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Horizon Therapeutics PLC (NASDAQ:HZNP)
Q3 2020 Earnings Call
Nov 2, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by, and welcome to the Horizon Therapeutics plc Third Quarter 2020 Earnings Conference Call. As a reminder, today's conference is being recorded.

I would now like to introduce Ms. Tina Ventura, Senior Vice President of Investor Relations. Please go ahead.

Tina Ventura -- Senior Vice President, Investor Relations

Thank you, Sarah. Good morning, everyone, and thank you for joining us.

On the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer; Liz Thompson, Group Vice President, Clinical Development and External Search; Paul Hoelscher, Executive Vice President, Chief Financial Officer; and Andy Pasternak, Executive Vice President and Chief Strategy Officer. Tim will provide a high-level review of the business, our third quarter performance and our full-year guidance that we again increased this morning. Liz will then provide a review of our R&D program, followed by Paul, who will discuss our financial performance and guidance in more detail. After closing remarks from Tim, we'll take your questions.

As a reminder, during today's call, we'll be making certain forward-looking statements, including statements about financial projections, development activities, our business strategy and the expected timing and impact of future events. Our actual results could differ materially due to a number of factors, including the extent and duration of the effects of the COVID-19 pandemic, as well as other factors outlined in our latest Form 10-K or 10-Q we filed this morning and any 8-Ks filed with the Securities and Exchange Commission. 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.

Tim Walbert -- Chairman, President and Chief Executive Officer

Thank you, Tina, and good morning, everyone. We delivered record results this quarter driven by the continued outperformance of TEPEZZA, our biologic medicine launched earlier this year for Thyroid Eye Disease, as well as growth in the rest of the orphan segment, including a return to growth for KRYSTEXXA, our biologic medicine for uncontrolled gout and our second key growth driver.

We generated third quarter net sales of $636 million, up 90% year-over-year and adjusted EBITDA of $330 million, up 153% year-over-year. Given these exceptional results, we are increasing our full-year 2020 TEPEZZA net sales guidance to more than $800 million, a considerable increase from the previous guidance of more than $650 million we announced last quarter.

TEPEZZA, already at an annual run rate of more than $1 billion in its second full quarter since launch, is turning out to be one of the most successful rare disease medicine launches ever. We're also announcing this morning a significant expansion of our TEPEZZA field-based organization; further investment in our direct-to-consumer TED awareness campaign; the initiation of our TEPEZZA global expansion; and the additional investment in our long-term manufacturing supply capacity to support our continued growth expectations.

Given the better-than-expected performance of TEPEZZA, KRYSTEXXA and our orphan disease medicines overall, we're increasing our 2020 total Company net sales guidance to $2.12 billion to $2.14 billion, which represents 64% year-over-year growth at the midpoint.

We're also raising our adjusted EBITDA guidance to $920 million to $940 million, which represents 93% year-over-year growth at the point. The adjusted EBITDA guidance midpoint represents 44% of net sales, a 7 percentage point increase over last year. Our margin expansion was significantly accelerated, a full-year ahead of schedule, based on the very strong launch of TEPEZZA and despite the impact to our business from COVID-19.

We also continued to advance our clinical development strategy and expanded our pipeline. With HZN-825, our LPAR1 antagonist that we acquired earlier this year, we announced today that we're expanding the clinical program to now include interstitial lung diseases, including the idiopathic pulmonary fibrosis, or IPF, a rare progressive lung disease with a median survival rate of less than five years. We continue to expect our diffuse cutaneous scleroderma trial to start in the first half of 2021. If successful in these diseases, which have significant unmet need, we estimate that HZN-825 could generate more than $1 billion in peak net sales.

For KRYSTEXXA, we continue to focus on improving its complete response rate in rheumatology, impacting the patient experience and increasing its use among nephrologists. Data will be presented from the KRYSTEXXA RECIPE trial at the American College of Rheumatology Annual Meeting this week, demonstrating an 86% complete response rate. This is the first randomized placebo-controlled trial using KRYSTEXXA plus immunomodulation and the fourth immunomodulator study -- studied with successful results in combination with KRYSTEXXA.

We recently initiated our new KRYSTEXXA trial to explore a shorter infusion duration to impact the patient experience. And interim data was presented from open-label KRYSTEXXA PROTECT trial at the American Society of Nephrology meeting in October that showed KRYSTEXXA improved the management of uncontrolled gout in kidney transplant patients.

With TEPEZZA, we continue to progress on our additional clinical programs, including our chronic TED trial, which we anticipate initiating shortly; and our subcutaneous dosing trial, which we recently initiated.

We've also made considerable progress on our capital allocation strategy. We completed a public offering of 13.6 million shares, raising approximately $920 million in net proceeds, and we completed the extinguishment of all $400 million of our exchangeable senior notes. In less than two years, we've reduced our gross debt by almost $1 billion and transformed our balance sheet from a net debt position of $1 billion to a net cash position of more than $700 million at September 30.

Our gross leverage ratio was 1.3 times at September 30, well below our target of 2 times. With our strong balance sheet, we are in an excellent position to take advantage of future opportunities that meet our disciplined M&A criteria.

Our extraordinary success in the third quarter and year-to-date is a testament to our incredible ability to execute, both commercially and clinically, driven by the talented people who make up Horizon. We continue to receive multiple recognitions as a best workplace. This includes 11 workplace awards so far this year, including being selected as one of PEOPLE magazine's 50 Companies That Care, and as one of FORTUNE and Great Place to Work's Best Medium Workplaces. We have worked hard to preserve our Company values and persevere through a challenging 2020 by listening to our employees, understanding their needs and developing solutions that help maintain a trusting, transparent culture. Based on these awards, our employees remain highly engaged and dedicated to making a powerful difference in the lives of people and the communities for which we serve.

Today, we also announced that Karin Rosen as our Executive Vice President, Research and Development and Chief Scientific Officer. Karin comes to us with nearly three decades of experience, which includes clinical research and development of biologics, as well as building, leading and successfully launching multiple novel medicines in the United States and globally. We are very pleased to welcome Karin, and we're confident that her ability to build and lead cross-functional teams, along with her therapeutic area expertise, will contribute to solidifying our position as a leading rare disease biotech Company.

Moving on to our third quarter results. In our orphan segment, year-over-year net sales of $535 million, grew 131% and was driven by the strong performance of TEPEZZA, the return to growth of KRYSTEXXA and the durable growth of our rare disease medicines, RAVICTI and PROCYSBI. Our orphan segment sales now represent nearly 85% of Company net sales, underscoring the rapid transformation we have made to a leading rare disease biotech company.

Third quarter TEPEZZA net sales of $287 million significantly exceeded expectations. Our outperformance has been driven by the severity of TED leading to highly motivated patients seeking out therapy, the impressive efficacy and safety profile of TEPEZZA, our highly successful pre-launch efforts and our outstanding commercial execution. We are proud of the fact that in less than eight months, TEPEZZA made such a dramatic difference in the lives of so many patients.

Ophthalmology continues to be one of the most impacted markets during COVID-19. And as we've discussed since last March, it has impacted our launch and the growth of our patient enrollment forms, or PEFs, which are leading indicators of demand. While ophthalmology has recovered from the acute impact of COVID that we experienced for the second quarter, today, still only about a third of our sales calls are in-person due to the pandemic. For perspective, we're back to roughly 75% in-person calls in rheumatology and our inflammation business units. Our significantly increased guidance to more than $800 million this year continues to incorporate this impact. Demand would have been substantially higher if it weren't for the impact of COVID-19. And while we're not yet back to our pre-COVID PEF volumes, we continued to see strong patient starts of more than 2,000 patients started on TEPEZZA through the third quarter.

We have only scratched the surface of the potential we see for TEPEZZA and its ability to help so many more patients suffering from TED. That's why we're announcing this morning our significant expansion efforts in multiple areas: our US infrastructure and marketing activities, our long-term supply capacity and our efforts to pursue TEPEZZA outside the United States.

First, with our US expansion. Our objectives are three-fold: to increase the penetration of TEPEZZA among our current prescriber base; to expand our reach to drive new prescribers; and to drive higher awareness of TED and TEPEZZA to reduce the time it takes for a patient to get diagnosed and ultimately treated.

Beginning in the fourth quarter, we are initiating a US expansion to roughly double our ophthalmology commercial and field-based organization to approximately 200 employees. As we've discussed, this is a market that requires continued physician education on the importance of treatment, strengthening the co-management of the disease across key physician specialties and establishing and reinforcing the treatment path, infrastructure and referral network. In line with that need, our field expansion includes our sales force, as well as our field-based teams across medical affairs, patient services, reimbursement services and sites of care. We are taking this step sooner than originally anticipated given the significant progress we've made since launch and to support the continued demand from the 15,000 to 20,000 new acute TED patients coming into the market each year, as well as more -- the more than 70,000 patients that have chronic TED for five years or less. This expanded organization will support growth beyond 2020 by enabling us to reach more patients who are suffering from this rare and debilitating disease.

In fact, just like we've only treated a fraction of the TED population to date, we've also only reached a fraction of the total TED prescriber base. We penetrated the market quickly, driven by a highly successful pre-launch effort and a launch effort that has driven a core base of prescribers, who are primarily oculoplastic surgeons and other oculoplastic subspecialties, such as neuro-ophthalmologists. However, our ability to reach and educate new physicians based on our current commercial infrastructure has been limited by the impact of COVID-19.

To date, about 1,000 of our physician target that prescribed TEPEZZA with roughly 60% writing one or two prescriptions. By expanding our reach, increasing our call frequency through smaller territories and increasing the time spent with each physician to educate them on TED and TEPEZZA, we intend to drive uptake of TEPEZZA among these prescribers and increase the total prescriber base.

We are also significantly increasing our investment in marketing initiatives, including our direct-to-consumer disease awareness campaign we initiated last quarter. Our marketing efforts are driving results. For example, our tepezza.com patient site has received more than 550,000 unique visits, with 80% of those happening in the third quarter following the initiation of the campaign. Similarly, our online TED specialist finder that connects the patients with physicians has received 70,000 visits, about one-third of those visits happening in the third quarter. We are now expanding our online, digital and broadcast DTC presence from select markets to a national campaign will be adding a TEPEZZA brand awareness component. We're also targeting Graves' disease sufferers to raise awareness of the connection between Graves' and TED and increase the speed to diagnosis and treatment. Our aim with these expanded marketing efforts is drive more patients to identify TED sooner, seek treatment and connect with the TED specialist.

We are working to expand the long-term supply capacity for TEPEZZA as well. We'll be adding a third site in Boulder, Colorado with our manufacturing partner, AGC Biologics. These expansion initiatives all support our expected near-term growth and long-term peak US annual net sales for TEPEZZA of more than $3 billion.

In addition, we want patients in other part of the world to also be able to benefit from TEPEZZA. We have conducted a preliminary analysis of the TED market opportunity outside the US. Based on our analysis to date, we project the overall peak annual international opportunity to be greater than $500 million. Europe is not yet included in this analysis.

One of the key countries we are pursuing is Japan, where we will be engaging with the Japanese regulatory authorities to discuss the potential regulatory pathway for TEPEZZA. We'll also be engaging with the Japanese medical community to understand the TED patient journey in Japan. We're encouraged by the demonstrated commitment of the Japanese authorities to provide timely access to safe and effective treatment for unmet needs, and we look forward to our discussion with the key stakeholders there.

Finally, we're investing in our clinical programs for TEPEZZA to maximize the value it offers TED patients, including our TEPEZZA chronic TED trial, which we plan to initiate in the coming weeks. We also continue to expect to see more chronic TED case reports presented at future medical meetings.

At the upcoming American Society of Ophthalmic Plastic and Reconstructive Surgery, or ASOPRS, Fall Symposium, the successful chronic TED case study that I discussed last quarter will be presented. In addition, another case study will be presented showing the successful use of TEPEZZA in the treatment of dysthyroid or compressive optic neuropathy, which is a severe manifestation of TED that can result in permanent vision loss. We also look forward to presenting additional TEPEZZA data that Liz will discuss in more detail shortly.

Moving on to KRYSTEXXA. We returned to growth during the quarter sooner than expected, which is especially impressive given the challenges of COVID-19. KRYSTEXXA generated $108 million in net sales, resulting in year-over-year growth of 9%. As a result, we increased full-year 2020 net sales guidance to low-double digits versus our prior expectation of similar net sales to 2019. Though we are continuing to monitor the impact of COVID-19 on KRYSTEXXA, we're encouraged by trends we're seeing of patients returning to the physicians' offices in recent months and in many patients who had deferred treatment to start to go back on the KRYSTEXXA.

Most important and key to our long-term success is the continued execution of our KRYSTEXXA immunomodulation strategy. Since 2018, data has been published in well over 100 patients on concomitant treatment with several different immunomodulators. This represents more patients than studied in our Phase 3 trials using KRYSTEXXA alone. The data using KRYSTEXXA with immunomodulation points to response rate that is double the response rate observed in our Phase 3 clinical program. Our most recent internal data suggest that the use of immunomodulation with KRYSTEXXA for new patient starts is more than 25%, a significant increase from the approximately 15% we saw at the end of 2019. The approach of using immunomodulation with KRYSTEXXA is quickly becoming the preferred treatment options for patients with uncontrolled gout.

Data from the investigator-initiated RECIPE trial will be presented later this week at the American College of Rheumatology Annual Meeting. As I mentioned earlier, RECIPE is the first randomized placebo-controlled trial to study KRYSTEXXA with an immunomodulator, in this case, mycophenolate mofetil. The primary endpoint at 12 weeks was achieved with 86% of patients in the immunomodulation arm achieving a complete response compared to 40% of patients in the placebo arm on KRYSTEXXA alone. The RECIPE results add to the growing body of evidence supporting the use of immunomodulation with KRYSTEXXA, and we look forward to seeing preliminary six-month results from our randomized controlled trial, MIRROR, in the first half of next year.

Given our return to growth and the continued increase in the use of KRYSTEXXA plus immunomodulation, we are highly confident in our peak US annual net sales estimate for KRYSTEXXA of more than $1 billion.

Our other rare disease medicines, RAVICTI, PROCYSBI and ACTIMMUNE, continued to generate durable growth during the quarter. Combined active shipping patients increased mid-single digits year-over-year, and we continued to see high rates of compliance and adherence.

I will now turn the call over to Liz for an update on our R&D programs.

Elizabeth H.Z. Thompson -- Group Vice President,Clinical Development and External Search

Thank you, Tim, and good morning, everyone. As Jim mentioned, we've made considerable progress as we continue to advance multiple R&D programs. We've nearly doubled the number of pipeline programs this year, and this is despite the impact of COVID-19.

I'll start today's update with HZN-825, our newest pipeline candidate. We acquired this oral selective LPAR1 antagonist earlier this year, when we announced our HZN-825 clinical program in diffuse cutaneous systemic sclerosis. We're excited to announce today that we're expanding the HZN-825 program to include interstitial lung diseases, or ILD, starting with idiopathic pulmonary fibrosis, or IPF. IPF is a rare progressive lung disease with an estimated US prevalence of 100,000 and high unmet need, despite the current available therapies. Given the potential impact that the LPAR1 mechanism of action may have on fibrosis, we believe there's strong rationale to explore it further in IPF and potentially other ILDs. We'll be sharing further information on the trial design as we finalize the trial protocol next year, and we anticipate initiating a Phase 2b pivotal trial in this indication in mid-2021.

Regarding our systemic sclerosis program, HZN-825 showed early clinical signals of benefit in this rare, chronic autoimmune disease, which has no FDA-approved therapies and a high unmet need, with an approximately 30,000 patient population in the US. We're working with the FDA and European regulators to finalize the Phase 2b pivotal trial protocol in the coming months and continue to expect to begin the trial in the first half of 2021.

Moving to TEPEZZA and our trial in chronic TED patients. Chronic TED patients have disease that is no longer progressive or inflammatory, but they may continue to experience proptosis, diplopia, pain and other debilitating eye symptoms that can impair their quality of life. Signaling through IGF-1 receptor drives many of these symptoms. Given that IGF-1R is still present at heightened levels in orbital fibroblast from chronic TED patient surgical samples, the TEPEZZA mechanism of action that inhibits IGF-1R appears to be relevant in chronic disease. And while the TEPEZZA prescribing information is broad and includes all TED patients, our objective is to generate data to better inform the physician community who may wish to use TEPEZZA in treating their chronic TED patients.

We expect to initiate the randomized, placebo-controlled trial in the coming weeks. Target enrollment is approximately 40 patients with a 2:1 ratio of patients receiving infusions of TEPEZZA or placebo once every three weeks for a total of eight infusions. The primary endpoint is the change in proptosis in the study eye from baseline at week 24. After the initial 24-week treatment period, proptosis non-responders may choose to enter an additional 24-week open-label treatment period. We expect topline data to be available in early 2022.

In July, we were pleased to announce topline results of OPTIC-X, the open-label extension trial of the Phase 3 OPTIC trial for TEPEZZA, as well as results of the OPTIC 48-week off-treatment follow-up period. The results provide further data regarding the dramatic efficacy of TEPEZZA in patients with longer disease duration, its long-term durability and the potential for retreatment.

To briefly summarize the data: 89% of OPTIC placebo patients who participated in OPTIC-X achieved a clinically significant proptosis reduction of 2 millimeters or greater by week 24. These patients had longer disease duration, an average of 12 months compared to six months for patients in the OPTIC trial. The 48-week follow-up data from OPTIC showed that the majority of TEPEZZA responders maintained their response at week 72, nearly a year off treatment. And notably, of the small number of OPTIC TEPEZZA patients who relapsed during the 48-week follow-up period, more than 60% experienced at least a 2 millimeter reduction in proptosis with an additional course of TEPEZZA in OPTIC-X. Importantly, there were no new safety concerns in either the 48-week follow-up period or OPTIC-X, during which patients received additional TEPEZZA treatment.

At upcoming medical conferences this fall, including the AAO meeting, we will present additional data on OPTIC-X and OPTIC 48-week off-treatment results, as well as data on the impact of TEPEZZA on less severe TED. There will also be a case report presented at AAO on the improvement of dysthyroid optic neuropathy as a result of treatment with TEPEZZA. Dysthyroid or compressive optic neuropathy is a severe manifestation of TED that can result in permanent vision loss.

The ASOPRS Fall Symposium later in November will include a second discussion on TEPEZZA in the treatment of dysthyroid optic neuropathy, as well as a presentation on the recent case report published in the American Journal of Ophthalmology on the treatment of a patient with chronic TED.

Work is well under way in our two other TEPEZZA trials. We have initiated a pharmacokinetic trial to explore the potential for subcutaneous dosing of TEPEZZA, and we continue to expect to start our exploratory trial in diffuse cutaneous systemic sclerosis later this year.

Moving on now to KRYSTEXXA. First, topline data in the investigator-initiated RECIPE trial will be presented this week at the virtual ACR annual meeting. RECIPE is the first randomized, placebo-controlled trial evaluating the effect of co-administration of KRYSTEXXA with an immunomodulator to improve the complete response rate of KRYSTEXXA. Patients were randomized 3:1 and received a two-week run-in of either mycophenolate mofetil or placebo, followed by daily dosing of MMF or placebo, and biweekly KRYSTEXXA infusions for a total of 12 weeks. After this initial 12-week trial period, patients continued on KRYSTEXXA therapy alone for a further 12 weeks.

The primary endpoint was the proportion of patients with serum uric acid less than 6 milligrams per deciliter at 12 weeks. 86% or 19 out of 22 patients receiving KRYSTEXXA co-administered with MMF achieved this outcome, compared to 40% or four out of 10 patients receiving KRYSTEXXA alone, with a p-value of 0.01. After 12 weeks off of MMS therapy but continuing on KRYSTEXXA therapy, 68% or 15 out of 22 patients, achieved a complete response. This compares to 30% or three of 10 patients, in the placebo arm. There were no new safety signals.

We'll be further adding to the clinical data for immunomodulation with our randomized, placebo-controlled MIRROR trial, which is evaluating the efficacy and safety of the concomitant use of KRYSTEXXA with methotrexate. We've completed enrollment in the trial, the largest randomized controlled trial evaluating KRYSTEXXA with immunomodulation, with 145 patients in total. We continue to expect preliminary six-month results, including the primary endpoint, in the first half of 2021, with the full data set, including the secondary endpoints, available after the trial completes in the second half of 2021.

Regarding our KRYSTEXXA shorter infusion duration trial, we enrolled the first patient in this open-label trial last week. While KRYSTEXXA is currently infused over a two-hour or longer timeframe, this trial is assessing up to three new infusion durations, 60 minutes, 45 minutes and 30 minutes. A shorter infusion duration can meaningfully impact the experience and convenience for patients, physicians and sites of care.

In the PROTECT trial, we're studying the use of KRYSTEXXA for people who are living with uncontrolled gout and have undergone a kidney transplant. Evidence indicates that gout is more common and often more severe among those who have undergone kidney transplant, with data showing prevalence more than ten-fold higher than in non-transplant patients.

We were very pleased to announce encouraging interim data at this year's American Society of Nephrology Kidney Week in October that relate to KRYSTEXXA's ability to reduce serum uric acid levels in this very sensitive transplant population without compromising kidney function. To date, the estimated glomerular filtration rate, or eGFR, which is a measurement of kidney function, remained stable throughout KRYSTEXXA treatment. The data also showed reductions in pain and disability scores. We continue to expect enrollment to be completed by the end of the year.

In conclusion, it has been a busy quarter for R&D at Horizon. We continue to make significant progress with multiple trials across our portfolio.

And with that, I'll turn the call over to Paul.

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

Thanks, Liz, and good morning. My comments this morning will primarily focus on our non-GAAP results, unless otherwise noted. Third quarter net sales were $636 million, a year-over-year increase of 90%. Our orphan segment generated net sales of $535 million, a year-over-year increase of 131%, driven by the strong performance of our key growth drivers, TEPEZZA and KRYSTEXXA. Orphan segment operating income was $275 million, a year-over-year increase of 245% and representing a margin of 51%.

Net sales for the inflammation segment were $102 million, with segment operating income of $55 million. We continue to reinvest the cash flow generated from this segment into our key growth drivers, TEPEZZA and KRYSTEXXA, and our growing pipeline.

Our non-GAAP third quarter gross profit ratio was 87% of net sales.

Non-GAAP operating expenses were $222 million. This included non-GAAP R&D expense of $28 million, and non-GAAP SG&A expense of $194 million.

Third quarter adjusted EBITDA was $330 million, an increase of 153%.

As we expected, the non-GAAP tax rate for the third quarter was negative 23%, resulting in a year-to-date tax rate of 5.5%. And as we've seen in prior years, there can be variability in the tax rate across quarters.

Non-GAAP net income was $392 million, and non-GAAP diluted earnings per share were $1.74. Weighted average shares outstanding used to calculate third quarter 2020 non-GAAP diluted EPS was 225 million shares.

As of September 30, cash and cash equivalents were $1.725 billion, which includes the net proceeds of approximately $920 million from our August equity offering of 13.6 million ordinary shares.

Our non-GAAP operating cash flow for the third quarter was $109 million. Although collection of TEPEZZA receivables increased significantly during the quarter, the benefit was offset by investments in TEPEZZA inventory and timing of payments for accounts payable and accrued expenses. We remain confident in our ability to generate considerable operating cash flow, allowing us to pursue acquisitions or licensing of further pipeline assets as a top priority.

Our total principal amount of debt is $1.018 billion, with the earliest maturity in 2026. We've reduced our gross leverage to 1.3 times at September 30 and significantly lowered our interest expense as a result of several capital structure improvements made since the beginning of 2019.

This morning, we announced that we are increasing our full-year net sales guidance range to $2.12 billion to $2.14 billion from $1.85 billion to $1.9 billion. This reflects our significant outperformance across all business units in the third quarter and increases in our full-year 2020 net sales guidance for both TEPEZZA and KRYSTEXXA.

For TEPEZZA, we are increasing our full-year 2020 net sales guidance to more than $800 million, compared to the previous guidance of greater than $650 million. For KRYSTEXXA, we are increasing our full-year 2020 net sales guidance to low-double-digit growth versus our prior expectations for similar net sales to 2019.

We are also increasing our adjusted EBITDA guidance range to $920 million to $940 million from $725 million to $775 million. At the midpoint, adjusted EBITDA is 44% of our net sales, reflecting a further significant acceleration of our margin expansion and a 700 basis point increase over 2019, a full-year ahead of schedule. At the midpoint, our updated guidance represents year-over-year growth in net sales of 64% and a near doubling of adjusted EBITDA, which, again, was accomplished despite the challenges of COVID-19.

Moving on to the rest of the income statement. We now expect our non-GAAP gross profit ratio to be approximately 87%. This is primarily due to the impact of royalty associated with the significantly higher net sales expectations for TEPEZZA this year.

We expect full-year 2020 non-GAAP operating expenses to increase compared to our prior expectations. This is driven by additional SG&A expense to support the TEPEZZA launch outperformance. While we expect R&D spending to be in line with previous guidance on a dollar basis, given our significant increase in net sales guidance, we now expect our non-GAAP R&D expense as a percentage of net sales to be in the mid-single digits for 2020.

We continue to expect a full-year non-GAAP tax rate in the low-double digits, with our fourth quarter non-GAAP tax rate to be in the high-teens to bring the full-year rate in line with our expectations.

We continue to expect our 2020 cash tax rate to be in the low- to mid-single digits.

We continue to expect full-year non-GAAP net interest expense to be approximately $45 million.

Given our August equity offering, we now expect our fourth quarter weighted average diluted share count to be approximately 235 million shares.

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

Tim Walbert -- Chairman, President and Chief Executive Officer

Thank you, Paul. The third quarter was another record quarter for Horizon and one of significant strategic process -- progress. We again increased our full-year 2020 net sales and adjusted EBITDA guidance, driving robust year-over-year growth at the midpoint. TEPEZZA continues to generate outstanding results, already at a greater than $1 billion annual run rate in just its second full quarter after launch. Importantly, we're also seeing positive trends with KRYSTEXXA as it returns to growth, and we now expect low-double-digit year-over-year net sales growth. We made significant progress on our R&D programs, including on our two HZN-825 pivotal Phase 2b programs we intend to initiate next year and on development activities related to our international TEPEZZA expansion.

Finally, we're in an incredibly strong financial position with a cash balance of over $1.7 billion at September 30, allowing us to execute on our M&A strategy. We're one of the fastest-growing profitable biotech companies among our peers. With our continued progress and strong execution, we are well-positioned to continue to deliver increasing value to our shareholders now and over the coming years.

With that, I'll turn it over to questions. Tina?

Tina Ventura -- Senior Vice President, Investor Relations

Sarah, go ahead.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first questions comes from the line of Ken Cacciatore with Cowen and Company.

Kenneth Cacciatore -- Cowen and Company -- Analyst

Thanks, everyone. Congratulations on all the performance here. First question for you. Obviously, you've had lots of physician engagement now since the launch. So, a little bit more experience, some interaction with them. Some of the investors are concerned about the annual kind of replenishment. We talked about 15,000 to 20,000 patients coming in. So, can you just talk about increased comfort now that you've been able to really interact with the clinical community to how we feel about that 15,000 to 20,000, and then maybe the percent of those patients that are realistically treatable annually?

Also, you talked about COVID having an impact on TEPEZZA. And some of us, as we step back, it's been such a fantastic launch. It's hard to believe that COVID is actually impacting it. So, can you put some magnitude on what the impact has been? Is it -- would have been 50% more, 25% more in terms of enrollment? So, maybe just flesh that out.

And then, lastly, just wanted to ask about BD, clearly different balance sheet than a year ago or two years ago. So, can you just talk about potential size here? We have access to significant debt, if we'd like to. Does it really change your thinking on BD? Thank you.

Tim Walbert -- Chairman, President and Chief Executive Officer

Sure, Ken. Thanks for the questions. The first one around the incident population. We continue to see patients coming into the market, 15,000 to 20,000. We see that as the treatable population, which is a subset of the overall incident population coming into the market each year. That is the subset of moderate to severe patients. As we continue to drive our consumer campaign, we're seeing significant engagement that confirms that for us, 550,000 hits to our website, 80% of them in the third quarter, driven by our consumer activities. We also have 70,000 visits to our TED specialists. And so, all the different activities that we see continue to reinforce that population. We also continue to see the population of chronic patients, that's 70,000 that are seven years or less since diagnosis and continue to see data generated there. So, we are confident in that population.

As far as the question of what would we have been able to do in a non-COVID environment? I think it's reasonable to assume 20%, 25% higher, so well over $1 billion in sales would have been achieved this year if it weren't for COVID-19. We are continuing to drive uptake in that in spite of not having our PEF levels get back to the pre-COVID levels we had. And a lot of that was driven by just outstanding pre-launch execution. But certainly, had a significant impact. 32% of our visits are live versus about 75% for our rheumatology or KRYSTEXXA business or ibu, our inflammation business, so -- which has really driven the increase in our direct-to-consumer activities. So we think we're managing through this situation, setting up well and being able to drive people online and then generate the ability to get them into physician offices, but it's definitely had an impact.

And the last question was around M&A and our balance sheet, and Andy can address that.

Andy Pasternak -- Executive Vice President, Chief Strategy Officer

Sure. Hi, Ken. So, on the BD front, we continue to be very active, looking at opportunities to expand our clinical stage pipeline. Obviously, our balance sheet puts us in a good position, gives us a lot of flexibility. We're mostly focused on individual asset licensing opportunities, such as the Curzion transaction, which brought us 825; or the River Vision transaction, which brought us TEPEZZA, but we're also considering bolt-on acquisitions as well.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks, Ken. Sarah, next question, please.

Operator

Thank you. Our next question comes from the line of Annabel Samimy with Stifel. Your line is now open.

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Hi. Thanks for taking my question and congratulations on a good quarter. So, a few questions here. Just wanted to know if there was additional -- any additional movement of docs using TEPEZZA first beyond the six-month treatment period now that you've had some data on the safety in that population?

And two, in the chronic population, given that you're not really limited by the label there, the way TEPEZZA is performing, it doesn't seem like there's any barriers at all to upticks, so -- whether on the payer or physician side to use it broadly. So just curious about that.

And on KRYSTEXXA, what is the average length of treatment now? It seems like there's sufficient data out there on all types of immunomodulation and for multiple patient types that physicians can feel comfortable using it. And I assume that, again, the label doesn't limit the use -- that physicians can feel comfortable using in transplant patients as well, given that the label doesn't limit it.

And then, finally, just quickly on the international expansion, why not considering EU yet? Just out of curiosity. Thanks.

Tim Walbert -- Chairman, President and Chief Executive Officer

Thanks, Annabel. Appreciate it. So on the first question, as far as treatment beyond six months, we have not heard of any patients being treated beyond six months at this point in time. We continue to see most patients being treated for the full six months and compliance being well over 90% and greater than expected.

On the chronic population, it continues to be in the single-digit as a percentage of the total patients treated. And as you said, it is part of our overall broader indication of treatment of Thyroid Eye Disease. From an access standpoint, we see very strong access to the acute population, and in the chronic population, probably mirroring more what a standard biologic would be, so prior authorization, data required. And as we get more and more data from our chronic placebo-controlled trial and other case studies, that will continue to enhance the reimbursement in the chronic population.

As far as the average treatment with -- time with KRYSTEXXA, it's generally between six and nine months. And I think it's more defined by the severity of the patient than by a specific treatment paradigm. So, I think that's generally what we're seeing at this point in time. And again, we did see, as you mentioned, in kidney transplant at ASN this year, first presentation from the safety results and other of the PROTECT trial. So there's a lot of interest of KRYSTEXXA in that transplant population, especially because they're already on background immunomodulators. So we look to see more data coming there.

Relative to international, as we talked about greater than $500 million peak sales opportunity, that does not include Europe at this point in time. With Europe, we continue to pursue orphan drug designation and continued dialogue around best approaches, but we don't have enough information to define either the pathway or the financial opportunity.

Annabel Samimy -- Stifel Financial Corp. -- Analyst

Great.

Tim Walbert -- Chairman, President and Chief Executive Officer

So thanks a lot, Annabel.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks, Annabel. Sarah, next question?

Operator

Thank you. Our next question comes from the line of David Amsellem with Piper Sandler. Your line is now open.

David Amsellem -- Piper Sandler -- Analyst

Thanks. So just a couple. So, I wanted to get your latest thoughts on duration of TEPEZZA therapy. Are you hearing a more severely active patients getting treated or starting to get treated for more than six months? I know that this is early days. But what can you say about that and the extent to which that could happen down the road?

Secondly, can you talk about the extent to which the J-code taking effect has had an impact on the pace of new patient starts over the last few weeks?

And then lastly, just following up on your color, Tim, on the payer landscape. Can you talk about the lag time between a physician looking to start TEPEZZA therapy, and ultimately -- when insurance companies ultimately green light actual usage? That would be helpful. Thanks.

Tim Walbert -- Chairman, President and Chief Executive Officer

Sure, David. Thanks for the questions. As far as duration of TEPEZZA, I have not yet heard of any patients going longer than six months, and it's something that we monitor on a regular basis. So at this point in time, we're still seeing all patients move toward that six-month endpoint.

On the J-Code, I would say about 75% of the available reimbursement there is in process, 75% of people who leverage it. I don't know that it's changed the pace of new start, but it has improved the time to reimbursement.

From a payer landscape, it's an interesting dynamic in ophthalmologists. And if you look at the 800 to 1,000 oculoplastic surgeons and neuro ophthalmic surgeons, they typically are cash-pay businesses. They don't have a lot of experience with reimbursement. So what is normal reimbursement timelines to people treating biologics of 30 to 45 days is seen as more long to cash-pay experienced folks. So, I think it's more continued education. The timelines are generally in the 30 to 45 days for reimbursement, the shorter end for acute patient's chronic take. Obviously, more questions and more typical process that you would get for prior offs [Phonetic] with the biologic. But so far, the timelines are early in launch already at what we see for a mature brand like KRYSTEXXA.

Tina Ventura -- Senior Vice President, Investor Relations

Right. Thanks, David. Next question, please, Sarah.

Operator

Thank you. Our next question comes from the line of Chris Schott with J.P. Morgan. Your line is now open.

Christopher Schott -- J.P. Morgan -- Analyst

All right. Great. Thanks so much for the questions. Just two from me. Maybe just on TEPEZZA sequential growth. Just any signs you're seeing at all about sales growth slowing or plateauing? And, I guess, I'm thinking about here as you're completing that six-month duration of therapy for some of the early adopters. Should we think about a temporary either slowdown or plateauing or growth? Or with the penetration rate still so low, do you expect we can see fairly steady growth through that transition?

And then my second question was on TEPEZZA in Japan. And just any sense of what that clinical program could look like? I'm just trying to get my hints around when we could think about a revenue opportunity for the ex-US markets. Thanks so much.

Tim Walbert -- Chairman, President and Chief Executive Officer

Sure, Chris. Thanks. As far as sequential growth, we continue to see good, steady growth and expect that to continue. I think, as I said, ophthalmology is more impacted than rheumatology and primary care and that are -- inflammation and KRYSTEXXA businesses, like I said there, about 75% of those visits are live calls by representatives versus just over 30% for our TEPEZZA sales force. That's where our consumer programs have begun to really make a difference for a rare disease to get 70,000 contacts to our TED specialist finder and 550,000 hits to our TEPEZZA website. We're going to continue to ramp up our consumer activity, our digital activity, and we're seeing that outperform typical DTC benchmarks. So I think that, along with our expansion, smaller territories, more ability to get out in front of physicians' offices is going to keep us on a steady growth trajectory.

So, on the Japan, Andy can address that.

Andy Pasternak -- Executive Vice President, Chief Strategy Officer

Sure. We're still -- we're in the process of engaging with the local regulatory authorities to determine what the clinical program will look like. And as we work through that with them, we'll inform everyone.

Tina Ventura -- Senior Vice President, Investor Relations

Great. Thanks, Chris. Sarah, next question, please?

Operator

Thank you. Our next question comes from the line of David Risinger with Morgan Stanley. Your line is now open.

David Risinger -- Morgan Stanley -- Analyst

Thanks very much and congrats on the very strong performance. So, I have a few questions. First, I was hoping that you could just discuss the cash flow in the quarter in a little bit more detail. So, the adjusted EBITDA was $330 million, the operating cash flow was $109 million. Obviously, you have lengthy payment terms. But if you could talk about that cash flow in the third quarter? And then discuss what we should expect for the fourth quarter from a cash flow standpoint? And in addition, whether you're able to change any payment terms now that there is a permanent J-code as of October 1?

And then, Tim, I was hoping that you could just review the patients on TEPEZZA. So, I think you had said 2,000. I don't know if that was the end of the quarter. Do you have a number for the average number of patients during the quarter? If you could just run through that briefly? Thank you.

Tim Walbert -- Chairman, President and Chief Executive Officer

Thanks, Dave, and I'll answer the last and then turn it over to Paul to talk about cash flow relative to EBITDA. And the J-code is in terms are going to evolve over time.

Relative to the total patients, year-to-date through September 30, we're at over 2,000 patients, and we're not getting into specific average patients or things like that during the quarter at this point in time.

So, Paul, do you want to handle the cash flow questions?

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

Yeah. So thanks, David. On cash flow for the third quarter, we did see significantly higher TEPEZZA collections than we had in the second quarter, but receivables still grew over $160 million in the quarter because of the TEPEZZA sales and the growth in the KRYSTEXXA sales in the quarter.

As we talked about last quarter with the permanent J-code in place, we are stepping down our payment terms over time. And so, we'll see the payment terms go down in the fourth quarter and through the first quarter. And so, as we said last quarter, we expect the collections of the TEPEZZA receivables to significantly ramp up as we move through the fourth quarter and the first quarter. And by the time we get in the second quarter timeframe, we'll start having more normal terms for TEPEZZA receivables, similar to what we have with KRYSTEXXA and other biologics.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks.

David Risinger -- Morgan Stanley -- Analyst

Thank you.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks, Dave. Sarah, next question, please?

Operator

Thank you. Our next question comes from the line of David Steinberg with Jefferies. Your line is now open.

David Steinberg -- Jefferies -- Analyst

Thanks very much. I have three questions. First, on the operating margin. There was a really big uptick this quarter, over 50% are above last quarter. And I'm just curious as to how sustainable that will be for the next few quarters. And then perhaps you could talk about the progression of op margins over the next couple of years?

Secondly, you had originally pointed to a course of TEPEZZA therapy on a 75% to 80% adhering trade of about $200,000 a course. Now that you've had -- you're into your third quarter sales, you have indicated that pricing has been tracking north of that. But could you update a little more on your latest thinking in terms of TEPEZZA course of therapy cost overall?

And then, finally, back to the payer landscape. Obviously, being a rare disease product, TEPEZZA has step edits with steroids being the key product there. But I was just curious about, have you had any outright denials and coverage for many plans. And if so, were all those taken care of with -- do the patients get product through patient assistance or do they just make that product? Thanks.

Tim Walbert -- Chairman, President and Chief Executive Officer

Sure, Dave. From an operating margin standpoint, just as a background, we finished last year at about 37% and as you said, over 50% this quarter. We expect to significantly increase our spend on TEPEZZA expansion, DTC and building a -- and working to -- with AGC Biologics on a third facility. So, I think we're tracking more toward the mid-40s as we move forward. And it's -- at this point, all about really investing in the long-term growth and short-term growth of TEPEZZA and KRYSTEXXA.

As we look at the cost of a treatment course, there's a number of factors that go in. And as we look at it, two of the biggest factors that currently on a favorable standpoint are the average weight, which is probably about three kilograms on average, higher than we expected, and compliance, which is north of 90%. So, currently, those are trending much more favorably, but we continue to need to see how that trends over a longer period of time. And the most important thing is that, patients are complying virtually with the six-month treatment recommendations from their physician for a total infusion treatment course, and that's leading to great responses by the patients.

On a payer landscape basis, I'll break it into two subsets of acute and chronic. I would say the -- on the acute side, with over 90% of plans have made decisions, over 75% of them have favorable dynamics in place for TEPEZZA on the acute side, and we continue to see that flow quite well. We don't see a lot of situations where there is significant step edits or things along the lines of steroids that something that most patients already -- have already had. But that is not a significant impact.

On the chronic side, I would say, it's more like what we see for a standard biologic like KRYSTEXXA, where they want to see follow up and you have to bring in case studies and some of the other information and data that's presented. And that is a more arduous effort than for the standard acute patients. So -- and we expect that to continue to improve as we generate more data from our chronic placebo-controlled trial.

So thanks, David.

Tina Ventura -- Senior Vice President, Investor Relations

Yeah. Thanks, David. Sarah, next question, please?

Operator

Thank you. Our next question comes from the line of Gary Gerbreger with Bank of America. Your line is now open.

Jason Gerberry -- Bank of America Merrill Lynch -- Analyst

Hey, thanks. It's Jason Gerberry from BofA. First, can you guys comment at all on 2021 outlook? It looks like from your implied fourth quarter guidance, you'd be annualizing at about $1.4 billion. And your comment on sequential growth, so presumably, some nice growth off of that annualized number.

And then my second question is just, I'm curious your thoughts on the feasibility of combining TEPEZZA with FcRn based approaches. Do you think that the two modalities are complementary? Have you explored the feasibility of co-administering these agents? Or is there a risk that the FcRn could clear as an antibody from circulation more rapidly than would be desired? Thanks.

Tim Walbert -- Chairman, President and Chief Executive Officer

I'll take the second one first. We have not explored that. I think there are two key factors to keep in mind. One, we still need to understand the full safety impact of FcRn as a monotherapy in Thyroid Eye Disease and what off-target safety issues emerge.

And secondly, it is very rare that you have an efficacy level that we've seen with TEPEZZA, which is between 83% and 89% of patients having a just dramatic improvement in their disease. So, we don't see a situation with this level of dramatic efficacy where it would make sense to add-on another therapy, especially one that has off-target adverse events.

Relative to our 2021 outlook, we're not providing guidance other than as we have over the last several years, we expect to drive continued strong growth of our business and whether that be KRYSTEXXA back on a strong growth trajectory, we've gotten that return to growth much faster than expected, double-digit growth this year, and expect that to continue to accelerate into next year. And there aren't many medicines that have hit in the second full quarter $1 billion run rate. So, TEPEZZA has significantly outperformed, and I think it's set up to help many more patients and continue to grow as we get into 2021. The rest of our business continues to perform well. Our rare disease business is a low- to mid-single-digit business, and our ibu generates strong cash flow. So, we feel great about where we are heading into 2021, and we'll give more specifics as we get closer to the beginning of the year and our fourth quarter call.

So thank you, Jason.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks, Jason. Sarah, next question, please?

Operator

Our next question comes from the line of Dana Flanders with Guggenheim. Your line is now open.

Dana Flanders -- Guggenheim Partners -- Analyst

Great. Thank you for the questions. My first here is just on kind of some of the international dynamics and Japan being the first market you were looking at for TEPEZZA. Just curious if you envision looking for partners, ex-US. Or is this really an opportunity for you to build out the organization and wondering if ex-US might become a bigger focus for you from an M&A standpoint as well?

And then, secondly, just an R&D question on HZN-825. As you thought about the different indications you could go into, what led you to choose IPF as opposed to something like SSc-related ILD first? Thanks.

Tim Walbert -- Chairman, President and Chief Executive Officer

So if you look at the 825 decision, we have looked at broader interstitial lung disease, which encompasses a lot of what we're talking about, such as the IPF. And a lot of that's just based on preclinical and other data we've seen from LPAR antagonism in fibrotic diseases, and we see as the optimal opportunity, both in diffuse cutaneous scleroderma, as well as interstitial lung disease. So, we see those as the most attractive opportunities at this point in time.

And relative to Japan, Dana, we look at Japan as a market that we will go ourselves. We are completing our analysis in other markets around the world. And that will really be a market-by-market decision relative to the financials involved, as well as our interest in building a presence in that individual market. So, we do look to expand and build our international business with HZN-825. We're concurrently pursuing both US and Europe, regulatory discussions, as well as, including what Japan would look like from a regulatory standpoint. So, our business moving forward from a drug development standpoint will be internationally focused. TEPEZZA will be moving as we said into international markets.

And then, as we look at M&A, I don't think our primary target is to do geographic-based deals. However, if we're doing development-stage deals, we'll certainly look at the opportunity to also develop them in the international markets following on what we're doing at both TEPEZZA and HZN-825.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks, Dana. And, Sarah, with already being over the hour, we've got time for one more question, please.

Operator

Thank you. Our next question comes from the line of Gary Nachman with BMO Capital Markets. Your line is now open.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi, guys. Nice quarter and thanks for squeezing me in. The increased level of investment behind TEPEZZA, which makes a lot of sense, where do you think that will have the greatest impact? And how long would it take for that to materialize, especially given that only about a third of current sales calls are in person with OPSOs [Phonetic]? So, will you go more into endocrinology? How much more aggressive with DTC will you be?

And then for the chronic TED study, did I hear correctly that that it will be randomized, placebo-controlled? Why the change from open label? And will you need that data to really accelerate use in that patient population or could it happen before then in chronic TED? Thanks.

Tim Walbert -- Chairman, President and Chief Executive Officer

Thanks, Gary. So I'll start with that last one. Some of the data that's already been published relative to case studies has been very helpful from a reimbursement standpoint for individual patients. The reason we expanded it to a chronic study is, as we look at the long-term potential in the chronic population, that has become much broader than we originally expected. And we thought it made sense to add a placebo-controlled to really enhance the quality of the data and fully understand the opportunity for TEPEZZA there, and we think that will even help more as we look at the chronic population.

Relative to your question around our spend and activities, we certainly want to continue to work from a consumer and digital standpoint of accelerating the time that creates patients who -- about half of them could get TED, become aware of symptoms and get to the ophthalmologists and to potentially being treated sooner. I think the short-term impact our consumer activities are outperforming benchmarks and are generating strong growth. And the whole goal of our consumer strategy in the short-term here is to drive patients to find the right specialist. And if they find the right specialist, that leads to the right treatment for them. So, I think the ramp-up will be most in our consumer activities.

And from a sales force activity standpoint, it's not just sales reps that we're adding, we're also adding significantly many more patient access managers and reimbursement managers that can really help work through the process with the patients, the physician offices to make sure they also get to the right site of care. So it's a broader expansion that we're talking about.

Tina Ventura -- Senior Vice President, Investor Relations

Thanks, Gary. And Sarah, thank you. This concludes our call this morning. A replay of this call and webcast will be available in approximately two hours. Thanks for joining us.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Tina Ventura -- Senior Vice President, Investor Relations

Tim Walbert -- Chairman, President and Chief Executive Officer

Elizabeth H.Z. Thompson -- Group Vice President,Clinical Development and External Search

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

Andy Pasternak -- Executive Vice President, Chief Strategy Officer

Kenneth Cacciatore -- Cowen and Company -- Analyst

Annabel Samimy -- Stifel Financial Corp. -- Analyst

David Amsellem -- Piper Sandler -- Analyst

Christopher Schott -- J.P. Morgan -- Analyst

David Risinger -- Morgan Stanley -- Analyst

David Steinberg -- Jefferies -- Analyst

Jason Gerberry -- Bank of America Merrill Lynch -- Analyst

Dana Flanders -- Guggenheim Partners -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

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