HZNP (2021 - Q4)

Good morning, and thank you for standing by. Welcome to the Horizon Therapeutics Fourth Quarter and Full Year 2021 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 and Investor Relations Officer. Tina Ven

Thank you, Olivia. 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, Executive Vice President, Research and Development; Paul Hoelscher, Executive Vice President, Chief Financial Officer; Andy Pasternak, Executive Vice President, Chief Strategy Officer; and Aaron Cox, Executive Vice President, Finance. Aaron will be transitioning to CFO after our first quarter call. Tim will review the business, including our fourth quarter and full year performance. Liz will then review our R&D programs, followed by Paul, who will discuss our financial performance and guidance in more detail. After closing remarks from Tim, we'll take your questions. As a reminder, during today's call, we'll be making certain forward-looking statements, including statements about financial projections, development activities, our business strategy and the expected timing and impact of future events. Our actual results could differ materially due to a number of factors, including the risk factors and other information outlined in our latest Forms 10-K, 10-Q and any 8-Ks filed with the Securities and Exchange Commission and our earnings press release, which we issued this morning. You're cautioned not to place undue reliance on these forward-looking statements, and Horizon disclaims any obligation to update such statements. In addition, on today's conference call, non-GAAP financial measures will be used. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and other filings from today that are available on our investor website at www.horizontherapeutics.com. I will now turn the call over to Tim.

Thank you, Tina. [Technical Difficulty] At the same time, we once again delivered top-tier financial performance. Our full year total net sales of $3.2 billion increased nearly 50%, and our full year adjusted EBITDA of $1.3 increased 33%. We also generated more than $1 billion in operating cash flow. This morning, we issued our full year 2022 financial guidance that again represents a very strong growth at the midpoint. Our full year net sales guidance of $3.9 billion to $4 billion represents 22% growth. Our adjusted EBITDA guidance of $1.63 billion to $1.7 billion represents 30% growth and 230 basis points of margin expansion. Importantly, we expect our commercial performance to drive significant margin accretion, which should more than offset the increased investments we continue to make in R&D. As we look across profitable large cap and biotech peers, Horizon's growth profile is one of the best in the industry. In 2021, we made tremendous progress on our strategic goals, building our pipeline, maximizing our commercial medicines and expanding globally. We acquired Viela significantly expanding our pipeline and deepening our R&D scientific expertise. Our pipeline now includes more than 20 programs, with the majority added in 2021. We work to maximize the molecules in our portfolio. Notably, we identified 4 new indications for daxdilimab that we plan to initiate trials in this year, beginning with alopecia areata trial next quarter. We believe daxdilimab has the potential to be a true pipeline in a product with a multibillion-dollar potential. Commercially, we more than doubled net sales to TEPEZZA in its second year post launch and increased KRYSTEXXA net sales by nearly 40%, remarkable for a 12-year-old medicine. We also repositioned, rebranded and relaunched UPLIZNA in just 6 months after acquiring it with the Viela. We continue to build our global presence, including the required infrastructure in Europe, to support the potential launch of UPLIZNA in the second quarter, assuming European Commission approval. And last week, we announced the first patient enrolled in our clinical trial evaluating TEPEZZA in Japan. This is the first step in change in the treatment journey for people with TED outside the U.S. and puts us on a path for reaching our international peak to TEPEZZA annual net sales expectations of more than $500 million. We also significantly expanded our global supply capacity to meet growing demand. We added a second TEPEZZA drug product manufacturer and acquired new biologic drug product manufacturing facility in Waterford, Ireland. Behind all our efforts are the people of Horizon. Their dedication to executing on our strategy makes a difference in the lives of the patients we serve. Our employees continue to be highly engaged as evidenced by the 15 workplace awards we received in 2021, including ranking as the number 1 biotech pharmaceutical company in Fortune's 100 best companies to work for. We're also a company of values diversity and equity. In 2021, a second study conducted by Aon confirmed once again that Horizon demonstrates gender ethnicity pay equity. This is especially meaningful accomplishment as it was achieved while our workforce nearly doubled in size. Moving on to our fourth quarter and full year results. TEPEZZA fourth quarter sales were $590 million, representing year-over-year growth of 72%. Full year net sales were $1.66 billion, exceeding our full year expectations. We achieved this incredibly strong performance despite the continued impact of COVID-19 and the government-mandated supply disruption that took TEPEZZA out of the market from the end of 2020 through April of last year. We executed a strong commercial relaunch following this disruption, resuming patients on therapy quickly, converting new patients and driving new patient enrollment forms. We also initiated a randomized placebo-controlled trial in chronic TED to help drive further uptake in this patient population. As we enter our third year in the market, we continue to drive strong PEP growth and adoption of TEPEZZA. We are focused on the next stage of our commercial strategy and see significant potential to help many more patients benefit from TEPEZZA. First, we plan to more deeply penetrate our high-priority TED physician targets for acoplastic surgeons to business specialists and neuro ophthalmologists. We've done an incredible job to date with only 1/3 of those physicians prescribing TEPEZZA today. We see significant opportunity to build on our success and capture a higher proportion of those physicians and their patients. We're improving our physician targeting and refining our messaging as we learn more about what resonates best with each specialty. For example, proptosis reduction is the main focus for oculoplastic surgeons while neuro-ophthalmologists focus more on a broader set of signs and symptoms of TED such as diplopia or double vision. Second, we are broadening our reach to general ophthalmologists and endocrinologists in a targeted way. Endocrinologists typically treat patients with underlying graves' disease, and general ophthalmologists treat patients with the underlying symptoms of TED. But due to under diagnosis and lack of awareness of TED, the majority of their patients do not find a way to TEPEZZA prescriber today. Remember, this is a market that just 2 years ago had no treatment options for patients. And therefore, there was no well-defined patient journey. We are educating those physicians and working to improve the patient journey to both accelerate the referral process and activate certain physicians as TEPEZZA prescribers. This is a longer-term multiyear strategy that should help thousands of TED patients benefit from TEPEZZA. Third, we're continuing our significant investment in DTC, which has proven successful in reaching a broad spectrum TED patients. We're evolving the focus of the campaign to expand the impact of TED symptoms such as diplopia and have launched a new unbranded awareness campaign as well. In addition to awareness creation, the main goal of our DTC campaign is to help patients find a TED treatment specialist. We've continued to generate strong results and the use of our TED specialist finder more than doubled from when we launched the branded TED campaign in May of last year. Our primary commercial focus this year is to further penetrate the acute TED opportunity. Additionally, in the fourth quarter of last year, we began to educate physicians on the use of TEPEZZA in chronic patients. There are now 7 published case series setting successful experiences with TEPEZZA nearly 60 chronic TED patients. We expect the results for a randomized controlled clinical trial in chronic patients by year-end. Those trial results and subsequent publication in peer-reviewed journals next year could help remove barriers with payers as well as drive clinical conviction for many physicians who today only prescribe TEPEZZA for their acute patients or patients with high inflammation. We anticipate 2022 will be another year of outstanding growth for TEPEZZA, where we estimate full year net sales percentage growth in the mid-30s, driving towards our peak global annual net sales estimate of more than $3.5 billion. With KRYSTEXXA, we reported fourth quarter net sales of $170 million, representing year-over-year growth of 32% and full year net sales of $566 million. 2021 was a significant year for KRYSTEXXA as we continue to advance our immunomodulation strategy. Top line data from a MIRROR randomized controlled trial stood at 71% of patients on KRYSTEXXA plus immunomodulation methotrexate showed a complete response. This is more than 30 percentage point improvement compared to patients on KRYSTEXXA plus placebo. In January of this year, we submitted a supplemental biologics license application to the U.S. FDA to incorporate the MIRROR data into the KRYSTEXXA label. Approval would allow our commercial team to proactively promote KRYSTEXXA plus methotrexate to physicians. In the meantime, our medical affairs and clinical teams are working to present and publish the MIRROR trial results and additional analysis from the trial, including new safety data at medical congresses throughout this year. Immunomodulation is driving higher clinical conviction among treating physicians. This is now approaching 50% of new patients, which is up from more than 30% at the start of 2021. We continue to expand the prescriber base with significant growth in new prescribers as well as physicians who have prescribed KRYSTEXXA in over a year that has strong evidence that our immunomodulation strategy is working. Our Nephrology segment has been growing rapidly with pepsin 2021 nearly doubling compared to 2020. This reflects the continued growth we're seeing in nephrology prescribers, which increased 75% versus 2020. We attribute the successful progress to the dedicated nephrology sales team we put in place last year. As we look to 2022, we expect another strong year, projecting net sales growth of more than 20%. We're on track to achieve our peak annual net sales estimate of more than $1 billion, which is supported by our strategy to redefine KRYSTEXXA plus immunomodulation is the standard of care to expand utilization in our core specialty areas of rheumatology and nephrology, to elevate the urgency to treat uncontrolled gout patients and to invest and improve the patient experience, including our monthly dosing and short infusion duration trials. Moving to UPLIZNA. We generated fourth quarter net sales of $26 million. Approximately $4 million of that was international revenue from our Japanese partner. Along our acquisition of Viela and UPLIZNA, we work quickly to build a team and develop our strategy to conduct a full relaunch of the medicine, leveraging the patient-centric approach we use for TEPEZZA, KRYSTEXXA and our rare disease medicines. We put the right infrastructure and team in place with deep neuroimmunology experience, relationships and market knowledge. We successfully relaunched UPLIZNA in the fourth quarter. We're beginning to see results. This is evidenced by our market research survey we conducted earlier this year, where awareness of UPLIZNA among physicians and patients increased significantly compared to the period before our prelaunch. In addition, our physician call activity in the fourth quarter more than doubled from the third indicative of the extended reach of our expanded sales force. We significantly expanded our peer-to-peer speaker programs and generated a 30% increase in total prescribers in the fourth quarter compared to the third, with more than half of patient enrollment forms coming from new prescribers. As a result of our efforts, we generated strong quarter-over-quarter PEP growth in new patient starts. Internationally, we made substantial progress in 2021, building the infrastructure and capabilities to support the potential launch of UPLIZNA in Europe this year, beginning with Germany in the second quarter, assuming European Commission approval. We're increasingly confident in the prospects for this medicine in most and other indications we are pursuing. We expect another year of very strong growth in 2022 as we progress towards our peak global net sales expectations, more than $1 billion across all indications for UPLIZNA. I'll now turn the call over to Liz for an update on our progress in R&D.

Thank you, Tim, and good morning, everyone. 2021 was a transformational year for R&D, and I expect continued progress as we move through 2022. In 2021, we significantly expanded our pipeline through the acquisition of Viela, the 5 new internal programs we announced and the 2 preclinical programs we added through external collaborations. We made progress in 3 new therapeutic areas, including neuroimmunology, dermatology and respiratory. We began building out our research organization and discovery engine to drive long-term growth. We plan to generate high-quality INDs over the coming years through our own internal efforts as well as through partnerships and collaborations. And we announced our expansion into a new State-of-the-Art facility in Maryland to further support the growth of our R&D function and serve as our primary East Coast hub. This morning, I'll update you on the progress of our key programs, starting with daxdilimab, or HZN 7734. Daxdilimab is the first and only plasma cytogendritic cell or PDC depleter in clinical development. PDCs are found in high concentrations in disease tissues of individuals with certain autoimmune and inflammatory diseases, and the activity of these cells can result in significant inflammation and tissue damage. Our daxdilimab trial in systemic lupus erythematosus, or SLE, is underway. We expect to begin clinical trials in 4 additional indications this year. The first, alopecia areata, is an autoimmune disorder characterized by nonscarring hair loss. We estimate more than 600,000 patients in the U.S. suffer from this disease, of which approximately 40,000 would be appropriate candidates for biologics. There are currently no approved therapies and most patients are treated with off-label medicines often with significant side effects and variable efficacy. We're on track to initiate our Phase II open-label trial in alopecia areata in the second quarter in approximately 30 patients with moderate to severe disease. The primary endpoint of the trial is the percent change from baseline in the SALT score at Week 24. SALT, or the severity of alopecia tool, is a commonly used score to measure the level of disease severity in patients. We plan to initiate our discoid lupus erythematosus, or DLE, trial by midyear. DLE is a scarifying disease that can be significantly disfiguring. It can also result in hair loss. We expect to initiate our trial in lupus nephritis, an autoimmune inflammatory condition of the kidney in the third quarter. And finally, we expect to initiate our trial in dermatomyositis in the fourth quarter. This is a rare condition that manifests a severe skin rash and debilitate muscle weakness and can affect children in a very severe way. Moving on dazodalibep, or HZN 4920. This is our CD40 ligand antagonist designed to block a central pathway involved in many autoimmune and inflammatory diseases. Dazodalibep is currently in Phase II trials for Sjogren’s syndrome, rheumatoid arthritis and kidney transplant rejection. This year, we expect 2 Phase II trial readouts, rheumatoid arthritis in the second quarter and kidney transplant rejection by year-end. Our rheumatoid arthritis trial gives us the opportunity to accelerate our learning about dazodalibep in a large and reasonably accessible population using well understood clinical end points. CD40, CD40 ligand is a relevant pathway in rheumatoid arthritis, and our initial Phase I results suggest inhibiting this pathway can impact disease. In this trial, we can expand our understanding of the impact of the mechanism under various dosing regimens, which can also inform our decisions on a potential dosing profile in other indications. We expect to initiate our dazodalibep trial in the progressive and rare kidney disease, FSGS in the fourth quarter. Moving to HZN-825, our oral selective LPAR1 antagonist, which has shown early signs of clinical impact in fibrotic disease. We recently enrolled our first patients in our 2 pivotal Phase IIb trials for HZN-825 in diffuse cutaneous systemic sclerosis in November and in idiopathic pulmonary fibrosis in January of this year. UPLIZNA is our anti-CD19 humanized monoclonal antibody indicated for NMOSD, a rare and devastating neuro inflammatory autoimmune disease that attacks the optic nerve, spinal cord and brainstem. We continue to contribute to the literature regarding the efficacy and safety profile of UPLIZNA. Most recently, in February, we presented new data at the North American Neuro Ophthalmology Society Meeting, or NANOS. In addition to the benefit already demonstrated on increasing the time to first attack for patients living with NMOSD, this new analysis suggested that treatment with UPLIZNA also reduced the severity of attacks. We continue to advance our Phase III trials evaluating UPLIZNA for myasthenia gravis and IgG4-related disease. Moving now to TEPEZZA. We're continuing to enroll patients in our Phase IV randomized placebo-controlled trial in chronic thyroid eye disease. The results of this trial will add to the emerging literature studying TEPEZZA in patients with chronic TED. Meanwhile, we continue to see additional data and analysis regarding TEPEZZA and its role in the treatment of TED. For example, in a recently published meta-analysis and matching adjusted indirect comparison of TEPEZZA and intravenous metal pronisolone or IV steroids show that for IV steroids, only small, not clinically relevant changes we're seeing for proptosis and diplopia. This is consistent with what we have known for some time that steroids are not effective in treating some of the most impactful funds and symptoms of TED. In the same manuscript, cross-trial comparisons supported greater improvements on proptosis and diplopia with TEPEZZA compared with IV steroids. We also continue to advance our TEPEZZA subcutaneous administration program, where we are exploring multiple options with a new high concentration formulation. Options under consideration include approaches with and without the Halozyme technology. We have completed a Phase I single dosing trial in healthy volunteers with our current formulation. In this trial, we assess the safety, tolerability and pharmacokinetics of 2 different single subcu doses, and we were pleased with the response. Next, we're moving to test this formulation in TED patients and expect to initiate this Phase Ib study midyear. We expect to begin clinical work with a high concentration formulation later this year. The results of this work will help define our dose and regimen, which we will then evaluate in a pivotal trial. And as we announced last week, we initiated our clinical trial in Japan. The trial was designed based on discussions with the Japanese regulatory authority and Japanese experts in TED and informed by our experience in the OPTIC Phase III trial conducted in the United States and Europe. The trial will include approximately 50 patients with moderate to severe active TED. The primary endpoint is the proptosis responder rate at Week 24 measured by the percentage of participants with at least a 2-millimeter reduction in proptosis from baseline in the study eye. We expect results in the second half of 2023. We've made substantial progress with KRYSTEXXA, improving its efficacy and working to improve its profile for patients. Tim referenced our MIRROR trial, where we look forward to sharing additional details on the trial at key medical meetings such as ULAR midyear and ACR in the fall. And we continue to explore ways to improve the KRYSTEXXA profile with our trial evaluating shorter infusion duration and monthly dosing. Beyond these efforts with KRYSTEXXA, we're investing new approaches that target the underlying cause of gout such as with our Arrowhead and Hemosphere preclinical programs. In summary, we expect another busy and productive year ahead. I'll now turn the call over to Paul.

Thanks, Liz. My comments this morning will primarily focus on our non-GAAP results, unless otherwise noted. I will start with our fourth quarter results, followed by our financial guidance for 2022. Fourth quarter net sales were $1 billion, representing year-over-year growth of 36%, driven by the strong performances of our key growth drivers, TEPEZZA and KRYSTEXXA. This closed out a record year with full year total net sales of $3.2 billion, nearly 50% growth compared to 2020. Our Orphan segment generated fourth quarter net sales of $940 million, a year-over-year increase of 50%. Orphan segment operating income was $421 million. Net sales for the Inflammation segment were $74 million, with segment operating income of $33 million. We continue to focus on maximizing the cash flow generated from this segment to reinvest in our growth drivers and our expanding pipeline. Our non-GAAP gross profit ratio was 86.5% in the fourth quarter and 86.9% for the full year. Fourth quarter non-GAAP operating expenses were $460 million. This included non-GAAP R&D expense of $115 million or 11% of net sales. As we noted in December, we no longer exclude upfront and milestone payments related to collaboration and license agreements from our non-GAAP financial measures. So R&D expense in the fourth quarter includes approximately $36 million of upfront and milestone payments. For the full year, our non-GAAP R&D expense was $373 million, which includes approximately $90 million of upfront and milestone payments. Our non-GAAP SG&A expense was $345 million in the fourth quarter and $1.1 billion for the full year. Fourth quarter adjusted EBITDA was $416 million or 41% of net sales, representing year-over-year growth of 22%. Our full year adjusted EBITDA was $1.3 billion or approximately 40% of net sales, representing growth of 33%. The non-GAAP tax rate for the fourth quarter was 15.5%, bringing our full year non-GAAP tax rate to 9.8%. Non-GAAP net income for the fourth quarter was $334 million and non-GAAP diluted earnings per share were $1.41. Our full year non-GAAP diluted earnings per share were $4.62. The weighted average shares outstanding used to calculate fourth quarter and full year 2021 non-GAAP diluted EPS were 237 million shares and 236 million shares, respectively. Fourth quarter and full year non-GAAP operating cash flows were $551 million and $1.19 billion, respectively. As of December 31, Cash and cash equivalents were $1.58 billion. With the strong cash position and expected future cash flows, business development will continue to play a critical role in expanding our pipeline. The total principal amount of our debt outstanding is $2.6 billion, with the earliest maturity in 2026. As of December 31, our gross debt to last 12 months adjusted EBITDA leverage ratio was 2x. Our net debt was $1 billion, resulting in a net debt to last 12-month adjusted EBITDA leverage ratio of 0.8x. Moving on now to our outlook for 2022. This morning, we provided full year 2022 net sales guidance of $3.9 billion to $4 billion, representing year-over-year growth of 22% at the midpoint. For TEPEZZA, we expect full year 2022 net sales percentage growth in the mid-30s. For KRYSTEXXA, we expect full year 2022 net sales growth of more than 20%. We expect full year 2022 gross margin of approximately 87%. We expect our gross margin to be the highest in the first quarter. As we progress through the year, we expect gross margin to decrease as we reach higher percentage tiers on the TEPEZZA royalties we pay. Full year adjusted EBITDA is expected to be $1.63 billion to $1.7 billion, representing a 42% margin at the mid point, a 230 basis point expansion compared to 2021. Our adjusted EBITDA guidance reflects our expectations for strong growth in net sales, partially offset by our increased investment in R&D, which we expect to be in the low double digits as a percentage of net sales. We expect our commercial performance to drive significant margin accretion, which will more than offset this increased investment. As we think about our 2022 operating expense, we expect a steady increase over the course of the year. Excluding the R&D-related milestone payments from the fourth quarter of 2021, non-GAAP operating expenses were approximately $425 million. For 2022, we would expect a modest quarter-over-quarter increase from there, mainly driven by R&D. We expect our full year non-GAAP net interest expense to be approximately $80 million to $85 million. We expect our full year non-GAAP tax rate to approach 12%. As with 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 mid- to high single digits. And as always, our tax rates could change significantly as a result of acquisitions or divestitures we may make or any changes in tax laws. We expect our full year 2022 weighted average diluted share count to be approximately 238 million shares. And finally, let me touch on the first quarter. As we see every year, our first quarter net sales are expected to be the lowest of the year, impacted by seasonality as patients experience co-pay and deductible resets and other changes in their health care coverage. We also saw an impact from the COVID-19 omicron variant earlier this year due to delays in offices and scheduled infusion on both TEPEZZA and KRYSTEXXA. We have seen a nice uptick in the trajectory since then and feel good about our full year expectations. Therefore, we expect a typical step down in net sales this year in the mid-teens from the fourth quarter of 2021 to the first quarter of 2022. With that, I'll turn the call over to Tim for his concluding remarks.

Thank you, Paul. 2021 was another outstanding year for Horizon with record financial results supported by strong commercial execution as well as accelerated progress on our strategic goals, most importantly, the expansion of our pipeline. We expect to initiate 7 new clinical trials this year, 2 of which have recently started. As we look to the future, we see a combined peak annual net sales potential of approximately $10 billion for our current growth drivers to TEPEZZA for along with our pipeline candidates. We expect another standout year performance. Our full year 2022 guidance represents one of the best growth profiles among our profitable large cap biotech peers. With more than $1.5 billion of cash, we have significant flexibility to support our business development activities to further expand our pipeline. With that, we'll open the call up to questions.

Olivia, you can begin.

[Operator Instructions] Our first question coming from the line of Annabel Samimy with Stifel.

So first on TEPEZZA, the Optitex data were, I guess, big fourth quarter. Can you talk to us about what impact that might have had so far in terms of changing the way physicians are treating? Are they more comfortable starting to customize treatment by patients such as trading longer than the current label argument for longer disease or issue payments or refractory patients? And how does that factor into the guidance? Have you included any specific headwinds or tailwinds into the mid-30s rate this year? Because I think you characterize as there is a typical biotech launch. So I just wanted to get a little bit of color there. And then on UPLIZNA, maybe we can -- it looks like your infrastructure contribution is starting to have a nice impact. Any metrics that you're going to begin to share on a UPLIZNA like outside of just switches versus new patients like patient enrollment informed how -- what kind of patients are treating, who's treating the physician types academic versus community? Just any more color that you can provide there.

Great. Tim, perhaps do you want to start with a plus in some of the relaunch and then Liz, I think Annabel as part of that asked about some of the OPTIC-X data that was recently published in our thoughts on that.

Okay. Sure. So with the UPLIZNA, as we said in the prepared remarks, we've seen a strong initial start. Importantly, awareness since we put our sales force in places, has increased significantly from pre the fourth quarter. So continue to be pleased with the uptake and where things are tracking so far this year. So we'll continue to report that progress, and I assume we'll get into how taps are progressing from a high-level standpoint and expect to see continued sequential growth throughout the year with the plasma. And Liz with OPTIC-X?

Yes. So the OPTIC-X data were recently published, we had shared those previously at medical meetings. And I think you're exactly right that some of the really great findings out of the OPTIC-X data are that in patients with even a longer disease duration compared with our original Phase III trial, you do see good strong results. So we think this continues to confirm that TEPEZZA has a real role in therapy for patients that are beyond the strict criteria that were put in place for the Phase III trial, consistent with the broad label we have. And I think this is good support for this being relevant to a broader swath of patients.

And can you just tell us what percent of the chronic now?

So chronic right now is in the mid-teens as a percent of overall TEPEZZA patients, and we continue to expect that to remain as we move through the year. And when we look at the chronic population, there will be policies that are put in place as we launch in the Q. We're focused on clinical activity score being greater than 4, and that is certainly fitting through the acute population. And as we've looked at our penetration in chronic, it's really been focused on those chronic patients with high CAS scores of greater than 4. And that's why it's so important for us to get the results of our chronic trial towards the end of this year so that we can really see the benefit in patients with low CAS, the enrollment criteria CAS less than 1 there. So low clinical activity scores, but high end other symptoms like diplopia and pain, et cetera. So really looking forward to these results and really pleased with the mid-teens percentage of overall patients this year.

Thanks, Annabel. Operator, next question.

Our next question coming from the line of Chris Schott with JPMorgan.

Just a few more on TEPEZZA. Tim, I know you touched on this a little bit during the comments, but just in terms of the breadth of prescribing here. Is there still an opportunity to increase volumes within the core KOL community? Or is the focus more on expanding the breadth of prescribers or increasing referrals from general ophthalmologists into those core KOLs? I'm just trying get a sense of have you kind of tapped out the initial group and it's now about expanding or is there more traction there? I guess the second question I had was just on that chronic study reporting out this year. Is that a factor in the 2022 guidance? Or is that correct study more about kind of 2023 and beyond in terms of assuming success, the commercial opportunity? And then maybe just a third one on TEPEZZA and just clarifying the quarterly gating comment. I think you said mid-teens step down in sequential sales. Does that comment apply to TEPEZZA as well, just there's no confusion?

It does. It applies and has been consistent over the last 5, 6 years across our medicines. So it does apply to TEPEZZA, Chris. From a chronic standpoint, we have 57 patients of data in the chronic population. A lot of them have higher CAS scores from the investigator-initiated trial. So the most important one is getting those results toward the end of this year in our chronic placebo-controlled trial and the majority of that impact will be in '23 and beyond as we get that published. As we look at the TEPEZZA prescribers, we have about 8,000 total called on targets for TEPEZZA, about 1/3 of those are our top priority or high priority targets. And when you look at them, those are your ocuplastic surgeons and neuro ophthalmologists and so business specialists, only about 1/3 of those -- so if you do rough numbers, call it, 2,600, 2,700, about 1/3 of those have prescribed TEPEZZA. So there is significant opportunity to continue to penetrate that acute business in those high-priority targets and get to much broader prescribing in that universe. And that's the primary focus of our sales force effort from a chronic standpoint. We continue to focus, and we expect that to maintain in the mid-teens.

Thanks, Chris. Olivia, next question, please.

Our next question coming from the line of David Amsellem with Piper Sandler.

So just a couple. I'll start with UPLIZNA. So given the growth of that product sequentially, I know some of that was ex-U.S., but -- that being said, with that in mind, are you seeing an uptick in switching away from rituximab or are you getting a good chunk of new starts coming from patients on older immunosuppressants? So can you just talk to how you're sourcing patients? And then secondly on daxdilimab. So this is sort of an overarching question about your thought process regarding casting a wide net for the product in lupus. And specifically, do you have a read as to where you think you could have the best signal amongst SLE, lupus nephritis and discoid. It seems that some KOLs we've talked to have somewhat higher enthusiasm about a PDC depleter and discoid, but I wanted to get your thoughts there.

I'll take the first, and then Liz can about daxdilimab, our PDC depleter. So as you noted, we've had strong sequential growth. The first quarter of the relaunch was in the fourth quarter, and we're very pleased with that. And we continue to see progress as we moved into this year. I would say from -- as far as sourcing patients, we're getting both. We're getting de novo new patients to treatment with NMOSD, but also we're getting patients that are primarily switching from rituximab. So I would say it's about equal percentage sourcing from both new patients and patients with prior treatment with rituximab. Liz?

So with respect to 7734, daxdilimab, which is our PDC depletor. We're looking at in a number of different indications, but exactly as you say, with a real focus on lupus and lupus related indications. As we think about it, we think that it's important to have data in SLE and lupus nephritis, given the overlap between those. We think that's going to be important in helping physicians make the right choice for their patients. So that's part of why we expanded from SLE to cover lupus nephritis as well. Pleased to hear that you're hearing the same kind of enthusiasm that we are about the potential in DLE, and I'll expand that a little bit to say dermatomyositis as well. There's a really good mechanistic rationale for there to be impact in these 2 places. So we're pretty enthused about what we might see there. And while it's not specifically within the lupus bucket, I should also note that we are launching our alopecia study. We've got good rationale here. We also are looking at an efficient study design here so we can get to a quick and efficient answer about what the possibility is here in alopecia. So overall, I think a lot of potential for 7734, and we're pretty excited to keep updating you all as that progresses.

Thanks, David. Olivia, next question please.

Our next question coming from the line of Madhu Kumar with Goldman Sachs.

Yes. So on KRYSTEXXA, I guess kind of -- can you give us more color on how you think about the supplementary BLA on combining KRYSTEXXA with immunomodulators? And where that kind of approval potentially could have impact on the peak sales number itself versus the trajectory towards that peak sales number? And then on the TEPEZZA guidance, kind of where do you think about puts and takes in terms of reimbursement and where there could be kind of like broader uptake among new prescribers you mentioned earlier in the call?

Sure. So with TEPEZZA and reimbursement, I expect it to remain typically how it's been and how we see on KRYSTEXXA and other biologics. It's hurdles in place. As I mentioned in a prior answer around chronic, we are doing very well in getting the chronic population that has high because if you have a over for that fits with the acute policies that were put in place in launch. So we continue to expect to be able to drive that business as we move to it. That's why it's so critical to get the results of the chronic study so we can begin to roll that and drive that as we move into 2023. With KRYSTEXXA, the supplemental BLA is critically -- I don't see it as the critical thing to hit our peak sales of greater than $1 billion, and we're on track to exceed that with our current business. What I do see is that's what drives upside. And I think for the first time, give our sales force and commercial organization the opportunity to actively promote KRYSTEXXA plus immunomodulation. And in this case, KRYSTEXXA plus methotrexate based on the results of the MIRROR trial. So getting that data, including in the label, have the flexibility to promote. And if you look at the standard time lines of a fourth quarter approval would really set us up for strong growth in '23 and beyond.

Great. Thanks, Madhu. Olivia, next question please.

Our next question coming from the line of Ken Cacciatore with Cowen.

Tim, you gave good context around the current TEPEZZA clinician base of the third or 2,600. Can you talk about, do they capture or hold 80% of the patient population, 50%? Can you put some context around the addressable population that they're treating versus the remaining 2/3 that you're going to now try to broaden out into? And then also can you talk about the willingness on the acute patient base for clinicians to try earlier maybe even a head of steroids? Or is it still steroids need to be first? Can you just talk about any changing dynamics as they've gotten more comfortable? I know in the past, there's maybe 40,000 to 50,000 patients that may be on steroids first and just wanted to understand if the clinicians are maybe getting a little bit more aggressive?

Sure. So I'll start with our overall targets. The vast majority of is all pace with active TED and best majority of chronic as well are seen by that 8,000 targets we call on and about half, if not greater, in the high priority targets. So significant opportunity to drive acute in that 2/3 that haven't prescribed at this point. We do not see physicians going to mild or earlier use. I think it's good care to start with steroids that typically what's done in that acute phase because there is a small number of patients that will spontaneously remit and they should stay on steroids. As patients get to moderate to severe and have a number of the other symptoms like diplopia and also proptosis and pain, those become the appropriate patients for treatment with TEPEZZA. So we are getting significant penetration, I would say, in the severe population. And we continue to penetrate in that moderate population, but we don't see a more mild patient as ones that should be candidates for TEPEZZA.

Great. Thanks, Ken. Olivia, next question please.

Our next question coming from the line of Jason Gerberry with Bank of America.

Just 2 on TEPEZZA. First just on the average annualized pricing. I think in the past, there's been some commentary that perhaps 28 vials might be the average versus the 23 that was talked about at the time of launch. And so -- just wondering that the huge swing factor in our pricing assumption, it could push pricing up to about 20% to closer to 300,000 per patient. So figure at this point of a launch, you guys might have a better handle on where that's netting out. So wondering if you could comment on that. And then with chronic TED, in the past, you guys have talked about a lot of these patients aren't actively engaging with their physician because they run out of treatment options probably blow through a few surgeries already. So are you -- can you track with your DTC efforts? Are you activating patients with both forms of the disease, both acute and fibrotic forms? Just sort of curious as the DTC adds sort of the pull-through effect that, that has?

So first with as we've discussed throughout the last 2 years that we had seen vials trending on average about 28 to 90-plus percent compliance last year with only 12 months of sales in 8 months, that certainly didn't help us get a full clarity of run rate, but that is the current trend that remains in place. When we look at our DTC effort, you're exactly correct, Jason. And that it's all about engaging really 3 series of patients are unbranded or nonbranded campaign, a TED campaign is focused on patients who have TED and have symptoms associated, and we're expanding that into symptoms. If you look at our current DTC and television commercials that are out there to focus on diplopia or double vision as a key symptom that patients have thyroid eye disease face and that they should go seek a specialist or find among specialists in their respective areas. Obviously our TEPEZZA branded advertising is focused on driving to TEPEZZA. And then our third campaign that we rolled out last year was -- is in the graves population and really identifying those patients early on that may have graves and anywhere from 40% to 50% of them may get pyrite IDC. So a lot of it is trying to drive all 3 early patients, patients that have active disease or diplopia and high clinical activity score is something that both acute and chronic patients have. So that would be going after both those sets of patients. And while patients don't self-identify as acute or chronic, they're typically responding to symptomology seen in our advertising. So that would indicate they have higher clinical activity going on, which would speak across both populations acute and chronic.

Our next question coming from the line of Gary Nachman with BMO Capital.

First on TEPEZZA, have you completely gone through the bolus from pent-up demand last year with the COVID issues? Or is there still a bit of a backlog? How is that factored into the 2022 guidance? And then on KRYSTEXXA, how has penetration been improving in nephrology? What can you do to accelerate that? Will you wait for the updated label to do that in a more meaningful way? And then just lastly, with the increasing level of R&D spend to drive the pipeline, where will you pivot to driving even more operating leverage? So what's the target for operating margin over the next few years?

Sure. So I'll take the first 2. Paul can address the operating leverage. With TEPEZZA, there were still some disruptive patients in the fourth quarter, as we've discussed many times. We don't see that factoring into our guidance in 2022. As we mentioned in the remarks, with KRYSTEXXA, we've seen strong growth in both rheumatology and nephrology. And I think growth of patient enrollment forms of 75% and overall patient penetration very strong in the nephrology space, albeit a much smaller penetration at this point in time. The label is focused on KRYSTEXXA plus methotrexate, and I would expect that addition into the prescribing information for KRYSTEXXA have its maximal impact on the rheumatology prescribing audience. Within nephrology, getting the results of the RECIPE trial that we have with showed KRYSTEXXA plus mycophenolate is certainly important because mycophenolate is more often used by nephrologists. In addition, our PROTECT trial, which looked at KRYSTEXXA in kidney transplant patients, most -- the majority of them on background like or other immunomodulators, again, that showed, I believe, it was about a 90% -- 89% response rate. So really the RECIPE and PROTECT trial is adding further evidence of of immunomodulation with medicines that are typically used by nephrologists has certainly helped, whereas the MIRROR data with methotrexate is really geared towards the rheumatology audience. And that would be significantly impacted as we get that in the label. Paul, do you want to address the leverage?

Sure. And as we've said, I think we believe we can get to kind of a typical rare disease margin of around 50% as we move through the future years. We would expect that to kind of increase year-over-year as we continue to leverage higher sales as we move towards our peak sales opportunities for our different commercial medicines. However, that could be impacted by any acquisitions we do as we bring additional assets in the pipeline that could impact that year versus year. But we would expect over the next several years that we will grow towards that 50%.

Our next question coming from the line of Akash Tewari with Jefferies.

Can you talk about some of the product characteristics you're looking to achieve with your Halo subcu formulation for TEPEZZA? Would you potentially need to administer 2 subcu doses in a maintenance setting? Or could you get around that requirement with the high concentration formulation you mentioned today? And then stepping back in terms of long term, what proportion of the 70,000 chronic TED patients would be addressable over time? Could we see penetration rates that approach 70% to 80% over the next few years? Or are there certain chronic patients who don't seem to respond well to TEPEZZA in your case reports?

So I'll take the TEPEZZA. We don't expect 70%, 80% penetration in chronic over the next 2 years. As we look at our current greater than $3 billion guidance that expects significant penetration in the acute population, and I would say modest penetration in the chronic population. And as we get more data as we get the results of the chronic trial -- placebo-controlled chronic trial at the end of the year, we expect that to drive '23 and beyond. But we see the 70,000 as being the eligible population. In the near term, we're getting those that have high cash scores over 4 that fit with existing policies that are in place that were created initially at launch around the acute population. And over time, we expect to be able to penetrate beyond that high cash as we get more and more data. Liz, do you want to take that?

Yes. So the subcu program, we are looking at multiple options, including using our new high-concentration formulation and approaches that do and do not include Halozyme. The specifics of the dosing regimen are going to continue to be worked out based on what we find in the clinical work that we're currently undergoing. That said, I don't envision a situation where we're going to be looking at multiple injections at any given dosing. That's not really what we're aiming towards here.

Thanks, Akash. Operator, we're coming to the top of the hour. It looks like we've got time for 1 more question, please.

And our last question coming from the line of Michael Ulz with Martin Stanley.

Just a quick one for me on TEPEZZA in terms of the Phase II chronic TED study. Maybe you can talk about the pace of enrollment in that study that you're seeing versus your internal expectations? It just seems maybe from some of the commentary on the call that we should be expecting data closer to year-end as opposed to -- so that would be sort of later in the initial second half time frame?

I think it's tracking us as we expect and just clarifying more specifically when we expect to get the results.

Great. Thanks, Mike, and thanks, Olivia. That concludes our call this morning. A replay of this call and webcast will be available in approximately 2 hours. Thanks for joining.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.