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Horizon Pharma, Inc. (NASDAQ:HZNP)

Q4 2013 Earnings Conference Call

March 13, 2014 8:00 AM ET

Executives

Robert J. De Vaere – EVP and CFO

Timothy P. Walbert – Chairman, President and CEO

Todd N. Smith – EVP and CCO

Analysts

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

Charles C. Duncan – Piper Jaffray & Co

Liisa A. Bayko – JMP Securities LLC

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

Operator

Good morning, ladies and gentlemen and welcome to the Horizon Pharma, Inc. Fourth Quarter and Year End 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) 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 Horizon Pharma's fourth quarter and year end earnings call. This morning we issued a press release providing the details of the Company's financial results for the fourth quarter and year-ended December 31, 2013, an update on DUEXIS, VIMOVO and RAYOS as well as other recent business highlights. This press release is available on our website at www.horizonpharma.com.

Leading the call today will be Tim Walbert, Chairman, President and Chief Executive Officer of Horizon, who’ll provide a corporate update. Tod Smith, Executive Vice President and Chief Commercial Officer, will provide an overview on the commercial performance of DUEXIS and RAYOS, as well as early metrics and performance around the VIMOVO, since we acquired it from AZ last November. And I will provide an overview of the financial highlights from the fourth quarter and year-ended 2013 before turning the call back over to Tim for closing remarks.

As a reminder, we will be making certain forward-looking statements during today’s call. These statements may include statements regarding our financial outlook and guidance, the expected result of prior transactions, our sales and marketing plans, potential growth of our business and our strategy to engage in future acquisitions.

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 Securities & Exchange Commission including our Annual Report on Form 10-K for the year-ended December 31, 2013.

You are cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligations to update such statements.

Further we may also discuss non-GAAP financial measures during this call to help you understand our underlying business performance. The GAAP reconciliations are provided in the press release which has been posted on our corporate website.

I’ll now turn the call over to Tim.

Timothy P. Walbert

Thank you Bob, and thank you everyone for joining us on this call this morning. 2013 was a transformational year for Horizon as we took major steps forward in our goal of becoming a profitable, specialty pharmaceutical company. We focus the year on driving prescriptions of DUEXIS and launching RAYOS successfully, resulting in a significant organic growth in terms of prescriptions and value for both products.

We are extremely pleased with the early results of VIMOVO since our acquisition of its US rights from AstraZeneca on November 18 last year. This acquisition has allowed us to execute on our commitment to deliver on acquisition, to leveraging our business model, and maximize our commercial infrastructure. This deal was a significant value creative event for the company and we expected to be accretive in 2014 on a non-GAAP basis.

I’ll discuss the performance since we took control of VIMOVO shortly. We ended 2013 with $80.5 million in cash and cash equivalents which we expect will be sufficient to achieve positive operating cash flow. We also expect to be profitable in 2014 on a non-GAAP basis. This being based on our prior GAAP to non-GAAP reconciliation practice.

And as stated back on November 18 of last year, we expect 2014 net revenue to be between $190 million and $205 million which we confirm today.

Confirming our guidance today is an effect of an increasing guidance given our reclassification of wholesaler fees and cost of good sold to gross to net. As the results of this reclassification, our net sales expectations are reduced by about 11% in 2014. With the overall performance of VIMOVO today, we are comfortable absorbing that increase in our guidance. In addition the company now expects gross revenue reduction in the mid-40% range across its business in 2014 and gross profit margins in the low 90% range, excluding intangible amortization.

I’ll now walk through a performance update on DUEXIS, VIMOVO and RAYOS. Total DUEXIS net sales for the fourth quarter of 2013 were $23.1 million versus $5.7 million in the fourth quarter of 2012. Full year 2013 DUEXIS net sales were $59 million versus $10.3 million in 2012, an increase of 473%.

Also, according to data from Source Healthcare Analytics, total prescriptions for DUEXIS in 2013 were 214,690 an increase of 128% versus 2012. Also according to SHA, total prescriptions for DUEXIS increased 13% in the fourth quarter of 2013 to 63,947 versus 56,673 in the third quarter of 2013.

With VIMOVO we acquired the U.S. rights from AstraZeneca on November 18 of last year and consistent with our strategy for DUEXIS and RAYOS, our goal is to optimize the value of each of our products and provide them to patients at a low monthly out-of-pocket cost. And so we stated in our conference call announcing the deal, we made a one time upfront payment of $35 million to AstraZeneca.

We’ll also pay a 10% royalty on net sales to POZEN subject to annual minimum royalties of $5 million in 2014 and $7.5 million each year thereafter provided that the patents owned by POZEN, which cover VIMOVO, remain in fact in their generic forms of VIMOVO on the market.

The acquisition of VIMOVO leverages our infrastructure to optimally target the NSAID market. We’ve already seen the synergistic effect of the deal in our expanded primary care sales force, which we’ve increased from 150 to 250 representatives.

Although sales representatives are primarily promoting DUEXIS to ibuprofen prescribers and VIMOVO to naproxen prescribers, there was about 30% overlap of prescribers for both products.

Our rheumatologist sales force which began promoting VIMOVO on November 26 has also increased from 25 to 40 representatives, with these representative promoting both RAYOS and VIMOVO to rheumatologists. We are very pleased with the performance of VIMOVO since the acquisition.

Based on this performance at the end of February, VIMOVO is exceeding our expectations. This is despite the loss of large portion of the Medicare, Medicaid and cash business which we expected. Our research indicates that these have effectively grown prescriptions in patients with commercial healthcare plans offsetting this expected decline.

And according to IMS Health, new VIMOVO prescriptions for the month of January 2014 increased 10% versus December 2013, and increased 18% in February 2014 versus January of 2014. Also according to IMS new and total prescription increased 28% and 10% respectively in the four-week period ending February 28 versus the prior four weeks.

I now would like to update on RAYOS performance. As a reminder we fully launched RAYOS in January of 2013 with our sales force focusing primarily on rheumatologists and targeted primary care physicians. Total prescriptions for RAYOS increased 18% in the fourth quarter of 2013 to just under 3,000 prescriptions, versus just over 2,500 prescriptions in the third quarter of 2013 and reported net sales of $3.2 million in the quarter.

Outside the U.S., RAYOS is known as LODOTRA, it’s now approved in over 30 countries. LODOTRA had net sales for the quarter of 2.8 million. In Europe, LODOTRA is marketed through our distribution partner Mundipharma, which also has commercial rights in certain Asian, and Latin American countries. As we continue to focus on product and company acquisitions as part of our long-term growth strategy, last week we announced the appointment of Bob Carey as our Executive Vice President and Chief Business Officer.

Bob has played an instrumental role in Horizon over the last six years as an outside investment banking advisor, where he was responsible for introducing us to Nitec Pharma where we were able to acquire RAYOS/LODOTRA. And also Bob played a key role in each of the financing transactions we have completed as a public company.

Bob has spent the last 11 years as the managing director and head of the life sciences investment banking group at JMP Securities. And he brings with an invaluable expertise and experience as we seek to grow our business through acquisition of products of our companies and adding to the significant base business we have built.

We are very pleased to have Bob lead our business development, life management and investor relations areas as we look to acquisitions that complement our ongoing organic growth.

At this point, I’d like to turn the call over to Todd, who will walk through the commercial highlights for the quarter and full year.

Todd N. Smith

Thank you Tim, and good morning everyone and again thank you for joining us today. Let me first start by saying we’re very pleased with the continued performance of our commercial organization. DUEXIS and RAYOS prescriptions grew substantially in the fourth quarter and we are off to an excellent start so far with VIMOVO.

As Tim, mentioned we continue to see acceleration of DUEXIS growth in 2013 with a 128% growth in prescriptions. We are pleased with the growing widespread adoption of Prescriptions Made Easy program which eliminates the barriers that often exist with traditional pharmacy processes and ensures that when a physician prescribes DUEXIS, the patient receives DUEXIS.

Our focus remains to provide the optimal experience to both the physician and patients.

As of the end of February almost 29% of our prescriptions for DUEXIS were filled through the PME program. We believe that over time an estimated 40% plus of prescriptions were roll through this program.

So given the success of our PME program for DUEXIS, we expanded the program into our other products. RAYOS was rolled into the PME program in the third quarter of 2013 and in early 2014, we’ve added VIMOVO. So we continued our focus as well on reimbursement and commercial plans throughout 2013, and we executed agreements for DUEXIS with a number of pharmacy benefit managers including CVS Caremark and Express Scripts. With approximately 40% of DUEXIS volume going through these PBMs this has allowed us to execute our Tier 3 and co-pay buy down strategies along with growing the prescription value of our products.

Our comprehensive co-pay systems program has ensured that approximately 93% of commercially insured patients received cost effective access to DUEXIS. Also patients taking DUEXIS on average pay less than $20 out-of-pocket per month allowing us to make sure that patients who need DUEXIS get DUEXIS at an affordable price.

Now with regard to VIMOVO, I’d like to provide an update on the progress made since we acquired U.S. rights from AstraZeneca in November of last year. All required FDA transfers including the NDA and IND have been completed with respect to VIMOVO. In addition all co-pay programs and our Prescriptions Made Easy specialty pharmacy program have been fully implemented to ensure patients have access to VIMOVO with zero dollar out-of-pocket cost.

Approximately 97% of commercially insured patients taking VIMOVO have had their co-pay brought down to zero since we took over commercialization of VIMOVO last year. With our completed expansion of our field force team in January, our full sales organization began promoting VIMOVO on February 3, 2014.

As Tim mentioned according to IMS Health, new VIMOVO prescriptions for the month of January 2014 increased 10% versus the month of December 2013, and then increased 18% in February versus the month of January 2014. These results demonstrate our sales forces, our sales force has driven a significant increase in new and total prescriptions among commercial payers growing to the loss of the Medicare, Medicaid and cash business.

IMS data indicates that we’re approximately 600,000 total prescriptions at peak for VIMOVO of which about half were lost by the time we acquired VIMOVO last year. We have aggressively focused our promotion of VIMOVO against these prior prescribers and we’ve seen a strong response to date from them.

We obviously are very pleased with the initial progress of VIMOVO and look forward to keeping you posted on its continued progress.

I like to now update you on the progress of RAYOS since our full launch in January 2013. Since the launch there have been 1,215 cumulative prescribers of RAYOS. In its first year of launch, total prescriptions of RAYOS were 8,987 scripts.

Market research feedback shows that 71% of physicians have indicated they prescribed RAYOS because of the 55% reduction in duration of mornings stiffness and over 50% of our prescribers prescribed at RAYOS for unique design which delivered prednisone after a four hour delay allowing patients to conveniently take RAYOS at bed time.

These messages remain consistent with our strategy to position RAYOS as a rheumatoid arthritis therapy that allows patients have less pain, hence stiffness in the morning and provide a significant improvement in the overall quality of life. So from a managed care standpoint, we’re seeing similar coverage of RAYOS as we have with DUEXIS amongst the commercial payers.

In the third quarter we rolled out our $5 co-pay plan for RAYOS patients placing us inline with generic prednisone monthly out-of-pocket patient cost. In addition over 90% of commercial patients are being approved for RAYOS and over 92% of patients are receiving RAYOS at a 5% co-pay.

So on a final note, I do want to recognize the execution of our team for maintaining the growth and results of our base business while managing the expansion overall, 135 sales reps and mediators, perhaps very good mobile into our supply chain and launching the co-pay programs as well as other launch activities. We are especially pleased with our early results in January just given that our sales force without any territory promotes half the month training of VIMOVO and attend international sales meeting.

At this time, I want to thank you again for your time and now I’ll hand the call back over to Bob.

Robert De Vaere

Thanks Todd. I want to spend a minute first and touch on the subject of how we account for distribution services and wholesaler fees. With the launch of DUEXIS in late 2011, we have accounted for certain service fees paid to our wholesale distributors of cost of good sold as described in the notes to our financial statements.

In connection with the audit of our 2013 financial results we determined that these services fee should be recorded as a reduction in revenue or a gross to net deduction rather than as cost of good sold. The revision to the classification of fees has the effect of reducing net revenue and cost of good sold by that same dollar amount with gross profit dollars unchanged resulting in a higher gross profit margin on the reduce net revenue amount.

As a result, the company now expects gross profit margins in the low 90% range excluding intangible amortization. This revision has no impact on our income earnings per share or cash flows. After evaluating the quantitative and qualitative effects of the revision, the company in discussion with this independent registered public accounting firm, PricewaterhouseCoopers determined that the revision would not require a restatement of its financial statements for any prior periods. The company has revised all effective financial statement presentation including those presented in our earnings release for this moment to reflect the revision.

And as Tim mentioned earlier, on a go forward basis, we expect gross to net revenue deductions in the mid-40% range across our business in 2014. For the fourth quarter ended December 31, 2013 growth in net sales were $43.1 million and $30.1 million respectively compared to $8.2 million and $6.4 million respectively for the fourth quarter of 2012.

DUEXIS growth in net sales for the fourth quarter of 2013 where $34.6 million and $23.1 million respectively after deducting sales discounts and allowances of $11.5 million including co-pay assistance costs of $6.5 million compared to growth in net sales of $7.5 million and $5.7 million respectively during the fourth quarter of 2012.

Increase in DUEXIS sales during the current quarter compared to the same period in the prior year was primarily a combination of product price increases implemented during 2013 and increased prescriptions driven by the company's expanded sales force.

VIMOVO growth in net sales during the fourth quarter of 2013 where $1 million each and represented net profit paid to the company by AstraZeneca in the fourth quarter under a transition services agreement entered into in connection with the acquisition of certain assets and commercial rights to VIMOVO in the U.S. in November of 2013.

RAYOS growth in net sales were $4.4 million and $3.2 million during the fourth quarter of 2013 after deducting sales discounts and allowances of $1.2 million which included co-pay costs of $0.6 million compared to growth in net sales of $0.8 million and $0.4 million during the fourth quarter of 2012.

The increase in RAYOS is primarily attributable to the increasing of our fourth quarter sales during the current year compared to the prior year and which RAYOS was launched in December of 2012.

LODOTRA growth in net sales during the fourth quarter of 2013 were $3.1 million and $2.8 million respectively after deducting trade allowances of $0.3 million compared to growth in net sales $0.3 million during the fourth quarter of the prior year. The increase in LODOTRA sales during the current quarter compared to the same period in the prior year was the result of higher product shipments to our European distribution partner Mundipharma.

And as we have said LODOTRA sales to Mundipharma, were at the time the company shifts products based on Mundipharma’s estimated requirements and accordingly LODOTRA sales are not linear or tied to Mundipharma sales to the market, it can therefore fluctuate from quarter-to-quarter.

As you can see in our press release this morning we have several charges in the fourth quarter related to our acquisition of the VIMOVO and the concurrent convertible debt financing we completed.

Net loss for the fourth quarter of 2013 was $102.9 million or $1.56 per share based on 65,856,170 weighted average shares outstanding, compared to a net loss of $24.3 million, or $0.40 per share and 61,574,187 weighted average shares outstanding, during the fourth quarter of the prior year.

Significant factors that contributed to the increase loss in the fourth quarter of this year were $69.3 million non-cash charge related to the increase in the fair value of the embedded derivatives in the convertible senior notes, due to an increase in the market value of the Company's common stock during the period from issuance through December 31, 2013, and $26.4 million charge related to extinguishment and refinancing of the Company's prior senior loan facility, and $1.2 million in VIMOVO transaction costs.

Non-GAAP net loss for the fourth quarter of 2013 was $14.6 million, or $0.22 per share, compared to non-GAAP net loss of $20.9 million, or $0.34 per share, during the fourth quarter of 2012. Excluding costs associated with early extinguishment of the Company's senior loan facility in the fourth quarter of 2013 in connection with the VIMOVO acquisition and convertible senior note transaction, net loss for the fourth quarter of 2013 was $0.04 per share on a non-GAAP, adjusted basis. Please refer to the section of our press release today titled, Note Regarding Use of Non-GAAP Financial Measures for more specifics on this subject.

The Company had cash and cash equivalents of $80.5 million at December 31, 2013. Cowen and Company, the Company's sales agent, sold 2,448,575 shares of the Company's common stock in 2013 under an aftermarket facility for gross proceeds of $6.2 million and net proceeds of $6.0 million after deducting commissions and other expenses. Cowen has not sold shares under the ATM since July of 2013.

Cost of goods sold increased $1.8 million, to $5.3 million during the fourth quarter of 2013, from $3.5 million during the fourth quarter of 2012, the increase was primarily attributable to the inclusion of $1.4 million in intangible amortization expense associated with the VIMOVO asset acquisition.

As a result of the asset purchase agreement with AstraZeneca, we capitalized $67.7 million in intangible assets related to VIMOVO intellectual property rights. This intangible asset will be amortized using a straight-line method over its estimated useful life currently expected to extend from the date of acquisition of U.S. rights through 2018. For the three months ended December 31, 2013 and 2012, intangible amortization expense accounted for 60% and 47%, respectively, of total cost of goods sold.

Research and development expenses during the fourth quarter of 2013 were $2.9 million, it’s decreased $1.8 million compared to research and development expenses of $4.7 million during the fourth quarter of 2012. The decrease in research and development expenses during the current year was primarily associated with the classification of $1.2 million in medical affairs expenses to sales and marketing expenses and $0.3 million reduction in consulting fees and $0.2 million decrease in regulatory and clinical trial expenses.

During the first quarter of 2013, in connection with the full commercial launch of RAYOS, company began to classify its medical affairs expenses, which not consist of expenses related to scientific publications, health outcomes, biostatistics, medical education and information, and medical communications, as sales and marketing expenses. Prior to the full commercial launch of RAYOS in late January 2013, medical affairs expenses were classified as part of research and development expenses.

Sales and marketing expenses during the fourth quarter of 2013 were $20.1 million, an increase of $5 million compared to $15.1 million during the fourth quarter of 2012. The increase in sales and marketing expenses was primarily attributable to an increase of $1.9 million in salaries and benefits expense due to the increase in staffing of the company’s field sales force, the inclusion of $1.2 million of selling related medical affairs expenses, a $1 million increase in market development, marketing and promotions expenses and $0.9 million in higher consulting in outside service costs.

General and administrative expenses during the fourth quarter of 2013 was $7.6 million from increase of $2.6 million compared to $5 million during the fourth quarter of 2012. The increase in general and administrative expenses was primarily due to $1.2 million increase in legal fees incurred in connection with the VIMOVO asset acquisition in the fourth quarter of 2013. $1.1 million in additional salaries and related benefits expenses associated with incremental administrative staff compared to the prior year period and $0.6 million increase in investment advisory expenses associated with the Company’s issuance of convertible notes during the current quarter.

Interest expense, net was $28.5 million during the fourth quarter of 2013, an increase of $25.1 million, compared to interest expense net of $3.4 million during the fourth quarter of 2012. The increase in interest expense was primarily attributable to $26.4 million charge related to the extinguishment of our senior loan facility.

During the three months ended December 31, 2013, the Company recorded $69.3 million non-cash charge related to the increase in the fair value of the embedded derivative in the convertible senior notes issued in November 2013. Principally due to an increase in the market value of the Company’s common stock during the period from issuance to December 31, 2013.

I’m going to touch on just a few items in the full year results with the complete disclosure included in our press release this morning. During the year ended December 31, 2013 gross and net sales were $103 million and $74 million respectively compared to $23 million $18.8 million respectively during the year ended December 31, 2012.

DUEXIS growth to net sales for the year ended December 31, 2013 were $85.5 million and $59 million respectively after deducting sales discounts and allowances of $26.5 million, which included co-pay assistance costs of $12.8 million, compared to gross and net sales of $13.2 million and $10.3 million in the year ended 2012.

VIMOVO gross and net sales during the year ended December 31, 2013, were $1 million each and presented the net profits paid to us by AstraZeneca under a transition services agreement.

RAYOS gross and net sales were $7.8 million and $5.8 million during the year ended December 31, 2013, after deducting sales discounts and allowances of $2 million, which includes co-pay costs of $0.8 million, compared to gross and net sales of $0.8 million and $0.4 million during the year ended December 31, 2012.

And finally, LODOTRA gross and net sales during the year ended December 31, 2013 were $8.7 million and $8.2 million after deducting trade allowances of $0.5 million, compared to gross and net sales of $9 million and $8.2 million during the year ended December 31, 2012.

Net loss for the year ended December 31, 2013, was $149 million, or $2.34 per share based on 63,657,924 weighted average shares outstanding, compared to a net loss of $87.8 million, or $2.26 per share based on 38,871,422 weighted average shares outstanding, during the year ended December 31, 2012.

As we mentioned earlier, significant factors that contributed to the increased net loss for the year ended December 31, 2013 were a $69.3 million non-cash charge related to the increase in fair value of the embedded derivatives in the convertible senior notes, principally due to an increase in the value of the Company’s common stock from issuance through the end of the year and a $26.4 million charge related to extinguishment of our existing senior loan facility.

Non-GAAP net loss for the year was $50.4 million, or $0.79 per share compared to a non-GAAP net loss of $76 million, or $1.96 per share during the year ended December 31, 2012. Excluding costs associated with early extinguishment of the Company’s senior loan facility in the fourth quarter of 2013 in connection with the VIMOVO acquisition and convertible senior note transaction, net loss for 2013 was $0.59 per share on a non-GAAP adjusted basis. And again, refer to the section of our press release titled, “Note Regarding Use of Non-GAAP Financial Measures” for more specifics on this subject.

I’ll now turn the call back over to Tim for closing remarks.

Timothy P. Walbert

Thank you, Bob. As you’ve heard today, we’ve very excited about the progress that we had in 2013 and believe that we’re well positioned to drive revenue, moving forward become a profitable company this year. We are poised on our commercial success and accelerate our business development effort, which will allow us to continue to leverage our business model and maximize our commercial infrastructure, in turn creating increased value for shareholders.

Thank you for your continued interest and support. And I’m happy at this point to open it up to questions.

Question-and-Answer Session

Operator

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

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

Hi, guys. Congratulations on a good quarter. Thanks for taking my call. I want to just clarify that the accounting change was related to these distribution service agreements, not an accounting change related to how you’re recording the royalties for VIMOVO to Pozen. Am I correct?

Timothy P. Walbert

Correct. Essentially all we have here is the wholesaler fees moving from cost of goods sold to gross in that, which is – the net effect is an increase in gross margins and a reduction in net sales.

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

Okay, and the royalty is going to be recorded in COGS, is that correct?

Robert J. de Vaere

No, this is Bob de Vaere. The royalty is was accrued as part of the purchase accounting around that transaction, and there won’t be a charge initially for the accrued royalties that get’s offset against the liability that was recorded at the time we announced and did that transaction, so there won’t be any royalty expense going to COGS for the VIMOVO transaction.

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

But there are payments to Pozen, I think you said $5 million in 2014 and $7.5 million, I guess the years after?

Timothy P. Walbert

Those are minimum royalty so, we are paying it’s 10% and as part of the transaction we agree to set those as minimal, minimum levels.

Robert J. de Vaere

Annabel, those royalty payments those are cash royalty payments, we’ll get offset against the accrued liabilities at the time - that we recorded at the time of the deal.

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

Okay, all right great. All right, then I guess the other question I have is related to the trends, so I think VIMOVO is doing great. We saw a nice pickup since it was folded into your infrastructure and it does seem that DUEXIS I guess is a little bit volatile and flattened out. Are you seeing any I guess dislocation of DUEXIS sales because of the efforts on VIMOVO? Or is it just related to price increases? Can you just help us understand the dynamic with DUEXIS in the same period where VIMOVO was increasing?

Timothy P. Walbert

Sure, Annabel, so some of the factors involved you had from a holiday perspective both Christmas and New Years were on a Wednesday, so you lost a broader period over the holidays, and in January we had our sales force in the field less than half the month. And the difference versus VIMOVO is you have 600,000 prescriptions - installed base of prescriptions that had been written by our target physicians at peak.

And so essentially you are going back and you have people that enjoy them and wrote VIMOVO on a regular basis, that we weren’t being called on and weren’t being sampled. So reactivating those physicians, who already have bought into VIMOVO has been rapid as you’re seeing in the numbers.

With DUEXIS because of the fact that it’s promotionally sensitive, it was more impacted by the time out of territory [inaudible]; VIMOVO went from zero reps to 290 reps promoting. So it’s really more dynamics around the transaction, time out of territory over the last several weeks, and now that we have our full sales force out there, since February 3 we had seen DUEXIS prescription start to reaccelerate, so feel very comfortable with the growth moving forward.

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

Okay, and then I just want to clarify in fourth quarter you recorded $1 million in profit from VIMOVO, so technically that is not, that’s not sales, it’s just a profit based on this agreement. But from this point forward starting in January, it should be recognition of sales and would $23 million that they recorded in third quarter be a good starting point to go off of essentially?

Timothy P. Walbert

So that was a net profit for that period between November 18 and December 31, so that’s just net profit. When you refer to the third quarter $23 million for AstraZeneca that was global revenues, of which the majority of that was ex-U.S. revenues, so we will be recording net sales at that mid-40 gross and net that I commented earlier, for VIMOVO beginning January 1.

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

Okay, great. Thank you.

Timothy P. Walbert

Thanks Annabel.

Operator

Our next question comes from Charles Duncan with Piper Jaffray. Your line is open.

Charles C. Duncan – Piper Jaffray & Co

Hi guys. First of all, congrats on a great transformational year. And secondly, I wanted to follow up on that last question and that is really how is it that you can continue to turnaround VIMOVO while growing DUEXIS. What is the difference between say a naproxen writer and an ibuprofen writer?

Todd Smith

Thanks Charles for the question. So as we did our analysis there is a couple of key factors. First of all if we look at DUEXIS prescribers [inaudible] prior to acquiring VIMOVO, only about 30% of those prescribers actually wrote VIMOVO. And if we look at VIMOVO prescribers only about 30% of them wrote DUEXIS. So there is minimal overlap between the prescriber base of the two products, and in aggregate you’re looking at less than 2% of the total prescriptions in the marketplace.

So the key focus for us with DUEXIS is to sell versus ibuprofen where there is about 500,000 prescriptions each week. And so we’re targeting those prescriptions and with VIMOVO there is about 250,000 prescriptions of naproxen each week. So the other key factor is, that if you look at the average primary care physician they are using between three and four NDAIDs on a regular basis, because these drugs are very patient specific, Charles, you may react very well to naproxen or VIMOVO and in fact you may not respond at all to ibuprofen.

So these drugs have a lot of variability in what – how they respond to different patients and as a result average doctors using 3 to 4 of them - so a physician that’s using DUEXIS simply continued to prescribe DUEXIS and if you have patients that don't respond to ibuprofen for some reason, VIMOVO is a great option in the patient. So very easily co-positioned in each physician office, but the primary focus is against ibuprofen for DUEXIS and naproxen for VIMOVO.

Charles C. Duncan – Piper Jaffray & Co

Okay. That’s helpful. And if you look at your current three products, and you had to pick a winner in terms of a potential source of upside, and I know this is very speculative and we’re early in the year, would it be DUEXIS, RAYOS or VIMOVO that could surprise to the upside in your internal forecasting?

Todd Smith

Well, if you look at two months of prescription data, VIMOVO has had the highest growth of our three products. And VIMOVO had the highest percentage of prescriptions at its peak of about 600,000. So being able to garner prescriptions among physicians who had already bought into the products, but stopped writing because of lack of promotion and samples is on a relative basis an easier sell - we don’t comment on forward guidance other than the total revenue guidance we have given, but that should give you some context.

Charles C. Duncan – Piper Jaffray & Co

Okay, and my last question is, congrats on the recent hire, I guess I am wondering how would you best measure the value of that hire over the course of say this year? Do you have capacity to do another product acquisition and could that be this year or would it be perhaps the pursuit of a tax efficient strategy?

Timothy P. Walbert

Well, Charles we didn’t hire Bob for his good looks. But the key focus for him is as we’ve articulated out long is we see great opportunity for products that have been deemphasized among pharmaceutical companies like VIMOVO where, very good asset, highly differentiated, but because of the cutback in the primary care sales force is across many of these organizations, as we look at many products between $20 million and $200 million in revenues that are being optimized that we think are opportunities to bring into our infrastructure.

So, Bob is going to be focused on that and we see opportunities to go in incremental acquisitions. We don’t provide guidance relative to number of deals or when they’re going to occur, but certainly that is the focus that the team is working on.

Charles C. Duncan – Piper Jaffray & Co

Thanks for the added color. Congrats on a good year.

Timothy P. Walbert

Thanks, Charles.

Operator

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

Liisa A. Bayko – JMP Securities LLC

Hey, guys.

Timothy P. Walbert

Hi, Liisa.

Liisa A. Bayko – JMP Securities LLC

Congrats on the quarter, and the color on the launch was incredibly helpful. I just have a couple more questions on the wholesaler fees and just to drill down a little bit more on that. Has that mostly come out of the cost for DUEXIS and will that change over time or is there kind of split amongst VIMOVO and DUEXIS?

Robert J. De Vaere

Well, wholesaler fees are fees where the wholesaler behold and distribute the product. So it applies to all products equally and was approximately 7%.

Liisa A. Bayko – JMP Securities LLC

That’s helpful. And then, just another question on the minimum payment was 10% for VIMOVO. So what I think I heard in the other question is that is not seeing content as part of cost. That’s just something that’s going into taken out of cash?

Robert J. De Vaere

Yes. So if you look at our reported financials, you’ll see on our balance sheet we had both the current as well as a long-term accrued royalties and that relates to the VIMOVO acquisitions. When we did that deal we obviously have models and have to record under the purchase accounting rules, report the accrued royalties that we expected. And I think you’ll see on there a combination of about $33 million in accrued royalties.

And so to the extent we incurred cost of royalty expense on VIMOVO sales related, so those are accrued royalties. We’ll offset those accrued royalties again with those payments. And if we exceed the deal model numbers then ultimately those royalty payments will hit cost of goods, but again we’ve accrued that as a balance sheet basis December 31, about $33 million in royalties payable.

Liisa A. Bayko – JMP Securities LLC

I think that all my questions have been answered. Thanks, guys.

Timothy P. Walbert

Thank you.

Operator

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

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

Hi, good morning, and thanks for taking my questions. Just a couple of quick ones. The ones you process to business development with the existing commercial infrastructure, how many additional products, Todd, you think you can set into that structure or the next product you acquire will follow just – include of those royalty expansion?

Todd N. Smith

Well, that’s a good question. So first of all, relative to our existing sales force we have no plans to increase the size with our base business, with DUEXIS, VIMOVO and RAYOS. So among the primary care sales force, which is 250 representatives, pulling on any one point of time about 40,000 primary care physicians, we do see an opportunity for an incremental product to be sold by that infrastructure and maximize. And again, it’s hard to say, how would you look, if there is a situation where there is an opportunity with a particular product to drive incremental revenues and the transaction is accretive, and at that point we would look at increasing our infrastructure and sales reps. On our basic business we have no plan to do so.

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

Yes, thank you. And then a follow up on – could you share with us your thoughts with regards to the financing of additional deals. Where do you see they come from?

Timothy P. Walbert

Well, if you look back to the VIMOVO acquisition at that point in time we did a convertible note, and paying off our existing senior secured note which was reflected in the one-time charges in the fourth quarter. We can’t comment specifically around what financing plans would be because you have that situation coming on that. But I think that as we move and if you look at comparable companies, typically these transactions are funded via high yield debtor or other similar mechanisms. But it’s hard to comment beyond that only what’s comparable companies are doing currently.

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

Yes, thank you. Thanks for the additional color.

Timothy P. Walbert

Thanks, okay.

Operator

And I am currently showing no further questions. At this time, I will now turn the call back to Tim Walbert, Chairman, President and CEO for final remarks.

Timothy P. Walbert

Thank you very much and thanks everyone for joining the call today. I appreciate the time and as we’ve stated, we’re very pleased with 2013, and even more excited about the early progress we’re making here in 2014, and appreciate your time and look forward to speaking again. So thank you very much.

Operator

Thank you ladies and gentlemen. That does conclude today’s conference. You may all disconnect and have a wonderful day.

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