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Good morning, and thank you for standing by. Welcome to the Horizon Pharma Fourth Quarter and Full-Year 2018 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, Amanda. 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; Shao-Lee Lin, Executive Vice President, Head of Research and Development and Chief Scientific Officer; Bob Carey, Executive Vice President, Chief Business Officer; and Vikram Karnani, Executive Vice President, Chief Commercial Officer.
Tim will provide a high-level review of the fourth quarter and full-year results and an update on the business. Paul will provide detail on our financial performance and 2019 guidance, and Shao-Lee will discuss the clinical development programs for our rare disease medicines. After closing remarks from Tim, we will 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, 2018 and our earnings press release, which was issued this morning. You are cautioned not to place undue reliance on these forward-looking statements, and Horizon disclaims any obligation to update such statements.
In addition, on today's conference call, non-GAAP financial measures will be used. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and other filings from today that are available on our Investor website at www.horizonpharma.com.
I will now turn the call over to Tim.
Thank you, Tina, and good morning, everyone. 2018 was a highly successful year for Horizon. In addition to record financial results, we made tremendous progress executing on our strategy to build robust and differentiated pipeline and maximize the growth for flagship medicine KRYSTEXXA. We enrolled our teprotumumab Phase III clinical trial ahead of schedule and anticipate topline data this quarter.
We hope to bring to markets the first ever therapy for thyroid eye disease to thousands of patients were suffering without a treatment option. We also delivered on our full- year 2018 net sales growth target of 65% for KRYSTEXXA. This is a direct result of having doubled our commercial organization which we started roughly one-year ago. We continue to invest in KRYSTEXXA to help many more patients suffering from uncontrolled gout, a very painful and often disfiguring disease. In fact more than 100,000 patients underwent gout-related amputations over the last five years. We believe KRYSTEXXA that can certainly help prevent this type of last resort measure.
Our focus and execution results and a strong financial performance, we increased full-year net sales 14% to $1.21 billion, a record for the company, and achieved $451 million in adjusted EBITDA well above our guidance. The successful year was capped off by a strong fourth quarter with Orphan, Rheumatology segment net sales of $238 million. This segment makes up nearly 70% of our total net sales, reflecting the value of our rapid evolution into a company focused on rare and rheumatic diseases.
Driving the segments 33% growth in the quarter was the 90% increase in KRYSTEXXA net sales to $83 million. This is impressive performance when you take into account that KRYSTEXXA was first approved nine years ago, and we have quadrupled its annual sales in the three years since we acquired the medicine in 2016.
The investments we are making are working. During 2018, we opened 620 new KRYSTEXXA accounts, representing an increase of 25% compared to total KRYSTEXXA accounts at the end of 2017. And vials from existing accounts increased 30% year-over-year. We continue to expect double-digit growth for KRYSTEXXA for the full-year 2019.
Net sales of our Orphan medicines, RAVICTI and PROCYSBI grew 16% and 21% respectively in the fourth quarter. Demand remained strong for both medicine driven by patient growth and improved compliance. Both medicines are benefiting from the updates we made to their labeled indications, which have served to increase physician confidence in the clinical profiles of the medicines for treating younger, treatment-naive patients.
Our commercial success in 2018 was mirrored by key developments and progress in R&D. We built out our R&D leadership team beginning with the addition of Shao-Lee Lin early in the year and then with the new leadership team, she brought into enhance the organization's capabilities. This is all in support of our strategy, which is to bring new medicines to patients and maximize the benefits of our current medicines.
Shao-Lee will discuss our R&D progress in more detail. I’ll highlight a few milestones now. With teprotumumab, we enrolled our Phase III clinical trial well ahead of schedule and expect topline results this quarter. Teprotumumab is our fully human monoclonal antibody IGF-1 receptor inhibitor in Phase III development for thyroid eye disease or TED. We continue to anticipate a mid-year 2019 BLA submission assuming positive clinical data and if approved teprotumumab would be the first and only approved treatment for TED.
We're also investing KRYSTEXXA to maximize its value and enable more patients who suffer from uncontrolled gout to benefit from the medicines impressive efficacy reducing serum uric acid. Our initiatives include MIRROR, our immunomodulation trial underway, which is evaluating the impact of combining KRYSTEXXA with methotrexate. The immunomodulator most commonly used by rheumatologists.
We are currently advancing MIRROR to support the potential registration, continue to expect these asset trial to begin in the second quarter. Today, we announced plan to initiate a KRYSTEXXA trial in the second half of this year that demonstrate the efficacy of KRYSTEXXA in reducing serum uric acid levels and kidney transplant patients with uncontrolled gout.
Can you transplant patients and more than a tenfold increase in the prevalence of gout compared to the general population, which makes this an important patient population to evaluate, we estimated it's about 30,000 patients with the little over a third as an addressable patient population for us.
In 2019, we expect our Orphan and Rheumatology segment to continue to drive our growth, supported by our durable base of rare disease medicines and KRYSTEXXA. In addition, the $960 million in cash on our balance sheet allows us to pursue external opportunity to expand our pipeline.
Looking to the future, our high growth opportunities KRYSTEXXA and if approved teprotumumab and more than double our current net sales, which each expected more than $750 million in peak net sales.
Finally with continued strong growth of KRYSTEXXA expected for many years to come, the additional potential growth from teprotumumab beginning in 2020 and the potential acquisition opportunities to augment our pipeline, we believe we’re in an excellent position to deliver long-term growth, margin expansion and shareholder value.
I'll now turn it over to Paul.
Thanks, Tim. My comments this morning will primarily focus our non-GAAP results unless otherwise noted. Fourth quarter net sales of $355.5 million were driven by continued strong growth in our Orphan and Rheumatology segments. This segment generated net sales of $237.6 million in the quarter, an increase of 33% and generated segment operating income of $84.8 million, an increase of nearly 40%.
As we've discussed previously, we significantly increased our investment in 2018 in both our pipeline and our KRYSTEXXA commercial efforts. With the increase in KRYSTEXXA sales and continued growth from our orphan medicines and RAYOS, fourth quarter segment operating margin improved 130 basis points year-over-year. For the full-year, the Orphan and Rheumatology segment generated net sales of $831.5 million and segment operating income was $290 million, increases of 22% and 20% respectively.
Net sales for the Primary Care segment were $117.9 million and segment operating income was $66.2 million. For the full-year, the primary care business generated net sales of $376.1 million and segment operating income of $160.4 million. We delivered improved segment operating income from Primary Care, which we continue to invest back into our Orphan and Rheumatology segments.
Our non-GAAP fourth quarter gross profit ratio was 89.1% of net sales. Non-GAAP operating expenses were $165.8 million for the fourth quarter. This included GAAP R&D expense of $18.7 million, reflecting investment in teprotumumab as well as our rheumatology pipeline program.
Non-GAAP SG&A expense was $147.1 million. Adjusted EBITDA was $151.1 million for the fourth quarter. Non-GAAP income tax expense for the fourth quarter was $10.4 million. Non-GAAP net income and non-GAAP diluted earnings per share were $116.8 million and $0.67 respectively.
The weighted-average shares outstanding used to calculate fourth quarter 2018 non-GAAP diluted EPS were 174.2 million shares and non-GAAP operating cash flow was $115.1 million.
As of December 31, cash and cash equivalents were $958.7 million, which gives a significant flexibility to manage our business. The total principal amount of our debt outstanding was $1.993 billion, and we have a long run way to our first debt maturity which is not due until 2022. Net debt was $1.034 billion, and our net debt-to-last 12 months' adjusted EBITDA leverage ratio was 2.3x, compared to 3.3x at the end of 2017.
Moving now to our outlook for 2019. This morning we provided 2019 full-year net sales guidance of $1.23 billion to $1.25 billion, underscoring our expectation of another year of commercial execution driven by our Orphan and Rheumatology segments. In 2019, we continue to project double-digit full-year net sales growth for KRYSTEXXA.
Our full-year net sales guidance also incorporates the divestiture of three of our medicines outside the United States. RAVICTI, AMMONAPS known as BUPHENYL all in the U.S. and LODOTRA known as RAYOS in the U.S. Therefore beginning with the first quarter, we will no longer recognize RAVICTI and AMMONAPS that sales outside of North America and Japan or net sales a LODOTRA, which in 2018 representative about $12 million in the domestic markets.
With regards to primary care, our 2019 guidance as soon as the single-digit year-over-year decline in net sales for the segment with no price increases this year. We will continue to deploy the strong cash flows from primary care to support investment in our Orphan and Rheumatology segments.
Our 2019 full-year adjusted EBITDA guidance of $440 million to $455 million reflects continued investment in our key growth drivers, including an increase in spend to prepare for the potential U.S. launch of teprotumumab assuming positive Phase III data. It also incorporates continuing investments in our KRYSTEXXA and uncontrolled gout pipeline programs including two new KRYSTEXXA studies in 2019.
Our MIRROR registrational immunomodulation trial and our KRYSTEXXA trial with kidney transplant patients. We expect our non-GAAP gross profit ratio to be approximately 90%. Non-GAAP R&D expense as a percentage of sales is projected to be in the high single-digits for 2019. A significant year-over-year increase driven by KRYSTEXXA and are uncontrolled gout pipeline programs.
We anticipate a year-over-year increase in non-GAAP SG&A expense, which primary reflects the investments we are making to prepare for the potential teprotumumab U.S. launch. We expect full-year non-GAAP net interest expense to range between $90 million and $95 million. We expect the full-year non-GAAP tax rate and the low-to-mid teens. As we see every year we anticipate variability and our non-GAAP tax rate on a quarterly basis.
We estimate that our cash tax rate will be in the low-to-mid single-digits in 2019 increasing to the mid-to-high-teens over the next several years. As always, this projection could change significantly as a result of any acquisitions or divestiture is made by the company or any changes in tax laws. We expect our full-year 2019 weighted average diluted share count to be higher than 2018 ranging between 172 million and 177 million shares.
And finally, for the first quarter we expect double-digit growth for both net sales and adjusted EBITDA. We expect total net sales to be approximately 20% of our full-year 2019 net sales in line with prior years. As we discuss every year first quarter net sales are generally the lowest of the year impacted by seasonality as patient deductibles reset or patients experienced changes in their health insurance coverage.
In addition for KRYSTEXXA as expected, we will see an impact from 340B pricing as well as seasonality. We expect the first quarter KRYSTEXXA net sales to be a similar percentage of full-year net sales as we saw in 2018 or approximately 18%. We continue to expect full-year double-digit net sales growth for KRYSTEXXA. We expect first quarter adjusted EBITDA to be in the low double-digits as a percentage of our full-year 2019 adjusted EBITDA. This is in line with first quarter adjusted EBITDA contributions in prior years.
With that, I'll turn the call over now to Shao-Lee.
Thank you, Paul, and good morning, everyone. We continue to make strides in the fourth quarter on our strategy to expand our pipeline, advance our current research and development programs and maximize the benefits of our on-market medicine.
I'll begin today's update with teprotumumab, our fully human monoclonal antibody IGF-1 receptor inhibitor in the development for the treatment of Thyroid Eye Disease or TED. We’re particularly enthusiastic about this program given that there are no approved treatments for TED despite the thousands of patients impacted by this debilitating disease.
Based on the data from the Phase II study, we believe the teprotumumab they demonstrate a disease modifying effect and therefore has the potential to be the first approved therapy for TED. In 2018, we achieved two significant milestones for teprotumumab. One, we presented additional Phase II data in the fourth quarter that demonstrated durability of response almost a full-year post treatment for both proptosis or bulging of the eyes and diplopia or double vision. And secondly, we enrolled OPTIC, our Phase III confirmatory trial ahead of schedule.
We expect 2019 to be an exciting year. As we anticipate topline Phase III data results in the first quarter and continue to expect a mid-2019 BLA submission assuming positive data. Ahead of the Phase III data readout, I'd like to provide a brief overview of TED and several key points about the Phase III trial.
In patients with TED, the IGF-1 receptor is over-expressed on orbital tissues resulting in local inflammation, orbital fibroblast proliferation and tissue swelling, which in turn called this proptosis. Patients may experience discomfort simply closing we’re even blinking their eyes, which can leads to poor sleep patterns and result in painful ulcers of the surface of the eye itself. Proptosis can result also in diplopia or double vision.
Overall, the morbidity that patients experience with TED can be highly detrimental to activities of daily living such as the ability drive a car, read or even walk downstairs. In some instances, pressure on the optic nerve from proptosis can even result in blindness. Therefore, an importantly, reduction in proptosis is the primary endpoint the teprotumumab Phase III confirmatory trial. It is objective physical measurement that was agreed upon with the FDA to be the primary outcome measure.
The design of OPTIC is similar to the Phase II trial teprotumumab and placebo are fused once every three weeks over a course of 24 weeks. The enrollment criteria for Phase III match those of Phase II, and 8 of the 13 clinical trial investigators are also the same. These 8 investigators enrolled 80% of the 83 patients in OPTIC.
We are also conducting an extension study, OPTIC-X that will allow up to an additional 24 weeks of teprotumumab treatment. Data from OPTIC-X will help inform us as to whether non-responders from the initial 24 weeks of treatment during OPTIC would benefit from longer treatments and if patients who lose response of drug after the initial 24 weeks of treatment would benefit from retreatment.
Moving now to our uncontrolled gout programs in KRYSTEXXA, a core component of our clinical strategy for KRYSTEXXA is the maximize its benefit for patients, given that it is the only FDA approved treatment for uncontrolled gout. In the KRYSTEXXA pivotal Phase III trials, 42% of patients achieved complete response maintaining a serum uric acid level of less than 6 milligrams per deciliter over 6 months.
Our goal is to increase the number of patients who achieve a complete response with KRYSTEXXA and we are investigating ways to do this. There's evidence that the addition of the immunomodulators to biologic therapies can reduce the formation of antidrug antibodies. And therefore has the potential to improve response rates.
As we discussed last quarter, we are conducting the MIRROR study to evaluate the effect on the response rate of KRYSTEXXA with co-administration of methotrexate, based on a positive case series presented by external investigators at the annual college of rheumatology meeting in the fourth quarter.
We are in the process of adapting the MIRROR study of course the potential for registration. We expect to begin enrollment in the adapted MIRROR trial as the randomized and placebo controlled studies in the second quarter of 2019.
And as we've shared today, we are also initiating clinical trial in the second half of 2019 evaluating KRYSTEXXA in kidney transplant patients. These patients were excluded as part of the original pivotal trials for KRYSTEXXA. However, they have more than a 10 fold increase in the prevalence of gout when compared to the general population and literature also suggests that high serum uric acid levels are associated with organ rejection.
Managing uncontrolled gout is there for both the common and significant unmet need of kidney transplant patients. This trial will also serve as an opportunity to further inform nephrologists as to the use and effectiveness of KRYSTEXXA and its potential benefit for chronic kidney disease patients of uncontrolled gout.
Finally, our pipeline includes three preclinical programs designed to enhance sustain our leadership position in uncontrolled gout. Two of the programs, our next-generation biologics, which we continued to advance in 2018, these programs are exploring to the use of optimized uricase technology as well as optimized PEGylation and PASylation technologies to potentially improve the half-life of the molecule and enhanced response rate.
We are targeting subcutaneous formulations for both programs. The third program, which we recently announced is a long-term discovery collaboration with Hemoshear Therapeutics. That provides us with the capability to explore novel targets for lowering the serum uric acid levels in chronic gout and feeding acute gout flips. As always, I look forward to updating you on our continued progress.
I'll now turn the call over to Tim for his concluding remarks.
Thank you, Shao-Lee. In summary, 2018 was the year of continued transformation for the Company. We made significant progress in building a robust pipeline of differentiated medicines and maximizing KRYSTEXXA to enhance our leadership and uncontrolled gout. We generated double-digit growth rates from both our record net sales of $1.21 billion and adjusted EBITDA of $451 million.
Our diversification strategies working with 70% of our total net sales now generated from our rare and rheumatic disease medicine. We're building on that momentum in 2019, continuing to drive strong commercial execution and pipeline expansion.
We expect continued growth from our Orphan and Rheumatology segment with KRYSTEXXA net sales growing double-digits. We're looking forward to the Phase III teprotumumab’s topline data read out this quarter.
So in positive data, we intend to submit our BLA by mid-year to begin our launch preparation. We also continue to advance our uncontrolled gout programs to enable more patients benefit from KRYSTEXXA, including the MIRROR registrational trial and our new KRYSTEXXA trial in kidney transplant patients that have uncontrolled gout.
So exciting time for Horizon, where we are well on our way towards our goal of being at leading rare disease Biopharma Company, delivering innovative therapies for patients, considering sustainable long-term growth and value for our shareholders.
With that, we’ll open it up for questions. Tina?
Amanda, go ahead.
Absolutely. [Operator Instructions] Our first question comes from the line of Dana Flanders of Goldman Sachs. Your line is open.
Hi. Thank you for the questions and congratulations on all the progress. My first question, Tim, maybe you can just speak to how you see the margin profile evolving for your business in the next several years? That seems like to me 2019 is a low point given the 340B impact on KRYSTEXXA, and then the tepro pre-launch spend. And just that you have a really powerful margin expansion story as you grow the Orphan business. So maybe just curious where you think you can take the – own our margins over time?
And then secondly, just on M&A, maybe just some comments on what you're seeing out there in the landscape. And I know your leverage profile continues to tick down, how you're balancing, bringing that leverage profile down relative to orphan peers and deal flow? Thank you.
Bob, maybe address the – how we view our gross debt and the deal environment, and then Paul can address how we look at margin. But certainly 2019 is a significant investment year for teprotumumab and we continue to be excited by that, so Bob?
Sure. So Dana, thank you. We continue to see good opportunities out there. As we've talked about the focus is changed from buying large transactions that would incur debt to bolt-on acquisitions that would – or licenses that would build our development stage pipeline.
And as a result of that, we've been very careful about managing our debt levels. We've been able to reduce overall debt and leverage ratios through cash flow. And we've got this group of aspirational peers that we keep focused on that are the leading rare disease medicines companies.
And so as we move forward, that's the goal that we set for ourselves is to look more like those companies out into the future. So it's fair to assume that as we move forward, that that's the trend that we will pursue to move that direction. And we think we can manage that through, but being smart about the transactions that we pursue, as well as being smart about how we manage the overall debt levels and deployment of cash. Paul?
Dana, your comments on margin were pretty much spot on. 2019 is our new – is an investment year as indicated by our EBITDA guidance. So assuming we have positive data from tepro, we're going to be ramping up spend significantly on the preparation for the commercial launch for that product. And as we look into 2020, we don't expect to have a full-year of sales for tepro that'll ramp up throughout the year. And so I think it's really as you move into 2021, that you're going to see a significant change in the margin profile as we leverage both KRYSTEXXA and tepro sales as we move into 2021.
Thanks, Dana. Our next question please.
Thank you. Our next question is from the line of David Amsellem of Piper Jaffray. Your line is open.
Thanks. Just a couple. So first on KRYSTEXXA, it sounds like you're further expanding the focus on other populations. I just wanted to get some further detail on other gout subgroups you may consider exploring beyond the kidney transplant patients? And then secondly, is the rationale there that these are patients who are already on immunosuppressive agents, so KRYSTEXXA would therefore sync pretty well. In other words, they’re already on an underlying immunomodulatory agents. So that combination is fairly intuitive. And then lastly, at the risk of sort of beating this over the head once again, can you talk about any new thoughts, if any, on strategic options for the primary care segment? Thanks.
I’ll take the primary care. We see it’s best managed by us. It's stable, driving significant cash flow and we have no intentions of doing anything with that business other than continue to expect strong cash flow generation. Shao-Lee, maybe address the first one.
Yes. So I can speak to the kidney transplant population. And as we said, these are patients that were excluded from our pivotal trials. And so, in addition to that, they are really some of the patients that have the most severe forms of gout mostly to their chronic kidney disease as well as some of the medications that they're on. So as a rheumatologist, I can tell you that these patients when I saw them as consults in the hospital and really had rip-roaring gout. So it's really unfortunate that we weren't able to treat them previously with KRYSTEXXA.
I think that you've been spot on in terms of the fact that they're also on chronic immunosuppressive – heavy immunosuppressive therapies because of their organ transplant. And interestingly, the literature suggest out there that high serum uric acid levels really can contribute to organ rejection. So as nephrologists, we think that – understand that there's a high urgency in treating this disease state because of the systemic nature. We think that going back and picking up this population potentially for the KRYSTEXXA label, ultimately also gives nephrologists an opportunity to get more experienced with KRYSTEXXA and learn how to use it effectively.
What about other gout populations that you mentioned…
We don't have any others to share at this time, but certainly we're always thinking about ways to maximize the benefit for KRYSTEXXA for gout kidney foundations.
And as I said in my remarks, we see the kidney transplant population with the current uncontrolled gout is about 30,000 patients of which over a third are addressable as a refractory and chronic gout patients. So we see that as a significant near-term opportunity that we can leverage that Shao-Lee went through.
Thanks David. Amanda, next question please.
Okay. Your next question comes from the line of Annabel Samimy of Stifel. Your line is open.
Hi, thanks for taking my questions. I just want to ask about teprotumumab. I was wondering if you could frame expectations around the trial outcome. We've been getting a lot of questions about what is considered a successful trial. Do you have a specific response rate threshold they would be considered clinically relevant or is it simply statistical significance that you're looking for? So maybe you can help us qualify that for us. And does a certain response rate change the commercial opportunity in your mind?
And separately on KRYSTEXXA, I just want to understand the dynamics within nephrology a little bit. It looks like starting this trial in kidney transplant is going to be good to help nephrologists to understand the capabilities of the drug. But I'm just wondering right now with penetration of this segment, how has that gone given nephrologists kind of entrenched capabilities, not necessarily being infusion centers and does that even matter given that these patients may just be referred back to rheumatologists or other tertiary centers for treatment? Thanks.
So I’ll take the first relative to expectations. The Phase III program was designed as a confirmatory trial. Again, looking at Proptosis with a greater than two millimeter reduction or resetting of the eye back into the socket, and if you look at the design of the Phase II and Phase III programs, greater than two millimeters was determined by the community to be clinically significant for their patients. So with nothing ever having had efficacy in this population before, so our goal is to confirm the data and we're excited to get that over the next month. So with that, maybe move over to KRYSTEXXA.
Yes. And I think on KRYSTEXXA, it is important to understand nephrology is performing right in line with our expectations. To your point about entrench capabilities for nephrologists, it almost doesn't matter because the patient is either refer to rheumatologists or to another site of care that maybe, perhaps in the hospital or in the community. And even though they may not have experience with infusion themselves, they do partner with other institutions in the community to make sure that patients do get the care that they need.
Great. Thanks Annabel. Amanda, next question please.
Absolutely. Our next question is from the line of David Steinberg of Jefferies. Your line is open.
Good morning. Thanks. Two questions. First, when you bought KRYSTEXXA, I think you indicated you'd expect initial competition in 2020. It seems like that probably will not occur. What's your current thinking about your first competitive threat there and how are you thinking about the competitive landscape over time?
And then secondly, with regard to teprotumumab given that if you get approval, you may launch next year. Could you give us some color on the cadence for the launch with some orphan drugs? All the patients are well known and peak sales reached pretty quickly than others, they are always finding new patients. I'm just curious, how many years do you think it'll take to get to peak approximately for that product? Thanks.
Thanks Dave. Relative to competition, I think you said it well, when we bought KRYSTEXXA, we expected a competitor in 2020 and the timing has delayed. So our forecast of double-digit growth in 2019 and greater than $750 million in peak sales, include having a competitor on board, and nothing has changed there. Relative to teprotumumab, we're not going to be providing forward-looking guidance. If you get the data, file the BLA and hopefully the medicine approved, and at that time, we will provide guidance on teprotumumab.
Thanks David. Amanda, next question please.
Absolutely. Our next question is from the line of Ken Cacciatore of Cowen and Company. Your line is open.
Thanks. Good morning, guys. Just my question is around teprotumumab. I believe I maybe wrong. It's the first time I've heard you refer to it as disease modifying. So just wondering, and obviously we're waiting for the data and hopeful it's successful, but can you talk about potentially the ability to use it earlier. I know you're studying it in OPTIC-X for maybe longer, and how that may have implications in terms of kind of the ultimate size pricing decisions?
Anything that you can kind of frame around maybe how the utilization may change beyond the Phase III study? And then also on MIRROR, I'm just wondering with success. Can you frame for us maybe how that might alter the equation in terms of your peak sales for KRYSTEXXA? Thank you.
So relative to the population for teprotumumab, we don't see it as early or late. There's no medicines that work. The disease is categorizes active versus byproducts. So for those patients within the first three years that have active disease.
We would – again, if data is confirmed and the medicines approved, see teprotumumab as the right agent for patients with active disease and that population, we estimate to be between 15,000 and 20,000 patients annually. At this point, we're not going to comment on what pricing may be. That would be more appropriate if the medicines approved.
I think the second question was relative to KRYSTEXXA, the MIRROR trial and the results that we saw from ACR around the methotrexate combination data. We did not have built into our peak sales, and should we confirm that data, we would update peak sales opportunity at that point in time.
But we're still are confident with the business has it is, fact that physicians are getting continued positive response. We get stories every day around patients avoiding now some of those 100,000 amputations that we've seen over the last five years, so how we're excited about the opportunity.
Thanks, Ken. Amanda, next question please.
Thank you.
Absolutely. Our next question is from the line of Louise Chen of Cantor. Your line is open.
Hi, thanks for taking my questions. I had a few here. So first question I had was on tepro. Just curious if you think there is a bolus of patients that would benefit from the treatment and how fast do you think the uptake would be for this product?
And then secondly on M&A. Just curious how much capital you have to deploy towards this and what are you interested in? Are there any new therapeutic areas? Where would you build on existing areas? What's more interesting to commercial or pipeline assets? Thank you.
Thanks, Louise. Relative to uptake and both the patients have and obviously assuming data's positive pre-launch efforts would focus on identifying these patients. One thing we know is that, from our research is that there isn't difficulty in diagnosing these patients, which we believe is, it's helpful. But as far as the guidance and at times peak sales, we're not providing that guidance at this point in time. Maybe Bob can address the second question around M&A environment.
Sure. Louise. So with a little over $950 million on our balance sheet, we need for working capital purposes on the order of $150 million. So somewhere in the neighborhood of $800 million is the capacity that we have to deploy at this point.
And the objectives that we've got are to stay within rare orphan diseases. We first look in the areas that we played today, which are rheumatology and metabolic diseases. We also have spent a considerable amount of time looking at immunology because of the expertise of the people that have joined the R&D team.
And then there's white space opportunities that we continue to look at. The objective is to build out the pipeline. So it's more likely – much more likely to be development stage assets as opposed to commercial assets at this point. We think that's the greatest return on capital for us at this stage. And so that's a outline of how we view the world and how we're planning to allocate capital as we move forward.
Thanks, Louise. Amanda, next question please.
And our next question comes from the line of Donald Ellis of JMP Securities. Your line is open.
Thank you, and good morning. Thanks for taking the questions. My first question is regarding the Tepro Phase III primary endpoint. And could you give us some indication of regarding the greater than two-millimeter reduction in proptosis? How subjective or objective is that endpoint? And my second quick question is regarding the tax rate. I want to make sure I heard the 2019 guidance correctly and did I hear mid single-digits? That's it. Thank you.
For the tax question first.
Yes. Mid single-digits is what we expect from a cash tax rate standpoints actually cash out the door. On a non-GAAP tax rate, we said, low to mid-teens.
And with regards to the Teprotumumab Phase III primary endpoint, that's objective measure. It’s actually measured with a specific device that is effectively [indiscernible].
Okay. Got it. Thank you.
Thanks Don. Next question please, Amanda.
Perfect. The next question is from the line of David Risinger of Morgan Stanley. Your line is open.
Thanks very much. So have a couple of questions please. First, with respect to 2019 KRYSTEXXA, I think previously you had said that they would be a 25% reduction as a result of the 340B adjustment. Just wondering if that is still the expectation. And with respect to operating cash flow to adjusted net income it declined in 2018 versus 2017. Just hoping to get your expectations for 2019 operating cash flow to adjusted net income? Thanks very much.
Well, relative to KRYSTEXXA our expectation continues to be for double-digit growth over 2018. So nothing has changed.
And in the cash flow as we look at the full-year 2018 versus 2017, the decrease is primarily due to what we talked about last year with the change to the PBM contracts. We had a one-time kind of cash flow benefit as we enter those contracts and did not pay a full-year of rebates because of – some of them being owed still at the end of the year. So we had a one-time benefit from that in 2017.
Going forward, we don't give operating cash flow guidance, but what we've said is that if you look at EBITDA and adjust for cash taxes and cash interest and then some growth and working capital due to the growth in sales that can give you a good proxy for operating cash flow.
Thanks David. Amanda, next question please.
Thank you. Your next question comes from the line of Gary Nachman of BMO Capital Markets. Your line is open.
Hi, good morning. On KRYSTEXXA, do you have a little more on the adapted protocol for the MIRROR trials so that it can qualify as a registration study. How big will it be and where would you expect to have data and when might you be able to file for an updated label and will there be any other data from the TRIPLE and RECIPE trials this year and use with other immunomodulators? How were those studies going?
So with regards to the MIRROR adapted trial, it's a trial that we're actually going to have the conversation with the FDA about in terms of ultimately what they will find acceptable for registration in terms of the design. So it will be better able to update you on the specifics of the design after that conversation. That said, we fully expected to be a KRYSTEXXA plus or minus methotrexate. And it'll be six months in duration, most likely, but it'll be a couple of years before we are ready to evaluate any data.
Thanks. Gary.
Yes, the TRIPLE and RECIPE.
Yes. So in terms of RECIPE our understanding for investigator initiated trials that recipe is moving along nicely. There actually hasn't been the uptick for TRIPLE that we had hoped for or that we're seeing and so ultimately we're not no longer funding that study.
Thanks Gary.
Thank you.
Next question please.
Perfect. Our next question is from the line of Irina Koffler of Mizuho. Your line is open.
Hi, thanks for taking my questions. Just wanted to go back to KRYSTEXXA. When can we expect the product get to at 750 million target? And I wanted to clarify that it doesn't include any upside from MIRROR or for many of these additional kidney, kidney trials? And then the second question I had was – as you sort of start to decline the primary care segment, is there still opportunities to improve operating margins in that business? Thank you.
If you look at the 2018, we essentially flat sales and primary care and increasing margins and across our business we continue to look for efficiency. So we were very pleased with how that is operating as far as KRYSTEXXA, we expect 750 million in peak sales and we haven't guided to when that will occur. And you are correct in your assumption or relative to MIRROR and the kidney transplant study and uncontrolled gout patients.
Thank you.
Thank you, Irina. Amanda?
Thank you. And at this time, there are no further questions. I'd like to turn the conference back over to Miss, Tina Ventura for the closing remarks.
Thank you, Amanda. That concludes our call this morning. A replay of this call and webcast will be available and approximately two hours. And thank you for joining us.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may not disconnect. Everyone have a great day.