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Horizon Pharma PLC (NASDAQ:HZNP)
Q2 2019 Earnings Call
Aug 7, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for standing by. Welcome to the Horizon Therapeutics Plc Second Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations. Ma'am, you may begin.

Tina Ventura -- Senior Vice President of Investor Relations

Thank you, Dimitrios. Good morning everyone and thank you for joining us on the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer, Shao-Lee Lin, Executive Vice President, Head of Research and Development and Chief Scientific Officer, Paul Hoelscher, Executive Vice President, Chief Financial Officer, Bob Carey, Executive Vice President, Chief Business Officer and Vikram Karnani, Executive Vice President, Chief Commercial Officer.

Tim will provide a high-level review of the second quarter and an update on the business after which Shao-Lee will discuss our R&D programs. Paul will discuss our financial performance and guidance, followed by closing remarks from Tim. We will then take your questions. As a reminder, during today's call, we'll be making certain forward-looking statements, including statements about financial projections, our business strategy and expected timing and impact of future events. These statements are subject to various risks that 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, 2018 subsequent quarterly reports on Form 10-Q and our earnings press release, which was issued this morning. You are cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligation to update such statements.

In addition, on today's conference call, non-GAAP financial measures will be used. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings press release and other filings from today that are available on our investor website at www.horizontherapeutics.com.

I will now turn the call over to Tim.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Thank you, Tina. And good morning everyone. We delivered another outstanding quarter with net sales and adjusted EBITDA, both up 6% year-over-year outperforming expectations. Importantly, net sales of our Orphan and Rheumatology segment grew 11% driven by 36% net sales growth of KRYSTEXXA. As a result, we are again raising our full year net sales and adjusted EBITDA guidance. Our focus on execution drove our strong second quarter financial performance and several key milestones. First, our Teprotumumab BLA submission in early July, an important step toward potentially bringing the first approved therapy to thousands of patients living with active thyroid eye disease. Second, the initiation of our KRYSTEXXA and MIRROR trial in June evaluating if adding methotrexate to KRYSTEXXA can increase the number of patients with uncontrolled gout who benefit from this medicine. And third, continued improvements to our capital structure to bring it in line with that of our rare disease biopharma peers.

In addition to these milestones, we're very pleased to have Sue Mahony join our Board last week. With more than 30 years of industry experience including an 18-year tenure at Eli Lilly, Sue will significantly strengthen our Board capabilities. Her personal investment in the lives of patients aligns directly with our mission. I will now recap our second quarter results and provide an update on our Teprotumumab launch preparations.

In the second quarter, we generated net sales of $321 million and adjusted EBITDA of $124 million. Our Orphan and Rheumatology segment, which is our strategic growth segment that makes up for 70% of total net sales drove our strong performances quarter increasing 11% year-over-year. Demand for our Orphan medicines remains strong, driven by both improved compliance as well as patient growth. ACTIMMUNE net sales increased 7% year-over-year. PROCYSBI patients increased 8% year-over-year and RAVICTI patients increased 6%. Similar to last quarter RAVICTI net sales were impacted by a few factors, Paul will discuss shortly. Rayos was another strong performer in the quarter with net sales growth of 51% driven by continued strong execution by the Rayos team. KRYSTEXXA was the major driver of our second quarter performance where net sales increased 36% as a result of our commercial team's ability to drive continued growth in both existing and new accounts, including uptake in nephrology, while our growth remains strong, up approximately 30% in the first half of this year.

With the continued momentum from KRYSTEXXA we now expect net sales to increase more than 20% for the full year. And we still see significant untapped opportunity for KRYSTEXXA. For example, there is a great deal of headroom in our existing accounts as more and more physicians understand the full potential of KRYSTEXXA. We continue to expect KRYSTEXXA to generate annual peak U.S. net sales of more than $750 million. This underscores how much our commercial team has accomplished in 3 years since acquiring the medicine. We took an underperforming undervalued asset and quadrupled its net sales and we just reported 36% net sales growth this quarter. Not many 9-year-old medicines can claim that type of growth and we've transformed KRYSTEXXA to the point that Horizon is now one of most recognized leaders in gout.

KRYSTEXXA is a great example of how we optimize the value of our medicines through commercial execution, one of our hallmarks strength. We use a 3-fold approach. First, we deeply understand the medicine, the disease and the market dynamics. Second, we build the right team and the required infrastructure to drive uptake, support our patients and take advantage of further opportunities. And third, we educate physicians who are highly experienced clinical team, investing in clinical data that is important to them and improve their understanding of the disease and its treatment. Executing on our commercial strategy has helped bring KRYSTEXXA to thousands more patients in need, which in turn has transformed its growth trajectory.

We are employing this successful approach and preparing for the U.S. launch of Teprotumumab. The TED market is similar to other rare diseases. In that it needs to be developed from the ground up. Today, with an improved medicine for patients, there is no defined successful treatment path. The promise of Teprotumumab is that for the first time patients with TED would have access through a groundbreaking alternative allowing them to circumvent years of disease progression, multiple intrusive surgery, vision impairment and even blindness. Given the dramatic efficacy of Teprotumumab we expect the current paradigm to shift and that shift will require significant amount of disease education and market development. We have made a great deal of progress on both fronts update last quarter. Our sales force is hired. We have completed training and they are out in the field building relationships with the treating physician community, which includes oculoplastic surgeons, ophthalmologists and endocrinologist.

In addition to our approximately 50-person sales force, we have hired our patient educators, reimbursement specialists and a dedicated set of care team. In total, this roughly 100-person team will support teprotumumab and the TED community. Together they bring a tremendous level of talent to Horizon with broad collective experience and deep relationships within the physician community as well as the experience with infused medicines. Our ongoing market development and access activities include educating the treating physicians on active TED in the importance and urgency of treatment. Strengthening the co-management of the disease across key potential prescribers and establishing the treatment path, infrastructure and referral network necessary for an infused therapy. This is especially important as ophthalmologists and endocrinologist really infuse medicines today. These physicians need to be educated on the processes involved to ensure patient access.

Our medical affairs team including field medical liaison supporting teprotumumab is also fully in place. We look forward to sharing Phase III teprotumumab data at key ophthalmology and endocrinology meeting this fall. This includes the American Thyroid Association and American Association of Ophthalmology meetings, as well as the fall meeting of the American Society of Ophthalmic Plastic and Reconstructive Surgery or [indecipherable] where we will be presenting Phase III diplopia data for the first time. We're also engaging at meetings of specialty societies on the local and community level, partnering with organizations dedicated to infusion therapy and connecting with relevant patient efficacy groups. All told, we are building a strong foundation across a broad spectrum of TED stakeholders and engaging with each of them to ensure they understand the severity of TED, the patient journey and the urgency with which this disease needs to be treated.

And we continue to see a tremendous amount of interest in teprotumumab both from the physician and patient community, which is understandable given the teprotumumab to manage efficacy data and the fact that there is currently no approved treatment. That's why we are excited about the possibility of teprotumumab becoming a key treatment option for patients suffering from this vision-threatening series and progressive disease. And also why we are pleased to recently announce the expanded access program for teprotumumab which Shao-Lee will discuss momentarily. This is an exciting time for us at Horizon and for the TED community as a whole.

I will now turn it over to Shao-Lee to provide an update on R&D.

Shao-Lee Lin -- Executive Vice President, Head of Research and Development and Chief Scientific Officer

Thank you, Tim, and good morning everyone. We continue to make excellent progress in R&D with several key developments. I'll start with teprotumumab which we submitted for FDA approval in early July. As part of the submission, we requested priority review, given that teprotumumab has breakthrough therapy, orphan drug and fast track designations. The FDA has a 60 day filing review period to determine if the BLA is complete and acceptable for filing. If the FDA accepts the filing and grants priority review, we would expect a 6-month review period beginning on the filing acceptance dates with potential approvals in the first quarter of 2020. The BLA submission included results from both OpTic, our Phase 3 trial as well as the results from the Phase 2 trial, which were published in the New England Journal of Medicine. OpTic confirmed the Phase 2 results and also demonstrated a highly statistically significant effect on the primary endpoint of reduction in Proptosis of 2 millimeters or more with an 82.9% response rate in the teprotumumab treatment group versus 9.5% in the placebo group in a p-value of less than 0.001.

All secondary endpoints were also met with a p-value of less than or equal to 0.001. We presented additional Phase 3 data at an Endocrinology meeting in April that included the key secondary endpoint of absolute Proptosis reduction. This data demonstrated that after the full 6-month course of therapy, the teprotumumab group achieved a Proptosis reduction of 3.32 millimeters compared to 0.53 millimeters for placebo. We look forward to sharing additional data from the Phase 2 trial at upcoming ophthalmology and Endocrinology meeting later this year. TED is a serious, progressive and vision-threatening autoimmune disease for which there is no FDA approved medical intervention. The disease is believed to be medically treatable only during the active stage. Once it progresses via the active stage, the effects are permanent and surgery becomes the only option. Multiple surgeries per eye may be required and even then results are not always often [Technical Issue] patients may still experience visual impairment despite the surgical intervention.

For patients to wait 2 years, the average length of active TED for the disease to burn out also poses serious challenges. During its active stage TED is painful and debilitating. Many patients can't close their eyes lids, their eyes become dry and irritated, which ultimately can lead to corneal isolations. Today, patients are treated with steroids or other agents that are off label and with no proven effectiveness on Proptosis which is the primary driver of morbidity in TED and can cause diplopia or double vision. Many feel stigmatized due to their appearance and can suffer from serious depression. The debilitating nature of the disease and the limited time frame for potential treatment underscore the urgency to treat, which is why we are working to make teprotumumab available as soon as possible. And which is why we were very pleased to have recently announced an expanded access program for teprotumumab. This program was developed in part [indecipherable] FDA and is designed to provide access to teprotumumab for patients who need protocol eligibility criteria while the BLA is under review. Such patients might otherwise experience further progression of TED prior to potential approval.

Moving now to KRYSTEXXA and our programs for uncontrolled gout. During the second quarter, we initiated our MIRROR immunomodulation trial, evaluating whether the administration of KRYSTEXXA in combination with methotrexate can increase the response rate of KRYSTEXXA allowing more patients living with uncontrolled gout to receive a full course of treatment. The randomized, placebo-controlled trial is expected to enroll approximately 135 patients to receive either KRYSTEXXA plus methotrexate or KRYSTEXXA plus placebo. The primary endpoint is defined as a proportion of patients maintaining serum uric acid levels of less than 6 milligrams per deciliter at both. One of the reasons we're excited about the MIRROR trial is the positive results from the K Series conducted by 2 external investigators evaluating the administration of KRYSTEXXA with methotrexate on patient response.

This original K series data was presented at the American College of Rheumatology Medical meeting last fall with all 9 sequential patients studied who had uncontrolled gout achieving positive response. This was defined as more than 80% of serum uric acid levels being maintained at less than 6 milligrams per deciliter during the observation period. In June, at EULAR, the European League Against Rheumatism meeting, the investigators shared updated data, including a 10th sequential patient. All 10 patients completed the course of therapy and achieved a positive response. Gout was a topic of significant interest at EULAR. As we previously noted, there is a growing body of evidence that the systemic impact of high serum uric acid levels and also the comorbidities associated with gout.

One presentation was particularly compelling. It demonstrated in a randomized clinical trial, that profoundly lowering serum uric acid levels led to improved kidney function in patients with diabetic nephropathy, suggesting that lowering serum uric acid could slow the progression of chronic kidney disease. Given that kidney transplant patients have more than a tenfold increase in the prevalence of gout when compared to the general population and their chronically elevated levels of serum uric acid are associated with transplant organ rejection. We will be evaluating KRYSTEXXA in kidney transplant patients with uncontrolled gout in our own study. On track to begin in the second half of this year, this study will serve to further inform nephrologists as to whether use and effectiveness of KRYSTEXXA and its potential benefit for the chronic kidney disease patients with uncontrolled gout.

Finally, we are making good progress in our early stage gout programs. Our discovery and development collaboration with HemoShear has identified a number of novel targets and recently achieved the milestone of moving into the validation phase of those targets ahead of schedule. To conclude, the second quarter was one of significant progress and I look forward to updating you again next quarter on the continued advancement of our program.

With that, I will now turn the call over to Paul.

Paul W. Hoelscher -- Executive Vice President, Chief Financial Officer

Thanks, Shao-Lee. My comments this morning will primarily focus on our non-GAAP results, unless otherwise noted. Second quarter net sales of $320.6 million were driven by another quarter of strong commercial execution. Our Orphan and Rheumatology segment generated net sales of $223.5 million in the second quarter, an increase of 11% driven primarily by KRYSTEXXA along with Rayos, PROCYSBI and ACTIMMUNE. Operating income for Orphan and Rheumatology was $74.5 million representing an operating margin of 33% in line with our expectations. As we have discussed previously, we are investing significantly in Teprotumumab and in our Rheumatology pipeline programs. We anticipate accretion to the margin profile of this segment over time as our investments drive higher net sales. Demand for RAVICTI remains strong, with a year-over-year patient growth of 6%.

Similar to the first quarter net sales in the quarter were impacted by a lower net price related to higher Medicaid rebate accruals, which we do not anticipate in the second half of the year. RAVICTI net sales were also impacted by the divestiture of the ex-U.S. rights late last year. As a result of both factors, RAVICTI net sales decreased 11%. Net sales for the inflammation segment, previously known as the primary care segment were $97.1 million and segment operating income was $49.7 million. We continue to invest cash flows generated from this segment into the Orphan and Rheumatology business. Our non-GAAP gross profit ratio was 90.9% of sales for the quarter. Non-GAAP operating expenses were $167.4 million. This included non-GAAP R&D expense of $22 million reflecting investment in Teprotumumab as well as in our Rheumatology pipeline programs. Non-GAAP SG&A expense was $145.4 million. Adjusted EBITDA was $124.1 million for the second quarter. Non-GAAP income tax expense for the second quarter was $12.2 million. Non-GAAP net income and non-GAAP diluted earnings per share were $95.6 million and $0.49 respectively. The weighted average shares outstanding used to calculate second quarter 2019 non-GAAP diluted EPS were 193.2 million shares. And non-GAAP operating cash flow was $95.7 million for the quarter. As Tim mentioned, in 2019 we began aligning our capital structure to be closer to those of our rare disease biopharma peers, which generally have lower debt levels.

So far this year, we have reduced our gross debt by $575 million while maintaining a strong balance of cash and cash equivalents, which totaled $866 million at June, 30. Net debt was $577 million at June, 30 and our net leverage ratio defined as net debt to the last 12 months adjusted EBITDA was 1.1X, down 2.5 turns from 3.6X only one year ago.

In July, we issued $600 million of 5.5% senior notes due in 2027 and are using the proceeds along with cash on hand to repay $625 million of our outstanding debt. Through our refinancing and debt reductions, we have lowered our annual cash interest expense by more than 40% versus a year ago and extended the maturity of our term loans and senior notes by 2 years to 4 years.

Moving to our outlook for 2019, we now expect full year 2019 net sales to range between $1.28 billion to $1.3 billion versus the previous range of $1.26 billion to $1.28 billion. We project full year net sales growth for KRYSTEXXA to be more than 20% and we continue to expect the full year net sales for the inflammation operating segment to be roughly similar to 2018. Should there be an at-risk generic launch a VIMOVO, we do not expect it to have a material impact on our 2019 net sales guidance.

In addition, we recently learned that PENNSAID 2% may be added to [indecipherable] 2020 exclusion list. While the list is not final until annual negotiations are complete, if PENNSAID 2% is on the list, we expect the impact to 2020 total company net sales to be immaterial. As a reminder, PENNSAID 2% has always been on the care market exclusion list.

We evaluate all of our PBM contracts to ensure that we can achieve patient access as well as generate a return. Our objective is to continue to generate strong cash flows from the inflammation segment to invest in Orphan and Rheumatology. Returning to 2019 guidance, the full year 2019 adjusted EBITDA is now expected to be in the range of $460 million to $475 million versus the previous range of $450 million to $465 million.

We continue to project our non-GAAP gross profit ratio to be approximately 90%. Non-GAAP R&D expense as a percentage of net sales is now expected to be in the mid to high-single digits for the full year. We expect non-GAAP SG&A expense to increase meaningfully in the second half compared to the first half as a result of the previously discussed investment in U.S. Teprotumumab launch preparations. We continue to expect a full year non-GAAP tax rate in the low to mid-teens and a cash tax rate in the low to mid-single-digits.

In line with previous years, we anticipate quarterly variability in our non-GAAP tax rate. And as always, this projection could change significantly as a result of any acquisitions or divestitures or any changes in tax laws. We now expect full year non-GAAP net interest expense to be approximately $65 million, a decrease from our previous guidance of approximately $70 million and from our initial guidance this year of $90 million to $95 million, due to the significant improvements that we have made to our capital structure so far this year.

We continue to expect full year 2019 weighted average diluted share count to be approximately 190 million shares.

With that, I'll turn the call over to Tim for his concluding remarks.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Thank you, Paul. We delivered another outstanding quarter. Outperforming expectations and increasing our full-year guidance. But more important than our latest quarter results, is what we have seen for the long-term success of Horizon in an incredibly short amount of time. The exceptional execution we have transformed Horizon, it's one of the leading profitable rare disease biopharma companies ,validated by several impressive successes. We built a portfolio of rare and rheumatic disease medicine in growing at a double-digit pace and driving the future growth of the company.

We successfully we launched KRYSTEXXA on track for more than 20% growth this year, 9 years post approval and 3 years post acquisition. And we are on track to achieve our projected peak U.S. annual net sales of more than $750 million. We've executed on our strategy to expand our pipeline with the successful development of Teprotumumab and a potential approval in the first quarter of next year.

We're preparing aggressively for the launch, leveraging our success with KRYSTEXXA to make Teprotumumab as successful, if not more and continue to project peak annual U.S. net sales and more than $750 million if Teprotumumab is approved. We have significantly improved our capital structure, taking advantage of market opportunities to reduce our gross debt, lower interest and expense and extend our debt maturities. With more than $850 million in cash and the net leverage ratio of 1.1X, our balance sheet has never been healthier.

We're in a great position to build our pipeline and take advantage of additional acquisition opportunities that meet our criteria. Our business fundamentals and financial position are strong. We are well positioned for significant future growth with perhaps one of the best long-term growth opportunities in our space. We remain focused on executing our strategy, which we believe will lead to long-term success and value for Horizon, for patients and for our shareholders.

With that, we'll now open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Annabel Samimy. You may proceed.

Annabel Samimy -- Stifel -- Analyst

Hi guys, thanks for taking my question and great progress. I'm happy to see it. So everything that you described in the commercial preparations for Teprotumumab suggests that you're going to be coming out of the gate essentially almost immediately. Do you have a sense of the trajectory in the first year? And the expanded access program, how broad is that and could it temper that initial uptake given the treatment is finite? And is it too bold to assume that this expanded access program is essentially a week from the FDA that they are totally behind you on that?

Timothy Walbert -- Chairman, President and Chief Executive Officer

So thanks, Annabel. Appreciate the questions. First ,with the expanded access program. This is a clinical program, and typically, when you look at expanded access programs in the rare disease space, they are in the range of prior clinical program for that medicines. So this is not any indication of FDA, these on the medicine. We expect those views to come 60 days after the submission.

When we look at our preparations, you are correct in that. We are putting all efforts required to ensure the long-term success of Teprotumumab. Vikram will speak probably more over the next few minutes here, but when you look at launching a part of the medicine that is infused, you have different dynamics at play. You have temporary J codes and C codes, depending on channel and you have the fact that plastic surgeons, ophthalmologists and endocrinologist have not typically infused medicines.

So the site of care in which the medicine is delivered is going to be an important factor. When you have a temporary J Code, that means that each patient goes on prior authorization and has to be go through what is typically 2-month to 3-month process to obtain that reimbursement and as most know, it takes -- if approved by March 31, we would be eligible for a permanent J code on January, 1 of 2021. So with those dynamics, we expect that it will take time to scale patients, just to get through the reimbursement process and so permanent J code is put in place. That being said, we're seeing extensive interest in the medicine from both physicians and patients and we'll be prepared to launch it successfully.

Tina Ventura -- Senior Vice President of Investor Relations

Great. Thanks, Annabel. Next question please.

Operator

And our next question comes from David Amsellem with Piper Jaffray. You may proceed.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. So just on Tepro, wanted to ask about infusion logistics and how you're thinking about support for docs who aren't set up for infusions. And then secondly, also remind us what the mix of Medicare, Medicaid and commercial is for the Thyroid eye disease population. And then another Tepro question. You talk about the incremental spend on the product next year. I know you're not going to have a big sales force by any means, but can you talked about disease awareness, direct to consumer activities and how we should think of that spend on that? Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Sure. So relative to infusing, you're right. It's going to take a significant effort and we're building a distinct organization to focus on that. We have had a lot of inbound interest from Oculoplastic surgeons to in fact, build infusion centers to be able to potentially treat patients with Teprotumumab. Vikram can speak to his organization in the process.

Vikram Karnani -- Executive Vice President & Chief Commercial Officer

Yes. And so David on that note, as Tim said earlier, Oculoplastic surgeons, Ophthalmologists, Endocrinologists have not typically infused medicine and so we're in the process of building out the team that will help them -- a dedicated site of care team, that will help them through all of the infusion logistics to get a patient on therapy. We anticipate that demand will be strong, but the pull-through of those patients after they have been prescribed the medicine is a key element for success. On that note, we're also hiring a team of patient educators as well as reimbursement specialists, and finally gave dedicated hub. All of this is a full cohesive infrastructure that will enable the pool of patients and minimize the time between being prescribed the medicine and getting therapy.

And to your question about the lives of patients between commercial and government. We anticipate based on our research that commercial is roughly about 60% and that the remainder about 40% is government with majority of that being Medicare.

David Amsellem -- Piper Jaffray -- Analyst

And on Tepro spread, we haven't given guidance for 2020 yet, but a good place to start would be to look at annualized our fourth quarter spend because by that time, we should have the full tepro organization in place.

Tina Ventura -- Senior Vice President of Investor Relations

All right, thank you. Dimitrios, next question please.

Operator

And our next question comes from David Risinger with Morgan Stanley. You may proceed.

David Risinger -- Morgan Stanley -- Analyst

Thanks very much. Congrats on the strong KRYSTEXXA performance. I have a couple of questions. First, with respect to sort of taking things to a little bit higher level and contemplating opportunities for future business development, could you discuss a risen competitive advantages with respect to licensing and acquiring underappreciated assets and whether you see opportunities to transact in the near-term or given the volatility in the environment more broadly, whether we need to be patient for future transactions?

And then second, in the wake of the strong second quarter results, any key considerations that we should bear in mind as we model the third quarter? Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Thanks, David. Relative to the overall business environment, we're not really focusing on picking under-appreciated assets. I think that was part of our earlier strategy, our strategy now is to build a pipeline of innovative medicines such as Teprotumumab and our early stage GAAP [Phonetic] programs. And in your point about what differentiates us I think a lot of it is underscored by how we delivered in the quarter and we have over the last five years of our strategy where we've shown we can take our own assets and assets that have failed in other people's hands and successfully continue to execute and drive the uptake of those medicines. So I think we've demonstrated that we can be a strong commercial partner with Teprotumumab, we've also shown that we can successfully develop an innovative medicine and as far as the environment, there are lot of opportunities in the marketplace, in the rare disease space as we're looking and for us it's making sure it's the right transaction. We can double our sales from where we are, we're in 2018 with just Teprotumumab and KRYSTEXXA and both are greater than $750 million in peak sales. So we're going to make sure we focus on the right transactions while we continue to execute our business. Relative to third quarter, we don't give quarterly guidance at this point in time, we expect our business and our team to continue to execute.

Tina Ventura -- Senior Vice President of Investor Relations

Thanks, David. Dmitri, next question please.

Operator

And our next question comes from Stacy Ku with Cowen and Company. You may proceed.

Stacy Ku -- Cowen & Company -- Analyst

Hi, congratulations on the quarter. Thank you for taking my questions, I have a few. If I could drill down on KRYSTEXXA growth. Are there any updates with the increasing penetration of Nephrologists versus Dermatologists for KRYSTEXXA. Where do you expect your double-digit growth to come from new prescribers or increased rating? And given the data presented at AACR [indecipherable] in the past few years, how should we think about physician awareness of KRYSTEXXA used in conjunction with Methotrexate. Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Thanks, Stacy. So Nephrology continues to perform in line with our expectations. As you rightly identified the performance in the second quarter was strong, 30% volume growth, which is through the first half of 2019 with strong underlying demand. And we see the interest in interest debt from all aspects of the business. New accounts for more than 600 new [indecipherable] in the last 12 months, which is an increase of 20% in the last 12 months. Existing accounts to growth in of vials an existing accounts, which is almost 30% and then accelerating on Nephrology growth. So we have all aspects of the business running very well and very strong and we expect that to continue.

To your question about use of Methotrexate. We certainly feel about it more and more in the field. Anecdotal evidence suggests that the word is out there and Rheumatologists would want to do the best thing for the patient. And if that use of methotrexate allows them to keep patients on therapy longer, then that's their choice and that's what they would do. It's certainly not something that we can promote actively at this point, which is why we initiated the mirror trial to be able to enable us to do that in the near-term.

Stacy Ku -- Cowen & Company -- Analyst

Thank you.

Tina Ventura -- Senior Vice President of Investor Relations

Dimitrios, next question please.

Operator

And our next question comes from David Steinberg with Jefferies. You may proceed.

David Steinberg -- Jefferies -- Analyst

Thanks. Just a follow-up on the external business environment. I guess your leverage ratio has never been lower, at least for the last 5 years. It's been a very long period of time since you acquired anything. I know you said you really don't need to do anything given the set up that you have. But is one of the key issues, just the price of assets that you're looking at too expensive at this point in time. Secondly, KRYSTEXXA was particularly strong this quarter, was there anything unusual in the quarter, for example, I've heard that a competitor who is doing head-to-head trials was a large purchaser KRYSTEXXA, is that correct?

And then finally, in terms of your normalized SG&A spend for the launch of Tepro I think, Tim, you had mentioned that you've heard that 100 reps and other ancillary folks associated with the launch. Was that -- is that-- I think Paul has said that Q4 was a good guide. But most of those folks hired in the second quarter and therefore, the $145 million SG&A is fairly representative of what things might look like with this fully loaded sales effort for Tepro. Thanks.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Well, I'll take the first. You're correct. There was some purchases from a competitive product that is running against the KRYSTEXXA, which had a relatively small impact. We exceeded our expectations significantly without that and we're not assuming much of a contribution from that moving forward. Maybe Paul, if you want to address the financial questions?

Paul W. Hoelscher -- Executive Vice President, Chief Financial Officer

Yes, I mean, on the ESP [Phonetic] side with Tepro, the people who have been hired -- most of those were hired at the end of the second quarter or early in the third and so the second quarter doesn't really -- is not really loaded heavily with those employees. As I said, continue to be hiring and adding more employees throughout the year and by fourth quarter we should have a fault more fully loaded run rate on tepro.

David Steinberg -- Jefferies -- Analyst

Great. And Vi, do you want to address the question regarding business development in the external environment?

Vikram Karnani -- Executive Vice President & Chief Commercial Officer

Sure, David. We continue to see good assets out there, but the prices that we've seen have been high, in some situations, and so we backed away from some of those transactions. But we continue to believe we will be able to execute that, build it out the pipeline. As we continue to build our team and see good assets, it's just a matter of time before we hit on the right ones to transact on.

Tina Ventura -- Senior Vice President of Investor Relations

Great, thanks Bob. Next question please.

Operator

And our next question comes from Donald Ellis with JMP Securities. You may proceed.

Donald Ellis -- JMP Securities -- Analyst

Thank you and good morning. First question is on Tepro. The activity of the drug is very clear in the active state of the disease. Would you expect Tepro to have any effect on inactive phase of the disease? And regarding KRYSTEXXA, the Mirror trials, assuming the data are positive, what impact would you expect that to have on your peak sales assumptions? Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

On the second question, our existing forecast greater than $750 million in peak sales does not include the potential benefit or upside from KRYSTEXXA alongside Methotrexate. Relative to the first question, Shao-Lee?

Shao-Lee Lin -- Executive Vice President, Head of Research and Development and Chief Scientific Officer

As you pointed out, clearly we've demonstrated market activity with Teprotumumab in the active state of the disease. And recall that within the context of our studies, we value patients with very high degree of activity, CAT scores greater than 4, Proptosis greater than 2 millimeters and individuals who had a diagnosis of the thyroid eye disease less than 9 months. I think, from a biological perspective, and based on the mechanism, we don't expect there to be activity in the truly burnt out inactive disease. I think one of the questions that remains unanswered at this point is whether or not, if you will, late active disease or recently active disease potentially could still see some degree of benefit. And, I think we don't know that at this juncture, there really isn't an on-off switch from when patients move from their active to inactive disease. We know that on a population basis, people have active disease for about a 2-3-year period. But that's the curve, and on an individual basis, that can certainly vary. I think the answer to your question is, in inactive, no, we don't expect there to be activity of the drug, but perhaps in late active, recently inactive, it's an open question.

Tina Ventura -- Senior Vice President of Investor Relations

Thank you. Next question please.

Operator

And our next question comes from Louise Chen with Cantor. You may proceed.

Louise Chen -- Cantor Fitzgerald -- Analyst

Congratulations on the quarter and thanks for taking my questions here. So, my first question is back on teprotumumab, curious what you think the uptake will look like. And then, have you given any additional thought to pricing or disclosed anything from that front? And then, secondly, you had talked about margins improving to more biotech-type levels in your earlier comments, I'm just curious, at what level of sales do you think you'd see that or when do you think we'll see something like that. And if you could put any context around that, relative to where you are today? And then last one, just on business development, you have quite a robust balance sheet, and just curious what's the right time for doing BD given you're right in front of this teprotumumab launch? Could you handle both next year or this year? Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Sure. So relative to uptake, as I mentioned earlier, in the long term we expect significant demand, an uptake for the medicine and the launch phase, we will have a temporary J-code. It takes 2 to 3 months for these patients to individually get through the approval process. So, as an infused [indecipherable] medicine, that is a process in which every patient will have to go through in the early launch phase. Until we get a permanent J-code, which would, assuming the timeline of approval in the first quarter and submission by March 31st of 2020, the timeline would be that you could get a permanent J-code by January 1 of 2021. There have been a few examples recently of medicines getting a permanent J-code sooner than that one-year period and there had been commentary from HHS around, moving to quarterly approval of permanent J-codes. We have not seen any official guidance from them so our working assumption is a permanent J code, again assuming potential first quarter approval would be January of 2021. That's there from a pricing standpoint, we'll discuss that approval. Paul, if you can speak to margin.

Paul W. Hoelscher -- Executive Vice President, Chief Financial Officer

On the margin side, as we've discussed, 2020 will still be an investment year, because that's when the Tepro launch will occur and this will be a significant investment and we won't have a full year of Tepro sales. As we look into 2021, we would expect to see a step-up in the margin profile at that point, as we have a full year of Tepro sales and KRYSTEXXA continues to grow and then that would grow over time, as both KRYSTEXXA and Tepro start moving toward their peak sales amounts.

Timothy Walbert -- Chairman, President and Chief Executive Officer

And importantly, when we look at our base business, we're seeing ex-Tepro spend, we're seeing accretion to the underlying business at this point in time. So, Teprotumumab will be significant investments to drive that long-term value, but our underlying business is performing extremely well.

Paul W. Hoelscher -- Executive Vice President, Chief Financial Officer

Great. I think the last question is related to business development and Tepro launch at similar timing. What was that last question, Louise, I think? Yes, so I'll address that. We have a distinct organization, focused on Teprotumumab an uptake and that will affect our ability or interest to do another transaction level. So, both are a key part of our strategy.

Tina Ventura -- Senior Vice President of Investor Relations

Terrific. Next question please.

Operator

And our next question comes from Gary Nachman with BMO Capital Markets. You may proceed.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi, good morning. First, you seem to be managing well through the 340B pricing impact to KRYSTEXXA. Is that having the same impact you anticipated? Are you able to adjust the amount of product going into 340B hospitals? And then, how long before you have results from the mirror trial, how long will it take to enroll, I think you said, 330 patients? And then, one last one on Tepro, how many patients could potentially enter your compassionate use program and would they automatically switch over, once the product is ultimately approved next year? Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

Sure. Relative to 340B, for the first half it was running at the low end of our 20% to 25% range, and that's been primarily driven because of the continued significant interest and growth from community rheumatology accounts. So that's a higher mix of community rheumatology is what's driving the lower end of 340B. Relative to our early access program, that, as I mentioned earlier, is a clinical protocol, and when you look at existing other rare disease medicines, generally those numbers in the range of the prior clinical programs, and once we put these people on medicine, we will make sure they continue to receive full treatment at no cost.

And then the last question was mirror timing, David. We got some mirrors. I mentioned, we initiated that study in the June timeframe. It's early days, you're correct, the target patient number is 135. So, we expect results in the next couple of years, it's early days for that trial.

Tina Ventura -- Senior Vice President of Investor Relations

Great, thanks. And Dimitrios, I think we have time for one more question, please.

Unidentified Speaker

Thank you. And our final question comes from Nicholas Rainer [Phonetic] with Mizuho Securities. You may proceed.

Operator

Thank you. And our final question comes from [Phonetic] Nicholas Rainer with Mizuho Securities[Phonetic] You may proceed.

Unidentified Participant

Sure. Hey guys, congrats for the third quarter. So, two questions, one is on KRYSTEXXA. So, if there is there any lumpiness expected in respect the revenues throughout the year associated with the 340B discounts or other buying patterns, or is it fair to say that this Q2 growth rate is a reasonable growth rate for the product going forward? And secondly, any update on your expectations for Selecta Bioscience SEL 212, any update on the timing or and your expectations. Thank you.

Timothy Walbert -- Chairman, President and Chief Executive Officer

So, we upped our guidance for KRYSTEXXA for the year. That gives you a sense of what our expectations are moving forward, an increase from what they were before. And relative to a competitor trial, that's in process, and we don't have anything further to update on timing from what's been said before. Thank you for the questions.

Tina Ventura -- Senior Vice President of Investor Relations

Thanks, Nick. Dimitrios?

Operator

Ladies and gentlemen, this now concludes the Q&A portion of today's conference. I'd like to turn the call back over to Tina Ventura, for any closing remarks.

Tina Ventura -- Senior Vice President of Investor Relations

Great, thank you. Dimitrios. That concludes our call this morning. A replay of this call and webcast will be available in approximately two hours. Thank you for joining us.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Tina Ventura -- Senior Vice President of Investor Relations

Timothy Walbert -- Chairman, President and Chief Executive Officer

Shao-Lee Lin -- Executive Vice President, Head of Research and Development and Chief Scientific Officer

Paul W. Hoelscher -- Executive Vice President, Chief Financial Officer

Vikram Karnani -- Executive Vice President & Chief Commercial Officer

Unidentified Speaker

Annabel Samimy -- Stifel -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

David Risinger -- Morgan Stanley -- Analyst

Stacy Ku -- Cowen & Company -- Analyst

David Steinberg -- Jefferies -- Analyst

Donald Ellis -- JMP Securities -- Analyst

Louise Chen -- Cantor Fitzgerald -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

Unidentified Participant

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