Horizon Pharma's CEO Presents at Agreement to Acquire U.S. Rights to Vimovo Conference (Transcript)

Nov.19.13 | About: Horizon Pharma (HZNP)

Horizon Pharma Inc. (NASDAQ:HZNP)

Agreement to Acquire U.S. Rights to Vimovo Conference Call

November 19, 2013 8:00 AM ET

Executives

Robert J. De Vaere – Executive Vice President and Chief Financial Officer

Timothy P. Walbert – President, Chief Executive Officer & Chairman of the Board of Directors

Todd N. Smith – Executive Vice President and Chief Commercial Officer

Analysts

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc.

Charles C. Duncan – Piper Jaffray, Inc.

Liisa A. Bayko – JMP Securities LLC

Edward H. Nash – Cowen & Co. LLC

Difei Yang – R.F. Lafferty & Co., Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the Horizon Pharma Conference Call. At this time, all participants are in a listen-only mode. As a reminder, today’s conference call is being recorded.

I’d now like to turn the conference over to your host Mr. Bob De Vaere, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Robert J. De Vaere

Thank you. Good morning, and welcome to the Horizon Pharma conference call. This morning we issued press releases that provides the details of the company’s acquisition of U.S. rights to VIMOVO and the entry into purchase agreements with investors for $150 million in convertible senior unsecured notes.

During this call, we will discuss the acquisition, the financing, as well as the full-year 2014 guidance we provided in our press releases. The releases are available on our website at www.horizonpharma.com.

Leading the call today will be Tim Walbert, Chairman, President and Chief Executive Officer of Horizon Pharma, Tod Smith, Executive Vice President and Chief Commercial Officer, who will provide a brief overview of the commercial plan for VIMOVO, and I’ll provide some comments on the convertible notes. Jeff Sherman, our Executive Vice President and Chief Medical Officer is also on the call.

As a reminder, during today’s call, we will be making certain forward-looking statements. These statements may include statements regarding our financial outlook including expected net revenues and non-GAAP profit for 2014, and our expectations of achieving cash flow positive operations, our sales and marketing plans, potential growth of our business, projected results of pricing decisions, expected benefits and costs of expanding our sales force and our plans to expand our Prescriptions-Made-Easy and copay assistance programs to include VIMOVO.

These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve a number of risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These risks are described in our filings made with the SEC including our Annual Report on Form 10-K for the year-ended December 31, 2012, subsequent Quarterly Reports on Form 10-Q and our current report on Form 8-K that we filed this morning. You are cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligation to update such statements.

I’ll now turn the call over to Tim.

Timothy P. Walbert

Thanks, Bob. Hi, everyone. This morning we announced the acquisition of the U.S. rights to VIMOVO from AstraZeneca. We believe this is a significant value creating event for us and is a major step forward in executing our long-term strategy of building a profitable specialty pharmaceutical company. This transaction leverages our business model and exist the commercial infrastructure and we expect VIMOVO to be accretive on a non-GAAP net income basis in 2014.

We believe that this transaction will also significantly increase our revenue, we now expect become profitable in 2014 on a non-GAAP basis. Let me recap the details of the VIMOVO acquisition and the current financing we announced this morning. We’re acquiring the U.S. rights to VIMOVO for a one-time payment of $35 million to AstraZeneca.

We will also assume payment of the existing 10% royalties and net sales to Pozen subject to guaranteed annual minimums of $5 million in 2014 and $7.5 million each year thereafter, provided that the patents owned by Pozen which cover VIMOVO remain in effect and no generic forms of VIMOVO are on the market.

We and AstraZeneca have also entered into a transition agreement, where for the remainder of 2013, AstraZeneca will continue to distribute and book revenues in certain related expenses for VIMOVO, and we will receive any net profits from AstraZeneca. Go ahead, Bob.

Robert J. De Vaere

Yeah. As I mentioned in the opening remarks, we also announced the pricing of $150 million aggregate principal amount of 5% convertible senior unsecured notes due on November 15, 2018, in a private placement. The initial conversion price of the notes is approximately $5.36 per share, or 20% conversion premium to yesterday’s closing stock price of $4.47 per share.

Additionally, a portion of the proceeds will be used to enter into a capped call transaction in connection with the offering, which has intended to reduce the dilution to Horizon’s common stock upon potential future conversion of the Notes, raising the effective conversion premium to the company to 50%, or approximately $6.71 per share.

We expect that the net proceeds of the offering after deducting fees and expenses will be approximately $143.8 million of which $70.4 million will be used to payoff all the obligations under our existing senior secured notes, $35 million will be used to pay AstraZeneca for the U.S. rights to VIMOVO, $18.7 million will be used to pay the cost of the capped call transactions, and the remainder which we expect to be approximately $19.7 million will be used for working capital and general corporate purposes. Additional terms are disclosed in the press release we issued today.

I will now turn the call back over to Tim.

Timothy P. Walbert

As part of our announcement today, we’re issuing company guidance for the first time, and this is for the full-year 2014. We expect net revenue in the range of $190 million to $205 million. We also expect to be profitable in 2014 on a non-GAAP basis, based on our prior GAAP to non-GAAP reconciliation practice. And finally we anticipate our existing cash of $58.7 million at September 30, 2013, along with the net proceeds from the offering of the notes of approximately $19.7 million, will fund the company to cash flow positive operations.

I will now turn the call over to Todd Smith to review our operational plans for VIMOVO.

Todd N. Smith

Thank you, Tim. Good morning, everyone, and thank you for joining us today. I’d like to reiterate our excitement for the significant opportunity that the VIMOVO transaction offers the company. At the same time we haven’t lost our focus to continue to drive DUEXIS and RAYOS prescription growth. As we reported on our third quarter earnings call in November 8, we saw strong acceleration in both DUEXIS and RAYOS in the third quarter.

DUEXIS prescriptions in the third quarter increased approximately 18% versus the second quarter of 2013. We also reported net revenue for DUEXIS of $23.5 million in the third quarter, an increase of a 122% versus the second quarter of 2013. Also, we reported $2 million in net revenues for RAYOS in the third quarter, the significant growth versus the second quarter of 2013. On Tuesday of last week, Source Healthcare Analytics released October monthly data, and we were pleased to see that total new DUEXIS prescriptions were 22,136 scripts, with an of 13% versus September of 2013, again demonstrating our continued momentum. Additionally, October prescriptions of RAYOS increased 17% versus September as well.

Now, I’ll walk you through our commercial planning for VIMOVO. First of all, we have signed a transition agreement, whereby AstraZeneca will continue to distribute and book revenues for VIMOVO for the remainder of 2013 and pay us any net profits. We’re working diligently towards first quarter 2014 launch of VIMOVO and we’re on track to shift Horizon labeled VIMOVO to wholesalers by the end of the year.

We’re also on the process of expanding our primary cared sales force from a 150 representatives to approximately 250 sales representatives. This sales force will promote both DUEXIS and VIMOVO to specific targets to discuss in a little more detail shortly. We are also expanding our rheumatology sales force from 25 reps to approximately 40 representatives, with those representatives promoting RAYOS and VIMOVO to rheumatologist targets. As we did our analysis of this transaction, we were pleased to see that there is only about a 30% overlapping physicians who prescribe both DUEXIS and VIMOVO.

We’ll continue to promote DUEXIS to high ibuprofen and branded end set prescribers at a smarter ibuprofen. And we will relaunch VIMOVO as a smarter naproxen, the high naproxen and branded non-steroidal prescribers. So consistent with our strategy with DUEXIS and RAYOS, our goal is to maximize the value of our products to both the patients and to the company. As Tim mentioned, we expect to bring VIMOVO into our Prescriptions-Made-Easy pharmacy program and to cover patients under our copay assistance program to ensure that patients receive VIMOVO at a reasonable out-of-pocket cost.

In January, we expect to launch VIMOVO under our label then we will price at a price similar to DUEXIS in under brand – other branded end sets. We plan to focus our promotional and reimbursement efforts on the commercial payers. Currently, just over 78% of VIMOVO prescriptions are reimbursed by commercial payers. We’ll also be transitioning VIMOVO from AstraZeneca’s current managed care contracts to our approach of being covered in a Tier-3 position in the first quarter of 2014, and we expect some volatility during this initial period. We’ll attempt to maintain existing VIMOVO contracts in the government program such as Medicare, but our main focus will be on maximizing VIMOVO among the commercial payers.

So in summary, we’re focused on continuing to drive the growth of DUEXIS and RAYOS prescriptions and excited about the prospects of adding VIMOVO to our commercial model. I look forward to updating you on the progress on future calls.

I’ll now turn the call over to Tim. Thank you.

Timothy P. Walbert

Thank you, Todd. We are very excited about this transaction, which follows a great quarter of execution by the company with DUEXIS and RAYOS.

Moving forward into 2014 with three promoted products in the U.S., we believe that we’re well positioned to drive significant revenue and become profitable as I mentioned. We also continue to seek new product or company acquisitions that will allow us to further leverage our business model and maximize our commercial infrastructure, creating increased value for our shareholders.

We thank you for your continued interest and support of the company. We’re now happy to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Annabel Samimy of Stifel. Your line is open.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc.

Hi. Thanks for taking my questions. Congratulations on the deal.

Timothy P. Walbert

Thank you, Annabel.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc.

Just a few questions with regard to the sales force expansion, this is clearly an increase over the 25 that you recently just hired for DUEXIS and even with that that makes – that gives you profitability into next year? And can you just help us understand sort of the progression of SG&A going forward? And then I have some questions after that. Thanks.

Timothy P. Walbert

Sure, Annabel. So looking at SG&A, we expect that on the base business our third quarter SG&A run rate will be remain constant. And we expect that SG&A related to this transaction will be an incremental $30 million to $40 million.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc.

Okay. And then, one other things I’m curious about is, you mentioned that it shouldn’t have any impact on RAYOS. And in RAYOS, you are going to make a big push for RAYOS, so can you help us understand how you are going to sort of separate the responsibilities amongst that sales force or you are going to keep RAYOS within just to rheumatology sales force or is there going to be overlap with any of the other sales reps. And also with regard to the different products, I believe I have slightly different release profile, so is there specific type of patient that you are targeting one drug versus the other for?

Timothy P. Walbert

Sure. So the first question related to RAYOS and overall sales force, so our 250 primary care sales force will focus on DUEXIS and VIMOVO. And our specialty sales force, which we are increasing to about 40 representatives with a primary responsibility for RAYOS and secondarily for VIMOVO. So we see the rheum specialty sales force is having the primary lead responsibility for RAYOS. To answer your question about patient selection, we look at this more from a target basis. So one of the things Todd mentioned is that only about 30% of the respective writers of DUEXIS and VIMOVO actually wrote the other respective product.

A couple of important things, the average doctor rates between three and four different end sets on a regular basis, we see a great opportunity if you look at in the case of VIMOVO, there is about 250,000 prescriptions of naproxen each week in the United States and significant opportunity to continue to focus on those naproxen writers with VIMOVO and differentiate VIMOVO as a much better naproxen. And with DUEXIS, we see about 500,000 prescriptions per week of ibuprofen and again a great opportunity to continue to differentiate DUEXIS as a better ibuprofen.

So our targets are really focused on those two audiences when where you have that 30% overlap, that really is if someone happens to be a high VIMOVO writers. And we’ll focus on driving that business. And the key thing when you look at these type of products is a patient specific. They don’t work in every patient and physicians need options and if someone is a big writer for VIMOVO, we’ll position DUEXIS as a second-line therapy for those patients that don’t respond to VIMOVO and vice versa.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc.

Okay. And just one last question if I may, what is the patent situation on VIMOVO these days?

Timothy P. Walbert

Currently, we have eight Orange Book listed patents that go out to 2023 at this point in time.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc.

Great, thank you.

Timothy P. Walbert

You’re welcome.

Operator

Thank you. Our next question comes from Charles C. Duncan of Piper Jaffray. Your line is open.

Charles C. Duncan – Piper Jaffray, Inc.

Hi, Tim.

Timothy P. Walbert

Hi, Charles.

Charles C. Duncan – Piper Jaffray, Inc.

Thanks for taking my questions and let me add my congrats, this looks like a pretty interesting transaction. So my first question though is on VIMOVO and the current sales trajectory and if you could provide a little bit more color on the messaging relative to say DUEXIS kind of wondering why there is only about 30% overlap and how you intend to kind of increase the prescribing within those docs for DUEXIS and RAYOS and VIMOVO?

Timothy P. Walbert

Thanks, Charles for the question. So the key thing for us is that we’re focusing DUEXIS promotion on those top ibuprofen writers that are writing about. In total 500,000 prescriptions a week and with VIMOVO we’re focused on those top naproxen writers. And in the case of our 250% sales force, there is two distinct 70% groups of prescribers, where there is overlap, we will position it from the standpoint of someone perhaps to be a high VIMOVO writer in that population DUEXIS will be promoted in the second position of someone happens to be a higher writer of DUEXIS and VIMOVO will be in a second position all offering an alternative to patients who don’t respond to the ibuprofen and DUEXIS. So we think that there is very distinct promotion and positioning for both products.

Charles C. Duncan – Piper Jaffray, Inc.

Okay. And then relative to the terms, I think Bob mentioned there is a 10% minimum or 10% royalty to Pozen with minimums of $5 million and $7.5 million as long as the patents exist and products on the market. So, I guess, I am assuming then help us understand the net part of the net sales. Because, I guess that suggest that at least $50 million and $75 million of sales would be generated with list of product?

Timothy P. Walbert

So to get to the net sales question, it simply similar to what we report with DUEXIS, we expect a gross to net deduction of approximately 35% to 40% and that includes prompt pay discounts and includes co-pay buy down and managed care or PBM rebates that may involve for the product. So, we expect that to the net amount of that.

Charles C. Duncan – Piper Jaffray, Inc.

Okay. And then finally with regard to the sales force changes or increase going from 150 to 250, it seems like there is going to be some changing maybe geographies or calling responsibilities for certain sales people. Do you anticipate any disruption or slowdown in terms of the current pretty good trajectory with DUEXIS or do you think that be an accretive pretty seamlessly?

Timothy P. Walbert

One of things we are doing is ensuring that all top DUEXIS prescribers maintain their current representatives. And for the most part what we’re seeing is just smaller territories, we go from 100 to 250, you can reduce overall geography reduced time driving around the car and actually increase the frequency against the key target. So, we don’t see an impact on DUEXIS from this. In fact we see an increase in DUEXIS promotion with these 250 reps because it’s 100 more reps are promoting DUEXIS in other primary or secondary position.

Charles C. Duncan – Piper Jaffray, Inc.

Good deal. Thanks for the added color. Congrats on the deal.

Timothy P. Walbert

Thanks, Charles.

Operator

Thank you. Our next question comes from Liisa Bayko with JMP Securities. Your line is open.

Liisa A. Bayko – JMP Securities LLC

Let me add by congratulations to the team, great deal.

Timothy P. Walbert

Thanks, Liisa.

Liisa A. Bayko – JMP Securities LLC

I just want to ask a technical question, how long do the VIMOVO patents last in the U.S.?

Timothy P. Walbert

Eight Orange Book lasted patents out to 2023.

Liisa A. Bayko – JMP Securities LLC

Okay. Are those compositions of matter took patents, so that…

Timothy P. Walbert

It’s made of different formulation and method of used patents primary patents are based on the initial work done by Pozen and some subsequent patents from AstraZeneca and most recently in October an allowance of the patents generated by Pozen. So consisted solved effort by the combined Pozen AstraZeneca team to expand the patent portfolio. And we will continue to work with both parties to expand prosecution beyond what exists today.

Liisa A. Bayko – JMP Securities LLC

Okay, great. And then Tim, do you expect any change in the sort of patient and payer mix, but the change in the most pricing, how should we think about, do we just sort of take a multiple what sales are today and maybe you can give us some guidance on if there is going to be any shift in the sort of patients payer mix?

Timothy P. Walbert

Great question, Liisa, so one of things that Todd mentioned in his remarks is about 78% of current VIMOVO prescriptions are to commercial payers, and that’s where we will focus our business. The remainder is Medicare, Medicaid and cash. We expect that that business will not be a core part of our focus and not a core part of prescriptions on a moving forward basis.

We have seen due to the lack of promotion of 1% to 2% decline on a week-over-week basis with VIMOVO prescriptions and just related to lack of promotion. So with our plan to launch in the first quarter, the first goal is to stem that decline and as we launch – relaunch VIMOVO get it back on a growth trajectory. But clearly the focus is on what we expect to be about 295,000 prescriptions going through commercial payers in 2013.

Liisa A. Bayko – JMP Securities LLC

Okay. And when you’ll be up and running with this new team, Tim?

Timothy P. Walbert

We have as of today hired all sales management, and over the next few days begin all the hiring process for representatives. So we expect to have most of the representatives hired this year and trained as we move into the New Year and we’ll launch in the first quarter.

Liisa A. Bayko – JMP Securities LLC

Okay. And then last question, what’s next for Horizon, you’ve obviously made some big moves today, maybe you can give us a sneak peek into your future strategy. Thank you.

Timothy P. Walbert

Thanks a lot Liisa. So, our strategy remains – our first goal has been to drive the base business successfully, and we’ve got a lot of momentum with our results as we reported for the third quarter with $26.2 million in net revenues and $23.5 million on DUEXIS. So the key for us is finishing strong in driving DUEXIS and RAYOS through the end of the year and into next year, integrate for VIMOVO successfully, and work with our partner Pozen to make that successful.

And then as we move forward, look for incremental products that fit into our business model and expanded commercial infrastructure focus on the primary care audience. So we certainly expect to look forward continued product and/or company acquisitions. We think we have an unique position where one of the few companies that has infrastructure maximizing the primary care space, whereas most companies are looking at the specialty space. So we think we’ve got the unique business model, unique focus, and we’re going to continue to pursue that.

Liisa A. Bayko – JMP Securities LLC

Thanks a lot.

Operator

Thank you. Our next question comes from Edward Nash of Cowen & Co. Your line is open.

Edward H. Nash – Cowen & Co. LLC

Thanks very much. And Tim, you promised to have an acquisition before the end of the year and you definitely delivered all that, so congrats guys.

Timothy P. Walbert

Thank you.

Edward H. Nash – Cowen & Co. LLC

So I wanted to just maybe ask a little bit, I just – I assume that AstraZeneca will continue to manufacture and just supply sort of transfer price to you guys?

Timothy P. Walbert

Right. So we have two things. So we will continue to work for a period of time with AstraZeneca, where they will supply finished goods of VIMOVO. We’ve also signed an agreement to work directly with Patheon, the existing commercial manufacturer for VIMOVO, so we would be working to transition from AstraZeneca supplied VIMOVO to our own, and we hope to have that done in the next six to twelve months where we’re working directly with Patheon and the individual API suppliers.

Edward H. Nash – Cowen & Co. LLC

Okay, great. And this in regard to the sales force add-ons, so understanding how position one and position two, these are going to work for the primary care rheumatology like, can you give us an idea about how many more docs if any, you guys will be able to target with this additional 100 reps on the primary care side, and 15 on the rheumatology side?

Timothy P. Walbert

Sure, so I think that there is two ways we look at it, so if we look at our 150 reps initially in the primary care space, we’re calling on about 30,000 targets, but on a regular basis, but any one point in time each representative probably has doubled those targets; and the key thing we focus on is for, and this primarily for DUEXIS, what we now as that after six visits by one of our representatives, half of those physicians have prescribed DUEXIS. And the key thing for us is a physician has prescribed after six visits, it’s unlikely they will and stop calling in that physician. So we have a funnel of typical pharma salesperson, they have a 100 to 125 targets. Our average representative has about 300 targets.

So it’s a constant after six visits if they write, get them to write more, if they don’t move on to your next target. So our average 250 rep sales force will have about 300 targets in any one point in time. We’re probably calling it about 40,000 to 50,000 targets. But in aggregate, we have about 90,000 targets in our overall funnel of targeted physicians who can prescribe both products.

Edward H. Nash – Cowen & Co. LLC

Okay. And with regard to just the physicians, when you’re targeting them, what do you think will be, how much this will play into the sales part of the story with regard to the GI protect and H2 antagonist versus a PPI, is this a significant differentiator here or is that more about the delayed action of VIMOVO versus DUEXIS?

Timothy P. Walbert

I think the key thing for us is VIMOVO is a superior version of naproxen. In Phase III clinical trials demonstrated to significantly reduced gastric ulcers. And we believe that’s a significant benefit for patients. We also see DUEXIS as a superior agent to ibuprofen and significantly reducing gastric and duodenal ulcers in our Phase III trials. So the focus is less on which GI protect, it’s really about the right thing for the patient is, if you’re on ibuprofen or if you’re on naproxen, we’ve got products that can offer significant advantage versus what they’re taking today.

Edward H. Nash – Cowen & Co. LLC

Great. Thanks very much and congrats again.

Timothy P. Walbert

Thanks a lot, Edward.

Operator

Thank you. (Operator Instructions) Our next question comes from Difei Yang of R.F. Lafferty. Your line is open.

Difei Yang – R.F. Lafferty & Co., Inc.

Congratulations and thanks for taking my question. Just a quick one on cost of goods, how should we think about that, is it going to be more or less in line with DUEXIS and RAYOS, or is it going to be significantly different?

Timothy P. Walbert

We expect gross margins in the low 80s and cost of goods on a relative basis to be similar.

Difei Yang – R.F. Lafferty & Co., Inc.

Okay, thank you. And with regards to the patent protection on the product, is – could you give us a brief update whether there is pending ANDA filings with the FDA or where – or how is the situation on that line?

Timothy P. Walbert

There are some pending ANDAs and litigation ongoing. We certainly believe in the strong patent protection that has been built by both Pozen and AstraZeneca. And they’re going to be working with both of them to take over and lead the litigation effort, as well as additional prosecution effort. So over the coming weeks or months, we’ll discuss that in more detail. But eight Orange Book listed patents, we believe that very strong patents for VIMOVO and we expect significant patent protection.

Difei Yang – R.F. Lafferty & Co., Inc.

Yeah, thank you so much, and congratulations again.

Timothy P. Walbert

Thank you, Difei.

Operator

Thank you. I’m not showing any further questions in the queue. I’d like to turn the call to Mr. Tim Walbert, Chairman, President and Chief Executive Officer for any final remarks.

Timothy P. Walbert

Thank you, and thanks everyone for joining us. In summary, we’re very excited about this transaction. We think the company is well positioned to drive significant revenues as we’ve guided between $190 million and $205 million. We expect to be profitable on a non-GAAP basis in our existing cash to get us to cash flow positive operations as well. So very excited about what this brings to us. Our base business has been accelerating, and VIMOVO is an exciting addition, and look forward to speaking to you in the future. And thanks so much for taking the time this morning.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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