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Horizon Pharma (NASDAQ:HZNP)

Acquisition of Vidara Therapeutics Call

March 19, 2014 08:00 AM ET

Executives

Robert De Vaere - EVP and CFO

Timothy Walbert - Chairman, President and CEO

Analysts

Annabel Samimy - Stifel

Edward Nash - Cowen and Company

Liisa Bayko - JMP Securities

Difei Yang - R.F. Lafferty

Charles Duncan - Piper Jaffray

Operator

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

I would 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 De Vaere

Thank you. Good morning and welcome to Horizon Pharma's conference call. This morning we issued a press release that provides the details of the Company's acquisition of Vidara Therapeutics International ltd., through a reverse merger for stock in cash valued at approximately 660 million. During this call we will discuss the acquisition and the financial implications outlined in our press release. The press release is available on or website at www.horizonpharma.com.

Leading the call today will be Tim Walbert, Chairman, President and Chief Executive Officer of Horizon Pharma; also on the call this morning are Tod Smith, Chief Commercial Officer; Rob Carey, Executive Vice President and Chief Business Officer; Chris Murphy, Vice President Business Development and Jeff Sherman Executive Vice President and Chief Medical Officer During the call will be referring to slides which we have posted in the events section of our website, so please refer to www.horizonpharma.com.

As a reminder, during today’s call we will make certain forward-looking statements. These statements may include statements regarding our financial outlook, including expected pro forma combined full-year net revenues and EBITDA excluding one-time transaction expenses for 2014, our expectations of achieving cash flow positive operations, our sales and marketing plans, potential growth of our business, expected benefits of expanding our product portfolio and other expected benefits from the timing of the proposed transaction with Vidara.

These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve a number of risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These risks are described in our filings made with the SEC including our Annual Report on Form 10-K for the year-ended December 31, 2013; and our current report on Form 8-K that we filed this morning.

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

I’ll now turn the call over to Tim.

Timothy Walbert

Thank you Bob, and good morning everyone. It’s certainly been a busy few months for us. This morning we announced the acquisition of Vidara Therapeutics Ltd., a privately held profitable specialty pharmaceutical company headquartered in Dublin, Ireland. The companies have agreed to combine to reverse merger accelerating Horizon’s transformation to a profitable specialty pharmaceutical company with a portfolio of products currently marketed in the United States. The acquisition expands and diversifies our revenue base with the addition of ACTIMMUNE, a bioengineered form of interferon gamma-1b.

We realized 58.9 million in net revenues in 2013. The addition of ACTIMMUNE is complementary to our business model of focusing on targeted commercial opportunities such as RAYOS or it can optimize the value of the product while providing affordable access to patients. This is an important next step in the execution of our growth strategy combining organic growth with products and company acquisitions. The combined company will be named Horizon Pharma plc, and will be organized under the laws of Ireland with the company’s U.S. operations continuing to be based on Deerfield Illinois. The combined company will have four products marketed in the U.S. with expected pro forma combined full-year 2014 revenues of 250 million to 265 million, and expected adjusted EBITDA of $65 million to $75 million, net of one-time transaction expenses -- or including one-time transaction expenses.

We will acquire Vidara Therapeutics in reverse merger for stock in cash valued at approximately 660 million including 200 million in cash subject to certain adjustments. At the closing of the transaction, Horizon Pharma stockholders would own approximately 74% of Horizon Pharma plc and Vidara Therapeutics shareholders would own approximately 26%. There will be approximately 100 million basic shares and 122 million fully diluted shares at the closing. Horizon officers and directors and funds affiliated with certain of its directors entered into bonding agreements representing approximately 20% of the outstanding shares and more than 95% of vector shareholders agreed to vote in support of the agreement. The Horizon Board of Directors will remain the same with Dr. Virinder Nohria, President and Chief Medical Officer of Vidara also joining the board. Our main Chairman, President and CEO of Horizon Pharma plc and the rest of Horizon management will remain in place with Vidara executives joining Horizon in leadership roles.

Let me tell you a little bit more about Vidara. This Ireland-based company is focused on meeting needs of orphan indications and diseases with high unmet needs. ACTIMMUNE which is a biologic for Chronic Granulomatous Disease also known as CGD in Severe Malignant Osteopetrosis or SMO is sold through a specialty sales force with orphan and biologic experience.

Investments have been made to support the growth of ACTIMMUNE through increasing diagnosis and improving patient compliance. As private company of 24 employees, as I mentioned, Vidara [ph] had sales of 58.9 million in 2013. Vidara’s lead product ACTIMMUNE is approved in the U.S. for two indications which I’ll share more about in a minute with significant growth in the product. We position that research or potential additional indications where we see great growth potential with U.S. patent protection out through 2022. Vidara has commercial rights to ACTIMMUNE in the United States, Canada, Japan, and certain Latin American, Asian and other territories.

Chronic granulomatous disease or CGD is a disease of immune system. It is described as primary immunodeficiency disorder because primary means is not caused by some other disease or disorder. In people of CGD a type of white blood cell called phagocyte is affected. These defective phagocytes cannot generate superoxide leading to an inability to do to harm for microorganisms such as bacteria and fungi. As a result the immune system is weakened and people with CGD are more likely to have certain forms of recurrent severe bacterial and fungal infections and chronic inflammatory conditions. These patients are prone to developing masses called granulomas which can occur repeatedly in organs throughout the body and cause a variety of problems.

ACTIMMUNE is also approved by the FDA to slow the worsening of severe malignant osteopetrosis also called as SMO. This genetic disorder effects normal bone formation. There are several forms of osteopetrosis not to be confused with the more common osteoporosis, a very different condition which is determined by the pattern of genetic inheritance and characteristics. All forms of osteopetrosis were characterized by the abnormal increase in bone density. Severe malignant osteopetrosis is one form of osteoporosis and it sometime is referred to as the marble bone disease or malignant infantile osteopetrosis because it occurs in very young children. While exact numbers are not known it’s been estimated that one out of 250,000 children are born with severe malignant osteopetrosis.

ACTIMMUNE delays the time of disease progression and benefits patients by increasing red blood cell production and bone reabsorption. Beyond the current approved indications for ACTIMMUNE there are several additional growth opportunities. There had been over 200 studies listed including investigator initiated trials most of which have not been supported by the company. The most advanced trials of 12 patient study had been conducted by the Friedreich's Ataxia Research Alliance. In addition, early work in Eczema Herpeticum which is being linked to atopic dermatitis is being pursued with investigators. Over the coming months, we will fully assess these opportunities and determine the path forward.

The acquisition helps diversify our revenue base with the portfolio of products across primary care, specialty markets and rheumatology. ACTIMMUNE complements our business model of targeted promotion to specialist and primary care physicians. This transaction is expected to be accretive to Horizon Pharma 2014 GAAP and non-GAAP earnings per share on a pro forma full year basis. No operating or cost synergies are assumed in the transaction. The tax rate of Horizon Pharma PLC is expected to be in the low 20 percentile or lower compared to Horizon’s expected future tax rate in the high 30%.

We also announced today committed capital from Deerfield Management Company of 215 million pending execution of the company’s final financing plans. To complete this transaction I’ll go through and outline the steps we need to take; first, we’ll follow preliminary proxy statement and Vidara must follow us for registration statement; closing will then be subject to customary closing conditions and regulatory approvals including Horizon’s stockholder approval, the S-4 registrations being declared effective by the SEC and antitrust clearance. Once all conditions of closing are met, we expect to close by mid-year 2014. We also expect this transaction to be taxable to Horizon’s U.S. shareholders.

The combined company strategy will be to continue to leverage the assets we have growing organically and to continue to identify new opportunities. We will focus on driving penetration of our existing products such as DUEXIS, VIMOVO and RAYOS and now focusing on increasing the penetration of ACTIMMUNE and looking to explore additional indications. We will continue to explore new business development opportunities looking for products with targeted approaches regardless of therapeutic area and leveraging our tax efficient corporate structure. We’ll maintain our ex-U.S. partnerships and continue to protect our exclusivity.

In closing, we’re very excited about the addition of ACTIMMUNE product well suited for a commercial portfolio and the acquisition of Vidara therapeutics which we believe will accelerate our transformation into a profitable specialty pharmaceutical company. Following the year of strong execution by Horizon on DUEXIS and RAYOS and our great start with VIMOVO so far this year we remain confident as we head into the remainder of the year with three promoted products and then later in the year with the addition of ACTIMMUNE following the closing. We’re well positioned to drive revenue and create increased value for our shareholders, we will continue to seek additional acquisition opportunities to further leverage our business model and maximize our commercial infrastructure.

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

Question-and-Answer Session

Operator

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

Annabel Samimy - Stifel

Hi, thanks for taking my question and congratulations on the deal. I had several questions. I was just wondering, if there is a bit of change in your strategy, I think originally you are focused on trying to leverage your primary care platform and looks like you’re going more to specialty angle now, so is it a change in strategy that you’re going after specialties and orphan drug indications and just can you help us understand that approach please?

Timothy Walbert

Thanks Annabel. No, we’ve always been focused on targeted assets primarily on primary care with the addition of VIMOVO, and as we said, we continue to look at that targeted assets like we have with RAYOS. So we think Actuant fit nicely in there, its targeted approach very efficient commercial model with 24 total employees, and really leverages our past experience in biologics and orphan diseases.

Annabel Samimy - Stifel

And can you help us understand how you’re going to be selling this product? Is there any leverage that you can get from your current sales force with RAYOS at all or is that a completely different sales force? And can you talk a little bit about the margins on the product?

Timothy Walbert

Sure, so there is a current sales force of high single digit selling ACTIMMUNE by their organization. So we expect to continue that. There is a significant amount of under diagnosis of CGD and several of the other potential indications as we seek them. So we do think there is an opportunity to enhance the education through our primary care sales force. But the primary focus would be on the targeted promotion by that commercial organization. But I think margins are in the low 90% I think roughly.

Robert De Vaere

Yes, I mean it’s a biologic and we really haven’t provided that level of detail yet. But obviously the biologic will be providing incremental financials as we go through this process over the next month or so as we file the S4 as well.

Annabel Samimy - Stifel

The 24 plays in Vidara that’s all. I guess you said sales forces high single digits; do you use any kind of contract sales at all for the product?

Timothy Walbert

No. High level experienced biologic and orphan drug sales specialist who are really working at a high scientific level, there are several medical science liaisons, significant advocacy effort as you would expect in these type of therapeutic areas in orphan disease and a very experienced management team that will continue to work with us.

Annabel Samimy - Stifel

Okay and if I can ask you a question on I guess the pipeline you mentioned the heavy number of different indications that they’re investigating right now, can you help us understand how that’s going to secure R&D going forward?

Timothy Walbert

We aren’t giving guidance at this point in time and one of the things that as I mentioned during my remarks is that, we’re going to be stepping back. Jeff Sherman, our Chief Medical Officer and the team will be working with the Vidara team to map out what are the potential indications scientifically and mechanistically make sense and will be developing that plan and updating as we have future calls, so no guidance from an R&D perspective other than the overall guidance that we provided on revenues and EBITDA.

Operator

Our next question comes from the line of Edward Nash of Cowen and Company. You line is open.

Edward Nash - Cowen and Company

Great. Congratulations guys. Fantastic deal announced this morning. Just so, want to get some clarity, this drug is obviously famous for having been developed or tried to be developed in [IPSI] by interim, which was obviously a significant indication for them in where a lot of the offsite usage was coming from, can you give us an idea with regard to CGD and the chronic osteopetrosis? What you guys are thinking the size of that market is on a dollar basis? And then also the additional indications what additionally do you think that could add to the overall size of the market?

Timothy Walbert

All good questions Edward, thanks. Relative to the broader market opportunity, and at this point, we’re focusing on our near-term guidance on revenue and EBITDA. And as we finalized the long-term plans relative to CGD, osteopetrosis and looking at Friedreich’s ataxia and some of these others at that point we’ll give some further colour relative to those market opportunity.

Edward Nash - Cowen and Company

And then maybe with regards to IP so, if I’m not mistaken, the CGD indication was originally approved in '91 so I’m assuming that not under protected, but osteopetrosis rather came in 2000, so is that where we’re getting to 2022 additional patterns that are carrying out the protection into [indiscernible] assume that also protects the CGD indication.

Timothy Walbert

Yes there is a broad composition product patents out to 2022 as certainly as we pursue other indications we'll be seeking opportunities or for exclusivity, but at this point in time we feel very confident in the existing broad patents up to 2022.

Edward Nash - Cowen and Company

Okay. So, just to be clear, so anybody who is going after -- so there is no one that right now you still feel that you’re protect for anyone who would try to go after just CGD alone and not osteopetrosis.

Timothy Walbert

Well, yes. We think this covers both product, both indications sufficiently.

Edward Nash - Cowen and Company

Okay, great. And then the last question I had was just -- so now you feel you guys did a fantastic job with regard to the capital structure and getting VIMOVO in. So, now how long do you think it will be before you’re going to be able delever yourself to be able to kind of focus on additional acquisitions to be able to continue to grow that bottom line since pretty much everyone's especially kind of behaving a profitable company this quarter.

Timothy Walbert

Very good question and [Bob's here] for weeks, so he’s got a lot of work to do from that perspective since joining us. But as far as our capital structure, we think we’re in a good place, if you look at our convertible note that $115 million convert that was done at I think approaching 450 and we did a camp to call hedge up to 671 and certainly that’s essentially acting as equity. So, we’re going to continue to pursue opportunity to delever but really focused on driving EBITDA and continuing to look for additional opportunities and as there is comp we think there is opportunities to finance them in a manner that’s made it.

Operator

Our next question comes from the line of Liisa Bayko of JMP Securities. You line is open.

Liisa Bayko - JMP Securities

Can you talk about what your current thoughts are with regards to price of ACTIMMUNE and then just give us a sense of COGS currently.

Timothy Walbert

So, let me give you guidance on COGS at this point in time, but the margins are set in the 90%, from the standpoint of pricing, so if you look at an annualized pricing, the average patient is about 280,000 at the current time. The typical patient is paying about $50 out of pocket. So, our plan over the next several months is to analyse that fully and make the best decisions moving forward, we certainly think there -- at some point there might be some potential opportunities from a price standpoint but we've not completed that analysis at this point in time.

Liisa Bayko - JMP Securities

And can you maybe give us some indication of where you think your longer term tax rate will be now that you have this…

Timothy Walbert

What I said in the remarks is below 20% or lower as we move forward.

Operator

Thanks you. And our final question comes from the line of Difei Yang of R.F. Lafferty. Your line is open.

Difei Yang - R.F. Lafferty

Good morning. Congratulations. Just a couple of quick questions. So ACTIMMUNE, could you give us a little bit of the breakdown between the two indications as well as whether those $58 million, $59 million revenue primarily coming from U.S. or is there international…

Timothy Walbert

All U.S. it’s all U.S. revenues and we don’t breakdown by indication.

Difei Yang - R.F. Lafferty

Okay. Thanks.

Timothy Walbert

You’re welcome. And there is early access program. So, patients through EAP programs or patient in basis programs in Canada but the primary effort is in U.S.

Operator

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

Charles Duncan - Piper Jaffray

Good morning guys, thanks for taking the question and congratulations on getting this deal done.

Timothy Walbert

Thanks Charles.

Charles Duncan - Piper Jaffray

First question and you may have covered this because I have joined the call a little bit late but tell me if you would what really drove the timing of this deal? We’re a little bit surprised pleased with how quick it came together but kind of thought that this would be a year-end transaction.

Timothy Walbert

Well, when we look at transactions, the opportunity presents itself, we executive upon it. So, really hard to guide on why now, why now is because it was available and we moved aggressively to close the transaction and not really much more to say to that.

Charles Duncan - Piper Jaffray

You believe that you have capacity to complete additional transactions this year in terms of maybe prior to acquisitions?

Timothy Walbert

At this point in time we’re not going to guide on specific timing, we built our origination with Bob Carrie and Chris Murphy joining us recently so it’s certainly a focus to continue to and now leverage the international platform that we’re establishing with Horizon Pharma Plc, so it’s definitely going to be a long driving organic growth or second core strategy. So aggressively pursuing it but not guiding to any specific number of timing of acquisitions.

Charles Duncan - Piper Jaffray

And then final question Tim is how quickly can we start to model in the lower tax rate, almost that take effect?

Timothy Walbert

Bob?

Robert De Vaere

Well clearly we have to go through the steps that Tim has outlined at a high level and complete the transaction we expect that to close mid-year depending on SEC review and things like that but a mid-year close that will affect some of the changes in the organization and more efficient tax structure post-closing.

Charles Duncan - Piper Jaffray

Okay, so from about mid-year on or so?

Robert De Vaere

Yes, I mean again assuming a mid-year close.

Operator

Thank you. And we have an follow up question from the line of Edward Nash of Cowen and Company. Your line is open.

Edward Nash - Cowen and Company

Hi. Sorry just had one more quick question, just since we did know what the -- I guess I could kind of back into this a little bit but we know what the cost of the drug is and what the revenue was for ’13. But just wanted to see if we know just most recently what if you guys had any clarity on the number of patients out there who are actively at two or on acting right now for the two approved indications?

Timothy Walbert

We haven’t guided to that specific number. I think as we finish our analysis of what the opportunity is and get a better understanding of the opportunity pricing then we'll probably start looking at providing patient numbers.

Operator

And I’d like to turn the conference back to management for closing remarks.

Timothy Walbert

Thank you very much. Again appreciate taking the time to join us today. We’re very excited about the opportunity given the acquisition of Vidara Therapeutics. But our core focus is to drive the organic growth with DUEXIS, RAYOS and very excited by the outstanding performance so far with VIMOVI and excited to work with the Vidara team to guess as to close and bring ACTIMMUNE into our commercial organization. So thank you very much for the time and have a nice day.

Operator

Ladies and gentlemen, this concludes our conference. You may now disconnect. Everyone, have a wonderful day.

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