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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and thank you for standing by. Welcome to the Horizon Pharma plc Fourth Quarter and Full Year 2017 Earnings Conference Call. As a reminder, today's conference call is being recorded.
I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations.
Thank you, James. Good morning, everyone, and thank you for joining us. On the call with me today are Tim Walbert, Chairman, President, and Chief Executive Officer; Paul Hoelscher, Executive Vice President, Chief Financial Officer; Bob Carey, Executive Vice President, Chief Business Officer; Shao-Lee Lin, Executive Vice President, Head of Research and Development and Chief Scientific Officer; Eric Mosbrooker, Senior Vice President, Orphan Business Unit; Vikram Karnani, Senior Vice President, Rheumatology Business Unit; and George Hampton, Executive Vice President, Primary Care Business Unit.
Tim will provide a high-level review of the fourth quarter and full-year results and an update on the business, and Paul will provide detail on our financial performance and 2018 guidance. Shao-Lee will provide an update on our pipeline development programs, and then Tim will provide closing remarks, and we'll take your questions.
As a reminder, during today's call, we will be making certain forward-looking statements, including statements about financial projections, our business strategy, and the expected timing and impact of future events. These statements are subject to various risks that are described in our filings made with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year-ended December 31, 2017, and our earnings news release which was issued this morning. You're cautioned not to place undue reliance on these forward-looking statements, and Horizon Pharma 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 news release and other documents from today that are available on our Investor website at www.horizonpharma.com. We've also posted an investor presentation to our website that summarizes our results as well.
I will now turn the call over to Tim. Tim?
Thank you, Tina, and good morning, everyone. 2017 capped off a year of significant progress for the company in which we launched the next stage of our strategy, building a pipeline of clinically meaningful medicines to drive long-term sustainable growth and shareholder value. Our acquisition of teprotumumab for thyroid eye disease and the initiation of its Phase 3 trial marked the beginning of this important next phase.
Following additional diligence on the patient population and market opportunity, in January, we raised our teprotumumab peak-year annual net sales guidance to more than $750 million. Also in January, we named Shao-Lee Lin our Executive Vice President, Head of R&D and Chief Scientific Officer. Shao-Lee is a 20-year pharmaceutical executive, physician and scientist.
Her arrival is a meaningful step in the company's evolution as she will be leading our pipeline expansion initiatives. In addition to teprotumumab, we added three new development programs to augment our rheumatology portfolio enhance our leadership position in the uncontrolled gout market. With these new programs in place, we are increasing our investment in R&D in 2018 and beyond, aligned with our strategy.
This morning, we reported full-year 2017 total net sales of a $1.056 billion and adjusted EBITDA of $389.7 million. Our fourth quarter and full-year 2017 performance was driven by better-than-expected performance of our rare disease medicines, which increased 60% for the full year. Our rare disease medicines now comprise 60% of our total net sales, which underscores the value of the rapid transformation and diversification of our portfolio over the last three years.
We completed another impressive quarter and year for KRYSTEXXA, generating full-year vial growth of 40% and completing the second expansion of our commercial organization. This expansion and the potential we see for thousands more uncontrolled gout patients that benefit from KRYSTEXXA led us in January to increase our peak annual net sales estimate to more than $750 million.
As we noted in our earnings release this morning, we're significantly increasing our promotional and clinical investment in KRYSTEXXA in 2018 to drive our growth expectations for 2018 and future years. This includes our expectation this year for more than 50% year-over-year KRYSTEXXA net sales growth. Since acquiring KRYSTEXXA in 2016, we have significantly changed its growth trajectory by putting in place the right strategy, the right team, and the right amount of investment. We saw that begin to pay off in 2017 performance.
Overall, our strong performance in 2017 resulted in robust cash flow generation that provides us with the financial flexibility to continue executing our acquisition strategy. Non-GAAP operating cash flow for the full year was $393.1 million, our yearend cash balance was $751.4 million, and our net debt to adjusted EBITDA leverage ratio remains at 3.3 times. We are providing 2018 full year net sales guidance of $1.15 billion to $1.18 billion, representing double-digit year-over-year growth at the midpoint and continued strong performance expectations from our rheumatology and orphan business units.
2018 full year adjusted EBITDA guidance is $370 million to $395 million, reflecting strong top line growth as well as continued investments we are making in teprotumumab, our development pipeline, and our key growth driver, KRYSTEXXA. Paul will provide additional detail on our guidance and financial performance in a few minutes. I will now briefly highlight our 2017 results by business unit.
Net sales for our rheumatology business unit, which includes both KRYSTEXXA and RAYOS, increased 48% for the fourth quarter and 50% for the full year. KRYSTEXXA generated fourth quarter net sales of $43.8 million, a year-over-year increase of 48%, and full year net sales of $156.5 million, a year-over-year increase of 72%. We completed the expansion of our KRYSTEXXA commercial organization in the fourth quarter, doubling the team to nearly 200, a move that will now allow us to reach more rheumatologists and expand our reach to nephrologists.
Our expectation for strong growth in 2018 reflects the impact of this expansion, as well as the significant increase we've noted in prescriber conviction once they see the therapeutic benefits of KRYSTEXXA in their patients. We continue to see significant opportunity to offer solutions for more patients with uncontrolled gout.
Gout is a chronic inflammatory systemic disease, most commonly associated with joint pain and visible tophi. However, uric acid deposits also build up in the organs such as the heart and kidneys. There is increasing evidence to support the significant impact of chronically elevated uric acid on other body systems, including hypertension, diabetes and chronic kidney disease.
Our data indicates there are approximately 50,000 uncontrolled gout patients currently treated by nephrologists, providing a significant opportunity to accelerate the number of patients treated with KRYSTEXXA, doubling the addressable patient population to approximately 100,000 in the United States. Given that we treated less than 2% of the addressable patient market in 2017, we see considerable opportunity with our recently expanded commercial team to rapidly and substantially grow our share of this market over the coming years. We're very pleased with the early positive feedback from nephrologists.
We continue to expect more than 50% year-over-year net sales growth for 2018, accelerating the second half as the expanded commercial team hits its stride. Our growth projection continues to assume the implementation of the 340B drug price rule on July 1 of this year.
RAYOS net sales increased 38% for the fourth quarter to $15.6 million and 10% for the full year to $52.1 million.
Our orphan business generated fourth quarter net sales of $116.6 million, a year-over-year increase of 32%. Full year 2017 net sales were $466.8 million, an increase of 56%. Strong growth of RAVICTI and PROCYSBI contributed to this performance as did the October 2016 acquisition of PROCYSBI. RAVICTI net sales for the fourth quarter increased 57% year-over-year to $51.9 million. Active shipping patients grew more than 20% compared to the fourth quarter of last year as we saw a continued conversion from older generation therapies and the addition of treatment-naïve patients. This growth was in part due to the April 2017 update of the RAVICTI label which expanded the use of medicine to patients older than two months of age, from two years of age and older.
Yesterday, we submitted a supplemental New Drug Application to the FDA to expand the age range for UCD patients to birth and older from the current range of two months of age and older.
PROCYSBI net sales in the fourth quarter, which no longer include EMEA revenues following our sale of that business to Chiesi in June of 2017, increased 31% to $33.2 million. In December, we expanded the PROCYSBI label to include children one year of age and older as well as to include new data we presented at the American Society of Nephrology meeting in November. This data is meaningful for children with nephropathic cystinosis. It demonstrates that children six years of age or younger naïve to treatment were able with PROCYSBI to maintain their cystine levels which is a biomarker for disease control. Further, they experienced measured improvements in height, weight and body surface area reaching important growth milestones equal to standard measures of unaffected children of the same age.
Fourth quarter net sales for ACTIMMUNE were $26.8 million, up 11% compared to the fourth quarter of 2016, which was driven by our continued effort to establish the role of ACTIMMUNE in a broader range of chronic granulomatous disease patients.
In our primary care business, fourth quarter net sales were $96.2 million and full year net sales were $375.4 million, both of which were in line with our expectations.
With that, I will now turn the call over to Paul.
Thanks, Tim. My comments this morning will primarily focus on our non-GAAP results unless otherwise indicated. Fourth quarter net sales totaled $274.2 million and full year net sales were $1.056 billion, driven by continued strong performance of our orphan and rheumatology business units. Our non-GAAP gross profit ratio was 89.3% for the fourth quarter and 89.6% for the full year, in line with our guidance of 89% to 90%.
Fourth quarter non-GAAP operating expenses were $141.9 million. This included non-GAAP R&D expense of $15.3 million which was somewhat lower than expected due to the timing of some expenses that shifted from the fourth quarter to the first quarter of 2018. Non-GAAP SG&A expense was $126.5 million, primarily driven by the expansion of the KRYSTEXXA commercial organization. For the full year, non-GAAP operating expenses were $555.9 million.
Adjusted EBITDA was $102.7 million for the fourth quarter and $389.7 million for the full year. The fourth quarter non-GAAP income tax rate was 37.6%. The full year non-GAAP tax rate was 31.8% and cash taxes were approximately 4%, both in line with our expectations. As a result of the enactment of the Tax Cuts and Jobs Act of 2017 in December, we recorded a one-time tax benefit of $74.9 million in the fourth quarter of 2017 to reflect the reduction in our net deferred tax liabilities.
The benefit, which was treated as a non-GAAP adjustment, resulted from the reduction in the U.S. federal corporate income tax rate from 35% to 21%, partially offset by the write-off of a deferred tax asset related to our U.S. interest expense limitation carry-forwards due to the lack of clarity in the tax legislation regarding the ability of companies to use those carry-forwards in the future.
Non-GAAP net income and non-GAAP diluted earnings per share in the fourth quarter of 2017 were $48.4 million and $0.29, respectively. For the full year, non-GAAP net income and non-GAAP diluted earnings per share were $194.8 million and $1.18, respectively. The weighted average shares outstanding used to calculate fourth quarter and full year non-GAAP diluted EPS were 166.9 million shares and 165.7 million shares, respectively.
Non-GAAP operating cash flow was $157.9 million in the fourth quarter and $393.1 million for the full year. And we ended 2017 with a strong cash position of $751.4 million. At December 31, the total principal amount of our debt outstanding was $2.02 billion. Net debt was $1.27 billion and our net debt to last 12 months adjusted EBITDA leverage ratio was 3.3 times.
Moving now to our outlook for 2018, this morning, we issued our full-year 2018 net sales guidance range of $1.15 billion to $1.18 billion and our full-year 2018 adjusted EBITDA guidance range of $370 million to $395 million. Specifically, our net sales assumptions by business unit are: full-year net sales percentage growth for the orphan business unit in the high-single-digits, full-year net sales percentage growth for the rheumatology business unit in the high 30s, and full-year net sales for the primary care business unit to exceed $350 million.
Regarding our orphan business unit guidance, as a reminder, we sold the marketing rights for PROCYSBI and QUINSAIR in Europe, the Middle East and Africa, in late June of 2017. This will impact the year-over-year comparisons for the first half of the year.
Our rheumatology business unit guidance assumes that full-year KRYSTEXXA net sales growth of greater than 50%, which incorporates assumptions of accelerating year-over-year vial growth, the positive impact of our recently expanded KRYSTEXXA commercial organization and increased promotional efforts, as well as the potential impacts of an assumed July 1, 2018, implementation of the 340B drug price rule.
We expect our non-GAAP gross profit ratio to range between 89% and 90%, in line with last year, and expect that the first quarter to have the lowest gross profit ratio of the year, which follows a similar historical pattern. Moving to operating expenses, as Tim mentioned, 2018 will be a year of investment in our key strategic initiatives. Our adjusted EBITDA range of $370 million to $395 million reflects significantly higher year-over-year spending for teprotumumab and other R&D programs, as well as SG&A primarily relating to the commercial expansion and promotional spending for KRYSTEXXA.
We anticipate non-GAAP R&D expense as a percent of sales to be in the mid to high-single-digits for the full year, driven by the ramp-up of our Phase 3 teprotumumab clinical program; our new rheumatology pipeline programs, HZN‐002, HZN‐003, and our PASylation work; as well as the KRYSTEXXA investigator‐initiated trials, RECIPE and TRIPLE. We anticipate R&D spend in the first and second quarters to be the highest on a dollar basis and in the high-single-digits as a percentage of sales.
This is driven primarily by teprotumumab commercial product manufacturing and process validation work which will be focused in the first half of the year as well as by the shift of some spend from the fourth quarter of 2017 to the first quarter of 2018. We anticipate a significant increase in non-GAAP SG&A spending year-over-year, primarily reflecting the full year impact of the expanded KRYSTEXXA commercial organization and additional KRYSTEXXA promotion-related investments.
It is critical for us to invest now in KRYSTEXXA to deliver on our greater-than-50% year-over-year net sales growth projection for 2018 and our peak annual net sales estimate of greater than $750 million. And similar to prior years, we anticipate that the first quarter will have the highest level of SG&A spend as a percentage of sales of any quarter during the year. We expect full year non-GAAP net interest expense to range between $105 million and $110 million, similar to the last year.
This assumes that the benefit of our debt refinancing in October of 2017 is offset by current LIBOR rates. We expect our full year non-GAAP tax rate in the high-single-digits, which incorporates a positive impact from the recently enacted Tax Cuts and Jobs Act. As we see every year, we anticipate some variability in our non-GAAP tax rate on a quarterly basis, which averages out to the full year estimate.
We anticipate a significantly higher non-GAAP tax rate in the first half of 2018 versus the second half. We estimate that our cash tax rate will be in the mid-teens in 2018, with that rate declining to the high-single-digits over the next five years. As we have stated previously, these tax rate projections could change significantly as a result of any acquisitions or divestitures made by the company. We expect our full year 2017 weighted average diluted share count to be between 165 million and 170 million shares.
Regarding cash flow, we expect our full year 2018 non-GAAP operating cash flow to be less than 2017. In 2017, we realized a one-time working capital benefit as a result of the implementation of the PBM contract we model for primary care. While we had a full year of rebates to two major PBMs reflected in our net sales in 2017, we only paid 11 months of invoices for one PBM and three quarters of invoices for the other major PBM.
For 2018, we expect to have a full year of rebates, reflecting both our net sales and in our operating cash flows. As a result, we expect a difficult year-over-year operating cash flow comparison for both the first quarter and the full year of 2018. And finally, let me cover our guidance for the first quarter of 2018.
As we discuss every year and as we see across the industry, first quarter net sales are impacted by seasonality as patient deductibles reset or patients experience a change in their health insurance providers. As a result, we expect first quarter net sales to be approximately 20% of our full year 2018 net sales. This is in line with prior years when the first quarter net sales contribution has ranged between 15% and 21% of full year net sales.
We expect first quarter adjusted EBITDA to be approximately 10% of our full year of 2018 adjusted EBITDA. As I mentioned in my earlier comments, we anticipate R&D to be higher in the first half of the year due mainly to the timing of teprotumumab's funding and SG&A spending to be the highest in the first quarter. Our first quarter adjusted EBITDA expectation is in line with prior years when the first quarter adjusted EBITDA contribution has ranged between 9% and 15% of our full year adjusted EBITDA.
With that, I'll now turn the call over to Shao-Lee.
Thanks, Paul, and good morning, everyone. It's a pleasure to be joined in the call this morning. I'm excited to be part of Horizon Pharma and to be part of the leadership team here as we enter the next phase of transformation in building a robust pipeline to drive sustainable growth for the long-term.
For me, as a physician, this commitment means greater opportunity to develop new medicines for patients with unmet needs and, in the case of rare diseases, some of the most significantly underserved patients. Over the past two months, I've been impressed by the people here that take their mission personally and at the shared passion and great pleasure of working with them in continuing to build our R&D capabilities and portfolio.
For today's call, I would like to highlight the programs related to our two key growth drivers, teprotumumab and KRYSTEXXA, as well as the recently added early-stage programs as next-generation opportunities to sustain leadership in uncontrolled gout. I'll start with teprotumumab, which is a fully human monoclonal antibody that blocks the insulin-like growth factor-1 receptor or IGF-1 receptor.
Teprotumumab is in Phase 3 development for the treatment of thyroid eye disease or TED. If approved, teprotumumab will be the only FDA approved medicine available to treat this rare thyroid eye disease. In TED, IGF-1 receptor is overexpressed in orbital tissues, the tissues surrounding the eye. And, therefore, by blocking IGF-1 receptor, it is thought that teprotumumab could block the specific autoimmune pathway involved in active TED and thereby diminish local inflammation, prevent orbital fibroblast proliferation, reduce tissue expansion and thus restore the orbital tissue to a more normal state.
The Phase 2 clinical study results that were published in The New England Journal of Medicine last May were impressive with response rate on the order of 70%. Significant improvements were demonstrated in proptosis, Clinical Activity Score and the Quality of Life. In addition, improvement in the objective measurable endpoint of proptosis suggest potential for teprotumumab as a disease modifying treatment. Late last year, we initiated enrollment in our Phase 3 (23:21) trial and we continue to expect enrollment of the planned 76 patients to be completed by year-end.
Titled OPTIC, this is a randomized, placebo-controlled, confirmatory trial evaluating the efficacy and safety of teprotumumab in subjects with active TED The primary endpoint is the effect of teprotumumab versus placebo on the proptosis responder rate at week 24 defined, as it was in Phase 2, as the percentage of patients with a reduction in proptosis of 2 millimeters or more. At the end of the Phase 3 double-blind treatment period at week 24, participants who are proptosis non-responders will also be eligible to enter OPTIC X (24:07), a 48-week open-label extension study in which participants may receive up to eight additional infusions of teprotumumab.
In addition, participants who are considered responders at week 24 but who meet criteria for retreatment due to relapse during the follow-up period off study drug may enroll in the 48-week open-label extension as well.
We expect to be in a position to submit data from the Phase 3 trial in the second half of 2019. Teprotumumab has U.S. FDA Orphan, Fast Track and Breakthrough Therapy designations.
Moving to KRYSTEXXA and our rheumatology pipeline, we saw progress across multiple fronts in the last several months. A key component of the clinical strategy for our uncontrolled gout franchise is to improve the response rate and reduce infusion reactions to KRYSTEXXA, thereby increasing the duration of treatment possible for those patients who may develop antidrug antibodies to the medicine.
As with many biologic medicines, some people develop antibodies as part of an immune response to their medicine and therefore lose clinical efficacy with the therapy. About half of patients who take KRYSTEXXA develop this type of immune response, while the other half achieve complete response to therapy, meaning a clinically significant reduction in serum uric acid levels coupled with resolution of tophi or the uric acid deposits, tender and swollen joints, pain, and improvement in the patient's own global assessment of wellness.
Relative to degrees of response achieved with biologics across the other types of arthritis, the magnitude of the complete response achieved with KRYSTEXXA is impressive. Nonetheless, we aim to improve it, as well as continue to improve understanding of the safety and proper use of KRYSTEXXA. One of the ways we're doing this is through the support of investigator-initiated trials to examine the effectiveness of concomitant immunomodulator therapy on the rate of immune response.
One of these is the TRIPLE trial, an exploratory, open-label adaptive trial with multiple patient cohorts evaluating various approaches to improving the response rate of KRYSTEXXA and reducing infusion reactions. Initial data from that study was presented at the 2017 ACR Meeting by the trial's lead investigator, Dr. Peter Lipsky. The data show a dramatic reduction in infusion reactions when stopping rules are followed, down to less than 1% from the 26% currently reported in the KRYSTEXXA label.
Stopping rules entail stopping treatment after two consecutive measurements of serum uric acid levels are above 6 milligrams per deciliter, which can signal that the body is developing an immune response to the medicine. While stopping rules have been a frequent real world practice, this was the first prospective trial to demonstrate the importance of stopping rules and reinforces our belief in the safety of KRYSTEXXA when administered appropriately.
Based on this new data as well as additional analyses of the Phase 3 clinical trials and post-marketing safety studies, in late September of last year we submitted a proposed update to the prescribing information for KRYSTEXXA to the FDA.
A new cohort of the TRIPLE trial will evaluate the impact to immune response of adding the immunomodulator azathioprine to KRYSTEXXA. And a second immunomodulation study, RECIPE, also an investigator-initiated trial led by Dr. Ken Saag at the University of Alabama, Birmingham, will evaluate the impact to immune response with the addition of mycophenolate mofetil to KRYSTEXXA. Both azathioprine and mycophenolate are agents well-known and commonly used by rheumatologists.
On the development front, we added two early-stage programs, both utilizing technologies to design new agents for uncontrolled gout with improved clinical response rates or decreased immunogenicity as well as the potential for subcutaneous dosing and hence improved patient convenience.
HZN‐003 is a pre-clinical genetically engineered and optimized uricase along with optimized PEGylation technology. We licensed HZN‐003 in December. The second program is a collaboration to identify clinical stage product candidates that could use PASylation technology, which is adding a peptide sequence to uricase. This is hypothesized to lower immunogenicity potential relative to PEGylation and also allow potential for subcutaneous dosing.
Together, these rheumatology pipeline programs represent significant steps for the future of our uncontrolled gout portfolio and we are excited about the prospects they offer for improved response rate and convenience in dosing for patients.
In conclusion, 2017 was a year of significant progress on the R&D front. This progress serves to catalyze the next phase of growth for Horizon Pharma and demonstrates our commitment to build a robust pipeline for sustainable long-term growth. I am looking forward to driving the continued buildout of our pipeline and R&D capabilities so that we can deliver our mission to bring new medicines to the patients who need them.
With that, I'll turn it over to Tim for his concluding remarks.
Thanks, Shao-Lee. 2017 was a year of significant progress for the company. With the acquisition of teprotumumab, we launched the next stage of our strategy building a pipeline of clinically meaningful medicines to drive long-term growth and shareholder value. We doubled the commercial organization of KRYSTEXXA to maximize its significant growth potential, which includes expanding our reach to nephrologists. We also delivered continued strong growth of our rare disease medicines, which underscores the value of our diversification strategy over the last three years.
In 2018, we expect continued strong performance from our rare disease medicines, which we expect to drive the double-digit year-over-year growth rate at the midpoint of our net sales guidance range. We're also investing in the long-term growth of KRYSTEXXA and advancing teprotumumab and our growing pipeline, which will generate strong and growing long-term returns for Horizon Pharma and our shareholders.
With that, we can now open the call up to questions.
Thank you, sir. Our first question comes from Ken Cacciatore with Cowen and Company. Your line is now open.
Thanks and congratulations on all the progress. Just a question as we're thinking about KRYSTEXXA and as you kind of continue to approach nephrologists. In terms of where the patients are located, is it kind of like 80%/20% rule? Is it few nephrologists treat many or few clinics treat many? Can you just talk about if you're able to penetrate kind of a high prescriber group is that going to kind of trigger an inflection? So, maybe how that market sits as you approach it.
And then on teprotumumab, really a lot of increased confidence from that $250 million to the $750 million and I know you have a slide in here, but maybe a little bit more nuance as you've done more work as to how you see that opportunity building. Clearly, you think it's much larger than you originally started. Just lastly, nice stability in the primary care market and clearly the company is getting away and diversifying away from that area. But just any update as how you're thinking about that business strategically either to retain or to divest. Thanks so much.
Sure. So I'll kind of answer them in reverse order. With the primary care business, we have strong stabilization over the last half of the year or three quarters and we continue to see strong cash flow and don't have anything further to update strategically on that business.
With teprotumumab, I'll walk through that and then Vikram can address your questions on nephrology. As we did further analysis looking at the market, there's a large funnel of Graves' disease patients which are about 30% developed thyroid eye disease, where we now estimate about 15,000 to 20,000 addressable patients each year that have active moderate to severe thyroid eye disease.
And as we step back and done a research and look at our ability to penetrate the market with about 53% penetration with RAVICTI, similar penetration with PROCYSBI, we model that type penetration with orphan-like pricing, along with the dramatic data that we've seen and Shao-Lee has reviewed, about 70% response rate in Phase 2, replicating that. And in aggregate, we felt very confident that the U.S. opportunity would be greater than $750 million in peak sales. Vikram, do you want to address the nephrology question for the KRYSTEXXA?
Yes. So, the question, I think, was about how concentrated is the patient pool within nephrology. What we've done is we've sized the team to call on up to 25% to 30% of nephrologists because that's where we see the largest opportunity. The only caution to add there is we're talking about uncontrolled gout as opposed to this gout. And so, from our standpoint, we wouldn't leave any stone unturned if there is even one or two or three patients out there that are not in the top three or four deciles of nephrologists. We will absolutely go out and address those. So, the general gout population tends to be concentrated similar to rheumatologists, but in terms of uncontrolled gout specifically that distribution might be a little bit wider. So we've sized the team to be able to call on all of them and maximize the opportunity for ourselves.
Great. Thank you.
Thank you. Our next question comes from David Amsellem with Piper Jaffray. Your line is now open.
Thanks. So, just a couple of quick ones on KRYSTEXXA. I wanted to drill down on your assumptions underlying the sales growth guidance. So, first, can you maybe quantify or maybe talk qualitatively about how much contribution is coming from the nephrology setting, at least in terms of the growth mix. So, that's number one.
And then number two, just remind us how you think about the impact of the implementation of the 340B rule. And then, lastly, maybe just comment anecdotally. I know you have the TRIPLE and the RECIPE studies ongoing but in terms of the anecdotal usage of immunosuppressants like azathioprine, how common is that right now and are you seeing that growing? Thanks.
Sure. So, with KRYSTEXXA, we expect about 85% of the opportunity to be in rheumatology this year and the remainder in nephrology, with that ramping up in the second half. With 340B, we continue to expect 20% to 25% of our business, which is 340B impacted to have a pending pricing rule go into effect July 1. So, our guidance of greater than 50% growth includes that impact. Vikram, do you want to comment on the immunosuppressant use?
Yeah. And we've heard anecdotally and this has been throughout the last 12 months or even maybe a little bit longer, physicians, especially rheumatologists, are very comfortable with the use of immunomodulation agents, because that's something they use in their practice or in other areas as well. So, that is azathioprine, methotrexate, mycophenolate. They are very familiar with this.
And we've heard anecdotal evidence of people using it on their own without, of course, us promoting that because we cannot, and with fantastic results in many cases, which stirs the evidence or one more piece of evidence, which is why we are supporting the RECIPE trial as well as the TRIPLE trial that should play out as this year goes by.
Thanks, David.
Thank you.
James, next question, please?
Thank you. Our next question comes from Marc Goodman with UBS. Your line is now open.
Yes. Good morning. First of all, on KRYSTEXXA, the third quarter to fourth quarter ramp didn't look that much. I was just wondering if there was anything that happened in the fourth quarter that was unusual for KRYSTEXXA. It just seemed like it would ramp a little faster given how bullish you are on stuff and I realize that the sales reps on nephrology hasn't kicked in yet but so that's the first question.
Second question as you talked about tepro started enrolling a couple of months ago, can you give us any sense of how many patients you've enrolled so far just to let us know how you're doing there? And then, thirdly, Tim, maybe you can just talk about your business development thoughts lately. Obviously, you look to be – the last couple deals seem to be pipeline related. I was just curious if you're still very focused on that or if you're equally as focused back on the commercial side. Thanks.
So, first with KRYSTEXXA, I think, you made the point, Marc, is that all territories were realigned in the fourth quarter. So with that significant disruption of all territories realigned, we're very pleased with the uptake and the acceleration in December going into January has continued and we're very confident in our ability to achieve our goals here in 2018. With teprotumumab and uptake, the U.S. is online and we've seen several patients begin to come into the program and we expect Europe to come online over the next few weeks. So we're progressing well. And, as we get further into the trial, we'll give more detailed updates. And Bob can address the last business development question.
Sure. So, Marc, we continue to move towards building out the development stage pipeline. That's where we see opportunities. We perceived that there's a healthy environment that exists for the funding and development of medicines for rare diseases. And as a result of that, we're seeing interesting and actionable opportunities there. So, the expectation is that that's the direction that we'll continue to move towards is building up that portfolio to create long-term sustainable value for the organization.
Great. Thanks, Marc. Next question, please?
Thank you. Our next question comes from Gary Nachman with BMO Capital Markets. Your line is open.
Hi. Good morning. On HZN-002 and 003 in the rheumatology pipeline those seem pretty interesting. Where do they come from? Were either generated internally? And could we see more from your internally generated pipeline going forward? So, maybe for Shao-Lee. Do you plan on building out the early-stage capabilities of the company or will you focus more on late-stage assets?
Yeah. Thanks for that, Gary. So, to answer the first part of your question, 003 came from an acquisition with AstraZeneca MedImmune, and 002 is a collaboration with a European company for the PASylation technology. I think that we are very excited that we have these opportunities to explore next-generation approaches to how we might improve KRYSTEXXA from an immunogenicity as well as a patient convenience perspective.
And in terms of developing our overarching capabilities, of course, we will have near-term focus on any late-stage opportunities that we might come across, including very focused efforts as you've heard about today in terms of how we might improve both our understanding of appropriate use of KRYSTEXXA from a infusion reaction perspective, as well as frame the efficacy that we're seeing there. But that having been said, from the longer-term, you can absolutely expect that in terms of our rheumatology pipeline, we will be looking at opportunities across the board to build that out in a robust fashion.
Great.
Okay. Just one quick follow-up just on the ACTIMMUNE cancer studies and the RECIPE and TRIPLE studies with the immunomodulators, just tell us when those will read out. Thanks.
So, let me take those a little bit separately. I think in terms of RECIPE and TRIPLE, we anticipate, as we've stated before, kicking off those studies still this quarter and as soon as we have some data from that, even the potential for us to move forward with Horizon-sponsored studies to take advantage of any data that we might have coming out of those early explorations. And so, sometime within the context of this year, we hope to start having some sense of what those approaches can or can't do for us.
In terms of the oncology studies with ACTIMMUNE, there're, as you know, a number of exploratory studies both in the context of PD-1 inhibitors as well as in breast cancer with ACTIMMUNE as an immune boost, if you will. We'll have a – again, exploratory we'll have much better sense of what, if anything, is sensible as next steps once we see some data from those with – and likely within the context of late this year, early next year.
Thanks.
Thanks, Gary. James, next question, please?
Thank you. Our next question comes from Annabel Samimy with Stifel, Nicolaus. Your line is now open.
Hi. Thanks for taking my questions. I have a couple. Shao-Lee, I heard you mention that teprotumumab could have potential disease modification properties in TED. So what would need to be done to establish that? Is that important for the condition for marketing? And just some details around that in terms of what you're baking into the trials to establish that.
And also just in terms of the stopping rules on KRYSTEXXA. So the utility of the stopping rules was to reduce, I guess, immunoresponses to 1% from 26%. What are the options for these patients once they have the stopping rules? And I guess is the RECIPE trial going to be able to address that specifically in terms of what the next options are, perhaps having more guidance around immunosuppression for these patients? Thanks.
So, Vikram can take the KRYSTEXXA and then Shao-Lee will go through the teprotumumab question.
So, thanks for the question. I think the question was around stopping rules and what happens to those patients, what options they have after stopping rules have been engaged. So, first of all, the data – just to remind everybody, the data that we showed at ACR showed that when engaged in stopping rules, the infusion reaction rate which was previously thought to be 26% can be as low as, as less than 1%, which has dramatic improvement if the right methodology is followed for the infusion protocol.
And what happens typically after that is that the – the only reason you would do that is if the patient is likely to develop some sort of immunogenicity or head towards an infusion reaction which is why we would stop. In that event, this is up to the physician's discretion, but one would imagine that they go back on continuing some sort of oral urate-lowering therapy to continue monitoring the disease and preventing any future symptoms.
The question around how this is tied in with the immunomodulation studies, whether it's RECIPE or TRIPLE, the whole idea is that if you use immunomodulation, you try to mitigate that event from occurring in the first place. And so, they are tied together. If you mitigate immunogenicity, even to a certain extent, the theory is that you should not be seeing a patient head towards infusion reactions, because you've mitigated the formation of those antibodies. But this remains to be seen in the trials that are being conducted as we speak.
So, they are very closely linked. But the bottom line is that even as of today, without the readout from those trials, the data showing infusion reaction rate going down to low single digits is a dramatic improvement over what has been thought about this drug for the past few years. And that's what's actually driving a lot of uptake within rheumatology as well as confidence in nephrology.
So – and thanks for the question about thyroid eye disease and, really, the potential for teprotumumab in terms of disease modification. In thyroid eye disease what we see is an active phase and then a stable burned out phase, if you will. The active phase we think lasts on the order of a year to two years, and is coupled with redness, pain, swelling, the bulging of the eyes that you see and pain and potentially even compression of the optic nerve and blindness or, at a minimum, sort of derangement of the ability to move the muscles of the eye, and things like double vision.
Once the disease state moves into the stable phase, that active phase of the inflammation is over, the burned out aspect of it can lead to permanent damage. And so, really subsequent to that, the treatments are about surgical decompression and trying to sort of put the eye back into a position in the orbit that has more function, and that can be difficult to achieve.
So the object or the premise for teprotumumab is really to catch patients within the context of the active phase of the disease to prevent the permanent damage that can come once you reach the stable phase of the disease. And if we are successful in our ability to do that, then we believe that the improvement that you can see with teprotumumab as you saw in terms of proptosis in The New England Journal paper, if those effects have durability associated with them, meaning that we can maintain that response off of drug, then that would be a measure of our ability to modify the natural course of that disease.
We have a follow-up period to that Phase 2 study that's ongoing. We anticipate that results from that follow-up period off of study drug for up to a year will be shared at a medical conference later this year. And in addition, in the context of our Phase 3 program, we have the ability for individuals who don't respond to determine whether or not a longer duration of therapy or retreatments would also be beneficial. So, I think all of those pieces of information will really help to inform us in terms of what the overarching benefits and best use of teprotumumab be for patients and physicians.
If you don't mind on the patients in the active phase, how do you consider – how did you calculate a placebo rate for patients who might move into a stable phase from an active phase?
The placebo rate was based on the results of the Phase 2 trial.
There's a placebo arm in the study.
Yeah.
Okay. All right.
Great. Thanks, Annabel. James, we have time for two more questions, please.
Yes ma'am. Our next question comes from Dana Flanders with Goldman Sachs. Your line is now open.
Hi. Thank you very much for the questions. I have two quick ones, please. My first, maybe talk a little bit about how you're viewing the longer-term margin profile of the business. You're obviously spending this year on your growth initiatives, investing in the pipeline. How should we think about just the ability to drive margins back up to that mid to high-40% range over time? I think of KRYSTEXXA and tepro as very high-margin products when they're fully launched. Is 2018 a low point for the business?
And then maybe just my second quick follow-up on KRYSTEXXA. Appreciate your earlier comments. Maybe now with the nephrology sales force in place, and I realize it's early, but can you just give a little bit greater detail on the receptivity you're seeing in the channel? I mean, what are physicians saying, what are patients saying, and is there any level of pushback at this point? Thank you.
Sure. So, your question around margin profile, certainly, with KRYSTEXXA, as we focus on the investment, doubling the sales force, continuing to invest in the RECIPE and TRIPLE and additional clinical programs, we're in launch and investment mode. We see the KRYSTEXXA accretion accelerating through the end of 2019 and getting to orphan margins, approximately 50% or greater, as we move into 2020.
Obviously, with teprotumumab anticipating a launch in that similar timeframe that would have much less cost infrastructure than KRYSTEXXA and to accelerate to a very high margin level quickly. Overall, the business as it stands we continue to look for development stage medicines from an acquisition standpoint and we will invest in the long-term growth of the company. That's not factored into our current estimate. The question around nephrology Vikram can address.
Thanks, Tim. So as we started calling on more and more nephrologists over the last few months, the feedback and the response from that community has been very positive both from physicians as well as patients. What we're observing with the physicians is a very high sense of urgency, in fact, higher than we had anticipated just because of the highly sick nature of the patient population.
I think the one part where we are working with them is helping them with the whole process around infusions and finding sites of care. And that has been an active part of our efforts with them and we'll continue on that throughout 2018. But, overall, very positive, high sense of urgency and – both from patients as well as physicians.
Great. Thanks so much. James, last question, please?
Yes, ma'am. Our last question comes from Louise Chen with Cantor Fitzgerald. Your line is now open.
Hi. It's Brandon Folkes on for Louise. Firstly, on PROCYSBI, do you see this as a growth asset in 2018 despite losing your revenues and if you can perhaps give us some color around the growth drivers there? And then secondly, could you just give us a bit more color on how you're thinking about potential competition for KRYSTEXXA in reaching the peak sales? Thank you.
I'll take the KRYSTEXXA. We don't see any potential entrants that would impact our ability to achieve our long-term objectives. With PROCYSBI, Eric, can you comment?
Thanks, Tim. So absolutely, we see PROCYSBI as a growth opportunity for the company. We have about half of the patients are on therapy right now. We still have a fair number of patients that are either not treated or on an older generation therapy. We had the label expansion which Tim talked about earlier. We continue to work on supporting the diagnostic process, so that more patients are diagnosed. And then finally when patients get on therapy, there's a titration process to get them to an optimal dose. So, those all contribute to the growth.
Great. Thanks, Brandon. James, I think I can wrap it up now.
Yes, ma'am.
That concludes our call this morning. So, thanks so much for joining us today.
Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may all disconnect. Have a wonderful day.