Description
Horizon Pharma Inc. Director JEFFREY W BIRD bought 575,356 shares on 9-25-2012 at $ 3.49
BUSINESS OVERVIEW
Overview
We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. On April 23, 2011, the U.S. Food and Drug Administration, or FDA, approved DUEXIS (formerly HZT-501), a proprietary tablet formulation containing a fixed-dose combination of ibuprofen and famotidine in a single pill. DUEXIS is indicated for the relief of signs and symptoms of rheumatoid arthritis, or RA, and osteoarthritis, or OA, and to decrease the risk of developing upper gastrointestinal, or GI, ulcers in patients who are taking ibuprofen for these indications. On November 14, 2011, we and sanofi-aventis U.S. LLC, or sanofi-aventis U.S., announced the FDA approved the use of the sanofi-aventis Canada Inc. manufacturing site in Laval, Quebec to manufacture DUEXIS. In December 2011, Valeant Pharmaceuticals International, Inc., or Valeant, acquired Dermik, a dermatology unit of sanofi-aventis U.S., which includes the Laval, Canada site. Although Valeant has taken over management and operations at the Laval, Canada facility, our manufacturing agreement remains with sanofi-aventis U.S. We have hired our initial commercial organization and completed sales force training, and we began detailing DUEXIS to physicians in December 2011 and held our launch meeting for DUEXIS in the U.S. in January 2012. In October 2010, we submitted a Marketing Authorization Application, or MAA, for DUEXIS in the United Kingdom, or UK, the Reference Member State, or RMS, through the Decentralized Procedure. In February 2012, we modified the DUEXIS MAA submission to include the recently approved manufacturing site in Laval, Quebec through the National Procedure in the UK. We anticipate a decision on the MAA in the second half of 2012. Our other lead product, LODOTRA, known as RAYOS in the U.S., is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by our distribution partner, Mundipharma International Corporation Limited, or Mundipharma, for the treatment of moderate to severe, active RA in adults when accompanied by morning stiffness. We have successfully completed two Phase 3 clinical trials of RAYOS and we submitted a new drug application, or NDA, for RAYOS to the FDA on September 26, 2011. As a result, we have a Prescription Drug User Fee Act, or PDUFA, goal date for RAYOS of July 26, 2012. We have worldwide marketing rights for DUEXIS and have retained exclusive marketing rights in the U.S. for all of our products. Our strategy is to commercialize our products in the U.S., to explore co-promotion opportunities for DUEXIS and RAYOS, if approved, in the U.S. and to enter into licensing or additional distribution agreements for commercialization of our products outside the U.S.
Our Strategy
Our strategy is to build a fully-integrated U.S.-focused biopharmaceutical company to successfully execute the commercial launches of DUEXIS and, if approved by the FDA, RAYOS in the U.S. market. We retain all U.S. commercialization rights for our products and have begun building an internal sales and marketing organization to market these products in the U.S. to top prescribing primary care physicians and to key specialists, such as rheumatologists, orthopedic surgeons and pain specialists. We plan to expand our sales force up to a total of approximately 160 sales representatives and explore other additional opportunities to expand the reach and frequency of our sales efforts such as co-promotion partnerships with companies that have commercial activity with similar physician targets and/or add sales representatives through a contract sales organization, or CSO. We intend to enter into licensing or additional distribution arrangements for commercialization of our products outside the U.S., such as our relationship with Mundipharma for the commercialization of LODOTRA in Europe, Asia and Latin America. As part of our longer-term strategy, we anticipate we will selectively in-license or acquire additional products and/or late stage product candidates that are synergistic with our commercial strategy.
We were incorporated as Horizon Pharma, Inc. in Delaware on March 23, 2010. We are a holding company that operates primarily through our two wholly-owned subsidiaries, Horizon Pharma USA, Inc., a Delaware corporation, and Horizon Pharma AG, a company organized under the laws of Switzerland. Horizon Pharma AG owns all of the outstanding share capital of its wholly-owned subsidiary, Horizon Pharma GmbH, a company organized under the laws of Germany through which Horizon Pharma AG conducts most of its European operations.
Our principal executive offices are located at 520 Lake Cook Road, Suite 520, Deerfield, Illinois 60015 and our telephone number is (224) 383-3000 . Our website address is www.horizonpharma.com . The information contained in or that can be accessed through our website is not part of this report.
Unless the context indicates otherwise, as used in this report, the terms “Horizon,” “Horizon Pharma,” “we,” “us” and “our” refer to Horizon Pharma, Inc., a Delaware corporation, and its subsidiaries taken as a whole. Also, unless the context indicates otherwise, for historical periods prior to April 1, 2010, the terms “Horizon,” “Horizon Pharma USA,” “we,” “us” and “our” refer to Horizon Therapeutics, Inc.
“Horizon Pharma,” “Horizon Therapeutics,” a stylized letter “H,” “DUEXIS”, “LODOTRA” and “RAYOS” are registered trademarks in the U.S. and/or certain other countries. This report also includes references to trademarks and service marks of other entities and those trademarks and service marks are the property of their respective owners.
Our Strategic Partnerships
We have entered into several strategic partnerships with respect to the manufacturing, distribution and marketing of LODOTRA. We entered into separate transfer, license and supply agreements with Merck Serono GmbH and Merck GesmbH for the commercialization of LODOTRA in each of Germany and Austria, respectively, and we subsequently consented to assignment of the agreements with respect to Germany and Austria to Mundipharma Laboratories GmbH. We also entered into distribution agreements with Mundipharma for the exclusive distribution and marketing rights pertaining to LODOTRA for Europe (excluding Germany and Austria) and certain Asian, Latin American and other countries and a manufacturing and supply agreement with Mundipharma Medical Company, pursuant to which we supply LODOTRA to Mundipharma Medical Company. We have also entered into a manufacturing and supply agreement with Jagotec AG, an affiliate of SkyePharma AG, from whom we purchase LODOTRA. In August 2011, SkyePharma leased their entire pharmaceutical manufacturing business to Aenova France SAS, or Aenova, with our consent to allow Jagotec to subcontract the manufacture of LODOTRA to Aenova.
Rheumatoid Arthritis
RA is a chronic disease that causes pain, stiffness and swelling, primarily in the joints. According to DataMonitor, 3.0 million people in the U.S. suffer from RA, of which 1.7 million are diagnosed and treated with various drugs. RA has no known cause, but unlike OA, RA is not associated with factors such as aging. RA occurs when the body’s immune system malfunctions, attacking healthy tissue and causing inflammation, which leads to pain and swelling in the joints and may eventually cause permanent joint damage and painful disability. The primary symptoms of RA include progressive immobility and pain, especially in the morning, with long-term sufferers experiencing continual joint destruction for the remainder of their lives. There is no known cure for RA. Once the disease is diagnosed, treatment is prescribed for life to alleviate symptoms and/or to slow or stop disease progression.
RA treatments include medications, physical therapy, exercise, education and sometimes surgery. Early, aggressive treatment of RA can delay joint destruction. Treatment of RA usually includes multiple drug therapies taken concurrently. Disease modifying antirheumatic drugs, or DMARDs, are the current standard of care for the treatment of RA, in addition to rest, exercise and anti-inflammatory drugs such as NSAIDs. Methotrexate is the most commonly prescribed DMARD for the treatment of RA. Other common agents for the treatment of RA include corticosteroids and biologic agents. Corticosteroids, such as prednisone, effectively reduce joint swelling and inflammation and have been shown to slow the progression of RA, but at high doses are associated with potential for significant long-term adverse side effects such as osteoporosis, cardiovascular disease and weight gain. Over the last decade, the advent of biologic agents has transformed the treatment of RA. Tumor necrosis factor, or TNF, inhibitors are the primary biologic agents used today to treat RA. Although effective for treatment of RA, these agents are costly and, because they are very potent immunosuppressants, may increase the risk of infection.
RA has the potential to cause serious damage to joints and bones and, as such, physicians typically treat patients aggressively, including with combination therapies to reduce pain and inflammation and to slow the progression of the disease. Recent research sponsored by Mundipharma and conducted by Ipsos MORI involving 750 RA patients from 11 European countries found that 60% of surveyed patients with RA indicated that pain and morning stiffness controls their lives. Additionally, 74% of people with pain and morning stiffness as a result of their RA indicated that they are either unemployed, retired early or are on sick leave as a result of RA and 58% say they are frustrated emotionally because they find it difficult to do everyday tasks due to morning stiffness caused by their RA.
Mild to Moderate Pain
Mild to moderate pain is generally characterized as either acute or chronic. Acute pain often results from tissue damage, such as a broken bone. Acute pain can also be associated with headaches or muscle cramps. This type of pain usually decreases as the injury heals or the cause of the pain is removed. Pain is generally considered acute if it dissipates within six months of onset. Chronic pain includes pain that persists after an injury heals, pain related to a persistent or degenerative disease and long-term pain from an unidentifiable cause. Chronic pain may be caused by the body’s response to acute pain or may have unknown causes. According to the American Pain Foundation, 44% of pain sufferers 20 years of age and over in the U.S. report pain that lasts up to three months (over 30 million people), 14% report pain lasting for three months to one year (approximately 11 million people) and 42% report pain lasting more than one year (approximately 32 million people). About one-third of people who report pain indicate that their pain is disabling, which is defined as both severe and having a high impact on functions of daily life.
However, even if the underlying disorder can be treated, analgesics such as NSAIDs may still be needed to manage the pain. Physicians choose an analgesic based on the type and duration of pain and on the likely benefits and risks. Most analgesics are effective for treatment of pain due to ordinary injury of tissues (nociceptive pain) but are less effective for treatment of pain due to damage or dysfunction of the nerves, spinal cord, or brain (neuropathic pain). Common analgesics to treat acute and chronic pain are opioid (narcotic) analgesics and non-opioid analgesics, such as acetaminophen and NSAIDs.
Benefits of a Fixed-Dose Combination Therapy
Numerous studies have demonstrated that fixed-dose combination therapy provides significant advantages over taking multiple pills. Specifically, fixed-dose combinations can reduce the number of pills, ensure that the correct dosage of each component is taken at the correct time and improve compliance, often associated with better treatment outcomes. DUEXIS has been formulated to provide an optimal dosing regimen of ibuprofen and famotidine together in the convenience of a single pill.
Phase 3 Clinical Trial Results
We have completed two large-scale Phase 3 clinical trials of DUEXIS. We received scientific advice from the European Medicines Agency, or EMA, with respect to certain questions concerning the quality, and preclinical and clinical development of DUEXIS as part of our MAA submission plans. These trials, named the Registration Endoscopic Study to Determine Ulcer Formation of DUEXIS (HZT-501) Compared to Ibuprofen: Efficacy and Safety Study, or REDUCE-1 and REDUCE-2, were randomized, double-blind, controlled trials that enrolled 1,533 patients in the U.S. with chronic pain or arthritis. Patients were randomly assigned, in approximately a 2:1 ratio, to receive DUEXIS (800 mg ibuprofen and 26.6 mg famotidine in a single pill) or ibuprofen (800 mg) alone, orally three times daily for a 24-week treatment period or until patients developed either an endoscopically diagnosed upper GI ulcer and/or prohibitive toxicity.
REDUCE-1 and REDUCE-2
The primary endpoint of REDUCE-1 was to show a reduction in the cumulative incidence of gastric ulcers during the six month treatment period. The primary endpoint of REDUCE-2 was to show a reduction in the cumulative incidence of upper GI (defined as gastric and/or duodenal) ulcers during the six month treatment period. In REDUCE-1, DUEXIS demonstrated a statistically significant reduction in the incidence of gastric ulcers versus treatment with ibuprofen alone (8.7% versus 17.6%, p-value = 0.0004). In REDUCE-2, DUEXIS demonstrated a statistically significant reduction in the incidence of upper GI ulcers versus treatment with ibuprofen alone (10.5% versus 20.0%, p-value = 0.002). The overall relative risk reduction of upper GI ulcers with DUEXIS versus ibuprofen was consistent across key subgroups including: age (under and over 65), history of prior ulcer, low dose aspirin use, gender and presence of baseline upper GI erosions although the studies were not powered for those individual subgroups.
In the REDUCE-1 and REDUCE-2 combined patient population, the most common adverse reactions (at least 1% and greater than ibuprofen alone) were nausea, diarrhea, constipation, upper abdominal pain and headache. The incidence of dyspepsia with DUEXIS was statistically significantly lower than ibuprofen alone (4.7% vs. 8%, p-value = 0.009). Overall, the discontinuation rate in the REDUCE-1 and REDUCE-2 studies due to adverse events for patients receiving DUEXIS and ibuprofen alone were similar.
Commercial and Regulatory Status
On April 23, 2011, the FDA approved DUEXIS, and we began the initial commercial sale of DUEXIS in the U.S. in December 2011. We held our national launch meeting in late January 2012. We have evaluated a number of metrics to assess the effectiveness of the DUEXIS commercial launch to date. These metrics looked at key messages, managed care access and field force execution on reach and frequency. We have evaluated key messages at launch through a message recall tool that surveys prescribers that have been seen by our sales representatives. We believe the data to date has shown strong brand and message awareness among target physicians who have been seen by our sales representatives.
In October 2010, we submitted an MAA for DUEXIS to the Medicines and Healthcare products Regulatory Agency, or MHRA, in the UK, the RMS, through the Decentralized Procedure in the European Economic Area, or EAA. In February 2012, we modified the DUEXIS MAA submission to include the recently approved manufacturing site in Laval, Quebec through the National Procedure in the UK. In connection with our MAA for DUEXIS, and consistent with an identical request we made in our NDA for DUEXIS, we are requesting that the MHRA approve a formulation that is different from the formulation in our Phase 3 clinical trials, which we determined had inadequate stability characteristics to be suitable for commercialization. As a result, we were required to demonstrate the bioequivalence of famotidine between the new and old formulations of DUEXIS and the reference labeled drug ibuprofen as part of the MAA submission. See “—Government Regulation” for a description of the regulatory approval process in the EAA. We expect that a determination with respect to the MAA will be made in the second half of 2012.
LODOTRA/RAYOS
LODOTRA, known as RAYOS in the U.S., is a proprietary programmed release formulation of low-dose prednisone and has received regulatory approval in Europe for reduction in morning stiffness associated with RA.
Market Opportunity and Limitations of Existing Treatments
According to DataMonitor, there are approximately 4.5 million RA patients in the U.S., Japan, France, Italy, Spain, Germany and the United Kingdom, of which approximately 3.0 million are diagnosed. Common agents for the treatment of RA include NSAIDs, DMARDs, biologic agents and corticosteroids such as prednisone. Physicians are increasingly supportive of prescribing multiple therapies as some RA patients are able to achieve a clinical remission with a multiple treatments. A Medical Marketing Economics May 2008 study of 150 RA patients in the U.S., which we sponsored, showed that despite the use of a combination of currently available treatments for RA, over 90% of the patients reported suffering from morning stiffness, pain and immobility.
In addition, according to DataMonitor, approximately 50% of RA patients in the U.S., Japan, France, Italy, Spain, Germany and the United Kingdom are prescribed combination therapy which often includes corticosteroids, with prednisone being one of the most common. Corticosteroids, including prednisone, are used to suppress various autoimmune, inflammatory and allergic disorders by inhibiting the production of various pro-inflammatory cytokines, such as interleukin 6, or IL-6, and TNF-alpha. Joint inflammation in RA is driven by excessive production of inflammatory mediators and cytokines such as IL-6 and TNF-alpha. While corticosteroids are potent and effective agents to treat patients with RA, they are often used at high doses to treat RA flares or significant inflammation. High-dose oral corticosteroid treatment is not a viable long-term treatment option due to adverse side effects such as osteoporosis, cardiovascular disease and weight gain. However, clinical studies have shown that the long-term use of low-dose prednisone (<10 mg per day) does not dramatically increase total adverse events. In addition, low-doses, typically less than 10 mg daily, of corticosteroids such as prednisone have been shown to treat the symptoms of RA while slowing the overall progression of the disease.
CEO BACKGROUND
Michael Grey. Mr. Grey, 59, has served on the Board of Directors since September 2011. Mr. Grey currently serves as president and Chief Executive Officer at Lumena Pharmaceuticals, Inc. and is a venture partner at Pappas Ventures. Mr. Grey holds over 30 years of experience in the pharmaceutical and biotechnology industries, and has held senior positions at a number of companies, including president and Chief Executive Officer of SGX Pharmaceuticals, Inc. (sold to Eli Lilly in 2008), president and Chief Executive Officer of Trega Biosciences, Inc. (sold to Lion Bioscience in 2001) and president of BioChem Therapeutic Inc. For approximately 20 years, Mr. Grey served in various roles with Glaxo, Inc. and Glaxo Holdings, P.L.C., culminating in his position as vice president, corporate development and director of international licensing. Mr. Grey also serves on the Board of Directors of BioMarin Pharmaceutical Inc. and Selventa, Inc. Mr. Grey received a B.S. in chemistry from the University of Nottingham in the United Kingdom. The Nominating and Corporate Governance Committee and the Board of Directors believe that Mr. Grey is qualified to serve as a director of the Company on the basis of his extensive experience managing pharmaceutical and biopharmaceutical companies, which will bring important strategic insight to the Board of Directors as it plans the Company’s future growth.
Ronald Pauli. Mr. Pauli, 51, has served on the Board of Directors since September 2011. Mr. Pauli is currently chief business officer at Sagent Pharmaceuticals, Inc., where he was recently promoted from his role as Chief Financial Officer. As Chief Financial Officer, he played a key role in Sagent’s recent initial public offering. In addition, Mr. Pauli has held senior positions at a number of biopharmaceutical companies, including Chief Financial Officer at NeoPharm, Inc. and corporate controller and interim Chief Financial Officer at Abraxis BioScience, Inc. (formerly American Pharmaceutical Partners, Inc.). Mr. Pauli previously served as corporate controller for Applied Power, Inc. and R.P. Scherer Corporation and held multiple finance positions at Kmart Corporation. Mr. Pauli received a B.S. in accounting from Michigan State University and a master’s degree in finance from Walsh College. The Nominating and Corporate Governance Committee and the Board of Directors believe that Pauli is qualified to serve as a director of the Company on the basis of his financial experience at numerous biotechnology and pharmaceutical companies, which will add valuable expertise in guiding the strategic direction of the Company and working with the investment community.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. On April 23, 2011, the U.S. Food and Drug Administration, or FDA, approved DUEXIS ® (formerly HZT-501), a proprietary tablet formulation containing a fixed-dose combination of ibuprofen and famotidine in a single pill. DUEXIS is indicated for the relief of signs and symptoms of rheumatoid arthritis, or RA, and osteoarthritis, or OA, and to decrease the risk of developing upper gastrointestinal, or GI, ulcers in patients who are taking ibuprofen for these indications. On November 14, 2011, we and sanofi-aventis U.S. LLC, or sanofi-aventis U.S., announced the FDA approved the use of the sanofi-aventis Canada Inc. manufacturing site in Laval, Quebec to manufacture DUEXIS. In December 2011, Valeant Pharmaceuticals International, Inc., or Valeant, acquired Dermik, a dermatology unit of sanofi-aventis U.S., which includes the Laval, Canada site. Although, Valeant has taken over management and operations at the Laval, Canada facility, our manufacturing agreement remains with sanofi-aventis U.S. We have hired our initial commercial organization and completed sales force training, and we began detailing DUEXIS to physicians in December 2011 and held our launch meeting for DUEXIS in the U.S. in January 2012. In October 2010, we submitted a Marketing Authorization Application, or MAA, for DUEXIS in the United Kingdom, or UK, the Reference Member State, through the Decentralized Procedure. In February 2012, we modified the DUEXIS MAA submission to include the recently approved manufacturing site in Laval, Quebec through the National Procedure in UK. We anticipate a decision on the MAA in the second half of 2012. Our other lead product, LODOTRA ® , known as RAYOS ® in the U.S., is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by our distribution partner, Mundipharma International Corporation Limited, or Mundipharma, for the treatment of moderate to severe, active RA in adults when accompanied by morning stiffness. We have successfully completed two Phase 3 clinical trials of LODOTRA/RAYOS and we submitted a new drug application, or NDA, for RAYOS to the FDA on September 26, 2011. As a result, we have a Prescription Drug User Fee Act, or PDUFA, goal date for RAYOS of July 26, 2012. We have worldwide marketing rights for DUEXIS and have retained exclusive marketing rights in the U.S. for all of our products. Our strategy is to commercialize our products in the U.S., to explore co-promotion opportunities for DUEXIS in the U.S. and to enter into licensing or additional distribution agreements for commercialization of our products outside the U.S.
On April 1, 2010, we effected a recapitalization and acquisition pursuant to which Horizon Pharma, Inc. became a holding company that operates through its wholly-owned subsidiaries Horizon Pharma USA, Inc. (formerly Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly Nitec Pharma AG, or Nitec). Our LODOTRA/RAYOS product was developed and is owned by Horizon Pharma AG and our historical financial statements and results of operations do not reflect the results of operations of Nitec for any period prior to the recapitalization and acquisition in April 2010. As a result of the acquisition of Nitec and organic growth, our organization has grown from 12 full-time employees as of March 31, 2010 to 164 full-time employees as of December 31, 2011. Our development efforts have also expanded significantly through the acquisition of Nitec. Consequently, we expect our expenses to increase from prior periods. As a result of the recapitalization and acquisition, our future operations will be impacted by both the operations of our U.S. subsidiary Horizon Pharma USA and our Swiss subsidiary Horizon Pharma AG.
We market LODOTRA in Europe through three separate agreements. Pursuant to two separate agreements, we granted Merck Serono GmbH, or Merck Serono, and Merck GesmbH, an affiliate of Merck Serono, exclusive rights to distribute and market LODOTRA in each of Germany and Austria, respectively, and pursuant to the third agreement, we granted Mundipharma exclusive rights to distribute and market LODOTRA in the rest of Europe. In April 2011 and September 2011, we consented to assignment of the agreements with respect to Germany and Austria to Mundipharma. Pursuant to another agreement, we granted Mundipharma exclusive rights to distribute and market LODOTRA in certain Asian, Latin American and other countries. We also have a manufacturing and supply agreement with Jagotec AG, or Jagotec, under which Jagotec or its affiliates manufacture and supply LODOTRA exclusively to us as bulk tablets. We have committed to certain minimum orders under the agreement, and we also supply the active ingredient to Jagotec for use in the manufacture of LODOTRA.
On August 2, 2011, we completed our initial public offering, and we sold 5,500,000 shares of common stock at an offering price of $9.00 per share, resulting in net proceeds of approximately $41.9 million, after deducting underwriting discounts of $3.5 million and offering costs of $4.1 million. Upon the consummation of our initial public offering, all outstanding shares of preferred stock were automatically converted into common stock, and all outstanding preferred stock warrants were automatically converted into warrants to purchase an aggregate of 459,003 shares of common stock. In addition, the convertible promissory notes in the aggregate principal amount $10.0 million issued in July 2010, or 2010 notes, the convertible promissory notes in the aggregate principal amount $5.0 million issued in January 2011, or January 2011 notes, and the convertible promissory notes in the aggregate principal amount of $1.7 million issued in April 2011, or April 2011 notes, and interest accrued thereon, were converted into an aggregate of 2,017,242 shares of common stock, based on a conversion price of $9.00 per share.
As of December 31, 2011 we had cash and cash equivalents of $18.0 million. In February 2012, we received $60.0 million under a senior secured loan entered into with a group of institutional lenders, which we refer to as the Senior Secured Loan. We used $22.4 million of the loan proceeds to repay the remaining obligations under our debt facilities with Kreos Capital III (UK), or the Kreos facility, and Oxford Finance LLC, or the Oxford facility. Also, in March 2012, we received gross proceeds of $50.8 million from the sale of 14,033,829 shares of our common stock and warrants to purchase an aggregate of 3,508,448 shares of our common stock with an exercise price of $4.308 per share to certain institutional and accredited investors in a private placement, or PIPE financing. For each share of common stock purchased, the investors received a warrant to purchase 0.25 of a share of common stock. The warrants will expire on March 2, 2017 and may be exercised for cash or, if the current market price of our common stock is greater than the per share exercise price, by surrender of a portion of the warrant in a cashless exercise.
We believe that our existing cash and cash equivalents (including net proceeds from our recently completed debt and equity financings), together with interest thereon, will be sufficient to fund our operations into the second half of 2013. In addition to the near-term funding we will need to support the continued commercialization of DUEXIS in the U.S., we will need additional future financing in the event that we do not obtain additional regulatory approvals for DUEXIS in Europe and RAYOS in the U.S. when expected or if the future sales of DUEXIS, LODOTRA/RAYOS and any additional products we may develop or acquire do not generate sufficient revenues to fund our operations. Our failure to raise capital if and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.
Unless otherwise indicated, historical amounts presented with respect to Nitec are presented in accordance with accounting principles generally accepted in the U.S., or U.S. GAAP.
Financial Overview
Prior to our acquisition of Nitec we had no revenues and incurred significant operating losses since inception. Before our acquisition of Nitec, as of March 31, 2010, we had an accumulated deficit of $87.9 million. As of December 31, 2011, we had an accumulated deficit of $220.3 million.
Revenue and Cost of Goods Sold
As a result of our acquisition of Nitec in April 2010, we began recognizing revenues from the sale of LODOTRA. In December 2011, we began recognizing revenue from the sale of DUEXIS following its commercial launch. We recognize revenues from out-licensing marketing and distribution rights to third parties in Europe and certain Asian, Latin American and other countries, including upfront fees, milestone payments and product sales. Upfront fees and payments for non-substantive milestones are recorded as deferred revenue when paid and recognized over the remaining life of the marketing and distribution agreement or manufacturing and supply agreement, as applicable. Milestone payments are considered non-substantive if any portion of the associated milestone payment is determined to not relate solely to past performance or if a portion of the consideration earned from achieving the milestone may be refunded. Cost of goods sold consists of raw materials, manufacturing and other supply chain costs for the manufacture of LODOTRA, and royalty amounts payable to SkyePharma AG on LODOTRA sales and upon receipt of certain milestone payments. In addition, cost of goods sold includes amortization of developed technology relating to our acquisition of Nitec. We expect to record approximately $3.0 million annually related to amortization of developed technology, subject to currency fluctuations. We will adjust the rate of amortization if there are changes in our expected LODOTRA sales in Europe that indicate impairment of the developed technology or change in the expected useful life of the developed technology. The use of material is charged applying the “first-in first-out”, or FIFO, method on capitalized inventory stock. We expect the per unit cost of goods sold for LODOTRA to decrease as sales volumes increase, due to lower per-unit manufacturing costs at higher volumes.
The process of commercializing products is costly and time consuming. The probability of success may be affected by a variety of factors, including, among others, competition, pricing and reimbursement, manufacturing capabilities and commercial viability. As a result of these uncertainties, we are unable to determine when, or to what extent, we will generate significant revenues from the commercialization and sale of any of our products. We are also currently focused on obtaining U.S. regulatory approval of RAYOS. We would also need to raise substantial additional capital to the extent that we decide to pursue further development and commercialization of other product candidates.
Substantially all of our research and development expenses prior to our acquisition of Nitec were attributable to development of DUEXIS. A portion of our internal costs, including indirect costs relating to our product candidates, are not tracked on a project basis and are allocated based on management estimates of where the benefit accrues, or as a percentage of direct project costs. Our research and development expenses increased in 2010 as a result of our acquisition of Nitec and continued into 2011 primarily attributable to the development of LODOTRA/RAYOS, including expenses related to obtaining additional regulatory approvals for RAYOS and post-marketing studies of DUEXIS.
We generally consider our development of a product to be complete when we receive approval from regulatory authorities to market the product in the applicable jurisdiction. As a result, we are unable to reasonably estimate our additional research and development costs to complete our development work with respect to RAYOS in the U.S. and DUEXIS in Europe, including our regulatory approval and manufacturing activities. Such estimates depend on numerous factors that are outside of our control, such as whether regulatory authorities will change their approval criteria for products in the same class as DUEXIS or LODOTRA/RAYOS, whether our applications for marketing approval will be accepted for review by regulatory authorities, whether regulatory authorities will require that we complete additional studies before or after granting marketing approval, and when, if ever, regulatory authorities will approve any applications for marketing approval that we submit. For similar reasons, we are unable to reasonably estimate when, if ever, our development work with respect to DUEXIS and LODOTRA/RAYOS will be complete or when we may receive material net cash inflows related to our on-going development work with respect to DUEXIS and LODOTRA/RAYOS. We submitted an MAA in selected European countries in October 2010 to market DUEXIS, and in February 2012, we modified the DUEXIS MAA submission to include the recently approved manufacturing site in Laval, Quebec through the National Procedure in the UK. Although, Valeant has taken over management and operations at the Laval, Canada facility, our manufacturing agreement remains with sanofi-aventis U.S. We submitted an NDA for RAYOS in the U.S. on September 26, 2011. However, we cannot estimate when, if ever, the applicable regulatory authorities will grant marketing approvals based on these submissions.
If we experience delays in submitting or receiving approval of our marketing applications for DUEXIS or LODOTRA/RAYOS, our ability to generate significant revenues from these product candidates will also be delayed, which will negatively affect our financial position and liquidity. If the FDA or other regulatory authorities require that we complete additional studies prior to approving our marketing applications, the costs of such studies could have a further material adverse effect on our capital resources and financial position. We believe that if we experience delays in receiving marketing approval for our product candidates, our ability to raise additional funds to continue our operations would also be adversely affected.
Sales and Marketing Expenses
Sales and marketing expenses of Horizon Pharma USA and Horizon Pharma AG historically have consisted principally of business development expenses, trade show expenses and pre-launch marketing activities, including market research and pricing reimbursement studies in anticipation of our market launch for DUEXIS and RAYOS in the U.S. Sales and marketing expenses also consist of stock-based compensation expense. As of December 31, 2011, our sales and marketing headcount was 118 full-time equivalents, primarily as a result of recruiting and hiring our sales organization. We expect sales and marketing expenses to increase significantly as we continue to establish sales and marketing capabilities to commercialize DUEXIS and RAYOS in the U.S.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, information technology and human resources functions. Other general and administrative expenses include facility costs, professional fees for legal, consulting and auditing and tax services. General and administrative expenses also consist of stock-based compensation expense. As of December 31, 2011, our general and administrative headcount was 20 full-time equivalents. We expect general and administrative expenses to increase as we continue to build our corporate infrastructure in support of our activities relating to commercializing DUEXIS and obtaining regulatory approval of and commercializing RAYOS in the U.S., and as a result of operating a public company. These increases likely will include salaries and related expenses, legal and consultant fees, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services and costs of enhanced business and accounting systems.
Interest Expense
Interest expense, both historically and prospectively, is related to interest and fees on certain debt facilities. Through August 2, 2011, we were incurring interest expense on the 2010 convertible promissory notes, the January 2011 convertible promissory notes, and the April 2011 convertible promissory notes. Upon the closing of our initial public offering on August 2, 2011, all of the outstanding convertible promissory notes were converted into common stock and therefore, we are no longer incurring interest on these notes. In June 2011, we entered into the Oxford facility, which incrementally increased interest expense in 2011 by approximately $1.0 million. The Oxford facility was repaid in its entirety in connection with the Senior Secured Loan we entered into in February 2012. As of February 2012, we expect to incur interest expense related to the Senior Secured Loan of approximately $8.7 million in 2012, $10.2 million for each of the years in 2013 to 2016, and $1.5 million in 2017. The Senior Secured Loan allows us, at our option each fiscal quarter, to pay the full 17% interest when due or pay 12% interest in cash and the remaining 5% interest in the form of incremental debt.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reported period. We evaluate our estimates and judgments on an ongoing basis. Actual results could differ materially from those estimates.
We believe the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of our financial statements.
Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of our agreements contain multiple elements and in accordance with these agreements, we may be eligible for upfront license fees, marketing or commercial milestones and payment for product deliveries.
Revenue from up-front license fees.
We recognize revenues from the receipt of non-refundable, up-front license fees. In situations where the licensee is able to obtain stand-alone value from the license and no further performance obligations exist on our part, revenues are recognized on the earlier of when payments are received or collection is assured. Where continuing involvement by us is required in the form of technology transfer, product manufacturing or technical support, revenues are deferred and recognized over the term of the agreement.
Revenue from milestone receipts.
Milestone payments are recognized as revenue based on achievement of the associated milestones, as defined in the relevant agreements. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgment from our partner, provided that (1) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (2) the milestone represents the culmination of an earnings process and (3) the milestone payment is non-refundable. If all of these criteria are not met, revenue from the milestone achievement is recognized over the remaining minimum period of our performance obligations under the agreement.
Revenue from product deliveries.
We recognize revenue from the delivery of our products when delivery has occurred, title has transferred to the partner, the selling price is fixed or determinable, collectability is reasonably assured and we have no further performance obligations. Products sold to our wholesale distributors and retail chains are recognized based on the amount of product sold through to the end user consumer until such time as a reasonable estimate of allowances for product returns, rebates and discounts can be made.
As a result of the acquisition of Nitec in April 2010, we began recognizing revenues from the sale of LODOTRA. We recognize LODOTRA revenues from marketing and distribution agreements with third parties in Europe and certain Asian, Latin American and other countries, including up-front license fees, milestone payments and product deliveries.
Prior to 2011, revenues from the sale of LODOTRA made to our distribution partner, Mundipharma, were accounted for using the sell-through method. Under the sell-through method, we recognized revenue based on an estimate of the amount of product sold through to the customers of our distribution partners and end users.
Under a manufacturing and supply agreement with Mundipharma Medical Company, or Mundipharma Medical, Mundipharma Medical agreed to purchase LODOTRA exclusively from us at the price which is a specified percentage of the average net selling price, or ANSP, for sales in a given country, subject to a minimum price. Mundipharma Medical has a nine-month period from purchase date to request for an ANSP adjustment. If the ANSP is lower than the actual purchase price, then Mundipharma Medical would receive a price adjustment. Beginning in 2011, products sold to Mundipharma Medical were recognized upon delivery at the minimum price, as no contractual right of return exists. The difference between the actual selling price and the minimum price is recorded as deferred revenue until such time as adjustments for product returns, rebates and discounts can be reliably estimated or the nine-month period ANSP adjustment passes at which time any previously deferred revenue would be recognized as revenue.
In December 2011, we began recognizing revenue from the sale of DUEXIS following its commercial launch in the U.S. DUEXIS is currently sold to wholesale pharmaceutical distributors and to several national and regional retail pharmacy chains. Until we can reliably estimate returns, we have determined that shipment of product to wholesale distributors and retail chains do not meet the criteria for revenue recognition at the time of shipment. We currently defer DUEXIS revenue recognition until the right of return no longer exists, which is the earlier of DUEXIS being dispensed through patient prescriptions or the expiration of the right of return (twelve months after the expiration date of the product). We also defer the related cost of product sales and record such amounts as finished goods inventory held by others until revenue is recognized.
Product Sales Discounts and Allowances
We record DUEXIS sales to wholesale pharmaceutical distributors and national and regional retail chains net of allowances for product returns, rebates and discounts. We are required to make significant judgments and estimates in determining some of these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future. Our product sales discounts and allowances and the specific considerations we use in estimating these amounts include:
Prompt Pay Discounts. As an incentive for prompt payment, we offer a 2% cash discount to customers. We expect that all customers will comply with the contractual terms to earn the discount. We recorded the discount as an allowance against accounts receivable and a reduction of deferred revenue.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
OUR BUSINESS
We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. On April 23, 2011, the U.S. Food and Drug Administration, or FDA, approved DUEXIS ® , a proprietary tablet formulation containing a fixed-dose combination of ibuprofen and famotidine in a single pill. DUEXIS is indicated for the relief of signs and symptoms of rheumatoid arthritis, or RA, and osteoarthritis and to decrease the risk of developing upper gastrointestinal ulcers in patients who are taking ibuprofen for these indications. In the second half of 2011, we hired our initial commercial organization and completed sales force training, and we began detailing DUEXIS to physicians in December 2011 and held our launch meeting for DUEXIS in the U.S. in January 2012. In June 2012, we began expanding our commercial organization and expect to almost double its original size by the end of the third quarter of 2012, to approximately 150 field sales representatives. In June 2012, we also engaged Mallinckrodt LLC, the pharmaceutical business of Covidien plc, on a non-exclusive basis to co-promote DUEXIS in the U.S. and entered into an exclusive collaboration, license and supply agreement with Grünenthal S.A. for the potential commercialization of DUEXIS in Latin America. In October 2010, we submitted a Marketing Authorization Application, or MAA, for DUEXIS in the United Kingdom, or UK, the Reference Member State, through the Decentralized Procedure. In February 2012, we withdrew and updated the DUEXIS MAA submission to include the recently approved manufacturing site in Laval, Quebec through the National Procedure in the UK. We anticipate a decision on the MAA in the fourth quarter of 2012.
Our second product, RAYOS ® , known as LODOTRA ® outside the U.S., is a proprietary delayed release formulation of low-dose prednisone that is currently marketed in Europe by our distribution partner, Mundipharma International Corporation Limited, or Mundipharma, for the treatment of moderate to severe, active RA in adults, particularly when accompanied by morning stiffness. In addition, we have granted to Mundipharma commercialization rights to LODOTRA in Asia and Latin America. On July 26, 2012, the FDA approved RAYOS for the treatment of a broad range of diseases including RA, polymyalgia rheumatica, or PMR, psoriatic arthritis, ankylosing spondylitis, asthma and chronic obstructive pulmonary disease. We expect to commence commercial sales of RAYOS in the U.S. for rheumatologic diseases such as RA and PMR during the fourth quarter of 2012. Our strategy is to commercialize our products in the U.S. and to enter into licensing or additional distribution agreements for commercialization of our products outside the U.S.
Sales. During the six months ended June 30, 2012, gross sales and net sales were $7,516 and $6,364, respectively, compared to $3,127 in gross sales and net sales during the six months ended June 30, 2011. DUEXIS gross sales were $3,211 and net sales were $2,502 after deducting trade discounts and allowances of $307 and co-pay assistance costs of $402, and represented 43% of gross sales and 39% of net sales during the six months ended June 30, 2012. Gross and net sales for LODOTRA increased 39% and 26%, respectively, during the six months ended June 30, 2012 compared to the same period in the prior year as a result of higher product shipments to the Company’s distribution partner, Mundipharma.
Cost of Goods Sold. Cost of goods sold increased $979, from $3,943 during the six months ended June 30, 2011, to $4,922 during the six months ended June 30, 2012. The increase in cost of goods sold was primarily the result of $800 of DUEXIS direct product costs, which were absent in the prior year period and $300 in higher product costs for LODOTRA as a result of higher product sales compared to the prior year period.
Research and Development Expenses. Research and development expenses increased $2,112, from $6,190 during the six months ended June 30, 2011, to $8,302 during the six months ended June 30, 2012. The increase in research and development expense was primarily associated with a $2,100 increase in salaries and benefits expense in support of our RAYOS new drug application and expenses associated with DUEXIS clinical studies.
Sales and Marketing Expenses. Sales and marketing expenses increased $19,230, from $2,285 during the six months ended June 30, 2011, to $21,515 during the six months ended June 30, 2012, which was primarily attributable to initial staffing of our sales and marketing functions during the fourth quarter of 2011, resulting in $10,700 in higher salaries and benefits expenses. In addition, primarily as a result of ongoing sales and promotional efforts for our DUEXIS product launch, during the six months ended June 30, 2012, advertising and promotional efforts increased $4,900, samples and marketing expenses increased $1,200, market research expenses increased $1,000 and consulting fees increased $800.
General and Administrative Expenses. General and administrative expenses increased $3,309, from $6,449 during the six months ended June 30, 2011, to $9,758 during the six months ended June 30, 2012 due to a $1,500 increase in salaries and benefits expense associated with an increase in administrative personnel, $900 in higher legal and consulting costs associated with intellectual property related matters and public company compliance costs and a $300 in higher insurance and rent expense.
Interest Expense, Net. Interest expense, net increased $3,273, from $4,469 during the six months ended June 30, 2011, to $7,742 during the six months ended June 30, 2012. The increase in interest expense was primarily attributable to higher borrowing balances under our Senior Secured Loan and higher debt extinguishment costs. During the six months ended June 30, 2011, there was $1,900 charge related to the loss on extinguishment of the Kreos-SVB facility compared to a $2,500 charge related to extinguishment of our debt facility with Oxford Finance LLC and Silicon Valley Bank, or Oxford facility, and our debt facility with Kreos Capital III (UK) Limited, or Kreos facility, during the six months ended June 30, 2012.
Foreign Exchange (Loss) Gain, Net. During the six months ended June 30, 2012, foreign exchange loss was $900 compared to a foreign exchange gain of $532 during the six months ended June 30, 2011. The foreign exchange loss reporting during the six months ended June 30, 2012 was associated with a continuing decline in the value of the Euro against the U.S. dollar during the current year, which resulted in an unfavorable currency impact for our Horizon Pharma AG subsidiary, compared to a gain in the Euro versus the U.S. dollar during the corresponding period in 2011.
Other Expense. Other expense was $56 during the six months ended June 30, 2012 and primarily represented a loss on disposal of office furniture recorded during the first quarter of 2012.
Income Tax Benefit . Income tax benefit decreased $45, from $368 during the six months ended June 30, 2011, to $323 during the six months ended June 30, 2012. The decrease in income tax benefit was primarily due to foreign currency translation resulting from a decline in value of the Euro vs. the U.S. dollar as compared to the prior year.
Net Loss. Net loss increased from $19,309 during the six months ended June 30, 2011, to $46,508 during the six months ended June 30, 2012, primarily as a result of the increase in expenses described above, partially offset by higher sales and gross profit.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.
We have identified the accounting policies and estimates listed below as those that we believe require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties. This section should also be read in conjunction with Note 2, “Summary of Significant Accounting Policies,” in the notes to our condensed consolidated financial statements included in this report, which includes a discussion of these and other significant accounting policies.
Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of our agreements contain multiple elements and in accordance with these agreements, we may be eligible for upfront license fees, marketing or commercial milestones and payment for product deliveries.
Revenue from up-front license fees.
We recognize revenues from the receipt of non-refundable, up-front license fees. In situations where the licensee is able to obtain stand-alone value from the license and no further performance obligations exist on our part, revenues are recognized on the earlier of when payments are received or collection is assured. Where continuing involvement by us is required in the form of technology transfer, product manufacturing or technical support, revenues are deferred and recognized over the term of the agreement.
Revenue from milestone receipts.
Milestone payments are recognized as revenue based on achievement of the associated milestones, as defined in the relevant agreements. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgment from our partner, provided that (1) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (2) the milestone represents the culmination of an earnings process and (3) the milestone payment is non-refundable. If all of these criteria are not met, revenue from the milestone achievement is recognized over the remaining minimum period of our performance obligations under the agreement.
Revenue from product deliveries.
We recognize revenue from the delivery of our products when delivery has occurred, title has transferred to the partner, distributor or retail chain, the selling price is fixed or determinable, the right of return no longer exists (which is the earlier of product being dispensed through patient prescriptions or the expiration of the right of return) or product returns can be reasonably estimated, collectability is reasonably assured and we have no further performance obligations. Products sold to our wholesale distributors and retail chains are recognized based on the amount of product sold through to the end user consumer until such time as a reasonable estimate of allowances for product returns, rebates and discounts can be made.
Cost of Goods Sold
Cost of goods sold for LODOTRA includes all costs directly related to the manufacture and delivery of product and out-licensing of distribution and marketing rights to third parties. The costs in connection with product delivery to our distribution partners consist of raw material costs, costs associated with third parties who manufacture LODOTRA for us, supply chain costs, amortization of developed technology, royalty payments to third parties for the use of certain licensed patents and applicable taxes.
Cost of goods sold for DUEXIS includes all costs directly related to the acquisition of product from our manufacturer, including freight charges and manufacturing overhead costs. We defer the DUEXIS related cost of goods sold and record such amounts as other current assets until revenue is recognized.
Inventories
Inventories are stated at the lower of cost or market value. Inventories consist of raw materials, work-in-process and finished goods. We have entered into manufacturing and supply agreements for the manufacture or purchase of raw materials and production supplies. Inventories include the direct purchase cost of materials and supplies and manufacturing overhead costs. Inventories exclude product sample inventory, which are included in other current assets and are expensed as a component of sales and marketing expense when provided to physicians or healthcare providers.
Provision for Income Taxes
We account for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted. We also account for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return.
Stock-Based Compensation
We account for employee stock-based compensation by measuring and recognizing compensation expense for all stock-based payments based on estimated grant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. We estimate the fair value of our share-based awards to employees using the Black-Scholes option pricing model. The Black-Scholes model requires the input of subjective assumptions, including the expected stock price, volatility, risk-free interest rate, the calculation of expected term and the fair value of the underlying common stock on the date of grant, among other inputs.
We also account for stock options issued to non-employees based on the stock options’ estimated fair value determined using the Black-Scholes option pricing model. The fair value of the equity awards granted to non-employees is re-measured at each reporting date, and the resulting change in the fair value associated with awards, if any, is recognized as a corresponding increase or reduction to stock-based compensation during the period.
Recent Accounting Pronouncements
The following is a listing of recent accounting standards issued by the FASB and their effect on us.
In December 2011, FASB issued ASU No. 2011-12 , Comprehensive Income (ASC Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers only those changes in ASC 220 that relate to the presentation of reclassification adjustments. We believe that the pronouncement will not have a material effect on our results of operations.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
We have incurred losses since our inception in June 2005 and, as of June 30, 2012, we had an accumulated deficit of $266,825. We anticipate that we will continue to incur net losses for at least the next few years. We expect that our development, sales and marketing, and general and administrative expenses will continue to increase as a result of our development and commercialization of DUEXIS and RAYOS/LODOTRA. As a result, we will need to generate significant net product sales, and royalty and other revenues to achieve profitability.
We have financed our operations to date through equity financings, debt financings and the issuance of convertible notes. As of June 30, 2012, we had $63,460 in cash and cash equivalents. In February 2012, we entered into the $60,000 Senior Secured Loan. We used $22,381 of the loan proceeds to repay the remaining obligations under the Oxford facility and the Kreos facility. Under the terms of the Senior Secured Loan, the outstanding principal accrues interest until maturity in January 2017 at a rate of 17% per annum, payable quarterly unless repaid earlier. The Senior Secured Loan allows us to pay the full 17% interest when due or pay 12% interest in cash and the remaining 5% interest in the form of incremental debt. Beginning in April 2013, and for each quarter thereafter, the lenders may require us to repay $4,000 of the loan principal. We may prepay the loan at any time, subject to certain prepayment premiums. In connection with the Senior Secured Loan, we also issued warrants to the lenders to purchase up to an aggregate of approximately 3,277,191 shares of our common stock at an exercise price of $0.01 per share. The warrants will become exercisable 180 days after issuance and will remain exercisable until the maturity date of the Loan on January 22, 2017, subject to limited exceptions. The Senior Secured Loan is secured by a lien covering substantially all of our assets including intellectual property in addition to pledging all of our equity interests in Horizon Pharma USA, Inc. and 65% of our equity interests in Horizon Pharma AG.
The Senior Secured Loan restricts our ability to incur additional indebtedness, incur liens, pay dividends and engage in significant business transactions, such as a change of control, so long as we owe any amounts to the lenders under the related loan agreements. If we default under our Senior Secured Loan, our lenders may accelerate all of our repayment obligations and take control of our pledged assets. Our lenders could declare us in default under our debt obligation upon the occurrence of any event that the lenders interpret as having a material adverse effect upon us as defined under the loan agreements, thereby requiring us to repay the loans immediately or to attempt to reverse the lenders’ declaration through negotiation or litigation. Among other loan covenant requirements, the Senior Secured Loan also requires us to maintain a minimum level of liquidity of at least $10,000 at all times during the term of the loan unless our quarterly consolidated EBITDA is at least $6,000 and to meet specified minimum net revenues during a trailing twelve-month period commencing on June 30, 2012. The negative covenants include, among other things, restrictions on transferring or licensing our assets, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions and creating other liens on our assets, in each case subject to customary exceptions. In April 2012, we elected to pay the 12% interest in cash and the remaining 5% interest of $333 was added to the principal loan balance as incremental debt. At June 30, 2012, the outstanding balance on the Senior Secured Loan was $60,333.
As of June 30, 2012, we were in compliance with all applicable financial covenants under the Senior Secured Loan. However, our ability to comply with the operating and financial covenants under the Senior Secured Loan in future periods will be dependent on several factors including; the continued growth of the arthritis, pain and inflammation markets; whether we are able to obtain marketing approvals for DUEXIS in Europe; acceptance of our products by patients, primary care specialists and other key specialists, including rheumatologists, orthopedic surgeons and pain specialists; and potential or perceived advantages or disadvantages of our products over alternative treatments, including cost of treatment and relative convenience and ease of administration. Changes in key markets or our inability to execute our operating plan could result in non-compliance with our operating and financial covenants which may adversely affect our cost of financing or cause an acceleration of our debt obligations.
In March 2012, we sold 14,033,829 shares of our common stock and warrants to purchase an aggregate of 3,508,448 shares of our common stock with an exercise price of $4.308 per share to certain institutional and accredited investors in a private placement. For each share of common stock purchased, the investors received a warrant to purchase 0.25 of a share of common stock. The warrants will expire on March 2, 2017 and may be exercised for cash or, if the current market price of our common stock is greater than the per share exercise price, by surrender of a portion of the warrant in a cashless exercise.
On August 1, 2012, we filed a registration statement on Form S-3 which allows us to offer and sell up to an aggregate of $175,000 worth of common stock, preferred stock, debt securities and/or warrants in public offerings.
CONF CALL
Robert De Vaere - EVP and CFO
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 - Chairman, President and CEO
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 - EVP and CCO
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 - EVP and CFO
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 - Chairman, President and CEO
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.
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Fund Letters
