Salix Pharmaceuticals Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Salix Pharmaceuticals, (SLXP)

Salix Pharmaceuticals (NASDAQ:SLXP)

Q4 2013 Earnings Call

February 27, 2014 4:30 pm ET

Executives

G. Michael Freeman - Associate Vice President of Investor Relations & Corporate Communications

Adam C. Derbyshire - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance & Administration

Carolyn J. Logan - Chief Executive Officer, President and Director

William P. Forbes - Chief Development Officer and Executive Vice President of Research & Development

Analysts

Jason M. Gerberry - Leerink Swann LLC, Research Division

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

David G. Buck - The Buckingham Research Group Incorporated

Gary Nachman - Goldman Sachs Group Inc., Research Division

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

Tim Lugo - William Blair & Company L.L.C., Research Division

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Marc Harold Goodman - UBS Investment Bank, Research Division

Operator

Good day, and welcome to the Salix Pharmaceuticals Fourth Quarter and Full Year 2013 Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Michael Freeman. Please go ahead, sir.

G. Michael Freeman

Good afternoon. Thank you for joining us today. With me are Carolyn Logan, President and Chief Executive Officer; Adam Derbyshire, Executive Vice President and Chief Financial Officer; and Bill Forbes, Executive Vice President and Head of Research and Development and Chief Development Officer.

Adam will begin the presentation with a review of financial results for the fourth quarter and full year 2013. Carolyn will then review operations and key highlights for the quarter and full year, and then we will open up the call for questions.

Before I turn it over to Adam, let me remind you that various remarks management might make during this conference call about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our press releases and SEC filings, including on our Form 10-K for 2012. Specifically, the information in this conference call related to projections, development, plans and other forward-looking statements is subject to this Safe Harbor.

Additionally, today, we will be using, as usual, both GAAP and non-GAAP measures. We believe these non-GAAP measures might provide investors additional relevant information, in part for purposes of historical comparison. In addition, we use these non-GAAP measures to analyze our performance in more detail and with better historical comparability. However, you should be aware that non-GAAP measures are not superior to, nor a substitute for, the comparable GAAP measures, and these non-GAAP measures might not be comparable to similarly named measures disclosed by other companies.

Please note that EBITDA is earnings before interest, taxes, depreciation, stock-based compensation expense, amortization, the noncash change in acquisition-related contingent consideration, onetime license payments and excluding transaction costs related to the Santarus acquisition.

Non-GAAP net income is comprised of EBITDA, adjusted for cash, interest expense and interest income and a provision for income taxes based on non-GAAP income before tax.

Non-GAAP EPS is non-GAAP net income divided by outstanding shares on a diluted basis.

With that, let me turn the call over to Adam.

Adam C. Derbyshire

Thank you, Mike. I will start with the financial results for the fourth quarter and full year ended December 31, 2013. For the fourth quarter, we delivered strong results, achieving double-digit revenue, EBITDA and EPS growth, primarily due to continued strong performance in our 2 largest products: XIFAXAN 550 and APRISO. This strong performance resulted in double-digit growth for the full year as well, with revenue growing 27% over 2012.

On a GAAP basis, we reported fourth quarter net income of $52.3 million or $0.76 per share fully diluted compared to $17.6 million and $0.28 per share fully diluted, respectively, in the same quarter last year. For the full year, GAAP net income was $143 million or $2.18 per share fully diluted compared to $64.2 million or $1.01, respectively, for 2012.

For the fourth quarter, non-GAAP net income was $73.5 million or $1.06 per share fully diluted. This compares to $50.9 million and $0.81, respectively, in the same quarter last year.

For the full year, non-GAAP net income was $246.9 million or $3.76 per share fully diluted.

Total product revenue was $257.6 million for the fourth quarter, a 30% increase from the prior year period.

XIFAXAN revenue for the fourth quarter increased 20% over the prior year to $175.8 million. XIFAXAN 550 continued to perform well during the quarter, as demonstrated by prescription growth of 18% compared to the fourth quarter of 2012.

For the full year, XIFAXAN performance was also strong, as revenue rose 25% to $645.6 million, with a 22% increase in XIFAXAN 550 prescriptions.

APRISO revenue for the fourth quarter increased 153% over the same period last year to $34.6 million, as prescriptions grew 39% over that same period.

APRISO revenue for the full year 2013 was $126.1 million, a 79% increase over 2012, with an associated 36% increase in prescription growth.

Excluding $11.2 million in amortization of product rights and intangible assets, gross margin in the fourth quarter was 78% compared to 85% for the fourth quarter of last year. For the full year, gross margin was 81% compared to 83% in 2012, and essentially in line with our guidance of approximately 82%. The period-to-period changes in gross margin are due to the product revenue mix in the respective periods.

Research and development expenses were $36.2 million for the fourth quarter, relatively flat compared to $36.6 million in the prior year period. For the full year of 2013, R&D expenses totaled $150 million compared to $123.2 million in 2012. The increase in R&D expenses in absolute terms from 2012 to 2013 was due primarily to rifaximin development programs and a $10 million payment for the purchase of intellectual property related to rifaximin.

Selling, general and administrative expenses for the fourth quarter, excluding onetime transaction cost of $8.7 million related to the Santarus acquisition, were $71.8 million compared to $70.9 million for the same period in 2012.

For the full year of 2013, SG&A expenses were $295.5 million compared to $258.2 million for the prior year period.

Fourth quarter EBITDA, or earnings before interest, taxes, depreciation, stock-based compensation expense and amortization and the noncash change in acquisition-related contingent consideration, onetime license payments and excluding transaction cost related to the Santarus acquisition, was $101.9 million, up 50% versus the same period a year ago.

Moving on to the balance sheet. Cash and cash equivalents were $1.16 billion at the end of the year before we closed on the Santarus acquisition. At the end of January 2014, after the transaction closed, cash and cash equivalents were approximately $525 million.

As we have stated, our goal is to reduce our current debt-to-EBITDA multiple of approximately 6x to 3x within the next 3 years. Over that time period, we'll be focused on optimizing our cash flows to decrease our leverage and to take advantage of business development opportunities.

Let's now review our outlook for the first quarter and full year 2014. For the full year, we expect the company product revenue to be approximately $1.6 billion. We expect to generate EBITDA for 2014, excluding expenses associated with the acquisition of Santarus, of approximately $650 million.

Net income on a non-GAAP basis for 2014 should be approximately $475 million or $6.46 per share fully diluted.

Included in our guidance is an assumed tax or cash tax rate of approximately 12%. Based on this full year guidance, we anticipate total company revenue for the first quarter of 2014 to be approximately $373 million; and EBITDA, excluding expenses with the acquisition of Santarus, to be approximately $130 million.

For the first quarter, we expect non-GAAP net income to be approximately $61 million or $0.85 per share fully diluted. Included in our guidance is an assumed cash tax rate for the first quarter of 40%. The higher cash tax rate for the first quarter of 2014 is related to the timing of cash tax payments.

The current annualized run rates based on dollarizing December 2013 prescription data for XIFAXAN, UCERIS, APRISO, GLUMETZA, ZEGERID, MOVIPREP/OSMOPREP, RELISTOR and our other products are approximately $702 million, $111 million, $155 million, $212 million, $120 million, $96 million, $37 million and $84 million, respectively.

We believe our expanded sales and marketing resources, combined with our current and potential products, position Salix to generate strong growth in product revenue and profitability over the near and long term. We believe that our potential market opportunity for our currently marketed products, led by XIFAXAN 550 for hepatic encephalopathy and our ulcerative colitis franchise comprised of APRISO and UCERIS, plus the potential estimated market opportunity for future potential indications for our currently marketed products and new products in development, should provide a number of growth drivers for the years to come.

I now will turn the call over to Carolyn.

Carolyn J. Logan

Thanks, Adam. Let me begin with today's news. This morning, we announced that we have acquired the worldwide exclusive rights from RedHill to what we believe could be the first prescription encapsulated bowel prep product. We are excited with the prospects of developing and commercializing a tasteless, solid oral formulation bowel prep, which, if approved by the FDA, could potentially go a long way in helping to increase patient compliance and to ease patient burden associated with bowel cleansing prior to a number of different abdominal procedures. We have a successful bowel prep business now with MOVIPREP/OSMOPREP, and we'll work to build on our success with the addition of this new and innovative product.

We're very proud of our accomplishments in 2013, with our acquisition of Santarus, clearly the highlight of a very good year. We closed the transaction on January 2, 2014.

While the integrated results are not part of our reporting today, they are included in our guidance for 2014, and we're very excited about the possibilities ahead.

This was a transformational acquisition for Salix for a number of reasons: The added products diversify our sales mix and revenue. The expanded sales force reinforces our strong position in the GI market and expands our sales coverage to the primary care physician market. And finally, the acquisition enhances our critical mass in ulcerative colitis by providing the opportunity to capitalize on UCERIS's success.

With this acquisition, we have more than doubled our sales force, expanding our sales effort from approximately 250 to 500-plus specialty sales representatives.

And with the combination of the Salix and Santarus product portfolios, all 500-plus representatives will have more products than ever before to offer physicians and patients. We look forward to leveraging our strengths in sales effort and product portfolio as we increase our depth in gastroenterology and as we expand our reach into other targeted specialties.

With the completion of our National Sales Meeting last week, I am pleased to report that we are well on our way to achieving our goals for the integration. We estimate it should take about 6 months for all our representatives to become fully productive. And therefore, we anticipate seeing an inflection in product sales during the second half of this year. We believe that the combination of our expanded sales effort and our expanding product portfolio positions us to drive momentum through 2014 and beyond.

Since launching our first product in 2001, Salix has built a culture of success, demonstrated by our ability to acquire approximately 25 products, secure regulatory approval for 9 products and generate growing product revenue. We're very proud of our role as a leader in the GI market. And with the integration of Santarus, we have transformed our company and are prepared to move to the next level.

Let me now take a few minutes to speak about some significant achievements in 2013. XIFAXAN 550 for the reduction in risk of overt hepatic encephalopathy recurrence continued to demonstrate sustained growth and market penetration during the fourth quarter and throughout 2013. During December, XIFAXAN 550 achieved a record high level of total monthly prescriptions, exceeding the previous monthly record by 8%.

We believe our expanded footprint should allow us to reach more physicians to treat HE patients, including primary care physicians, as well as gastroenterologists and hepatologists.

Market research and claims data suggests that approximately 50% of cirrhotic patients at risk for HE are managed by a primary care physician. The number of monthly prescribers increased 20% from December 2012 to December 2013, and the majority of these new prescribers were from specialties other than gastroenterology. This trend in prescribing reinforces our belief that many patients with HE, as a result of chronic liver disease, are being managed by primary care physicians.

In 2014 and beyond, we anticipate continued prescription growth from primary care physicians, as we fully deploy and utilize our newly created digestive disease specialty sales force.

The market for HE continues to expand, with the latest data indicating an estimated 400,000 patients in the U.S. are currently diagnosed with HE. Despite a growing HE patient population, approximately 60% of patients remain untreated in the outpatient setting. We believe that the expanding utilization of H.E.L.P., an acronym for Hepatic Encephalopathy Living Program, a Salix-developed initiative to improve patient compliance, and the recent implementation of government mandates to reduce rehospitalizations should serve to increase treatment and improve compliance.

Last January, we filed in Canada for approval to market rifaximin 550-milligram tablets to treat hepatic encephalopathy. And in August, approval was granted under the trade name, Zaxine.

Our second largest product, APRISO, also demonstrated sustained growth and market penetration during the fourth quarter and full year, exceeding our expectations for 2013. The number of monthly prescribers increased 38% from December 2012 to December 2013, and APRISO's market share increased 45% in 2013. We anticipate continued strong growth in 2014, as we capitalize on favorable market dynamics, including the discontinuation of coverage of 2 competitive products by a major prescription benefits manager. We also believe APRISO should benefit from the effort we're investing in UCERIS, the newest addition to our inflammatory bowel disease franchise that came to us with Santarus.

UCERIS is a glucocorticosteroid, specifically budesonide with MMX technology, indicated for the induction of remission in patients with active mild to moderate ulcerative colitis.

On January 2, 2013, we announced the approval of FULYZAQ for the symptomatic relief of non-infectious diarrhea in adult patients living with HIV or AIDS who are on anti-retroviral therapy. We believe the approval of FULYZAQ is a significant step forward in addressing the unmet medical need of people with HIV and AIDS who experience non-infectious diarrhea. Diarrhea is a common reason for a patient to discontinue or switch their anti-retroviral therapy and consequently to negatively affect the patient's quality of life.

During the first quarter of 2013, we hired HIV therapeutic specialists to complement our specialty sales force, and we believe our expertise in gastrointestinal medicine should position the company to deliver this much-needed treatment to HIV patients.

This is important work, and we're very proud of this effort and believe FULYZAQ has already started to make a difference in people's lives.

This past Tuesday, February 25, a New York State Supreme Court jury decided in favor of Salix, in a lawsuit filed against the company by Napo Pharmaceuticals. We take our contractual obligations to our partners very seriously, and we are pleased that the jury specifically found that Salix complied with its contractual obligations; and thus, did not breach the license agreement.

During 2013, we continued to introduce SOLESTA, our nonsurgical, in-office procedure that requires no anesthesia, as an option to treat fecal incontinence in their adult patients who have failed conservative therapy. The Centers for Medicare and Medicaid Services, or CMS, issued SOLESTA a reimbursement code effective April 1, 2013. That should help facilitate reimbursement in the hospital outpatient department setting. We expect data demonstrating the efficacy of SOLESTA over 3 years to be published this year. This publication should help facilitate consistent and improved coverage among commercial payers.

Over the course of 2013, we continued to enhance our intellectual property position related to XIFAXAN, FULYZAQ and RELISTOR. We view patent protection as an essential component of our product life cycle management strategy to protect the products and our portfolio.

In May of 2013, we acquired a pending patent application and an issued patent claiming amorphous rifaximin and related intellectual property rights.

Additionally, Olon, formerly known as Solmag, granted Salix the exclusive worldwide right under Olon's intellectual property rights to amorphous rifaximin.

Earlier this month, we announced the issuance of a patent providing coverage of methods of treating hepatic encephalopathy that provides protection until October 2029, and we have filed for Orange Book listing.

We now have the broadest and most comprehensive coverage for XIFAXAN in the history of the company. XIFAXAN 550 has 9 Orange Book patents, with patent protection through October 2029, as well as additional patents covering specific polymorphic forms, methods of manufacturing and the pharmaceutical composition of XIFAXAN 550.

XIFAXAN 200 also has 9 Orange Book patents, with patent protection through July 2029. These patents provide protection for specific polymorphic forms in the formulation, methods of manufacturing, the pharmaceutical composition and methods of treating travelers' diarrhea.

Additionally, we have broad patent coverage for irritable bowel syndrome with diarrhea, or IBS-D indication, that is currently in development. We currently have 13 patents issued that are eligible for Orange Book listing for the IBS-D indication, 5 of which have method of treatment claims. The other patents contain claims to the specific polymorphic form in XIFAXAN 550, methods of manufacturing and pharmaceutical composition claims covering XIFAXAN 550.

We secured a formulation patent covering our RELISTOR syringe, vial, prefilled syringe and multi-dose pen products that should provide protection until 2024, and a formulation patent covering our oral RELISTOR product that should provide protection until 2031.

We also secured a method of treatment patent covering FULYZAQ that should provide protection until 2018.

We were very proud that, in October, the American Liver Foundation named Salix as the National Corporate Partner of the Year. The award recognizes Salix's contribution to the development and introduction of XIFAXAN 550 and the company's support of the foundation's efforts to educate patients and caregivers. We are honored by this recognition and believe that this award exemplifies our commitment to collaborating with health care providers, caregivers and patients to diagnose and manage hepatic encephalopathy.

This year, we partnered with the foundation to launch several initiatives, including HE 123, which is the most comprehensive online resource available for patients and caregivers to learn about hepatic encephalopathy. We look forward to continuing our relationship with the foundation in our mutual effort to lessen the burden of liver disease.

In addition to the growth of our commercial business during 2013, we also achieved impressive gains on the product development side of the business during the year. We continued to progress in the development of XIFAXAN 550 for the retreatment of IBS-D. Additionally, we moved forward with the development of rifaximin in delayed release, also known as rifaximin EIR, or extended intestinal release. The development of rifaximin SSD, or soluble solid dispersion, also progressed during the year.

Just a month ago, at the end of January, we enrolled the last patient into the double-blind phase of TARGET 3, our Phase III study to evaluate the efficacy and safety of repeat treatment with rifaximin 550 milligrams TID, or 3x a day, for 14 days in subjects with IBS-D who responded to an initial treatment course of open-label rifaximin 550 milligrams TID for 14 days. We anticipate top line data for the study will be available by mid-July.

Work progressed in our Crohn's disease program with the ongoing development of rifaximin delayed release, a more soluble formulation designed to release the active drug following passage through the stomach and provide a homogenous distribution of rifaximin in the intestinal tract.

During the first quarter of 2014, we intend to initiate our Phase III double-blind placebo-controlled, 52-week study program investigating rifaximin delayed release and induction of remission and mucosal healing in Crohn's disease.

With respect to rifaximin SSD, we initiated one Phase II dose ranging study in June of 2013. This formulation of rifaximin is designed to improve solubility in order to provide once a day dosing, lower total daily dose and increase efficacy, while maintaining the safety profile of the current formulation. Patient enrollment continued during the year, and we anticipate completing that process by the end of 2014. Rifaximin SSD is being investigated for the prevention of early decompensated liver cirrhosis. If approved, this formulation potentially could expand the use of rifaximin to treat not only hepatic encephalopathy, but also additional decompensating liver events.

During 2013, we continued to work with the FDA to generate a Fast Forward for the further development and regulatory review of RELISTOR injection for subcutaneous use for the treatment of opioid-induced constipation, or OIC, in adult patients with chronic non-cancer pain. On July 27, 2012, the company received a complete response letter from the FDA requesting additional clinical data for our supplemental New Drug Application for RELISTOR for opioid-induced constipation in patients with chronic pain.

During the first quarter of 2013, in an attempt to resolve this dispute, Salix submitted an appeal to the FDA. The appeal process is intended to promote rapid resolution of scientific and procedural disputes that cannot be resolved at the division level.

On June 11, 2013, the FDA responded to our appeal by informing the company that it would convene an advisory committee to seek input regarding our application. On October 1, 2013, the FDA informed the company that the advisory committee would be convened tentatively on March 10 and 11, 2014.

Earlier this month, the FDA informed the company that due to substantial scheduling conflicts, the meeting proposed for March had been postponed to a date in the near future.

Throughout this intervening time, we have continued to make every effort to gain approval for this expanded use of RELISTOR, so that the relief RELISTOR has provided since 2008 to treat opioid-induced constipation in patients with advanced illness who are receiving palliative care, where response to laxative therapy has not been sufficient, can be extended to patients with chronic non-cancer pain.

In May 2013, we announced that our 2 pivotal Phase III studies to evaluate the efficacy and safety of budesonide rectal foam in the treatment of active mild to moderate ulcerative proctitis, or UP, and ulcerative proctosigmoiditis, or UPS, demonstrated that a significant portion of subjects treated with budesonide rectal foam achieved clinical remission compared to subjects treated with placebo foam.

In November, we submitted a New Drug Application for budesonide, 2-milligram rectal foam for the induction of remission in patients with active mild to moderate distal ulcerative colitis extending up to 40 centimeters from the anal verge.

The PDUFA action date for the NDA is September 15, 2014. If approved, budesonide rectal foam would be the first foam product approved in the United States for patients with UC, as well as for patients suffering from UPS.

These conditions are unmet medical needs, and we believe the availability of a rectally administered corticosteroid, such as budesonide rectal foam, may help overcome limitations of existing products to treat these conditions.

In April 2013, Santarus submitted to the FDA a therapeutic biologic application, or BLA, for RUCONEST, seeking approval for the treatment of acute attacks of angioedema in patients with hereditary angioedema. The FDA has recently informed the company that the PDUFA action date of April 16, 2014, has been extended to July 16, 2014.

In summary, I'm very pleased with our success in 2013 and also very happy to welcome our new colleagues from Santarus. We believe this acquisition, and the combined assets of our 2 companies, has created a larger, even stronger Salix that is better positioned for significant growth for 2014 and beyond. Salix continues to succeed in our mission of being the leading specialty pharmaceutical company, licensing, developing and marketing innovative products to health care professionals to prevent or treat gastrointestinal disorders.

This completes my comments. Thank you for being on the call today. And now I'll turn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Jason Gerberry with Leerink Partners.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Just a quick question for Adam. Just going through the earnings results and the tax, just the first 9 months, not reconciling with the reported number for the full year. Just kind of curious if you're switching over to using the cash tax rate with a full year non-GAAP tax number. Just trying to understand exactly the go-forward how to think about the tax rate that you'll be communicating.

Adam C. Derbyshire

That is correct. So in 2014, our non-GAAP will potentially be a cash EPS.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Got it. And then as a follow-up, just thinking about '13 -- the growth in '13, we're seeing a little bit of a drop in the gross margin due to mix. Can you talk a little bit about 2014, the outlook for gross margin and some of your higher-margin products like XIFAXAN?

Adam C. Derbyshire

Yes. Our guidance for 2014, our overall margin is about 80%.

Operator

We'll take the next question from Andrew Finkelstein with Susquehanna Financial Group.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Just briefly on the guidance. Can you talk at all -- you explained the tax rate for the first quarter, but how that -- whether there are any other timing issues you anticipate on a cash basis throughout the year. And then maybe on -- as we think about 2015, you'd updated the rate to about 30% next year, but can you talk at all about any swing factors we should be thinking about? And then I had some questions on the pipeline.

Adam C. Derbyshire

Yes, sure. So after the first quarter, I would expect the cash tax payments to be relatively equivalent for second, third and fourth. And in terms of 2015, we really don't have any update on tax rate for 2015.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Okay, terrific. And then thinking about the pipeline, we saw some results for a potentially competing IBS-D product, and I don't know if you had any observations on the data itself. And as you think about potentially being in the market where there are product like XIFAXAN, which is used on an intermittent basis and a daily therapy, is there a segmentation to the market that might steer patient towards one or the other? And on the Crohn's design, can you talk a little more detail about the trial design, and particularly, how that was influenced by the FDA workshop last fall? Particularly, what are the time points for looking at the remission and mucosal healing endoscopy for the trial? And then to what extent are pain and bowel function looked at?

Adam C. Derbyshire

Yes, I'll just make a comment on the IBS-D product. We don't like to really comment on other company's programs. And as you know, the mechanism of action of their product and our product are very different. And I'll let Bill -- you want to talk a little bit about the Crohn's?

William P. Forbes

Sure. And I think we have been talking quite a bit about the Crohn's. And you're right, the workshop, I do believe that was -- a lot of the designs -- design things that have been discussed with the GI division were outlined in that workshop that you mentioned, the great workshop that was held last year. So again, using abdominal pain and liquid stool frequency, those will be the symptomatics. So the timing on this with the 52-week study, really, will be somewhere around 12 to 16 weeks. And I think we're settling up right now to 16 weeks. When we look at mucosal healing, we're going to be looking further out at the end of the treatment on that. So we'll look at baseline and end of treatment, 52 weeks. And there will actually be 2 of these studies that we envision right now. So the indication would be for induction. But of course, we hope that mucosal healing will also be part of that indication as well. So that's why we termed it the way that we have. Does that answer your question?

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

It does.

Operator

We'll take the next question from David Amsellem with Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

Just a couple. I wanted to start with UCERIS. So I wanted to get your thoughts on the prescription volume trajectory. It looks somewhat sluggish in recent weeks. And I was just wondering, is that a function of the transition and the integration with Santarus? Or are there other forces at work here? And then my second question is just on the debt levels, how does that play into your ability to do additional, meaningful acquisition? Is another sizable acquisition something you can explore? Should we expect to see more in-licensing along the lines of what you announced this morning?

Carolyn J. Logan

David, this is Carolyn. I'll start off commenting on UCERIS. We continue to just get really positive feedback on the drug. So remember, we've had almost our entire sales force in training so far this year, capped off with the National Sales Meeting last week. And then there has also just been unbelievably difficult weather and lots of storms. And I think physician visits overall have been down so far this winter because of that. So I don't think there's anything at all to be concerned about on UCERIS. We continue to believe it's going to be a great growth driver for us, and we haven't seen or heard anything that would contradict that or make us question our thinking on that.

Adam C. Derbyshire

And then, David, in terms of the debt level. I mean, obviously, if you take the combined or pro forma EBITDA for 2013, that gets you in that approximate 6x. If you apply to that the EBITDA for 2014, that gets you down to 4.5x. And then, obviously, we are going to be making payments toward paying down the debt. And then when the 2015 convertible bond comes due in June of 2015, that will -- we'll be paying that off at the par value of that in cash. And then where our EBITDA will be at that point in time, we'll be getting probably close to 3.5x. So you can quickly see that we can stay very active in business development. But to your point, the kinds of things that we are looking at right now are along the lines of what we announced earlier today. We're not looking at anything of the size of Santarus right now, but we will remain very active in business development.

Operator

We'll hear next from David Buck with Buckingham Research Group.

David G. Buck - The Buckingham Research Group Incorporated

Just a couple of quick ones. First, can you talk about whether there are any price increases in this quarter or in the fourth quarter for your other Santarus products? And maybe for Adam or Carolyn, quantitatively -- or qualitatively rather, can you just give a sense of some of the growth rates you might be expecting to see for XIFAXAN? What kind of trajectory you're assuming in APRISO? Whether you're assuming continued growth levels or competition going back in for APRISO? And maybe some comments on the Santarus products.

Adam C. Derbyshire

Sure. I'll start with the price increases. So in October of last year, we did have an 8% price increase on MOVIPREP. And then this year, we've only done one price increase, and that's on UCERIS of 8%.

Carolyn J. Logan

And on growth rates, I mean, we would expect growth rates to continue to be very strong for XIFAXAN. APRISO, we believe the business we gained last year will stick generally in ulcerative colitis patients, especially maintenance patients. When they're on a drug that is maintaining their remission, they are hesitant to switch. That's why it's very difficult to get patients. And the good fortune we had last year allowed us to make that big leap forward. But we do expect to keep that. And then as we've discussed, a very large PBM has written a couple of big competitive products. They're going to be non-formulary, not covered. And so it will be us and the others. I understand it will be the only 2 drugs they'll cover. So we expect to get additional business from that. So we should have another great year with APRISO. We believe UCERIS will have a very strong year as well because of the increased number of physicians we will be calling on with it. The increased frequency we'll be able to call on it. And we will do some additional marketing things to help drive that, and also working with managed markets and all of the things that we normally -- all the marketing muscle we normally put behind our drugs. So yes, we would expect to have really good growth rates in those products this year.

David G. Buck - The Buckingham Research Group Incorporated

Great. And just a quick follow-up. Was there any -- can you give a sense of what type of revenue synergy? There's a $40 million synergy, I think, for cost and revenue combined, but was there any meaningful synergy from moving your products into primary care that you can point to in the revenue guidance?

Adam C. Derbyshire

Yes. We are expecting to add some revenue synergies, and that's built into our guidance of the $1.6 billion.

Operator

We'll take the next question from Gary Nachman with Goldman Sachs.

Gary Nachman - Goldman Sachs Group Inc., Research Division

Adam, I don't think you covered this, but why was RELISTOR such a big number in the quarter? Were there any onetimers in there? And Bill, any sense of when they might reschedule the panel? Do you think it will be this year? And then on XIFAXAN IBS, just review for us what the FDA has asked for in terms of additional retreatment data? How many patients you think will end up having more than 1 retreatment cycle? And what exactly is the FDA looking for there, do you think?

Adam C. Derbyshire

I'll start with RELISTOR. So you'll notice in the third quarter, the RELISTOR number was extremely low, and we talked about that. When we launched the prefilled syringe, we launched it, but it was unfortunately short-dated but we wanted to get it out there. So we had some significant returns that occurred in third quarter, some in second but mainly in third quarter. So this was just getting prefilled syringe back out in the marketplace and getting our inventory levels back where they need to be.

William P. Forbes

Right. And let me see if I can handle the RELISTOR questions. I'm a little hesitant to say anything about RELISTOR dates given the fact that they've already had. Because of the scheduling conflicts cancel the last one that was going be coming up here in March. But it looks like now it may be near the end of May, is one of the new date -- or 2 days will be. But I think right now, it's a little early, until everybody has a chance to weigh in if those dates are acceptable. But I think it's -- you can look possibly towards the end of May at this point in time. Regarding the IBS and the retreatment, I think we've been covering this quite a bit over the last few years. But as you can imagine, what they're looking for is efficacy. So the open label, we followed the responders. And they're really looking to make sure that once the patients relapse, we put them into the double-blind and determine -- hopefully, what we show is that the rifaximin 550 is superior to placebo on the second treatment. So I don't know if that helps, but maybe if you can help me to understand if you have another question on the retreatment for the IBS.

Gary Nachman - Goldman Sachs Group Inc., Research Division

Yes. It's more -- I think recently you said that there were going to be some additional retreatment cycles maybe beyond that second one, maybe going out a third or I don't know if they can even get to a fourth. But maybe just saying if there's sustainability in terms of the number of retreatment cycles that patients might have. And there were going to be recovery -- I don't know if they required a certain number of patients, but that there were going to be some patients that went out even farther and had more retreatment cycles. So that's what I was referring to.

William P. Forbes

Sure. Sure. Okay, thank you. And so the treatment 3, which is the first double-blind retreatment. And of course, we've always said we needed 600 to 800 and we -- in fact, we have just short of 640 patients into that cycle. And we follow them, and they get a scheduled retreatment at week 12. Many of those patients, and that would be treatment 4, they get the exact same treatment they had for treatment 3. So if you were allocated the double-blind rifaximin, you'd receive it again in 12 weeks. So really I think from our perspective, what we're looking is to use all of that data, which is the 12-week treatment period -- or I'm sorry, it's 2-week treatment, but then another 10 weeks for treatment 3. So it's 12 weeks through treatment 3. And then add 6 weeks for treatment 4, and just show that over that 18 weeks that patients do very well. So it's really kind of a prevention of relapse. What is the agency looking for? I think they just wanted additional data on and additional retreatment to see how patients did. So treatment 4 is the last treatment that's in the protocol. And once patients complete that, then they exit the protocol. So there's going to be a lot of data coming from this study. The primary endpoint is treatment 3. That's what it's powered off of and that's where we have to show superiority. Treatment 4, we expect will show similar results to treatment 3, and I think there will be a lot of interesting data coming from it because it is the only rescheduled treatment data that we have. So if we can show that we've maintained remission from the symptoms, then I think that will be a positive and something we'd certainly want to get in the label.

Gary Nachman - Goldman Sachs Group Inc., Research Division

Okay, that's very helpful. One quick follow-up. So you're going to have the top line data mid-July. And I think you said you're not going to file probably until -- or resubmit until the first quarter of 2015. In the past, it seemed like that window was narrower, so are you just giving yourselves more flexibly because there is so much data? Is there any other reason why it might take a little bit longer to reach that?

William P. Forbes

No. Let me be really clear. So we'll file as soon as possible after top line data is released, and then we're talking weeks. It will take 6 months for the agency to review -- I mean, what they're given under our Class 2 resubmission to clinical data that addresses a complete response letter, as this is, is 6 months. So that's why we've been talking about a Q1 decision from the FDA. And of course, the FDA, they have to -- I mean, they could obviously prolong that review, but that's what they've been held to. As far as the Class 2 resubmission, it should be 6 months review, and they should be able to provide us an answer.

Operator

We'll hear next from Mario Corso with Mizuho USA.

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

On XIFAXAN, anything going on in the quarter inventory-wise, which would prevent quarter-over-quarter growth into the first quarter? And I know the weather and other issues might be a factor as well. Also wondering what you can say about HE penetration there and how far you think you have to go. And then on the financial side of things, anything in the quarterly R&D or SG&A trends over the course of this year that would make things particularly lumpy? Or would you expect things to be relatively linear?

Adam C. Derbyshire

Yes. I would expect the R&D to be spread pretty evenly throughout the year, maybe slowly ramping but no real extreme lumpiness in that. And in terms of inventory levels on XIFAXAN, based on the latest run rate or data -- run rate data, we were right in line with demands and no changes with XIFAXAN. And was there a third part to that question? I'm sorry, Mario.

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

The trends on SG&A for the year as well?

Adam C. Derbyshire

Yes. Again, I would say, I mean, we do see around the big medical meetings or actually big -- like DDW and ACG and EASL, we can see a little bit of a blip here or there. But no, I would say that would just be ramping up slowly throughout the year.

Mario Vincent Corso - Mizuho Securities USA Inc., Research Division

And then, I asked about HE also penetration and...

Adam C. Derbyshire

Yes. There's no real update on that. We don't get that data on a weekly, monthly basis. We tend to mine that data every 6, 8, 9 months to get an update on trends. But there's no real update there. We still believe -- there's 60% of the population that's not getting treated on an outpatient basis. So obviously, we're wanting to target them. And obviously, we want to make sure they're on therapy more consistently. So we still have that data of about 125 to 130 days on average. Although the patients that are in the H.E.L.P. program tend to be on therapy longer for maybe about 185 to 190 days. So as more patients get enrolled in that, that's very helpful. But that's the latest data we have on HE.

Carolyn J. Logan

And we're looking for a new digestive disease sales force to really help us access a lot more of those patients. Because we know about 50% of the cirrhotic patients are being treated by their primary care physicians. So what we're hoping that, that's going to allow us to increase these numbers more aggressively.

Operator

We'll go next to Annabel Samimy with Stifel.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Just on the sales force structure. So you mentioned that you have a digestive disease sales force. Can you just help us understand how you're going to structure the sales force now as a primary care? And given the number of products you have on your plate right now, how are you going to split that out?

Carolyn J. Logan

Sure. We have a great slide in our corporate presentation. So I don't know if you've seen that slide or not, but it really lays it out nicely for you. We have 3 GI sales forces now. The names of those our Integra, Futura and Willow. And each one of those has close to 100 reps in each one. So in Integra, they will focus -- their first presentation will be SOLESTA, and then they'll be -- they'll follow that with our purgatives, MOVIPREP/OSMOPREP, and then ZEGERID. In Futura, they will -- their primary products will be XIFAXAN 550, and then they'll go into UCERIS and then RELISTOR. In the third GI sales force, Willow, their primary products will be UCERIS and then APRISO and then XIFAXAN 550. And we do expect there'll be overlap because when you're talking about UCERIS, you'll probably also end up talking about APRISO. So that's the 3 GI sales forces. Then the digestive disease sales force is 161 reps, and they will call on a lot of primary care physicians, but they'll also call on some endocrinologists, pain specialists and infectious disease physicians. So when they're calling on a primary care doctors -- really when they're calling on any physician, they have data that shows the types of products that those physicians write, which tells you what types of patients they see. So in primary care physicians who are treating liver patients, XIFAXAN 550 will be their first. And then they'll look to see if they're writing opioids, then RELISTOR could be the second. Or if they're treating a lot of diabetes, GLUMETZA and CYCLOSET will be second. When they're calling on infectious disease physicians, FULYZAQ will be their primary call, followed by XIFAXAN 550 because in HIV and AIDS patients, there's quite a bit of co-infections with hepatitis B or liver disease. They'll also use ZEGERID from a sampling standpoint to help gain access into the offices. We have 8 HIV therapeutic specialists. These are specialists in the largest HIV market that will be on top of the digestive disease sales force. And of course, FULYZAQ is their primary, XIFAXAN 550 is their secondary. Our hospital representatives, there are about 40 of those. They will focus mostly -- they'll have our whole portfolio. But mostly, they'll focus on XIFAXAN 550, RELISTOR and DEFLUX. Our federal account representatives that focus on anybody who buys off the Federal Supply Schedules, VA hospitals are a big target, Department of Defense, prisons, anyone like that. They will focus on XIFAXAN 550, APRISO, UCERIS, FULYZAQ and RELISTOR based on the type of physician and what that physician -- types of patients they treat. Does that help?

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Yes, that's quite extensive. Just want to also ask you -- I guess, you kind of opened yourself up to this, but you said you want to take yourself to the next level. Can you define what that next level is now that you've got Santarus under your wing?

Carolyn J. Logan

Increased -- we have an increased presence in gastroenterology and hepatology. We're now able to access the primary care market, which we had not been able to do, and that was something we'd wanted to do for a long time, but we didn't want to build out a sales force without having something that was already generating revenue there. We didn't want it to be dilutive. And so Santarus was transformational for us in many ways, that being one of those ways. We also increased our pipeline with RUCONEST, with SAN-300, with the addition of the product that we announced today that was in-license, the bowel prep that we're very excited about. We think that has a potential to cause a lot of people that won't get colonoscopy to not fear the purgative process. Because in oral products, it's just much easier for many people to get down than those thick-consistency liquid types of things that are so unpleasant for many people.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

Right. So while you're talking about that new purgative. Can you talk about the development pathway for purgatives? And where is it in development and what the time lines might be for that?

William P. Forbes

Sure. This is Bill again. I think, in a general way, I'll walk through this. But if you've watched companies that are in this purgative space -- ever we purchased InKine years ago, we know quite a bit about this. There are actually fairly rapid development programs. We have to have a pre-IND meeting, but we believe that from IND through to filing of the NDA, oftentimes, 24 months or 25 months or more than that time frame is what it takes to go through the dose ranging, then do the Phase III work for our purgatives. Because we have to meet with the FDA and we have to make sure that we hit all of their requests and all of -- and make sure that we incorporate all of the questions that they might have. But generally speaking, because colonoscopies are very quick and there's a great deal of them being done in the United States, purgative development is rapid.

Adam C. Derbyshire

And Annabel, as you know, MOVIPREP and OSMOPREP have a finite life. So MOVIPREP can go or will go generic in September of 2018 and OSMOPREP in November of 2019. So the goal is to get it on the market before that time frame, so we can convert the business over.

Operator

We'll hear next from Irina Rivkind with Cantor Fitzgerald.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

You gave time lines for the various treatment and retreatment measurements in the IBS-D trial. Just wondering if you could provide a little more detail about the microbial collections and at which time points you'll be taking those. Are you going all the way out to treatment 4 with those? And will all of that data be submitted with your NDA? And will it be available for us to kind of see it in the press release when you disclose the data in July?

William P. Forbes

Yes. This is Bill again. So there are scheduled acquisitions of both fecal, as well as skin swabs that we've laid out throughout the entire study. I mean, we have them in treatment 3. We have them when they complete treatment 3 and then in the -- even treatment 4, when they exit the study. So there's quite a bit of data. And I think I've mentioned this a number of times before in other calls, but we worked through all of the data that needs to be included in the resubmission with the FDA, and we're just processing that information right now. So will it be available? Yes -- my hope is that, if it is available at the same time as the top line efficacy data is, then we'll try to include something in the press release at that point in time. But we're not finding any surprises at this point in any of that data.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

And then just a quick follow-up on the RUCONEST PDUFA, that was delayed. Is that because FDA wants additional data or something else?

William P. Forbes

No. They didn't -- I mean, if you mean by additional data, were there additional work that needed to be done, no. But there's some additional requests that they had, and those were submitted and they took the opportunity to extend the PDUFA by 3 months. And so I think, in a way, maybe that's -- we like to look the glass half-full, maybe that's a positive for us because they've requested information. We submitted it, and they've taken a little additional time.

Operator

We'll take the next question from Tim Lugo with Blair.

Tim Lugo - William Blair & Company L.L.C., Research Division

For -- I guess, following up on RUCONEST. Are you prepared to launch the product yourself? I know it's a bit outside the GI or primary care focus and HIV is pretty competitive these days.

Carolyn J. Logan

We -- it's a small number of physicians. So we certainly could do this ourselves, and we're looking very strongly at that. I don't know if we have 100% made that decision yet, but I think we are strongly leaning in that direction.

Tim Lugo - William Blair & Company L.L.C., Research Division

Okay. And have -- you have kind of a growing exposure to primary care. Should we expect straight primary care in-licensing deal over, let's say, in the medium term?

Carolyn J. Logan

Most likely not. I don't -- I think we would hesitate to say never. But really, our focus is on gastrointestinal. We love products that have usage in both primary care and gastroenterology or other small specialties. So to just go for a strictly primary care product, I would say we don't see the need to do that any time soon, and that's not our plan at this point. We have lots of holes -- as big as our portfolio is, we have lots of holes still that we are looking at.

Operator

We'll hear next from Greg Fraser, Bank of America.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

It's Greg Fraser for Greg Gilbert. On XIFAXAN and the growth in non-GI prescribers, are PCPs the biggest driver there? And do you know how the new non-GI prescribers are writing XIFAXAN? I'm just wondering if most of the prescribing is for HE or the new -- doctors are also writing for other indications.

Carolyn J. Logan

No. From the size of the prescription side, we believe and from market research we've done, we believe that the majority of our new business is in hepatic encephalopathy. And so the primary care physicians, if their patients are hospitalized, they can get put on XIFAXAN and go back to their primary care doctors. Sometimes they will keep them on XIFAXAN. But without us there constantly messaging it and providing support and providing samples, it would be easy for them to fall back into lactulose. So that's one of the reasons we think that's a great opportunity. So years ago, we thought that all of these patients were being treated by gastroenterologists or hepatologists. But as we've done more market research and we've been in this market longer, we've learned that, that assumption did not hold up. That in fact, primary care doctors are treating a lot of these liver disease patients. And the experts in liver disease actually have initiatives going on trying to train primary care physicians to treat liver disease patients because this is a burgeoning market. Now with so much emphasis on diagnosing hepatitis C, a lot of people that had been undiagnosed are being diagnosed. And then also, because as a society we're getting heavier, there is this new liver problem called fatty liver disease. And it's expected to -- unfortunately, for all of us as patients, to keep this market growing for years to come. And the hepatology community and gastroenterology community, as you know, is a relatively small number of physicians compared to the number of patients that could be affected. So they are predicting that more and more of these patients will be treated by primary care. And the thought there is to get these physicians in primary care trained to appropriately treat liver disease patients. And of course, we hope to be able to participate in some of that with some of our programs.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Great. That's helpful color. Has the LINZESS launch made you more or less excited about the IBS-C space?

Carolyn J. Logan

Has the what launch?

Gregory D. Fraser - BofA Merrill Lynch, Research Division

LINZESS.

Carolyn J. Logan

Oh, LINZESS. We don't consider LINZESS a competitor. But we consider anytime, anybody's talking about IBS, whether it's constipation or diarrhea, an advantage for us. Because the more IBS is talked about, the more excited or motivated IBS patients may be to go into their physician and seek treatment. So if we are granted approval, as we hope we will be, then we believe we'll benefit from increased noise around IBS.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Sure. I was wondering more about your interest in an asset in that space, and whether it's gone up or not.

Carolyn J. Logan

We've always been interested in having a drug for IBS-C, and so we look for that. Yes, that's definitely an interest of ours. Also chronic idiopathic constipation is -- would be a good product for us now that we have access to the primary care marketplace.

Gregory D. Fraser - BofA Merrill Lynch, Research Division

Okay. And then a couple of quick ones for Adam. What were FULYZAQ sales in 4Q? And then it looked like other sales were negative. Can you just explain what's going on there?

Adam C. Derbyshire

Okay. The FULYZAQ number -- actually, can I just follow up with you Greg on that because I don't have that number with me. I'll just call you back.

Carolyn J. Logan

With FULYZAQ, we have this in specialty pharmacy who do not report to our traditional data source, such as IMS or Symphony. So we have had to do contracts with each of these individually to try to capture that data.

Operator

We'll go next to Marc Goodman with UBS.

Marc Harold Goodman - UBS Investment Bank, Research Division

Quick question. When companies are acquired by other companies, a lot of times, there's the stuffing of a channel. And so I was curious whether there was any stuffing in the channel by the Santarus people and whether we're going to see that as an issue come back in the next couple of months. And if not, that would be great.

Adam C. Derbyshire

That did not occur.

Marc Harold Goodman - UBS Investment Bank, Research Division

That did not occur?

Adam C. Derbyshire

Correct.

Carolyn J. Logan

No, they actually had very low inventory levels.

Marc Harold Goodman - UBS Investment Bank, Research Division

Excellent. And then maybe you could just comment on just some of the trends that you're seeing in some of the Santarus products and obviously now that you've taken it over, has there been any surprises by anything that you've seen?

Carolyn J. Logan

No. There have been no surprises. Or I guess, if there has been any surprise, it's been on the upside. We've learned a lot more about their products. CYCLOSET, for example, is something we've learned more about and gotten more interested in. RUCONEST, we've learned more about that, gotten more excited about that. And UCERIS, we continue to just get great feedback on it. We really have not been out marketing these products long enough to have a tremendous amount of feedback yet. We -- as soon as the deal closed January 2, we launched into training all of the Santarus people, all of the Salix people and the new people that we hired. So we have had a massive training effort going on since the deal closed, that first week in January, until it all sort of culminated last week in the National Sales Meeting. And we have almost all of the territories filled now. There are just a handful of vacancies. So this is the first full week that we've had everybody out there selling. We still have training to do because we do a lot of training. It's not a one-shot deal. So we will continue to do probably a fair amount of training throughout this year. So I just can't give you a whole lot of feedback there because we're just getting everybody out into the offices. That's why we said it will be -- the inflection point will probably be in the second half of the year because a sales representative, on average, has to call on a physician about 5 or 6 times or so to change a prescribing habit. So it just takes a while to get them out there. They've got to all see their targets and then they've got to call on them, in most cases, several times to really have an impact. But I don't know if that answers your question or not, Marc.

Operator

And with no questions remaining, I'd like to turn the call back over to Carolyn Logan for any additional or closing comments.

Carolyn J. Logan

I really don't have a lot of additional comments. I just like to thank everybody for joining us today, and we look forward to speaking with you on our next call. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference, and we thank you for your participation.

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