HZNP (2019 - Q2)

Good morning and thank you for standing by. Welcome to the Horizon Therapeutics PLC Second Quarter 2019 Earnings Conference Call. As a reminder, today's conference call is being recorded.I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations. Ma'am, you may begin. Tina Ven

Thank you, Demetria. 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; Bob Carey, Executive Vice President, Chief Business Officer; and Vikram Karnani, Executive Vice President, Chief Commercial Officer.Tim will provide a high-level review of the second quarter and an update on the business after which Shao-Lee will discuss our R&D programs. 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 will be making certain forward-looking statements, including statements about financial projections, our business strategy and 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 was issued this morning. You are cautioned not to place undue reliance on these forward-looking statements, and Horizon disclaims any obligation to update such statements.In addition, on today's conference call, non-GAAP financial measures will be used. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and other filings from today that are available on our Investor website at www.horizonpharma.com.I will now turn the call over to Tim.

Thank you, Tina, and good morning, everyone.We delivered another outstanding quarter, with net sales and adjusted EBITDA both up 6% year-over-year, outperforming expectations. Importantly, net sales of our Orphan and Rheumatology segment grew 11%, driven by 36% net sales growth of the KRYSTEXXA. As a result, we are again raising our full-year net sales and adjusted EBITDA guidance.Our focus on execution drove our strong second quarter financial performance and several key milestones: First, our teprotumumab BLA submission in early July, an important step toward potentially bringing the first approved therapy to thousands of patients living with active thyroid eye disease; second, the initiation of our KRYSTEXXA, MIRROR trial in June, evaluating of adding methotrexate to KRYSTEXXA and increase the number of patients with uncontrolled gout who benefit from this medicine; and third, continued improvement to our capital structure to bring it in line with that of our rare disease biopharma peers.In addition to these milestones, we're very pleased to have Sue Mahony, join our Board last week. With more than 30 years of industry experience, including an 18-year tenure at Eli Lilly, Sue will significantly strengthen our Board capabilities. Her personal investment in the lives of patients aligns directly with our mission.I'll now recap our second quarter results and provide an update on our teprotumumab launch preparations.In the second quarter, we generated net sales of $321 million and adjusted EBITDA of $124 million. Our Orphan and Rheumatology segment, which is our strategic growth segment that makes some 70% of total net sales, drove our strong performance this quarter, increasing 11% year-over-year.Demand for our orphan medicines remains strong, driven by both improved compliance as well as patient growth. ACTIMMUNE net sales increased 7% year-over-year, PROCYSBI patients increased 8% year-over-year, and RAVICTI patients increased 6%. Since the last quarter, RAVICTI net sales were impacted by a few factors Paul will discuss shortly.RAYOS was another strong performer in the quarter with net sales growth of 51%, driven by continued strong execution by the RAYOS team. KRYSTEXXA was the major driver of our second quarter performance where net sales increased 36% as a result of our commercial team's ability to drive continued growth in both existing and new accounts, including uptake in nephrology. Vial growth remained strong, up approximately 30% through the first half of this year.With the continued momentum from KRYSTEXXA, we now expect net sales to increase more than 20% for the full year. And we still see significant untapped opportunity for KRYSTEXXA. For example, there's a great deal of tailwind in our existing accounts, as more and more physicians understand the full potential of KRYSTEXXA.We continue to expect KRYSTEXXA to generate annual peak U.S. net sales of more than $750 million. This underscores how much our commercial team has accomplished in three years since acquiring the medicine. We took an underperforming, undervalued asset and quadrupled its net sales, and we just reported 36% net sales growth this quarter. Not many nine-year old medicines can claim that type of growth. And we've transformed KRYSTEXXA to the point that Horizon is now one of the most recognized leaders in gout.KRYSTEXXA is a great example of how we optimize the value of our medicines through commercial execution, one of our hallmark strengths with thee threefold approach. First, we deeply understand the medicine, the disease and the market dynamics; second, we build the right team and the infrastructure to drive uptake, support our patients and take advantage of further opportunities; and third, we educate physicians through a highly experienced clinical team, investing in clinical data that is important to them and improve their understanding of the disease and its treatment.Executing on our commercial strategy has helped bring KRYSTEXXA to thousands more patients in need, which in turn has transformed its growth trajectory. We're employing this successful approach and preparing for the U.S. launch of teprotumumab. The TED market is similar to other rare diseases and that it needs to be developed from the ground up. Today, without an improved medicine for patients, there is no defined successful treatment path. The promise of teprotumumab is that for the first time patients with TED would have access to a groundbreaking alternative, allowing them to circumvent years of disease progression, multiple intrusive surgeries, vision impairment and even blindness.Given the dramatic efficacy of teprotumumab, we expect the current paradigm to shift, and that shift will require significant amount of disease education and market development. We've made a great deal of progress on both fronts since our update last quarter. Our sales force is higher, they have completed training and they are out in the field building relationships with the treating physician community, which includes oculoplastic surgeons, ophthalmologists and endocrinologists.In addition to our approximately 50% sales force, we've hired our patient educators, reimbursement specialists, and a dedicated site of care team. In total, this roughly 100-person team will support teprotumumab and the TED community. Together, they bring a tremendous level of talent for Horizon with broad collective experience and deep relationships within the physician community, as well as experience with infused medicines.Our ongoing market development access activities include educating the treating physicians on active TED and the importance and urgency of treatment, strengthening the co-management of the disease across key potential prescribers and establishing the treatment path, infrastructure referral network necessary for an infused therapy. This is especially important as ophthalmologists and endocrinologists rarely infuse medicines today. These physicians need to be educated on the processes involved to ensure patient access.Our medical affairs team including field medical liaisons supporting teprotumumab is also fully in place. We look forward to sharing Phase 3 teprotumumab data, a key ophthalmology and endocrinology meeting this fall. This includes the American Thyroid Association, and American Association of Ophthalmology meetings, as well the fall meeting of the American Society of Ophthalmic Plastic and Reconstructive Surgery or ASOPRS, where we will be presenting Phase 3 diplopia data for the first time.We're also engaging at meetings of specialty societies on the local and community level, partnering with organizations dedicated to infusion therapy and connecting with relevant patient advocacy groups. Also, we are building a strong foundation across a broad spectrum of TED stakeholders and engaging with each of them to ensure they understand the severity of TED, the patient journey and the urgency with which this disease needs to be treated.And we continue to see a tremendous amount of interest in teprotumumab, both from the physician and patient community, which is understandable given teprotumumab’s dramatic efficacy data and the fact that there is currently no approved treatment. That's why we're excited about the possibility of teprotumumab becoming a key treatment option for patients suffering from this vision threatening, serious and progressive disease, and also why we're pleased to recently announced the Expanded Access Program for teprotumumab, which Shao-Lee will discuss momentarily. This is an exciting time for us at Horizon and for the TED community as a whole.I will now turn it over to Shao-Lee to provide an update on R&D.

Thank you, Tim, and good morning, everyone.We continue to make excellent progress in R&D with several key developments. I'll start with teprotumumab, which was submitted for FDA approval in early July. As part of the submission, we requested priority review, given that teprotumumab has breakthrough therapy, orphan drug and fast track designations. The FDA has a 60-day filing review period to determine that the BLA is complete and acceptable for filing. If the FDA accepts the filing and grants priority review, we would expect a six-month review period, beginning on the filing acceptance date with potential approval in the first quarter of 2020.The BLA submission including results from both OPTIC, our Phase 3 trial, as well as results from the Phase 2 trial, which was published in the New England Journal of Medicine. OPTIC confirmed the Phase 2 results and also demonstrates a highly statistically significant effect on the primary endpoint of reduction in proptosis of 2 millimeters or more with an 82.9% response rate in the teprotumumab treatment group versus 9.5% in the placebo group and a p value of less than 0.001. All secondary endpoints were all also met with the P value less than or equal to 0.001.We presented additional Phase 3 data in endocrinology meeting in April that included the key secondary endpoint of absolute proptosis reduction. These data demonstrated that after the full six months course of therapy, the teprotumumab group achieved the proptosis reduction of 3.32 millimeters compared to 0.53 millimeters for placebo. We look forward to sharing additional data from Phase 3 trial at coming Ophthalmology and Endocrinology meeting later this year.TED is a serious, progressive and vision-threatening for autoimmune disease for which there is no FDA approved medical intervention. The disease is believed to be medically treatable only during the active stage. Once it progresses to the inactive stage, the effects are permanent and surgery becomes the only option. Multiple surgeries for eye may be required and even then results are not always optimal. Patients may still experience visual impairment, despite the surgical intervention. For patients to wait two years, the average length of active TED, for the disease to have burnout, also poses serious challenges. During its active stage, TED is painful and debilitating. Many patients can't close their eyelids; their eyes become dry and irritated, which ultimately can lead to corneal ulcerations.Today, patient are treated with steroids or other injectables that are off label and with no proven effectiveness on proptosis, which is a primary driver of morbidity in TED and can cause diplopia or double vision. Many feel stigmatized due to their appearance and can suffer from serious depression. The debilitating nature of the disease and the limited time frame for potential treatment underscore the urgency to treat, which is why we are working to make teprotumumab available as soon as possible, and which is why we were very pleased to have recently announced an Expanded Access Program for teprotumumab. This program was developed in partnership with the FDA and is designed to provide access to teprotumumab for patients who meet protocol eligibility criteria while the BLA is under review. Such patients might otherwise experience further progression of TED prior to potential approval.Moving now to KRYSTEXXA and our programs for uncontrolled gout. During the second quarter, we initiated our MIRROR immunomodulation trial, evaluating whether the administration of KRYSTEXXA in combination with methotrexate can increase the response rate of KRYSTEXXA, allowing more patients living with uncontrolled gout, to receive a full course of treatment. The randomized placebo-controlled trial is expected to enroll approximately 135 patients to receive either KRYSTEXXA plus or methotrexate or KRYSTEXXA plus placebo. The primary endpoint is defined as the proportion of patients maintaining serum uric acid levels of less than 6 milligrams per deciliter at month six.One of the reasons we're excited about the MIRROR trial is the positive results from a case series conducted by two external investigators, evaluating the administration of KRYSTEXXA with methotrexate on patient response. This original case series data was presented at the American College of Rheumatology Medical Meeting last fall with all nine sequential patient studies, who had uncontrolled gout, achieving positive response. This was defined as more than 80% of serum uric acid levels being maintained at less than 6 milligrams per deciliter during the observation period.In June at EULAR, the European League Against Rheumatism Meeting, investigators shared updated data including 10 sequential patients. All 10 patients completed the course of therapy and achieved a positive response. Gout was a topic of significant interest at EULAR. As we have previously noted, there's a growing body of evidence that the systemic impact of high serum uric acid levels and also the comorbidities associated with gout. One presentation was particularly compelling. It demonstrated in a randomized clinical trial that profoundly lowering serum uric acid levels led to improved kidney function in patients with diabetic nephropathy, suggesting that lowering serum uric acid could slow the progression of chronic kidney disease.Given the kidney transplant patients have more than a tenfold increase in the prevalence of gout when compared to the general population, and the chronically elevated levels of serum uric acid or associated with transplant organ rejection, we will be evaluating KRYSTEXXA in kidney transplantations with uncontrolled gout in our own study. On track to begin in the second half of this year, this study will serve to further inform nephrologists as to the use and effectiveness of KRYSTEXXA and its potential benefits for the chronic kidney disease patients with uncontrolled gout. Finally, we are making good progress in early stage gout programs. Our discovery and development collaboration with HemoShear has identified a number of novel targets and recently achieved a milestone of moving into the validation phase of those targets ahead of schedule.To conclude, the second quarter was one of significant progress, and I look forward to updating you again next quarter on the continued advancement of our programs. With that I will now turn the call over to Paul.

Thanks, Shao-Lee.My comments this morning will primarily focus on our non-GAAP results unless otherwise noted. Second quarter net sales of $320.6 million were driven by another quarter of strong commercial execution. Our Orphan and Rheumatology segment generated net sales of $223.5 million in the second quarter, an increase of 11%, driven primarily by KRYSTEXXA, along with RAYOS, PROCYSBI and ACTIMMUNE.Operating income for Orphan and Rheumatology was $74.5 million, representing an operating margin of 33%, in line with our expectations. As we have discussed previously, we are investing significantly in teprotumumab and in our rheumatology pipeline programs. We anticipate accretion to the margin profile of this segment over time as our investments drive higher net sales.Demand for RAVICTI remained strong with year-over-year patient growth up 6%. Similar to the first quarter, net sales in the quarter were impacted by a lower net price related to higher Medicaid rebate accruals, which we do not anticipate in the second half of the year. RAVICTI net sales were also impacted by the divestiture of the ex-U.S. rights late last year. As a result of both factors, RAVICTI net sales decreased 11%.Net sales for the Inflammation segment, previously known as the Primary Care segment, were $97.1 million, and segment operating income was $49.7 million. We continue to invest cash flows generated from this segment into the Orphan and Rheumatology business.Our non-GAAP gross profit ratio was 90.9% of sales for the quarter. Non-GAAP operating expenses were $167.4 million. This included non-GAAP R&D expense of $22 million, reflecting investment in teprotumumab as well as in our rheumatology pipeline programs.Non-GAAP SG&A expense was $145.4 million. Adjusted EBITDA was $124.1 million for the second quarter. Non-GAAP income tax expense for the second quarter was $12.2 million. Non-GAAP net income and non-GAAP diluted earnings per share were $95.6 million $0.49, respectively.The weighted average shares outstanding used to calculate second quarter 2019 non-GAAP diluted EPS were 193.2 million shares. And non-GAAP operating cash flow was $95.7 million for the quarter.As Tim mentioned, in 2019, we began aligning our capital structure to be closer to those of our rare disease biopharma peers, which generally have lower debt levels. So far this year, we have reduced our gross debt by $575 million, while maintaining a strong balance of cash and cash equivalents, which has totaled $866 million at June 30th.Net debt was $577 million at June 30th. And our net leverage ratio, defined as net debt to the last 12 months adjusted EBITDA was 1.1 times, down 2.5 turns from 3.6 times, only one year ago. In July, we issued $600 million of 5.4% senior notes due in 2027 and are using the proceeds along with cash on hand to repay $625 million of our outstanding debt.Through our refinancing and debt reductions, we have lowered our annual cash interest expense by more than 40% versus a year ago, and extended the maturity of our term loans and senior notes by two to four years.Moving to our outlook for 2019, we now expect full-year 2019 net sales to range between $1.28 billion to $1.3 billion versus the previous range of $1.26 billion to $1.28 billion. We project full year net sales growth for KRYSTEXXA to be more than 20%. And we continue to expect the full year net sales for the Inflammation operating segment to be roughly similar to 2018.Should there be an at-risk generic launch of VIMOVO, we do not expect it to have a material impact on our 2019 net sales guidance.In addition, we recently learned that PENNSAID 2% may be added to Express Scripts 2020 exclusion list. While the list is not final until annual negotiations are complete, if PENNSAID 2% is on the list, we expect the impact to 2020 total company net sales to be immaterial. As a reminder, PENNSAID 2% has always been on the Caremark exclusion list. We evaluate all of our PBM contracts to ensure that we can achieve patient access as well as generate a return. Our objective is to continue to generate strong cash flows from the Inflammation segment to invest in Orphan and Rheumatology.Returning to 2019 guidance, the full-year 2019 adjusted EBITDA is now expected to be in the range of $460 million to $475 million, versus a previous range of $450 million to $465 million. We continue to project our non-GAAP gross profit ratio to be approximately 90%.Non-GAAP R&D expense as a percentage of net sales is now expected to be in the mid to high single digits for the full year. We expect non-GAAP SG&A expense to increase meaningfully in the second half compared to the first half, as a result of the previously discussed investment in U.S. teprotumumab launch preparations.We continue to expect a full year non-GAAP tax rate in the low to mid teens, and a cash tax rate in the low to mid single digits. In line with previous 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 now expect full year non-GAAP net interest expense to be approximately $65 million, a decrease from our previous guidance of approximately $70 million and from our initial guidance this year of $90 million to $95 million, due to the significant improvements that we have made to our capital structure so far this year.We continue to expect 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 his concluding remarks.

Thank you, Paul.We delivered another outstanding quarter, outperforming expectations and increasing our full year guidance. But more important than our latest quarter's results is what we have achieved for the long-term success of Horizon in an incredibly short amount of time. With exceptional execution, we have transformed Horizon into one of the leading profitable rare disease biopharma companies, validated by several impressive successes. We have built a portfolio of rare and rheumatic disease medicines, growing at a double-digit pace, and driving the future growth of the Company.We successfully relaunched KRYSTEXXA on track for more than 20% growth this year, nine years post approval and three years, post acquisition. And we're on track to achieve our projected peak U.S. annual net sales of more than $750 million.We've executed on our strategy to expand our pipeline with the successful development of teprotumumab and a potential approval in the first quarter of next year. We're preparing aggressively for the launch, leveraging our success with KRYSTEXXA to make teprotumumab as successful if not more and continue to protect peak annual U.S. net sales of more than $750 million if teprotumumab is approved.We have significantly improved our capital structure, taking advantage of market opportunities to reduce our gross debt, lower interest expense, and extend our debt maturities. With more than $850 million in cash and a net leverage ratio of 1.1 times, our balance sheet has never been healthier. We're in a great position to build our pipeline and take advantage of additional acquisition opportunities that meet our criteria.Our business fundamentals and financial position are strong. We are well positioned for significant future growth with perhaps one of the best long-term growth opportunities in our space. We remain focused on executing our strategy, which we believe will lead to long-term success and value for horizon, for patients and for our shareholders.With that, we'll open it up for questions.

[Operator Instructions] And our first question comes from Annabel Samimy. You may proceed.

Hi, guys. Thanks for taking my question, and great progress. I’m happy to see it. So, everything that you described in the commercial preparations for teprotumumab suggest that you're going to be coming out of the gate, essentially almost immediately. Do you have a sense of the trajectory in the first years? And the Expanded Access Program, how broad is that and could tamper that initial uptake, is it -- given that treatment is finite? And is it too bold to assume that this Expanded Access Program is essentially a wink from the FDA that they're totally behind you on this?

So, thanks, Annabel. I appreciate the questions. First, with the Expanded Access Program. This is a clinical program. And typically when you look at Expanded Access Programs in the rare disease space, they're in the range of prior clinical program for that medicine. So, this is not any indication of FDA views on the medicine. We expect those views to come 60 days after the submission. When we look at our preparations, you are correct in that, we are putting all efforts required to ensure the long-term success of teprotumumab. Vikram will speak probably more over the next few minutes here. But, when you look at the launching of Part D [ph] medicine that is infused, you have different dynamics at play. You have temporary J codes and C codes, depending on channel, and you have the fact that oculoplastic surgeons, ophthalmologists and endocrinologists have not typically infused the medicine. So, the site of care in which the medicine is delivered is going to be an important factor. When you have a temporary J code, that means that each patient goes on prior authorization and has to be -- go through what is typically two to three-month process to attain that reimbursement.And as most know, it takes -- if approved by March 31st, we would be eligible for permanent J code on January 1 of 2021. So, with those dynamics, we expect that will take time to scale patients, just to get through the reimbursement process and so permanent J code is put in place. That being said, we're seeing extensive interest in the medicine from both physicians and patients. And we'll be prepared to launch it successfully.

Great. Thanks, Annabel. Next question, please?

And our next question comes from David Amsellem with Piper Jaffray.

Thanks. So, just on tepro, I wanted to ask about infusion logistics and how you're thinking about support for docs who aren't step up for infusions. And then, secondly, also remind us what the mix of Medicare, Medicaid and commercial is for the thyroid eye disease population? And then, another separate question, you talked about the incremental step on the product next year. I know you're not going to have a big sales force by any means. But, can you talk about disease awareness, direct-to-consumer activities, and how we should think about spend on that? Thank you.

Sure. So, relative to infusing, you’re right, it’s going to take a significant effort, and we're building a distinct organization to focus on that. We have had a lot of inbound interest from oculoplastic surgeons to in fact build infusion centers to be able to potentially treat patients with teprotumumab. Vikram can speak to his organization and the process.

Yes. And, so David, on that note, as Tim said earlier, oculoplastic surgeons, ophthalmologists, endocrinologists have not typically infused medicines. So, we're in the process of building out a team that will help them, a dedicated site of care team that will help them through all of the infusion logistics to get a patient on therapy. We anticipate that demand will be strong. But, the pull-though of those patients after they have been described the medicine is a key element for success. On that note, we're also hiring a team of patient educators, as well as reimbursement specialists, and finally, a dedicated hub. All of this is a full cohesive infrastructure that will enable the pull-through of patients and minimize the time between being prescribed the medicine and getting therapy.And to your question about the list of patients between commercial and government, we anticipate based on our research that commercial is roughly about 60%, and the remainder, about 40% is government with majority of that being Medicare.

And on tepro spend, we haven't given guidance for 2020 yet but a good place to start will be to look at and annualize our fourth quarter spend because by that time we should have the full tepro organization in place.

Right. Thank you. Can we go to next question, please?

And our next question comes from David Risinger with Morgan Stanley. You may proceed.

Thanks very much. Congrats on the strong KRYSTEXXA performance. I have a couple of questions. First, with respect to sort of taking things to a little bit higher level and contemplating opportunities for future business development. Could you discuss Horizon's competitive advantages with respect to licensing and acquiring underappreciated assets, and whether you see opportunities to transact in the near-term, or given the volatility in the environment more broadly, whether we need to be patient for future transactions? And then, second, in the wake of the strong second quarter results, any key considerations that we should bear in mind as we model the third quarter? Thank you.

Relative to the business development [ph] environment period, we're not really focusing on taking underappreciated assets. I think that was part of our earlier strategy. And our strategy now is to build a pipeline of innovative medicines such as teprotumumab and our early stage gout programs. And to your point about what differentiates us, I mean, a lot of it is underscored by how we delivered the quarter. And we have over the last five years of our strategy where we've shown we can take our own assets and assets that have failed in other people's hands and successfully continue to execute and drive the uptake of those medicines.So, I think we've demonstrated that we can be a strong commercial partner with teprotumumab; we've also shown that we can successfully develop an innovative medicine. And as far as the environment, there are a lot of opportunities in the marketplace in the rare disease space, as we're looking. For us, it's making sure it's the right transaction. We can double our sales from where we are --were in 2018 with just teprotumumab and KRYSTEXXA both at greater than $750 million in peak sales. So, we're going to make sure we focus on the right transactions, while we continue to execute our business. Relative to third quarter, we don't give quarterly guidance at this point in time. We expect our business -- and our team to continue to execute.

And our next question comes from Stacy Ku with Cowen & Company. You may proceed.

If I could drill down on KRYSTEXXA growth, are there any updates with increasing penetration of nephrologists versus rheumatologists for KRYSTEXXA? Where do you expect your double-digit growth to come, from new prescribers or increased writing? And given that data presented at AAR and EULAR in the past few years, how should we think about physician awareness of KRYSTEXXA use in conjunction with methotrexate? Thank you.

So, nephrology continues to perform in line with our expectations. As you rightly identified, the performance in the second quarter was strong, 30% vial growth, which is through the first half of ‘19 would signify strong underlying demand. And we see the interest in KRYSTEXXA coming from all aspects from the business. New accounts, so more than 600 new accounts in the last 12 months, which is an increase of 20% over the last 12 months. Existing accounts growth in -- vials in existing accounts, which is almost 30%, and then accelerating our nephrology growth. So, we have all aspects of the business running very well and very strong, and we expect that to continue.To your question about the use of methotrexate, we certainly hear about it more and more in the field. Anecdotal evidence suggests that the word is out there. And rheumatologists would want to do the best thing for their patients. And if that -- if use of methotrexate allows them to keep patients on therapy longer, then that -- their choice on that will be able to do. It’s certainly not something that we can promote actively at this point, which is why we initiated the MIRROR trial to be able to enable us to do that in the near-term.

Our next question comes from David Steinberg with Jefferies. You may proceed.

Thanks. Just a follow-up on the external business environment. I guess, your leverage ratio has never been lower, at least the last five years. And it's been a very long period of time since you acquired anything. I know, you said, you really don't need to do anything, given the status you have. But, is one of the key issues just the price of assets that you're looking at too expensive at this point in time? Secondly, KRYSTEXXA is particularly strong this quarter, was there anything unusual in the quarter? For example, as I've heard that a competitor who’s doing head to head trials was a large purchaser of KRYSTEXXA, is that correct? And then, finally, in terms of your normalized SG&A spend, for the tepro, I think, Tim, you’ve mentioned that you’ve hired the 100 reps and other ancillary folks associated with the launch. Is that -- I think Paul had said that Q4 was a good guide, but were most of those folks hired in the second quarter and therefore the $145 million SG&A line is representative of what things might look like with this fully loaded sales effort for tepro? Thanks.

I'll take the first. You're correct. There were some purchases from a competitive product that is selling against KRYSTEXXA, which had a relatively small impact. We exceeded our expectations significantly without that. And we're not assuming much of a contribution from that moving forward. Maybe Paul, if you want to address the financial questions?

Yes. I mean, on the SG&A side with tepro, the people have been hired, most of those were hired at the end of the second quarter or early in the third. And so, the second quarter doesn't really -- is not really loaded heavily with those employees. As I said, we’ll continue to be hiring more employees throughout the year, and by fourth quarter, we should have a more fully loaded run rate on tepro.

Great. And Bob, do you want to address the question regarding business development in the external environment?

Sure. David, we continue to see good assets out there. But, the prices that we see have been high in some situations. And so, we backed away from some of those transactions. But, we continue to believe we will be able to execute, building out the pipeline as we continue to build our team and see good assets. It's just a matter of time before we hit on the right ones to transact on.

And our next question comes from Don Ellis with JMP Securities. You may proceed.

First question on tepro, the activity of the drug is very clear in the active phase of disease. Would you expect tepro to have any effects on the inactive phase of the disease? Regarding KRYSTEXXA, the MIRROR trial, assuming the data are positive, what impact would you expect that to have on your peak sales assumptions? Thank you.

On the second question, our existing forecast of greater $750 million in peak sales does not include the potential benefit or upside from KRYSTEXXA or alongside methotrexate. Relative to the first question, Shao-Lee?

Yes. So, as you pointed out, clearly, we demonstrated market activity with teprotumumab in the active state of the disease. And recall that it was in the context of our studies, we evaluated patients really with very high degree of activity with CAS scores greater than 4, proptosis greater than 2 millimeters, and individuals who had a diagnosis of their thyroid eye disease, less than 9 months. And I think, from a biological perspective, and based on the mechanism, we don't expect there to be activity in a truly burnt out inactive disease.I think one of the questions that remains unanswered at this point is whether or not, if you will, late active disease or recently inactive disease, if you will, potentially could still see some degree of benefit. And I think we don't know that at this juncture. There really isn't an on-off switch from when patients move from their active to inactive disease. We know that on a population basis, people have active disease for about a 2 to 3-year period. But that's a curve. And on an individual basis that can certainly vary. So, I think the answer to your question is, in inactive, no, we don't expect there to be activity of the drug. But perhaps in late active, recently inactive, it's an open question.

And our next question comes from Louise Chen with Cantor. You may proceed.

So, my first question is back on teprotumumab. Curious what you think the uptake will look like. And then, have you given any additional thought to pricing or disclosed anything from that front? And then, secondly, you had talked about margins improving to more biotech type levels in your earlier comments. I’m just curious, at what level of sales do you think you’d see that, or when do you think we'd see something like that? And if you could put any context around that relative to where you are today? And then, last one, just on business development, you have quite a robust balance sheet. Just curious, what's the right time for doing BD, given your right in front of this teprotumumab launch? Could you handle both next year or this year? Thank you.

So, relative to uptake, as I mentioned earlier, in the long term, we expect significant demand and uptake for the medicine. And the launch phase, we are going -- we will have a temporary J code. It takes 2 to 3 months for these patients to individually get through the approval process. So, as an infused Part D [ph] medicine, that is a process which every patient will have to go through in that early launch phase. So, until we get a permanent J code, which is -- assuming the timeline of approval in the first quarter and submission by March 31st of 2020, the timeline would be that you could get a permanent J code by January 1st of 2021. There have been a few examples recently of medicines getting a permanent J code sooner than that one year period. And there's been commentary from HHS around moving to quarterly approval of permanent J codes. We have not seen any official guidance from them, so our working assumption is a permanent J code, again, assuming potential first quarter approval would be January of 2021. So, that's there. From a pricing standpoint, we'll discuss that at approval. Paul, you can speak to margin.

Yes. On the margin side, as we discussed, I mean 2020, will still be an investment year because that's when the tepro launch will occur and this will be significant investment, and we won't have a full year of tepro sales. As we look into 2021, we would expect to see a step up in the margin profile at that point, as we have a full year of tepro sales and KRYSTEXXA continues the sale -- continues to grow. And then, that would kind of grow over time as both KRYSTEXXA and tepro start moving towards their peak sales levels.

And importantly, when we look at our base business, we're seeing ex-tepro spend, we're seeing accretion to the underlying business at this point in time. So, teprotumumab will be a significant investment to drive that long-term value. But, our underlying business is performing extremely well.

Right. I think the last question was related to business development and tepro launch, to more time. What was that last question Louise, I think?

Yes. So, I'll address that. We have a distinct organization focused on teprotumumab and uptake, and that won't affect our ability or interest to do another transaction. So, both are a key part of our strategy.

Terrific. Next question, please?

And our next question comes from Gary Nachman with BMO Capital Markets. You may proceed.

Hi. Good morning. First, you seem to be managing well through the 340B pricing impact to KRYSTEXXA. Is that having the same impact you anticipated? Are you able to adjust the amount of product going to 340B hospitals? And then, how long before you have results from the MIRROR trial, how long will it take to enroll? I think, you said 330 patients. And then, one last one on tepro. How many patients could potentially enter your Compassionate Use program, and would they automatically switch over once the product is ultimately approved next year? Thank you.

Sure. Relative to 340B, for the first half, it was running at the low end of our 20% to 25% range. And that's been primarily driven because of the continued significant interest in growth from community rheumatology accounts. So, that's a higher mix of community rheumatology, is what’s driving the lower end of 340B. Relative to our early access program, that as I mentioned earlier, is a clinical protocol. And when you look at existing other rare disease medicines, generally those numbers in the range of the prior clinical programs. And once we put these people on medicine, we will make sure they continue to receive full treatment at no cost.

And then, last question was MIRROR timing and data...

Yes. With respect to MIRROR, as I mentioned, we initiated that study in the June timeframe. It's early days. You're correct, the target patient number is 135. So, we expect results in the next couple of years. It's early days for that trial.

Right. Thanks. Demetria, I think we have time for one more question, please.

Thank you. And our final question comes from Nicholas Rainer [ph] with Mizuho Securities. You may proceed.

So, two questions. One is on KRYSTEXXA. So, is there any lumpiness expected in KRYSTEXXA revenues throughout the year associated with the 340B discounts or buying patterns veterans, or is it fair to say that this Q2 growth rate is a reasonable growth rate for the product going forward? And secondly, any update on your expectations for Selecta Bioscience SEL-212? Any update on the timing or -- and your expectations? Thank you.

So, we upped our guidance for KRYSTEXXA for the year. So, that gives you a sense of what our expectations are moving forward, they are increased from what they were before. And relative to a competitor trial, that's in process and we don't have anything further to update on timing from what's been said before. Thank you for the questions.

Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I'd now like to turn the call back over to Tina Ventura for any closing remarks.

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

Ladies and gentlemen, thank you for attending today's call. This now concludes the program. You may all disconnect. Everyone have a great day.