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Horizon Pharma, Inc. (NASDAQ:HZNP)

Q2 2012 Earnings Conference Call

August 10, 2012, 08:00 a.m. ET

Executives

Robert De Vaere - EVP and CFO

Tim Walbert - Chairman, President and CEO

Todd Smith - EVP and CCO

Analysts

Annabel Samimy - Stifel Nicolaus

Charles Duncan - JMP Securities

Edward Nash - Cowen and Company

Operator

Good morning everyone and welcome to the Horizon Pharma Second Quarter 2012 Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introduction, I’d like to turn the call over to Horizon Pharma’s Chief Financial Officer, Robert De Vaere. Mr. De Vaere, Please go ahead sir.

Robert De Vaere

Good morning, and welcome to Horizon Pharma’s second quarter earnings call. This morning we issued a press release that provides the details of the company’s financial results for the second quarter ended June 30, 2012, as well as an update on DUEXIS and RAYOS and 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 Pharma. Tim will provide a corporate update. Todd Smith, Executive Vice President and Chief Commercial Officer will provide an overview on the commercial launch of DUEXIS and I will provide an overview of the financial highlights from the second quarter 2012 before turning the call back over to Tim for closing remarks.

As a reminder during today’s call, we will be making certain forward-looking statements. These statements may include statements regarding our financial outlook, our regulatory and sales and marketing plans, potential growth of our business plans to enter into future commercial agreement and anticipated timing of product approvals. 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 and Exchange Commission including our Annual Report on Form 10-K for the year ended December 31, 2011 and subsequent quarterly reports on Form-10-Q. 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 our press release which was posted on our website www.HorizonPharma.com.

I will now turn the call over to Tim.

Tim Walbert

Thanks Bob. Good morning everyone and thank you for joining the call to discuss our second quarter 2012 results. I will begin this quarter’s conference call by discussing our results and the progress of our ongoing commercial launch of DUEXIS in the United States. And also I will discuss the recent U.S. FDA approval of RAYOS, where we are extremely pleased with the broad indications we received and the inclusion of rheumatoid arthritis data in the approved product prescribing information.

First, results we present today for DUEXIS show continued progress in prescription demand. We reported increase for DUEXIS of 91% gross revenues compared to the first quarter of 2012. We also reported an increase in total prescriptions for DUEXIS of 81% versus the first quarter of 2012. Bob will provide you more detail on DUEXIS revenue later on in this call.

To further our focus to driving sales growth to DUEXIS in the U.S. we are now focused on finalizing the expansion of our initial 80 person sales force to 150 sales representatives. In addition, we recently announced the co-promotion agreement with Mallinckrodt which is a pharmaceutical business of Covidien. We believe Mallinckrodt expertise in the distribution of pain therapeutic along with their experienced sales force in the osteoarthritis and rheumatoid arthritis market is well suited to successfully help us market DUEXIS to their exclusive target.

Our sales force expansion along with this co-promotion will enable us to significantly expand our reach and frequency against key high value prescribing physicians to treat patients with osteoarthritis and rheumatoid arthritis. We believe the combination of our additional Horizon sales representatives along with the substantial promotional efforts of Mallinckrodt will increase our [call on] position target to five-fold from 10,000 physicians to 50,000 physicians beginning in the fourth quarter. Todd Smith will comment further on this in his remarks.

At this point I’d like to turn the call over to Todd who will discuss our commercial highlights for this quarter.

Todd Smith

Thank you, Tim. Good morning everyone and thank you for joining us today. It's a pleasure to discuss with you our second quarter 2012 commercial performance. From Wolters Kluwer market data we know that there were approximately 97.7 million (inaudible) scripts written in 2011 with approximately 31 million of those scripts written for ibuprofen for more than 30%. Further this demand for ibuprofen other generic NSAID has created an increased risk in NSAID cause GI toxicity with over 85% patients not being protected, thereby creating a substantial opportunity for DUEXIS to address unmet medical need for osteoarthritis and rheumatoid arthritis patients.

We also know that the NSAID market is a promotional and sample sensitive market and as Tim indicated earlier on the call, our strategy with the combined Horizon and Mallinckrodt sales force is to increase our called on target physicians from 10,000 to 50,000 high prescribing physicians. The Horizon and Mallinckrodt sales effort was designed to be complimentary with no overlap among the two sales teams. Our sales efforts that will target 25,000 high prescribers that will continue with the relationship they have already established with physician, while Mallinckrodt sales specialist will focus on an additional 25,000 high value prescribers. As a combined effort this breaks down to approximately 40,000 partner and care physician, 4,000 rheumatologists and 6,000 additional physicians such as orthopedic surgeons.

We believe this strategy allows us to access to over 50% of the total U.S. NSAID prescriptions; the Mallinckrodt sales team has begun sales training for DUEXIS will begin selling DUEXIS later this month. So, while we continue to expand on our commercial execution for DUEXIS, we are pleased with the current feedback we received six months into the launch of DUEXIS.

Our market research continues to indicate that awareness of prescribing rate during the second quarter remain high for DUEXIS with over 90% awareness and 70% of targeted prescribers having written at least one prescription. According to monthly data from Source Healthcare Analytics formerly Wolters Kluwer, driven approximately 35,000 total prescriptions for DUEXIS since launch with 18,805 of those in the second quarter alone. Total prescriptions for second quarter grew by 81% compared to the first quarter of this year. As of June 30, there were 4,028 cumulative DUEXIS prescribers an increase of 75% versus March 31, 2012. Now our sales force added over 100 new prescribers each week during the second quarter.

Our sales representatives also generated 150% more prescriptions per detail in the second quarter versus the first quarter of 2012. So, in addition our recent market research continue to show that approximately 70% of commercial lives have access to DUEXIS with approximately 80% of DUEXIS commercial plans having a patients (inaudible) cost of $25 to the implementation of co-pay assistant program.

Further, we recently gathered our sales representatives at a sales meeting where we rolled up a next phase and messaging progression. These messages are build along patients types that expand physician use from (inaudible) adoption and use of DUEXIS in product osteoarthritis patients which we believe will continue to accelerate DUEXIS’ positioning and result in a longer refill rate.

So, thank you for your time again this morning. I’ll now turn the call back over to Bob.

Robert De Vaere

Thank you, Todd. First, let me remind everyone that in December of 2011, we began recognizing revenues from the sale of DUEXIS following its commercial launch in the U.S. DUEXIS is currently sold t wholesale pharmaceutical distributors and into several national and regional retail change. And until we can reliably estimate returns, we have determined that shipments of products to wholesale distributors and to these retail chains do not meet the criteria for revenue recognition at the time of shipment.

So, we are currently deferring DUEXIS revenue recognition until the right of return no longer exist which currently is the earlier DUEXIS being dispensed through patient prescriptions or the expiration of the right of return.

Total DUEXIS revenues recognized in the quarter ended June 30, 2012 based on sell-through to patients was 2.1 million with trade discounts and allowances of 0.2 million in co-pay assistance costs of approximately 0.3 million relating to net DUEXIS revenues recognized at 1.6 million an increase of 78% versus the first quarter of 2012. As of June 30, 2012 we had 1.3 million in deferred revenue on our balance sheet related to DUEXIS shipment.

For the quarter ended June 30, 2012, total net revenues were 3.8 million compared to net revenues of 1.3 million in the second quarter of 2011. For the second quarter of 2012, we reported a GAAP net loss of 22.8 million or $0.68 per share compared to a net loss of 11.6 million or $7.78 per share for the same period in 2011.

Research and development expenses increased 0.7 million from 3.5 million during the three month ended June 30, 2011 to 4.2 million during the three month ended June 30, 2012 primarily associated with a 0.6 million increase in medical education and related grants.

Sales and marketing expenses increased 9.3 million from 1.2 million during the three months ended June 30, 2011 to 10.5 million during the three months ended June 30, 2012, primarily attributable to ongoing sales and promotional efforts related to our DUEXIS product launch including a 4.6 million increase in salaries and benefits expense associated with additional staffing of our sales and marketing functions, a 2.3 million increase in market research and brand awareness program, a 1.4 million increase in consulting and outside service costs and a $0.8 million increase in samples and marketing materials cost.

General and administrative expenses increased 1.3 million from 3.3 million during the three month ended June 30, 2011 to 4.6 million during the three month ended June 30, 2012. The increase in G&A was primarily due to a 0.7 million increase in stock-based compensation expense, 0.4 million increase in salaries and benefits expense associated with increase in admin personnel, and a 0.3 million increase in legal costs associated with intellectual property related matters and public company compliance fees.

Now I’d like to turn the call back over to Tim for some closing comments.

Tim Walbert

Thank you, Bob. Before turning the call back to the operator for questions, I’d like to acknowledge our first full-year as a public company. On July 28, 2011, we closed our initialized IPO and today, we have executed on all the milestones we committed during the IPO process with the Covidien, Mallinckrodt deal, the (inaudible) for DUEXIS and RAYOS approval (inaudible).

We will continue to focus on the strategic goals we have outlined going forward. The key milestones for the second half of 2012 are to leverage the five-fold increase in called on physicians for DUEXIS, giving is critical mass to drive DUEXIS sales in the U.S. in the fourth quarter and launching RAYOS in the United States in the fourth quarter as well.

Our expanded U.S. commercial teams are in the final stages of readiness as we remain firmly on course to bring DUEXIS and RAYOS to physicians and their patients. Furthermore, in DUEXIS we anticipate a decision on the marketing authorization application in the United Kingdom in Europe by the end of this year. We have set a strong initial foundation for the company, we are strategically positioned to look for opportunity to co-promote, acquire, or in-license additional product which can leverage both our infrastructure and commercial expertise.

We thank you for joining us today and we would like to open the call up for questions at this point in time. So operator, please open up for initial questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Annabel Samimy of Stifel Nicolaus. Please go ahead.

Annabel Samimy - Stifel Nicolaus

Can you talk a little bit about the progression of the sales force expansion what we can expect for I guess content SG&A progression for the year and I guess maybe into 2013?

Tim Walbert

So, the question relative to SG&A expansion, we expect to complete all of the hiring of our incremental 70 sales representatives this quarter, the third quarter and would expect to have some increased expenses we launched RAYOS in the fourth quarter and beginning of the first quarter offset by increasing sales based on the Mallinckrodt and further DUEXIS effort. So, at this point we expect some increase in the ongoing expense base given the increase in headcount offset by increasing revenues.

Annabel Samimy - Stifel Nicolaus

And then for the commercial plans for RAYOS, how will they differ from the commercial plans for DUEXIS given the slightly I guess different population, what type of rebates or co-pay assistance programs do you expect to have in place for that are they similar or different to DUEXIS?

Tim Walbert

So for RAYOS, as Todd mentioned we are going to be calling on 50,000 target of those 50,000 targets or 4,000 rheumatologist, our initial focus for RAYOS is to promote it for rheumatoid arthritis and polymyalgia rheumatic which is somewhat similar to rheumatoid arthritis where the only drug typically used at 10 to 15 milligram of prednisone. So, we will focus our effort for RAYOS initially in the rheumatologist office where you have those 4,000 rheumatologists being called on by our existing sales force. Relative to the co-pay support and overall managed care plan, we have begun those plans with our managed care team; it would expect to have a similar co-pay plan in place where for instance we would expect to be a tier 3 position across commercialized. And then we would ensure that patients are able access RAYOS at a reasonable out of pocket expense to them on a monthly basis. So, very similar that we from a co-pay buy down and reimbursement perspective with DUEXIS.

Annabel Samimy - Stifel Nicolaus

And just as we are talking about the co-pay program, clearly you saw (inaudible) discuss on DUEXIS and in excess of co-pay program. Is this something that’s going to be persistent or it just something that would have tapers after your critical launch period?

Tim Walbert

You bring up a good point and I think that the initial focus is to maximize the initial launch period over the first 12 to 18 months and then really monitor what level of co-pay assistance is required. For instance we see that the co-pay assistance for DUEXIS is a fair amount below other products, branded products such as Celebrex, but we will monitor that over the time when there is an opportunity to reduce that once we get out pass that period we will do so.

Operator

Our next question comes from Charles Duncan at JMP Securities. Please go ahead.

Charles Duncan - JMP Securities

Tim, my first question is on the DUEXIS prescriber base that you spoke of, you mentioned that or Todd mentioned 70% of the targeted docs have written a script, could you share with us how they are the same or different from the 30% that haven’t. And maybe the message that is getting traction with those docs versus the 30% in which the message is not getting traction?

Todd Smith

The difference between the two is simply as I mentioned very promotionally sensitive marketplace. So as we look at the (inaudible) we call on, we will get our initial launch as (inaudible) trial and that as we have said we recently had our meeting with our sales force we brought them in. We expanded our patient type messaging then to highlight the fact that of extending from trials to adoption which means not only a continuing to increase the utilization of DUEXIS in those patients as they started prescribing on, but also then getting them into longer more expensive script. So, if you look at the 70% that we called on, many of those have been in trial (inaudible) and they have indicated or started to see some movement to adoption which means that the broader use. The 30% that at this point haven’t either means there we brought them in recently into an earlier phase of trial and we are continuing to have those dialogues or we moved on and made a decision that there is a more valuable target we should be calling on. And so, when I look in 70% of doctors writing in at 90% awareness of the product, I’m actually very pleased with those numbers and actually little bit higher than I’d have expected with the products in this market.

Charles Duncan - JMP Securities

Agree. If we can hop over to RAYOS, the label frankly was a lot broader and we had anticipated and Tim you mentioned the RA data. I think that’s pretty cool as well. I guess I’m wondering how that’s going to impact your messaging and if you believe if that’s going to be important in terms of driving utilization.

Tim Walbert

So, very good point and we are certainly pleased especially in the rheumatology space where typically a rheumatologist is treating anywhere from 5 to 7 different on immune diseases, such as rheumatoid arthritis, polymyalgia rheumatic and ankylosing spondylitis, psoriatic arthritis and a number of very similar or immune diseases and it gets very typical when you are trying to single out which one you indicated and then which one you are not. The real benefit we have now is that for any for the immune diseases that our rheumatologist treats RAYOS is indicated. But our real focus is on the indication both in the rheumatology space and beyond where there is a clear critical untoward effect based on an IL-6 mediated effect that occurs in the early morning hours, such as in both rheumatoid arthritis and polymyalgia rheumatic. It's a significant morning symptoms and pain and stiffness that occurs when patients wake up which is also very similar for patients with polymyalgia rheumatic.

When you look outside the RA marketplace, there is two other indications of diseases where IL-6 has a predominant clinical effect and that is in asthma and chronic obstructive pulmonary disease where the main clinical effect is nocturnal awakenings. So, as we look to broaden the potential plans to RAYOS, we look at potential co-promotion partners in developing a plan to focus on (inaudible). Our intent is to not increase our expenses and create a sales force or other effort against the (inaudible) at this point in time. But certainly in the rheumatologist office we think having the broader indication base especially with polymyalgia rheumatic which is relatively unknown disease where it has less than 25% of the prevalence over rheumatoid arthritis but two-thirds the use of prednisone by rheumatologist. So, that was an important second indication which if you recall from a first quarter call we said we were planning on doing a Phase 2, Phase 3 trial with Mundipharma starting later this year by having this indication right upfront we think it does increase the ability to penetrate into rheumatologist office.

Charles Duncan - JMP Securities

With regard to timing and the launch, I know we are half way through the third quarter and fourth quarter just around the corner, but what are the rate limiting steps in terms of the launch and would that be possibly an early 4Q launch or later on are you targeting a certain clinical meeting to have [coming out for RAYOS]?

Tim Walbert

We certainly expect that commercial supply available at some point in October with the launch occurring at the annual college of rheumatology meeting where you have about 14,000 attendees where the bulk of key rheumatologist in the U.S. is 10. This meeting is occurring in Washington DC in November 10 to 14 this year, and that’s where you expect to have the initial launch of RAYOS with the broader sales force launch occurring in January.

Operator

Our next question comes from Edward Nash of Cowen and Company. Please go ahead.

Edward Nash - Cowen and Company

So, just tracking looking at the scripts on a weekly and a monthly basis, the trending looks in my mind really looking very nice, are we seeing that the refills are actually now becoming a larger percentage of the total script. As we move forward and of course now you are going to be increasing your sales force and Mallinckrodt coming into play starting this month. Can you give us some idea, are you able to disclose exactly how many sales people Mallinckrodt is going to be brining and they are going to be focused on DUEXIS?

Tim Walbert

They have not given us permission to speak specifically, but I will put it in context Edward. First, our 150 representatives will call on 25,000 targets, and we will be focused on selling both DUEXIS and the 4,000 of them that rheumatologist we will focus on both RAYOS and DUEXIS. When it comes to the Mallinckrodt organization, we have given them 25,000 incremental exclusive targets they will call on. So, right now we are calling in about 10,000 physicians with our 80 representatives and as you noted we are pleased with that initial prescription growth with 80 representatives. But the lowest number of reps I have ever seen (inaudible) said it's about 250 reps with the majority of them being launched between 500 and 1500 representatives. So, we know no long that we would have an initial uptake with our 80 reps but getting to critical mass which we expect beginning October 1 (inaudible) 50,000 or five-fold increase in called on positions for DUEXIS allows us to rally start driving the sales in a meaningful way, given that we will be calling on 50,000 targets. So, definitely a meaningful increase, but we can’t comment specifically on the number of representatives they are placing on the product.

Edward Nash - Cowen and Company

Maybe with regards to this 25,000 targets, I guess two things, I guess the first being are those at all regionally focused or are they intermixed just in any territory and any of the code where you guys are currently also maybe targeting physician. And the second aspect is also, how does this actually curve with regard to sales, I mean do you guys basically put everything and then you sum everything else at the end of the quarter or how does that work?

Tim Walbert

Sure. So, the first question was relative to are these regionally placed, they are already calling on this 25,000 targets of their existing sales force and as you would expect they are in the major (inaudible) scenarios with their sales organization which is where the majority of prescriptions are actually written. So, with the combined effort of this 50,000 physician being called on we will hit 50% or 55 million prescriptions of NSAID. Relative to they are employing in the same physician as we are, we have exclusive target, so the 25,000 we call on are completely different group than this 25,000. They will be calling on for DUEXIS to minimize any confusion or interruption of the physician target. So, each of our reps will have their own target as well the Mallinckrodt team.

Second question you asked was relative to how we handle the financials of the deal, we [will build our] top line sales and then we will pay Mallinckrodt on a per prescription basis. And we will reconcile and announce that quarterly [alliance] management as an expense item.

Edward Nash - Cowen and Company

So, that will be broken out for us to be able to see as well?

Tim Walbert

Yes, it will.

Operator

We have a follow-up question from Charles Duncan of JMP Securities. Please go ahead.

Charles Duncan - JMP Securities

Couple of quick questions regarding some of the noise that I’ve heard recently regarding the debt covenants. I’m wondering if you could share with us your thoughts on whether or not there is going to be an impact of the revenue stream on your ability to meet those.

Tim Walbert

We don’t comment specifically on the debt covenants or give guidance. What I will say is that our debt holders are also equity holders in the company and holding both warrant and also common shares, and our partners with the company and ensuring that we are successful long-term. Relative to the noise that we are hearing, most of that was driven by internet blog who at the time of our approval serve things up by putting out comments relative to the debt, but as we look at it we got partners with our debt holders who have equal interest in the company being successful and we have a very good relationship and expect that to continue a we drive the business forward.

Charles Duncan - JMP Securities

Also regarding LODOTRA in Europe, how you feel about that, it seems to be getting some traction to us, but what’s your thought?

Tim Walbert

The initial effort with LODOTRA in Europe and as a reminder Mundipharma private company which is the sister company (inaudible) in the United States has done a good job launching in both Italy and Germany. We continue to see ex-factory sales and our requisite revenues and milestone payments increasing. The challenge we have is the broader macroeconomic environment going on in Europe and where we are waiting for approval is not the key item that you look for in most of your pain markets is reimbursement authorization. And when you have billions of dollars in unpaid bills on the balance sheet of P&L of these large pharma companies, most of these countries are not adding incremental products to be reimbursed. So, we are approved in 17 countries in both Europe and recent approval in Australia as well. We think that we will see continued traction in Germany and Italy. I think the expansion in Europe will really be ties to the macro economic situation in Europe, but the focus is now on moving into some of the Asian and Latin American market where Mundipharma has been an extremely good partner and has already gotten approval in a short order in Australia and we expect that to continue.

Charles Duncan - JMP Securities

And then my final question is more on strategy. You mentioned possibly in licensing other products to further leverage your infrastructure. I’m wondering if that’s going to be a focus of your seeing the next call it 6, 12 months or are you fully challenged with the launch of DUEXIS and RAYOS?

Tim Walbert

Certainly over the next fourth quarter and the first quarter, with the Mallinckrodt deal in our expansion we want to focus on executing on this five-fold increase in called on physicians with DUEXIS and launching RAYOS, but as we move forward over the next 12 months, we do have a second position where behind DUEXIS and the majority of our target, where we could bring in incremental product or products. So we are heavily focused now in looking at those potential opportunities and whether that would be via co-promotion acquiring products or acquiring companies, we will be looking at that, in fact we had several companies come to us asking us to co-promote their product. We have passed on this, because we do want to focus the next several quarters on DUEXIS and RAYOS, but certainly as we get through that period we will be focusing on brining clinical product or products.

Operator

I’m showing no further question, and I’d like to turn the conference back over to Mr. Tim Walbert for any closing remarks.

Tim Walbert

No, that’s it for now; I appreciate everyone taking the time and have a great day.

Operator

Ladies and gentlemen, this does conclude today’s conference; you may all disconnect and have a wonderful day.

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