPEZZA with a temporary J-Code. We submitted our application in early February for a permanent J-Code that we expect will go into effect on October 1. With this permanent code, we anticipate that Medicare reimbursement process should become much more efficient. Our payer team has meetings scheduled with nearly 70% of our top payer targets, representing nearly 80% of total lives. Conversations related to access and coverage have been positive at this point in time. Our site-of-care team has made great progress as well. Since approval, they have activated more than 150 infusion centers, including regional and national accounts. Activated accounts are now ready to administer TEPEZZA, provided the payer approves coverage.

Finally, our direct-to-patient and direct-to-physician media campaigns have been highly successful. Given the disfiguring and vision-threatening nature of TED and the fact that 2/3 of patients are female, this is a patient population that can be activated to ask for TEPEZZA themselves. So we're not surprised that visitors of tepezza.com have been very engaged. In fact, click-through rates or the percentage of people clicking our ad and then go to our site have been running at more than 20%, dramatically higher than the industry standard of 3% to 5%, which underscores exceptionally high interest in TEPEZZA.

There has been a significant level of social media engagement from physicians, patients and even infusion centers across Twitter, Facebook and Instagram. We are very pleased that the community is so enthusiastic about the promise for TEPEZZA. Based on early success we've had to date, we continue to feel very confident in our more than $1 billion peak U.S. net sales expectation given the significant unmet need in this market.

We'll now briefly cover orphan and rheumatology segment, which represented approximately 75% of our total net sales and increased 14% in the fourth quarter. KRYSTEXXA was again the major driver of our performance, with fourth quarter net sales increasing 33%, driven by strong bio growth. We also exceeded our full year growth target of more than 25%, ending the year with growth of 32%.

We increased our KRYSTEXXA peak U.S. net sales expectation to more than $1 billion earlier this year, expect more than 25% growth again in 2020. The commercial, medical affairs and clinical teams have done a fantastic job of reinvigorating this brand. Not many 9-year-old medicines can lay claim to this type of growth. Even so, only 4% of the 100,000 addressable patients in the United States used KRYSTEXXA in 2019, meaning there's substantial opportunity for continued growth. We see 3 areas of growth for KRYSTEXXA: continuing to expand existing accounts and new accounts; increasing use of KRYSTEXXA with immunomodulators, such as methotrexate; and the continued acceleration of growth in the nephrology space. We're seeing increased uptake of KRYSTEXXA from the efforts of our dedicated nephrology sales force we put in place last year.

Physicians are using immunomodulators, such as methotrexate, more frequently as they continue to see evidence that it dramatically increases the KRYSTEXXA patient response rate. This includes positive data generated by 2 external investigators that demonstrated complete response rate of 100% and 80% when methotrexate was used with KRYSTEXXA. In January, we added to this body of evidence with the top line results from our MIRROR open-label trial that demonstrated that adding methotrexate to KRYSTEXXA resulted in a significant 79% complete response rate, almost doubling the rate seen in the Phase III clinical program.

A separate investigator recently published use of KRYSTEXXA with multiple immunomodulators, including methotrexate, azathioprine and cyclosporine, and also achieved a complete response rate of 100% in those patients. We've analyzed claims data to understand the growth and physician use of immunomodulators with KRYSTEXXA.

In early 2019, it was running in the single digits. We recently reviewed data through October last year before our MIRROR open-label results were public, which showed that physician use has grown to the low double digits. For KRYSTEXXA use of methotrexate, the response rate is significantly higher, allowing for patients to potentially stay on therapy longer. This higher likelihood of patient success increases physician confidence in prescribing KRYSTEXXA to more of the patients in their care.

Moving on to our rare disease medicines. Demand remains strong, driven by improved compliance and net patient growth. Average shipping patients increased mid-single digits across ACTIMMUNE, RAVICTI and PROCYSBI combined for the quarter. With expanded indications for PROCYSBI and RAVICTI, many new patients are younger, starting treatment on lower doses, which will typically increase as they grow older.

Our strategy is driven by patient identification, diagnosis and ongoing support of patients throughout their treatment journey.

I'll now turn the call over to Liz, who will discuss our R&D progress in more detail. Liz led the TEPEZZA Phase III clinical program, and the TEPEZZA advisory committee meeting was integrally important in our success with TEPEZZA and early approval. Liz is leading our clinical development organization. Liz?

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Elizabeth Thompson, [4]

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Thank you, Tim, and good morning, everyone. I'm pleased to be with you today to provide an update on our key pipeline programs, beginning with TEPEZZA. The approval of TEPEZZA in January was the culmination of a tremendous amount of work. This effort spanned our organization, but it wouldn't have happened without the patients living with thyroid eye disease and the physicians who partnered with us on the clinical development program. I echo Tim's comments about how pleased we are to bring this important new medicine to thyroid eye disease patients, who until now had no other options.

Shortly after approval, the TEPEZZA Phase III results were published in the New England Journal of Medicine. It's a mark of the importance of these data that the results of both TEPEZZA Phase II and Phase III were published in this esteemed medical journal. We anticipate sharing additional data this year at key conferences for ophthalmologists, oculoplastic surgeons and endocrinologists.

We continue to advance OPTIC-X, the extension trial of the TEPEZZA Phase III trial. OPTIC-X was designed to explore whether patients who lose response off-drug after the initial 24 weeks of treatment would benefit from retreatment and whether nonresponders from the initial 24 weeks of treatment during the Phase III trial would benefit from longer treatment. We expect to report top line results on OPTIC-X early next year.

Now that TEPEZZA is on the market for thyroid eye disease, we're evaluating other indications to maximize the value of this medicine for patients. By blocking the IGF-1 receptor, TEPEZZA may have the potential to positively impact fibrotic processes in other diseases. To further evaluate this potential, we are embarking on an exploratory trial in diffuse cutaneous scleroderma, which we anticipate initiating midyear.

Diffuse cutaneous scleroderma, a subset of scleroderma, is a rare, chronic and systemic autoimmune disease marked by fibrosis, including hardening of the skin and internal organs, potentially causing significant organ damage. There are roughly 30,000 diagnosed patients in the U.S., primarily managed by rheumatologists, but there are no approved treatments for this rare disease.

It was a quarter of important developments for KRYSTEXXA as well. We continued our efforts to maximize the benefit that KRYSTEXXA offers patients with uncontrolled gout through our 2 MIRROR immunomodulation trials. The MIRROR program was designed to evaluate whether methotrexate can help dampen the immune response to KRYSTEXXA, and thereby increase the patient response rate, allowing more patients to complete a full course of therapy. We have results in hand now from the first disease, the MIRROR open-label trial, showing that 11 of 14 enrolled patients achieved a complete response, and we've submitted these data for presentation at a medical meeting later in the year. Our 135-patient MIRROR randomized clinical trial progressed during the quarter, and we're on track to complete enrollment midyear. Data are expected in 2021. And if positive, we would pursue an update to the KRYSTEXXA prescribing information.

We also continue to advance PROTECT, our 20-patient open-label trial, evaluating KRYSTEXXA in kidney transplant patients with uncontrolled gout. Kidney transplant patients have more than a tenfold higher prevalence of gout when compared to the general population, and chronically elevated levels of serum uric acid can be associated with transplant organ rejection. We believe this trial will provide helpful data to nephrologists in treating high-need patients.

And finally, in line with our strategy to maximize the value of our medicines, we'll be initiating an open-label trial with KRYSTEXXA to evaluate a significantly shorter infusion duration. Today, the infusion process takes approximately 2 hours. Reducing that time would meaningfully improve convenience for patients, which we believe should also result in greater treatment compliance. We expect a midyear start to this trial. We're keenly focused on building our pipeline through M&A and licensing, and my team is actively working with our business development colleagues to evaluate additional medicines to add to our pipeline.

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

Fourth quarter net sales of $363.5 million were driven by 14% growth of our orphan and rheumatology segment. Net sales for this segment were $269.8 million, and operating income was $95.4 million. This was in line with our expectations and reflects the significant investments that we have been making in the launch of TEPEZZA as well as our pipeline.

Net sales for the inflammation segment were $93.7 million, and segment operating income was $44 million. For the full year 2019, we generated higher operating income in this segment compared to 2018, despite modestly lower net sales. Our strategy is working. We are reinvesting the cash flow generated from this segment into our key growth drivers, TEPEZZA and KRYSTEXXA.

As noted in our press release this morning, beginning with the first quarter of 2020, we are changing the name of the orphan and rheumatology segment to the orphan segment, and are restructuring our commercial operations to move RAYOS to the inflammation segment as it shares similar call points with the other inflammation medicines. Therefore, beginning with the first quarter results, RAYOS will be reflected in the inflammation segment. In addition, with its launch in the first quarter, TEPEZZA net sales will be included in the orphan segment.

Our non-GAAP fourth quarter gross profit ratio was 90% of net sales. Non-GAAP operating expenses for the fourth quarter were $187.7 million. This included non-GAAP R&D expense of $26.5 million, reflecting investment in TEPEZZA as well as our gout pipeline programs. Non-GAAP SG&A expense was $161.1 million, reflecting increased launch preparation expenses for TEPEZZA. Adjusted EBITDA was $139.9 million for the fourth quarter, exceeding expectations. The non-GAAP income tax rate in the fourth quarter was 9%, resulting in a 6.7% non-GAAP tax rate for the full year.

On a GAAP basis, in the fourth quarter, we recorded a tax benefit of $559.9 million, primarily related to an intercompany transfer of intellectual property assets. Non-GAAP net income was $116.6 million, and non-GAAP diluted earnings per share were $0.56. The weighted average shares outstanding used to calculate fourth quarter 2019 non-GAAP diluted EPS were 211 million shares. This higher share count includes the impact of the potential conversion of our $400 million of exchangeable notes into ordinary shares. Given our recent share price appreciation, these notes are approaching the point where we can call them. Based on our current expectations, we are required to include the shares from this potential conversion in our fourth quarter and full year 2019 GAAP and non-GAAP diluted EPS calculations. Despite this impact, our non-GAAP diluted EPS still exceeded expectations for the fourth quarter and the full year. Non-GAAP operating cash flow was $192 million in the fourth quarter and $446.4 million for the full year.

As of December 31, cash and cash equivalents were $1.076 billion, giving us significant flexibility to manage our business, accommodate our operations and expand our pipeline.

As Tim highlighted, we significantly strengthened our capital structure in 2019, achieving our objective to be more closely aligned with profitable, R&D-focused biopharma peers, which generally have lower leverage levels.

We ended the year in a significantly stronger position, with gross debt of $1.418 billion and net debt of $341.7 million. Our net debt to last 12 months adjusted EBITDA leverage ratio of 0.7x is about 1/3 of our 2.3x net leverage at the end of 2018. The rating agencies have recognized us with S&P and Moody's, both upgrading our corporate ratings to BB- and BA3, respectively.

Moving to our outlook for 2020. This morning, we provided full year net sales guidance of $1.4 billion to $1.42 billion, underscoring our expectation for another year of strong commercial execution, driven by KRYSTEXXA, TEPEZZA and our other orphan medicines.

For KRYSTEXXA, we project net sales growth of greater than 25% in 2020, based on expectations for continued strong demand from rheumatology and accelerating nephrology adoption.

For TEPEZZA, as we mentioned on our approval call, we expect 2020 launch year net sales to be in the range of $30 million to $40 million. This assumes a more gradual net sales uptake in the first half, given the additional time required for the manual approval process associated with a temporary J-Code and the establishment of a referral infusion network. We expect the majority of our 2020 sales to occur in the second half of the year as the approval process becomes more efficient after the permanent J-Code takes effect on October 1.

We expect less than $5 million for VIMOVO net sales in our 2020 guidance, given the expected at-risk generic launch.

We expect full year adjusted EBITDA in the range of $485 million to $500 million, reflecting strong net sales performance, offset by our launch year investments for TEPEZZA and additional investments in our pipeline programs.

Our non-GAAP gross profit ratio is expected to be approximately 90%. We expect operating expenses to increase in 2020, primarily related to a year-over-year increase in SG&A for the launch of TEPEZZA, which has been reflected in our adjusted EBITDA guidance. We continue to expect our non-GAAP R&D expense as a percentage of net sales to be in the mid- to high single digits for 2020. We expect full year non-GAAP net interest expense to be approximately $50 million as a result of our capital structure improvements in 2019.

For our income tax rate, we expect the full year non-GAAP tax rate in the high single digits. 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 double digits in 2020, decreasing in 2021 and beyond. 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 2020 weighted average diluted share count to be in the range of 210 million to 212 million shares, similar to the fourth quarter of 2019.

And finally, let me touch on the first quarter. As we discuss every year, first quarter net sales are generally the lowest of the year, impacted by seasonality as patients experience changes in their health insurance coverage. In addition, first quarter operating expenses are also typically the highest of the year, and this year, even more so, driven by higher TEPEZZA launch expenses early in the year, with the majority of TEPEZZA sales in the second half of the year. Therefore, we expect first quarter net sales to be somewhat more than 20% of our full year 2020 net sales, in line with prior years. We expect first quarter adjusted EBITDA to be in the low double digits as a percentage of our full year 2020 adjusted EBITDA, also in line with prior years.

With that, I'll turn it over to Tim for his 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. 2019 was a year of tremendous progress and performance at Horizon, marked by the achievement of several important milestones. It is also a testament to the strong execution of our strategy to maximize our growth drivers and expand our pipeline for sustainable growth. We generated record net sales of $1.3 billion and adjusted EBITDA of $483 million, despite significant investment made in the development and U.S. launch preparations for TEPEZZA.

We also invested in several new R&D programs for KRYSTEXXA to maximize the benefit it offers for patients and to enhance our leadership in uncontrolled gout. And we recently extended our pipeline with the addition of 2 new programs. During 2019, we significantly improved our capital structure and aligned it more closely with our profitable biopharma peers, reducing gross debt by $575 million, extending our debt maturities and lowering our annualized net interest expense by more than 40%.

Our continued strong execution has generated substantial value for shareholders, with our total shareholder return consistently exceeding the NASDAQ biotechnology index over the last 1, 3 and 5 years. We're entering 2020 in our strongest position ever as a company, with the year already off to an excellent start. We look forward to updating you on our progress throughout this year.

Thank you, and we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Annabel Samimy of Stifel.

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Annabel Eva Samimy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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Congratulations on a great year. So I wanted to ask you about TEPEZZA. Clearly, it looks like you've got some very high demand -- high early demand for it. Do you think that there's going to be a big bolus of patients that were waiting for this drug, and then it tapers off? Any metrics you can share with the thyroid eyes to see how many, I guess, investigations have done from patients? And how difficult is it to bring patients out of the woodwork or essentially find these patients?

And then secondly, on KRYSTEXXA. Obviously, they are having a -- you're having a -- you had a very good end of year for fourth quarter. Just wondering if there's anything that's onetime. Or what part of it is persistent versus what was the big bolus in the fourth quarter? And then maybe with the increasing use of methotrexate, you can tell us what the average number of vials being used now is?

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

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I'll start at the back. The vials for patient has not substantially changed as yet. In the fourth quarter, there were no onetime events, and we saw 11% sequential growth over the third quarter. So we just continued execution of the business. And as we get more questions, we can go into more detail.

With TEPEZZA, when you look at the prevalence versus incidence in the active TED patient population that we are promoting to, as the patients have the disease from 1 to 3 years, you do see an overlap from 1 year to the next, allowing for what we expect to be a bolus of patients. We do expect an incident annual population of 15,000 to 20,000, where we are marketing the medicine. But certainly, there's been a significant interest as evidenced by the patient enrollment or prescriptions that we received to date. Your question about online has been of a pretty substantial interest. I mentioned just a click-through rate of 20%, which is 7x what we would typically expect, and we've had over 1,000 patient enrollment forms downloaded from our website alone. So highly activated and engaged patient population. About 20% of our total PEFs have come from outside our target physicians. So there's broad interest from both patients and physicians. So we're really excited about progress. And the key thing for us is evaluating the reimbursement and the speed to which the manual process per patient flows through and allows for treatment of these patients.

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Operator [4]

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Our next question comes from David Risinger of Morgan Stanley.

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David Reed Risinger, Morgan Stanley, Research Division - MD in Equity Research and United States Pharmaceuticals Analyst [5]

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Congrats, Tim and Paul, on very strong execution. So my 2 questions are, first, could you just frame your primary care assumptions, which were factored into your double-digit revenue growth target for 2020 to 2023?

And then second, Paul, if you could just flag any modeling considerations for the first quarter of 2020? Obviously, there are always a lot of anomalies in the primary care segment in the first quarter. So any specific modeling considerations we should be keeping in mind?

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

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Thanks, Dave. So when -- as we look at the inflammation or primary care business, our goal is to continue to manage the decline of this business while driving PENNSAID 2% and DUEXIS, we assume less than 5 million for the year for VIMOVO. And all of this is reflected in our guidance.

And to your comment on the 2020 to 2023 time frame, on the back end of that, we'd expect DUEXIS and RAYOS to become generic. So we will continue to manage it. And in fact, we saw significant increase in the margin from the inflammation business in 2019 with roughly similar sales. So we continue to execute that business well, drive improving margins. I think it was 47% operating income margins. And we see that continuing to be offset by the acceleration of KRYSTEXXA and uptake of TEPEZZA as we move through the launch phase. Paul?

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Paul W. Hoelscher, Horizon Therapeutics Public Limited Company - Executive VP & CFO [7]

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And David, with the first quarter, as we said earlier, with the seasonality of the business and with the ramp-up of TEPEZZA throughout the year, we expect the first quarter sales and first quarter EBITDA to be the lowest. And as we said, from a sales standpoint, we think it will be somewhat more than 20% of our full year sales in the first quarter and adjusted EBITDA to be low double digits as a percentage of the full year adjusted EBITDA in the first quarter.

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Operator [8]

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Our next question comes from David Amsellem of Piper Sandler.

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David A. Amsellem, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [9]

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So just a few KRYSTEXXA-related questions. Wanted to get your latest thoughts on the portion of docs that you think are using the product in combination with methotrexate or other immunomodulatory agents? Also the current mix between nephrologists and rheumatologists at this point? I know you cited growth in the nephrology community.

And then lastly, as the footprints of the product grows, has the payer landscape changed in any meaningful way? In other words, are you seeing any new payer roadblocks?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [10]

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Sure. On the payer side, we have not seen any increase in -- or decrease in access or any substantial roadblocks put in place. These are refractory patients with uncontrolled gout, and we certainly look at it. It's an acute treatment for generally between 6 and 9 months of treatment. So we see high levels of access and expect that to continue. Vikram can address the mix and how methotrexate co-used with KRYSTEXXA is tracking.

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Vikram Karnani, Horizon Therapeutics Public Limited Company - Executive VP & Chief Commercial Officer [11]

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Yes. Thanks, Tim. So on the percentage of physicians using methotrexate or immunomodulation, I think, as Tim mentioned in his comments, we -- in the prior year, we had seen about single digits to mid-single digits and that has grown in this most recent year to the low double digits. So we're definitely seeing a trend in the right direction.

As far as the split between rheumatology and nephrology, nephrology continues to grow. There's a significant amount of interest from nephrologists. In fact, when we look at benefits investigations, they are continuing to grow in the double digits quarter-over-quarter. However, as we've said before, it is difficult to pinpoint exactly where vial sales come from in relation to nephrology, just because very often they would refer that patient to a rheumatologist. And in that case, in our data, it appears as though a rheumatologist was the one who was the treating physician. So a lot of manual work has to be done, which both when we've done that, we have gone back and seen that our interest from nephrology continues.

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Operator [12]

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

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Jason Matthew Gerberry, BofA Merrill Lynch, Research Division - MD in US Equity Research [13]

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First one for me is, just wanted to confirm some of our payer research indicates that payers may not be implementing any sort of generic step-through for TEPEZZA or any severity-based thresholds for treatment. So wanted to just share notes and curious if that's consistent with what you guys are seeing.

And then secondly, on the business development front, Tim, I know, historically, you don't want to go down the path of talking about specific areas of focus. But given that you're operating from a position of strength this year from terms of your portfolio, is it a priority to do a deal in 2020 to bolster your mid-stage pipeline?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [14]

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Thanks, Jason. So definitely it is a priority, whereas last year, our focus was on paying down our gross debt and reducing interest on our leverage ratio. And I'll walk through the TEPEZZA question, and Andy can give some color around that after.

With TEPEZZA, like you mentioned and noted in your survey, so far we're seeing generally positive feedback. The first steps on the commercial side are for people to put draft policies out there that will lead to P&T meetings, and ultimately formulary. We have had some hospitals that are willing to move patients. We've had -- it's under 10 patients treated at this point in time. So we have seen those patients go through without generic step-throughs, which would really be steroids. Importantly, steroids have -- in the 1 double-blind controlled trial, did not show any benefit in reducing proptosis or diplopia. So there really is no step-through medically that relates to TEPEZZA. We're also not seeing, at least early, severity-based guidelines. And I think, what you mean there is it being restricted to the population that we studied in our clinical program. That is -- our promotion is focused on those 15,000 to 20,000 patients. And I think we're seeing with those patient enrollment forms, a population consistent with what we expected, active patients that need imminent treatment with TEPEZZA.

So, so far, there's been a lot of positive discussions. But as we continue to say, the next few months will see the translation of that to formulary approvals and permanent J-Code on the Medicare side. So I think we're hearing similar to what you're hearing at this point in time. I don't know, maybe Andy could highlight some of your thoughts.

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Andy Pasternak, Horizon Therapeutics Public Limited Company - Executive VP & Chief Business Officer [15]

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Sure. So Jason, as Tim said, we're very focused right now on expanding our clinical stage development pipeline. I think we're seeing very good opportunities that are both on strategy for us and actionable in terms of others by having upcoming capital events or seeking a partner from a capability or financial perspective. So we are quite active at the moment.

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Operator [16]

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

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Gary Jay Nachman, BMO Capital Markets Equity Research - Analyst [17]

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First on TEPEZZA. As you've been creating awareness of TED to help better identify these patients, do you think you'll get used initially just in active patients? Or could you get some use in inactive patients as well?

And then just talk through the different physician groups that you're targeting during the initial launch phase and managing the need for infusion, how that's been progressing and a little bit more on the sites of care that you had mentioned?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [18]

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Sure. Thanks, Gary. As you noted, we've seen significant awareness from all different perspectives here, strong demand based on patient enrollment forms and even the downloading of over 1,000 on our tepezza.com website. As we said in our launch call or approval call, our focus is on the 15,000 to 20,000 patients who have active disease, and that's where we've generated our evidence, and we feel strong about the compelling benefit in those patients. At this point, that's been the predominance of patients that we're seeing. We -- I've not seen a tremendous number of patients that would be classified as inactive. A small percentage of inactive patients do reactivate, as Ray Douglas said, has gone through an advisory committee meeting. But right now, it's focused on active patients.

To your question around our focus from a physician standpoint, we're calling on endocrinologists, ophthalmologists and oculoplastic surgeons. The patient enrollment forms or prescriptions we've seen so far have come from the oculoplastic surgeons and other subspecialties, like neuro-ophthalmologists in the ophthalmology space. So we expect endos to better understand the disease, diagnose it early, get those patients over to the ophthalmologist or oculoplastic surgeon for treatment. And that gets to your last question around sites of care. We had called on and been actively educating about 300 sites of care in the prelaunch phase. We've already in the first month had 150 of these sites-of-care centers activated, and they're ready today to infuse TEPEZZA. So that network continues to grow. We -- I think we're in a even better place than we expected at this point in time. And really, those types of care are waiting for that reimbursement process to kick in. And I think we're prepared to handle the demand through those sites of care as we expected.

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Operator [19]

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Our next question comes from Dana Flanders of Guggenheim.

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Dana Carver Flanders, Guggenheim Securities, LLC, Research Division - Senior Analyst [20]

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Congratulations on the good quarter. I just had 2 quick ones on the pipeline, if I could. Could you just help us frame the importance of the PROTECT trial, just relative to the broader opportunity in nephrology? I know you've mentioned nephrology growth is picking up. So just curious how this trial could play into a further acceleration in nephrology.

And then my second quick one, on the preclinical gout programs, any update that we should expect this year? And if we could see any of those move forward?

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [21]

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Sure. On the preclinical compounds, they continue to progress through IND-enabling time lines, and we have not guided to specific time line to move into human trials, but they continue to progress with the PROTECT trial. Maybe Vikram can talk a little bit about defining the market. And Liz, you can touch upon what we see as a potential clinical benefit. Vikram?

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

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Thanks, Tim. So the kidney transplant population that has affected the uncontrolled gout is about 30,000 patients, of which we believe 10,000 of those patients are addressable. This is included in the roughly 50,000 patients that we have discussed before. These patients, as we have discussed, have 10x higher rates of gout, and those with gout have higher mortality rates. So the unmet need here is very dire. Most patients are very difficult to treat. One of the interesting findings here is, they're already on immunosuppressives post-transplant, which goes also right in line with our immunomodulation strategy with KRYSTEXXA. Liz?

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Elizabeth Thompson, [23]

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Absolutely. So echoing what Vikram said, we see these as one of the highest unmet need populations in the nephrology space and that echoes what we hear from nephrologists. The PROTECT study was designed to provide data that support that clinicians can safely and effectively use KRYSTEXXA to manage uncontrolled gout in this patient population. So we think these will be very helpful data for nephrologists.

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Operator [24]

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Our next question comes from Ken Cacciatore of Cowen.

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Kenneth Charles Cacciatore, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

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Congratulations on all the progress here. Just back to TEPEZZA briefly, I think, at the launch call or the approval call, you talked about the top 130 clinicians had about 4,500 patients. And now you're saying about -- you've reached about 75% of the 1,300 treating clinicians. So just as you talk about the 15,000 to 20,000 patients, you have, obviously, a lot of data coming in from your sales force. So is that kind of eyes on, basically, you've identified those 15,000 to 20,000? Or just as you kind of canvas the landscape and get the feedback from the clinician, that just seems like the right number at this point?

And then on KRYSTEXXA, you do have a competitor that is going to be releasing head-to-head data shortly from Selecta. Just any way you can frame that for us as we go into that potential disclosure?

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

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Sure. Thanks, Ken. First of all, on competitive product and -- first of all, in all of our guidance, we assume a competitor is in the market, and we'll obtain some shares. So we don't have -- expect with any results to have it impact our greater than $1 billion guidance. If you look at their strategy, they're comparing their medicine, which includes immunomodulator, to KRYSTEXXA without immunomodulation. And as you've seen, we've seen a dramatic increase in the complete response rate with KRYSTEXXA plus methotrexate, the most commonly used immunomodulator in rheumatology, with 100% of rheumatologists using it. So we feel confident that our strategy will be the best option for patients, and that's indicated in the great success we've had to date.

With TEPEZZA, as you mentioned, we have 1,300 targets of our total of 5,000. We've called in over 75% of 1,300. When we look at the population, each year, there is 15,000 to 20,000 patients. So I do see -- I think we're seeing a majority of them with our 5,000 targets, as you mentioned, about 4,500 with the focus 1,300 patients. So everything is as expected. But importantly, when you look at our digital and direct-to-consumer efforts, we have seen substantial instances. As I mentioned in my remarks, we've had over 1,000 patient enrollment forms downloaded from the tepezza.com website. So our efforts within the physician targets are hitting that incident patients as well as the rollover patients who continue to have active disease. But importantly, our activities will continue to scale on the digital consumer side to ensure that we have patients who are not seen by our target physicians, have access, and that is what we've seen with about 20% of our patient enrollment forms to date. So very good progress. We think we can hit this audience fully with our commercial effort.

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Operator [27]

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Our next question comes from David Steinberg of Jefferies.

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David Michael Steinberg, Jefferies LLC, Research Division - Specialty Pharma Analyst & Equity Analyst [28]

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Last year, you added a large team in advance of the approval and launch of TEPEZZA. And Paul, I think you pointed to the fact that by Q4 that the SG&A figure should be roughly how we should think about SG&A on a quarterly basis going forward, plus inflation. Is that still the case? So around $161,000 -- $161 million? Or do you expect to add more folks to the team?

And then secondly, I know ex U.S., you've previously indicated that you've had initial discussions with the EU, both your predecessor company, River Vision, and Horizon about a pathway for approval, but you're going to wait until the approval and further discussions. I know it's only been a month. Have you had any more discussions and any initial thoughts on a potential rollout in Europe in the coming year?

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

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Thanks, Dave. Outside the United States, as we mentioned, we do have plans, and we're finalizing those plans with our external opinion leaders and advisers on the next step approach with the EMA, which would be 2-part looking for orphan drug designation and then what is the -- would be the best plan for a submission. As a reminder, biologics are only through centralized procedure through EMA, not offering the regional approaches you can with small molecules. So we will continue to update as we make progress there.

The other on the TEPEZZA. I think that we do not expect to add substantial employees or headcount to the TEPEZZA team at this point in time. Right now, we're focused on our 100-person team. We've got the right-sized sales force. We can hit the patients, as I mentioned in my prior remarks, and we feel confident that we can drive uptake with that team. Paul will speak to the impact of the broader launch expenses and how we expect to see that.

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Paul W. Hoelscher, Horizon Therapeutics Public Limited Company - Executive VP & CFO [30]

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Yes. And David, we -- as I said earlier, we do expect operating expenses to increase in 2020, primarily related to a year-over-year increase related to the launch of TEPEZZA. And I think we've said before, too, that 2020 SG&A will -- and OpEx will annualize at a somewhat higher rate than the fourth quarter. And as I said earlier, too, before, the first quarter is our -- probably our highest year -- highest quarter of OpEx expense, along with our lowest sales, which makes the first quarter EBITDA that lower, too.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [31]

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Yes. Real focused on -- with the early approval that we saw with TEPEZZA, we've accelerated our launch expenses, launch meeting, national sales meeting, all these activities earlier than we would have expected. So expect the launch expenses to focus there with TEPEZZA sales ramping up primarily in the second half. So that's how, based on our guidance, we're sequencing and led to Paul's guidance for about 20% of the year in revenue in low single digits for the year -- for the first quarter and adjusted EBITDA.

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Tina E. Ventura, Horizon Therapeutics Public Limited Company - SVP of IR [32]

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Low double digits.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [33]

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Low double digits, I mean. Thank you.

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Operator [34]

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Our next question comes from Graig Suvannavejh of Goldman Sachs.

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Graig Suvannavejh, Goldman Sachs Group Inc., Research Division - Executive Director & Senior Equity Research Analyst [35]

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Maybe this question is really more for Andy, just on BD. Now that you've, as an organization, has certainly been able to bring in products that have blockbuster potential. On a go-forward basis, is the strategy to find that one product that similarly has that profile? Or is the near-term focus to maybe add some smaller products that maybe we would consider more like singles, doubles or triples?

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Andy Pasternak, Horizon Therapeutics Public Limited Company - Executive VP & Chief Business Officer [36]

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I think -- thanks for the question, Graig. I think as we continue to grow as a company, we obviously want to bring in therapies that have the potential to move the needle financially and, of course, provide patient benefit. So I don't think we will be proactively seeking what you might consider to be a small product from a commercial potential perspective. Then, again, the only thing I'd add to that is we are focused on clinical stage programs. So as you think about the timing for when those might generate revenue for us, those are not necessarily going to be near term.

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Timothy P. Walbert, Horizon Therapeutics Public Limited Company - Chairman, President & CEO [37]

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Real focus is on the 2025 and beyond with -- as we went through in our guidance, '20 to '23, we expect strong top line double-digit net sales and even stronger double-digit EBITDA growth. So we can feel strong near-term growth and want to build a pipeline for the long-term success of the business.

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Tina E. Ventura, Horizon Therapeutics Public Limited Company - SVP of IR [38]

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

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Operator [39]

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