Horizon Therapeutics Public Limited Company (NASDAQ:HZNP) Q3 2022 Results Conference Call November 2, 2022 8:00 AM ET
Company Participants
Tina Ventura – Senior Vice President, Chief Investor Relations Officer
Tim Walbert – Chairman, President and Chief Executive Officer
Liz Thompson – Executive Vice President, Research & Development
Aaron Cox – Executive Vice President and Chief Financial Officer
Andy Pasternak – Executive Vice President, Chief Strategy Officer
Conference Call Participants
Chris Schott – JPMorgan
Annabel Samimy – Stifel
Madhu Kumar – Goldman Sachs
Jason Gerberry – Bank of America
Ken Cacciatore – Cowen
David Risinger – SVB Securities LLC
David Amsellem – Piper Sandler
Gary Nachman – BMO Capital Markets Equity Research
Amy Li – Jefferies
Operator
Good morning, and thank you for standing by. Welcome to the Horizon Therapeutics plc Third Quarter 2022 Earnings Conference Call. As a reminder, today’s conference call is being recorded. [Operator Instructions]
I would now like to introduce Ms. Tina Ventura, Senior Vice President and Chief Investor Relate Officer. Ms. Ventura, please go ahead.
Tina Ventura
Thank you, Chris. 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, Executive Vice President, Research and Development; Aaron Cox, Executive Vice President and Chief Financial Officer; and Andy Pasternak, Executive Vice President, Chief Strategy Officer.
Tim will provide a review of the business, including our third quarter performance and full year guidance. Liz will then review our R&D programs, followed by Aaron, who will discuss our financial performance and guidance in more detail. After closing remarks from Tim, we’ll take your questions. We posted our investor slide deck this morning as well.
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 from these forward-looking statements due to a number of factors, including the risk factors and other information outlined in our latest Forms 10-K, 10-Q and any 8-Ks filed with the Securities and Exchange Commission and our earnings press release, which we issued this morning.
You’re 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, our slide presentation 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
Thank you, Tina, and good morning, everyone. Our continued focus on clinical, commercial and operational execution drove progress across our portfolio this quarter. With our pipeline, we completed enrollment in our TEPEZZA chronic, Low-CAS TED trial, we expect to share top line results in the second quarter of next year. We also announced positive top line results from our Phase II trial evaluating Dazodalibep in patients with Sjögren syndrome, validation of the value we saw in the Viela pipeline we acquired last year.
Commercially, we have made a lot of progress executing on the actions we discussed on our second quarter call, to accelerate the growth of TEPEZZA in 2023, where our expectation is for at least mid-teens growth. And across the rest of the business, we exceeded expectations. Our launch of KRYSTEXXA with methotrexate has done exceptionally well, and the team continues to drive strong performance with immunomodulation going from more than 50% to more than 60%.
Generating 21% growth in the quarter, we now expect growth of 25% for the full year. The relaunch of UPLIZNA continues to progress nicely, and we again doubled our U.S. net sales this quarter. Our rare disease medicines, which typically grow in the low single digits generated strong growth as well. As a result, this morning, we increased our full year net sales and adjusted EBITDA guidance. We also increased peak annual net sales expectations for both TEPEZZA and KRYSTEXXA, in aggregate by an additional $1 billion. We feel very good across the board, executing on our strategic goals.
I’ll now discuss our third quarter performance. First, with TEPEZZA, it’s on track with our expectations and generated third quarter net sales of $491 million. Now, the most important of these actions we are taking to drive TEPEZZA growth is the expansion of our TEPEZZA sales force. It expands the reach of our effort across ophthalmologists and endocrinologist, and gives our sales representatives more time to engage with ocular specialists.
Ophthalmologists and endocrinologists see tens of thousands of potential TEPEZZA patients. But due to limited TED education, or lack of understanding of how to best refer their TED patients, many patients never find the care they need. So this expansion along with our DTC efforts are critical to helping patients get on to TEPEZZA therapy. With this expanded sales force, we are now targeting 12,000 total physicians, including approximately 2,000 ocular specialists and approximately 10,000 ophthalmologists and endocrinologists.
We completed the hiring of this expanded team at the end of the third quarter, adding about 60 sales representatives to what was previously about an 80-person sales team. And so by the end of October, the majority of the expanded team had completed their training or were out in the field starting to build relationships and engage with a broader set of ophthalmologists and endocrinologists, many of whom we are calling on for the first time.
We’ve enhanced our physician targeting based on new data sets and information from increased claims capture, which gives us even greater confidence we are engaging with the right physicians. While it is still early, we have heard positive feedback from the expanded team. Our sales representatives are getting into physician offices they haven’t accessed before. The new physicians we are calling on are very willing to see us and showing high interest in learning about TED. We’re very excited about the expanded team’s potential to drive additional growth for TEPEZZA, and we expect to see the impact begin next year.
To further support the field team, we recently launched an updated marketing campaign, highlighting the mechanistic rationale for TEPEZZA in the treatment of TED. Our new TV campaign also supports our efforts to drive broader patient and physician awareness. Both campaigns aim to highlight the unseen symptoms of TED and create an urgency to seek an eye exam or treatment by discussing the consequences of delaying diagnosis. Our continued investment in DTC has been effective at encouraging undiagnosed patients to visit a TED specialist.
In addition, we are continuing to focus on educating physicians by strengthening our advocacy network and driving clinical conviction through peer to peer education. Facilitating discussions on real-world experiences and best practices of managing patients is giving physicians increased confidence in the co-management of their patients. Our peer-to-peer program has more than doubled compared to the second quarter and we expect to continue to increase it moving forward.
As we have seen with both KRYSTEXXA and UPLIZNA, peer-to-peer education is one of the most effective ways to drive clinical conviction for physicians, and this is particularly critical for TED, which is a more complex co-management approach than those diseases of other medicines. In addition, our patient services and reimbursement team is spending more time and focus on the reimbursement process.
While coverage is favorable overall, as we have discussed, the process can be burdensome for some physicians, especially for ocular specialists who are not accustomed to it. We have enhanced how our patient services team operates, and we work to reduce reimbursement hurdles by educating physician offices on how to best work through this process. All of these actions, coupled with the very strong momentum coming out of the key fall medical meetings with our target physicians gives us confidence that we are on the right track. We continue to expect full year 2022 TEPEZZA net sales growth in the high teens, which assumes modest sequential growth in the fourth quarter.
With our expansion efforts beginning to have an impact as we move into next year, we continue to expect to drive net sales growth of at least mid-teens in 2023. As we’ve discussed over the last several months, we’ve also been conducting further analysis on the opportunity for TEPEZZA outside the United States. Our prior ex U.S. peak annual net sales guidance of more than $500 million was primarily focused on Japan, and other related markets.
Since then, we’ve gone back and looked more closely at the European opportunity as well as reevaluating the international markets where we intend to launch TEPEZZA. We have confirmed there is a significant unmet need in these markets with incidents and prevalence rates similar to the U.S. Including our updated expectations for TEPEZZA outside of U.S. and now incorporating plans to launch in Europe, we have increased our ex-U.S. peak annual net sales expectations to greater than $1 billion.
Our work to launch TEPEZZA outside the U.S. is progressing well. We expect to complete enrollment in our clinical trial in Japan by year-end. Market development and launch preparations there are well underway. In Europe, we expect our regulatory submissions to include data from both our Phase III OPTIC trial as well as our chronic Low-CAS TED trial, which we believe will drive significant uptake for this medicine in Europe. We expect meaningful contribution from our global expansion beginning in 2025. We estimate there are more than 100,000 addressable TED patients in the U.S., where we expect peak annual net sales of more than $3 billion.With our increased expectations outside the U.S., we now expect TEPEZZA global peak annual net sales to exceed $4 billion.
KRYSTEXXA was again a major driver of our third quarter performance with net sales increasing 21% year-over-year to $192 million. This continued momentum was driven by both the rheumatology and nephrology market segments, including increased adoption of KRYSTEXXA with immunomodulation, which now exceeds 60%.
Putting this in perspective, it’s been 5 years since we launched our immunomodulation strategy. And in that time, through early part of this year, we saw immunomodulation use increased from low single digits to more than 50%. In the few short months since our U.S. launch and FDA approval, immunomodulation use increased to greater than 60%. Our efforts in educating physicians on new-new profile of KRYSTEXXA with methotrexate are working well. We are receiving positive feedback from the field that more physicians have high confidence in KRYSTEXXA after seeing the MIRROR data.
In fact, following our immunomodulation relaunch in the third quarter, about half of all KRYSTEXXA patient enrollment forms have been submitted by new prescribers or physicians who had not prescribe KRYSTEXXA in at least a year. This is clear evidence of increasing clinical conviction. Both our rheumatology and nephrology strategy continue to deliver results.
In nephrology, momentum has been strong and through the end of the third quarter, we have had more nephrology prescribers and patient starts than we had in the full year of 2021. This has led to a more than doubling of nephrology patients on therapy as of the third quarter compared to the same time last year.
As we mentioned last quarter, we’re expanding our KRYSTEXXA sales force by approximately 20% to allow for greater reach and continued growth within the nephrology space. Given the strong momentum with KRYSTEXXA, we raised our full year 2022 net sales growth guidance to approximately 25%. And our U.S. peak annual net sales expectations to greater than $1.5 billion.
Moving on to UPLIZNA. We delivered another strong quarter, generating net sales of $44 million with $41 million in the U.S. This is the second consecutive quarter we have more than doubled our year-over-year U.S. net sales. UPLIZNA is another example of how we’ve taken an underperforming medicine and put it on a strong growth trajectory. We continue to see steady and consistent growth in new prescribers and new patient starts. Our team remains focused on disease education and drove a record number of peer-to-peer programs in the third quarter, increasing activity by more than 50% compared to the second quarter. We had a strong commercial and medical presence at the fall of medical mini ECTRIMS,
presenting multiple new data analyses from our Phase III trial.
Our launch in Europe is also making good progress. We are increasingly confident in the prospect for UPLIZNA in NMOSD. We are well on track and progressing towards our global peak annual net sales expectation of more than $1 billion across all potential UPLIZNA indications.
I will now turn the call over to Liz.
Liz Thompson
Thank you, Tim, and good morning, everyone. The goal of our R&D efforts is to bring more medicines to patients in need, particularly for patients in underserved communities. During the third quarter, we announced several important R&D milestones, including positive Phase II results from our Dazodalibep trial in Sjogren’s syndrome, enrollment completion in our TEPEZZA chronic or low CAS TED trial, and a new collaboration and option agreement with Q32 Bio.
I’ll start with Dazodalibep, which is our CD40-ligand antagonist designed to block a central pathway involved in many autoimmune and inflammatory diseases. As a reminder, this is 1 of several development-stage biologics that we brought on with our acquisition of Viela last year. As Tim referenced, the recent positive data from dazodalibep provide validation of the value we saw in the Viela pipeline, in fact, this is the second positive trial readout for this molecule, following positive top line results in rheumatoid arthritis patients.
In September, we shared top line results from the first of 2 patient populations we are studying in our Phase II Sjögren’s syndrome trial. Sjögren’s is a disease that affects 250,000 to 350,000 patients in the U.S. across 2 patient populations, patients with moderate to severe systemic disease activity and patients with moderate to severe localized symptoms. Of the patients with systemic manifestations of the disease, the population for which we shared top line results, we believe approximately 50,000 patients would be appropriate for novel therapeutics like biologics. And today, no disease modifying medicines are approved.
Sjögren’s is a debilitating chronic autoimmune disease that impacts exocrine glands, including the salivary and tear gland. Dryness is the most marked symptom. And while this could sound trivial, dryness across various systems in the body can greatly impact the patient’s life. Dryness in the mouth can impact chewing, swallowing, and lead to cavities. In the eyes, it can create a sensation of constant grittiness and irritation and can lead to corneal ulcers. Excessive dryness can also impact sexual function in women. Sjögren’s is commonly associated with arthritis, pain, debilitating fatigue and can cause kidney impairment, neurological dysfunction and in some cases, lymphoma.
We were very pleased with the top line results from this trial, meeting the primary endpoint with statistical significance in patients with moderate to severe systemic disease activity and achieving more than a 6-point reduction in the ESSDAI disease activity score. ESSDAI measures all of the potential areas of systemic disease involvement, evaluating the various levels of response on ESSDAI, including some high bars of improvement, we saw several important separations between patients on dazodalibep and patients on placebo.
Other measures, such as the number of tender and swollen joints, fatigue, dryness and physical function showed numerical improvement, suggesting dazodalibep could impact many aspects of the disease that affect the patient’s quality of life. From a safety perspective, the profile was acceptable and supportive of continued development. The Phase II trial is also evaluating a second population of patients with moderate to severe localized symptoms, which is fully enrolled and continues to progress.
So as far as next steps, we look forward to sharing new data from our Sjögren’s trial next year. We’ll have the full results for patients with moderate to severe systemic disease activity including results from patients who initially received placebo and then went on to receive treatment with dazodalibep. We’ll also have results for patients with moderate to severe localized symptoms. And we look forward to working with regulatory authorities to design our Phase III clinical program, which we plan to initiate next year.
Moving to TEPEZZA. In September, we completed enrollment in our Phase IV randomized, placebo-controlled trial in thyroid eye disease patients with a low clinical activity score, otherwise referred to as our chronic TED trial. While TEPEZZA has a broad indication for TED, these data will help design its profile in patients with low clinical activity scores for patients, physicians and for payers. We expect the top line data readout from this trial in the second quarter of 2023.
As Tim referenced, we had a strong presence at several key medical meetings this fall, each giving us the opportunity to connect with physicians who diagnose and refer their TED patients as well as physicians who prescribe TEPEZZA. We presented additional data and analyses regarding TEPEZZA and its role in the treatment of TED. This includes new data at the American Academy of Ophthalmology Annual Meeting, showing that insulin-like growth factor 1 and its related pathways are extensively upregulated throughout all stages of TED, including in patients with high and low clinical activity scores. This is important because it supports the relevance of TEPEZZA’s mechanism of action regardless of CAS.
We also presented new data from a real-world analysis of TEPEZZA at the American Thyroid Association Annual Meeting, showing the percentage of patients being prescribed an additional course of TEPEZZA remains low. We continue to advance our TEPEZZA subcutaneous administration program. Our Phase Ib trial in TED patients initiated earlier this year, and we are on track to begin enrolling our high concentration formulation cohort by the end of the year. Our OPTIC-J clinical trial is progressing well with a lot of interest from our Japanese investigators. We’re pleased with enrollment progress and anticipate completion of enrollment by the end of the year.
Moving beyond TEPEZZA, we also continued to contribute to the literature regarding our other on-market medicines. For UPLIZNA, this centered around new data analyses from the Phase III trial presented at the ECTRIMS Medical Conference. First, with a presentation showing that UPLIZNA effectively depletes CD19-positive B cells, including plasmablasts and plasma cells, which have been found to play a crucial role during an NMOSD attack. A separate analysis highlighted the efficacy of UPLIZNA among patients with fairly common genetic variations that have been associated with somewhat reduced response to other therapies, such as anti-CD20 B-cell depleting therapies.
As we look to the fourth quarter, we will have several important presentations for KRYSTEXXA. We recently announced a series of data presentations at the American College of Rheumatology Meeting, or ACR, later this month, focusing on our continued efforts to advance the understanding and care of uncontrolled gout. 12-month results from the MIRROR trial will also be presented for the first time at ACR. These results showed 60% of patients who received KRYSTEXXA with methotrexate achieved a complete response, nearly twice that of those who received KRYSTEXA with placebo. We also have presentations planned for the American Society of Nephrology Conference later this week, including a study in kidney transplant patients showing that KRYSTEXXA with methotrexate did not negatively impact those with diminished kidney function.
And finally, we just announced an important milestone in our collaboration with Q32 Bio, the initiation of the Phase II trial in atopic dermatitis patients. We first announced the collaboration focused on Q32’s lead asset, ADX-914 in August. ADX-914 is a fully human anti-IL-7R alpha antibody that inhibits the signaling of TSLP and IL-7. This program represents a novel approach to address allergic indications as well as disorders with an imbalance of regulatory T cells to potentially restore healthy immune regulation. Q32 plans to start a Phase II trial in a second autoimmune disease next year.
I will now turn the call over to Aaron.
Aaron Cox
Thanks, Liz. Before I cover this quarter’s performance, let me start with a brief comment on capital allocation. As you are aware, we announced a $500 million share repurchase program in September. This program reinforces the confidence we have in both our strategy and our commitment to deliver long-term value to our shareholders. Our strong balance sheet and cash generation gives us the flexibility to opportunistically repurchase shares while maintaining ample capital to prioritize the business development, which remains our top priority. To date, we have repurchased 3.9 million shares for an aggregate value of $250 million.
In addition, as we have noted previously, we no longer exclude upfront milestones and other similar payments related to collaborations, licenses and asset acquisitions from our non-GAAP financial measures. Beginning with the third quarter of 2022, we are separating R&D expenses into 2 categories: R&D expenses and a new category for acquired IP R&D and milestones expenses, which will isolate these amounts that are driven by business development transactions. Prior periods have also been revised to conform with the new classification.
Now I will cover our performance in the third quarter and our updated guidance. My comments this morning will primarily focus on our non-GAAP results, unless otherwise noted.
Our orphan segment generated third quarter net sales of $905 million, with strong contributions across our portfolio. Our Orphan segment operating income was $367 million. Net sales for the inflammation segment were $21 million and operating loss was $11 million. We are winding down the inflammation segment following the market erosion caused by the generic PENNSAID 2% entrant. We expect this wind down to be substantially complete by year-end. And as a result, we expect to operate and report as a single reporting segment starting in the fourth quarter of this year.
Our third quarter gross profit was 87.2% of net sales. Third quarter operating expenses were $470 million, R&D expenses were $108 million or 11.7% of net sales. Acquired IP R&D and milestones expenses were $19 million, primarily related to our collaboration agreement with Q32 Bio. And SG&A expenses were $343 million.
Third quarter adjusted EBITDA was $335 million, which also included the $19 million of acquired IP R&D and milestones expenses. The tax rate for the third quarter was 6.9%. As we have seen in prior years, there can be variability in our tax rate across quarters. Net income in the third quarter was $293 million. Third quarter diluted earnings per share were $1.25. The weighted average shares outstanding used to calculate third quarter 2020 diluted EPS were 235 million shares. Third quarter operating cash flow was $368 million. In the last 12 months to September 30, we’ve generated more than $1 billion of operating cash flow.
As of September 30, cash and cash equivalents were $2.13 billion. Backed by the strong cash position and expected future cash flows, we expect business development to continue to play a critical role in expanding our pipeline and diversifying our business. The total principal amount of our outstanding debt is $2.6 billion, with the earliest maturity in 2026. Our gross debt to last 12 months adjusted EBITDA leverage ratio was 1.8x as of September 30, and our net leverage ratio was well under 1x.
Turning now to our guidance. This morning, we announced we are increasing our full year 2022 net sales guidance range to $3.59 billion to $3.61 billion, up from $3.53 billion to $3.6 billion, representing year-over-year growth of more than 11% at the midpoint. We continue to expect TEPEZZA full year 2022 net sales percentage growth in the high teens. For KRYSTEXXA, we are increasing our full year 2022 net sales growth guidance to approximately 25%. For our inflammation business, we expect fourth quarter net sales of less than $10 million and net sales next year to be immaterial.
We now expect full year 2022 gross margin to be modestly higher than 87%. We are increasing our full year adjusted EBITDA guidance range to $1.32 billion to $1.34 billion, up from $1.27 billion to $1.32 billion. Both the current and prior guidance ranges for the full year 2022 include acquired IP R&D and milestones expenses of $53 million.
As it relates to operating expenses, we expect the fourth quarter to be in a similar range as the third quarter, including acquired IP R&D and milestone expenses, which are expected to be $34 million in the fourth quarter. We continue to expect our full year net interest expense to be approximately $85 million to $90 million.
We now expect our full year 2022 tax rate to be modestly above 11%, versus our prior expectation of approaching 12%. As with every year, we continue — we anticipate variability in our tax rate on a quarterly basis. We continue to estimate that our 2022 cash tax rate will be in the mid- to high single digits. As always, our tax rates could change significantly as a result of acquisitions or divestitures we may make or any changes in tax laws.
We now expect our full year 2022 weighted average diluted share count to be approximately 235 million shares, which incorporates the 3.9 million shares repurchased to date.
With that, I will turn it over to Tim for his concluding remarks.
Tim Walbert
In closing, our continued focus on execution drove meaningful progress this quarter. We are taking the actions we discussed last quarter to accelerate the growth of TEPEZZA in 2023. And the rest of our business, KRYSTEXXA, UPLIZNA and our rare disease medicines, all had outstanding performance. As a result, we increased our full year 2022 net sales and adjusted EBITDA guidance as well as our KRYSTEXXA full year 2022 guidance.
In addition, based on the strong momentum we are seeing with KRYSTEXXA and the further analysis we have completed on TEPEZZA internationally, we’ve increased our peak annual sales expectations for both medicines. Importantly, in our pipeline, we completed enrollment in our TEPEZZA chronic low-CAS TED trial and announced positive top line results from our Phase II trial evaluating dazodalibep in patients with Sjögren’s syndrome.
We look forward to several key readouts next year from our growing pipeline. This includes data from our TEPEZZA chronic low-CAS trial, our TEPEZZA trial in Japan, additional readouts from our dazodalibep Sjögren’s Phase II program, the first Phase II data readout for Daxdilimab, which will be in systemic lupus and potentially data from our UPLIZNA Phase III trial in IgG4 with the disease. There’s a lot to look forward to over the next 12 months. We remain highly focused on executing on our strategy, and I look forward to updating you on — further on our next call. Thank you.
Tina Ventura
Chris, we’d now like to open up the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question will come from Chris Schott of JPMorgan.
Chris Schott
I just had 2 here. The first is on TEPEZZA. Can you just talk about any PEF trends that you’re seeing with the drug as we think about kind of leading indicators of some of the revised selling efforts. I guess has there been any trend change there to note? Or is it still just too early to evaluate on that front?
And my second question was on — and I’m always going to mispronounce this one, dazodalibep. On the Sjögren”s Phase III program, are you just going to be looking at the systemic population, or do you plan to also look at some of the patients to localize symptoms? And as we say, I guess, thinking about market sizing here, how much larger is that localized symptom population versus, I guess, the 50,000 or so with systemic disease?
Tim Walbert
Thanks, Chris. As we look at where we are, I think, first of all, for the fourth quarter, we expect modest growth with TEPEZZA, the sales force is just getting out there in mass and we’re encouraged by what we’re seeing. And I think early on, we’re just looking at measures of activity and their ability to get out and quickly cover and really find their way around. And so we’re encouraged by what we’re seeing so far. And I think we have, based on all the data we’re looking at, we’ve got the right people, the territories are lined right and we’re getting after the right target. So I think it’s where we would expect it to be at this point in time. And as we get the final ones through training and get them out and rolling into the new year, we expect to start seeing the impact of that flow through.
Andy, do you want to take the market size and when you look at the systemic and the nonsystemic populations?
Andy Pasternak
Sure. Chris. So on dazodalibep, as Liz mentioned in her remarks, we estimate about 50,000 prevalent patients who would be appropriate for a biologic therapy that are — that have high systemic disease activity. There is also a very sizable population in the — that we think are appropriate for biologics as well with severe symptomatic disease. So we do think that, that is also a very significant unmet need. Of course, we need to see the data from that population in our trial to fully decide on our path forward.
Tina Ventura
Great. thanks so much, Chris. Chris, next question, please.
Operator
Our next question shall come from Annabel Samimy of Stifel Nicolas & Company, Inc.
Annabel Samimy
I have a couple on TEPEZZA. So when you think about the 80,000 TED patients that have more of a low-CAS population, where are they typically sitting? Or are they primarily in the ophthalmologic and endocrinologist, or are they in the ocular specialist office? And where is I mean, to what extent do they have urgency to treat? So I guess how symptomatic are those low CAS patients? I’m really asking as we consider, I guess, what’s a relaunch in this population, how — what kind of rapid uptake can we expect? Or what kind of uptake can we expect there?
And then separately, aside from those 80,000, can you maybe talk about strategies around retreatment, I think the study is that there’s about 15% who needed retreatment, I thought it was a little bit more than that, but only 2% right now are going through a treatment. So — are you doing anything? Are there any efforts there to expand that retreatment population as well? Is that going to be a source of growth rate?
Tim Walbert
Sure. I’ll start with retreatment. It’s based on the publication we — or the abstract that was just published, it’s less than 5%. So we’re not actively focusing on that. If you look at the general population of patients who have just gone through surgeries we see a reactivation rate of their active TED in the low to mid-single digit rates. So what we’re seeing right now is somewhere in that range. So I think we just have to see how things evolve over time there, but that’s not an area of focus for us.
To your question, Annabel, around the 80,000 TED patients, based on analysis, they’re predominantly sitting at the ophthalmologists and endocrinologists, and that was the real premise for our expanded sales force, and we’re certainly going to be focusing on them. What we know from these patients is they all have severe disease, meaning they have proptosis and/or diplopia. And those are severe enough where they require treatment. So it’s a matter of getting in, educating those ophthalmologists and endocrinologists to either refer or treat those patients and just raising that awareness but certainly, when we look at the total 100,000 including this 80,000, they’re all what we would consider moderate to severe and eligible for treatment with TEPEZZA.
Tina Ventura
Thanks, Annabel. Chris, next question please.
Operator
Our next question will come from Madhu Kumar of Goldman Sachs & Company, Inc.
Madhu Kumar
Two from us. First one is kind of following on Chris’ question on TEPEZZA sales force, the organization. I guess, kind of when do you expect to see kind of full benefit from this? Like what kind of timescale makes sense for really seeing that impact of having more feet on the street kind of talking endocrinologists and ophthalmologists? And then secondly, kind of bigger picture question, we’ve been hearing more and more about what extent is the impact of the Inflation Reduction Act for you guys on indication expansion for both approved drugs and pipeline candidates?
Tim Walbert
On the latter, I think you’ve heard a lot of people with the third quarter print commenting on this. We don’t have any specific medicine to comment on. But certainly, as you look at pipelines and rare diseases, the concept of having multiple rare disease indications for a development candidate is certainly something that we have to look at very closely and understand them. So it’s factoring into how we look at our pipeline, how we look at BD, certainly for small molecules, it’s an entirely different proposition, but nothing that factors in or changes our guidance with daxdilimab or dazodalibep, but certainly, as we look forward, we’re all going up to factor this soon.
To get to the first question around the sales force, I think you’re hitting on really how we got to our expectations for at least mid-teens growth next year. We expect the contribution from that expanded sales force to continue to grow throughout the year as those reps get to know their areas and begin to drive toward optimal impact. So that’s what we expect to continue to grow throughout next year and drive our current expectations for 2023.
Tina Ventura
Thanks, Midhu. Chris, next question, please.
Operator
Our next question will come from Jason Gerberry of Bank of America.
Jason Gerberry
One on TEPEZZA in the managed care environment. Just curious if you can comment on how plans are managing chronic TED coverage? Has payment or policies shifted more towards only covering within the parameters of the Phase III enrollment criteria versus initially, I got the sense it was more of a PA to label type dynamic. And so what I’m getting at here is the extent to which a positive trial in chronic TED could help alter or change those dynamics? And then 1 just quick one on KRYSTEXXA, given combo use is already pretty high, I think you said over 60%, I’m wondering is the change in peak sales more of a reflection of just assumed higher penetration rates versus sort of that dynamic where you get more revenue per patient with the combo just because patients are more likely to get the full course?
Tim Walbert
On KRYSTEXXA, as you noted, the launch has gone extremely well and accelerating to over 60%. We expect that rate to continue to grow. And as we look towards our peak sales expectations, continued high penetration, we have small overall penetration of that 100,000 population across both nephrologists and rheumatologists. We’re really pleased that the growth in nephrology continues to accelerate, and we’re growing that sales force by 20%, as I noted in my comments. So it’s predominantly around driving further penetration, further physicians. We noted in the quarter a significant percentage of KRYSTEXXA growth in the quarter came from new physicians who had not written KRYSTEXXA and people who hadn’t read it in over a year. So we’re really excited about the long-term potential and that’s what gave us the confidence.
From a managed care situation with TEPEZZA, that remains as we’ve discussed over the last several years. We have very good overall coverage. That was initially focused on what we studied and what drove the approval. That was driving around CAS and CAS levels. So the majority of lives have some level of a CAS of greater than 4 with some having CAS greater than 3. We have not seen a significant change in those coverage policies at this point in time.
When you look at the business we’re getting, as we continue to talk about the evolution of treatment of thyroid eye disease, this is not time-based. And when we look at our penetration of what would be the old way of looking at acute and chronic we are getting acute patients that match up with the clinical program we did in Phase III. We’re also getting chronic patients who currently have high — both proptosis and diplopia, and high clinical activity score. So the majority of our business is coming from acute and chronic patients, to your description that, have similar criteria to what our Phase III program. And that is patients who have high clinical activity scores, which reads through to the expectation of our chronic low test study, and that is to significantly move the CAS requirements within policy — payer proceeds to enable significant penetration into that broader population.
Tina Ventura
Thanks, Jason. Chris, next question, please.
Operator
Our next question will come from Ken Cacciatore of Cowen and Company, LLC.
KenCacciatore
Good progress here, good to see it. Just wondering if we could set a baseline here as we look at TEPEZZA, Tim, you’ve talked in the past about those 2,000 ocular specialists and ocular surgeons can you give us a sense of the percentage of those that have adopted TEPEZZA, maybe talk about the percentage of patients that they cover? And then maybe you’ve had such great success with these early adopters, top surgeons that really embraced the product. Can you give a best explanation why others have been slower to help that kind of remaining group and what you’re doing and what you can do to continue to accelerate it. And then maybe if you want to get into nuance, can you talk about quarterly gains in the quarter, clinicians or ocular surgeons that have been added?
Tim Walbert
So thank you, Ken. I appreciate the question. And certainly our early adopters and the tremendous benefit risk of TEPEZZA were key behind the dramatic launch uptake that we saw with TEPEZZA and ocular specialists were really the ones that adopted early and led that. And I think that is what led us to accelerating to the exposure to some of the reimbursement challenges that Ocular specialist went into. So for each respective ocular specialists, they would run into a situation where if I have 10 or 20 or 30 patients on TEPEZZA, my office staff and my capability to manage that reimbursement process hit the wall. And that’s a lot about what we’ve talked about is focusing on single point of contact with our patient services organization, and working to educate offices around how to streamline and make that process as smooth as possible.
So that’s really where our focus is. I think as we have talked, less than 20% of patients about that 20,000 are primarily being seen and treated within the ocular specialist, and that is what drove that initial uptake. And for us to continue to grow our expanded sales force getting into that broader ophthalmology and endocrinology office, there’s about 10,000 extended audience is really what’s required to continue to drive uptake.
Tina Ventura
Great. Thanks, Ken. Chris, next question.
Operator
The next question will come from David Risinger of SVB Securities LLC.
David Risinger
Thanks very much and congrats on all the progress. So my 2 questions are, number one, could you discuss the potential for TEPEZZA to obtain orphan drug designation in Europe, including what’s required and discuss the breadth of countries that you plan to launch in? And second, could you provide more color on expected TEPEZZA sequential sales growth in the fourth quarter, including the pushes and pulls?
Tim Walbert
So as we’ve discussed over the last few quarters, we do not expect orphan drug designation for TEPEZZA in Europe, and that principally led to us going through the process that we’ve been going through over the last several months and came out today with an expectation we will be going after both the acute and the chronic market in Europe, and we do not expect orphan drug designation.
Relative to sequential sales growth, what we expect, as I noted in my comments, is modest growth. And as we look into 2023, we expect at least mid-double-digit growth, and that’s going to be driven by a number of our key programs, our DTC, our peer-to-peer program as well as continued effectiveness and penetration of our expanded sales force. So thank you, Dave.
Tina Ventura
Thanks, Dave. Chris, next question, please.
Operator
The next question will come from David Amsellem of Piper Sandler Companies.
David Amsellem
One on TEPEZZA, one on dazo. On TEPEZZA, just following up on the topic of Europe. What changed? Because in the past, I think you sounded a high level of caution regarding whether you’re going to go in there and pricing was a big part of that. So I’m wondering what changed and specifically what kind of pricing do you think you can get over there on average relative to what you have in the U.S., that’s number one.
And then on dazo, just a question on localized disease versus systemic disease. Is there anything mechanistically about dazo that would lend you to believe that 1 subgroup might have a better signal than the other? I know we already have 1 piece of data. But regarding the localized symptoms, based on what we know about the drug, do you think you’ll see a similar signal or something better or something less? Maybe help us understand your expectations there.
Tim Walbert
Sure. Thanks, David. Nothing has changed with TEPEZZA from last quarter where we went through that — our initial approaches with EMA and was that we would get orphan drug designation and have pricing and a volume opportunity, focused around the acute population, which we did not see as being valuable. We have subsequently looked at the fact that we have had significant benefit in a number of different investigator-initiative trials, about 51 patients to be specific, showing significant benefit of TEPEZZA in lower-CAS patients. And given that confidence in the broader chronic market, we reevaluated Europe from a total TED ineligible TEPEZZA patient population, so similar incidence and prevalence. And with the broader opportunity and a much broader volume opportunity, we saw the opportunity to go into Europe. And the biggest difference is we’ll be waiting for that chronic data to move forward so that we have the combined data set. So that’s where our plan is focused.
Tina Ventura
And the question really —
Tim Walbert
For Liz, why don’t you talk about dazodalibep, please?
Liz Thompson
Certainly. So for dazodalibep, as we look at Sjögren”s syndrome. So what we know is that we see CD40 expression on relevant tissues that are relevant for both the systemic as well as sort of those more localized symptoms, salivary glands for sure, but also places like the joint and the kidneys, which are going to be relevant for that systemic disease population. And of course, we have already seen data in the moderate to severe systemic population that suggests benefit there.
I’ll also note that in that trial, we saw numerical improvements on dryness. And for patients with the primarily localized symptoms, dryness is really their defining feature. So this helps further support our optimism about the data we may see out of that population, but we’ll have to wait and see what comes out next year.
So overall, I think that we have good reason from both the mechanistic point of view as well as the data we’ve had so far that suggests it might be relevant in both populations. But certainly, even the systemic population, I think, is one with significant unmet need and that we would consider to be an attractive market opportunity.
Tina Ventura
Thanks, Liz. Operator, next question, please.
Operator
Our next question will come from Gary Nachman of BMO Capital Markets Equity Research.
Gary Nachman
So first on TEPEZZA, the chronic low-CAS study, now that it’s fully enrolled, when you release that data in the second quarter of next year, should we have certain expectations about the magnitude of efficacy relative to what you showed in the open-label studies? And if that data is positive, to maximize the opportunity, will you need to expand the sales force for low CAS? Or do you think the additional 60 reps are sufficient? So that’s one.
And then secondly, just on the Q32 Bio deal, it’s interesting to see you exploring atopic derm. Is that a category you would commercialize on your own since it’s a pretty large category, does that show that you’re considering larger markets in your BD efforts? Is that a shift at all in your thinking at this point?
Tim Walbert
Well, with Q32, that was a planned approach with Q32, Andy, do you want to speak specifically?
Andy Pasternak
Yes. In the Q32 collaboration, as we’ve shared Q32 was already embarking on the path of exploring this candidate in atopic dermatitis, and we’ve also agreed with them on another indication to pursue. And what we’re looking to get out of both of those studies is a signal of efficacy, so we can better understand how to take that forward in a variety of potential autoimmune diseases. We’re particularly excited about the mechanism here on IL-7R. And we think that we’re going to get a meaningful read on 1 of the axis of that through the atopic dermatitis trial. In terms of what we do following that, if we like the data and if we exercise the option, then we’ll decide based on the data at that point how we proceed with development.
Tim Walbert
And with TEPEZZA, I’ll take the first part and then pass it over to Liz to speak to powering and how we look at the chronic and relative to the initial work we did. We do not expect to expand the sales force for — based on getting the chronic data, that was all built into our analysis of the 100,000 eligible patient population. So that is not an expectation at this point in time. Liz?
Liz Thompson
Sure. So as we thought about the chronic TED trial, we wanted to make sure that we really were generating information that was going to be informative from a patient, physician and payer perspective. What we’ve looked at here is putting the trial together in such a way that we were able to show a meaningful improvement so that we would be able to demonstrate that patients had meaningfully improved on their proptosis and if we have a successful trial, we will have demonstrated that we’ve got a clinically meaningful improvement in proptosis in this patient population as well as patients with higher clinical activity scores.
Tina Ventura
Thanks, Liz. Operator, tend for 1 more question, please.
Operator
The last question will come from Akash Tewari of Jefferies LLC.
Amy Li
This is Amy on for Akash. So first one on TEPEZZA. Between taking a price increase at the end of the third quarter and your sales force ramp up, could we expect an uptake in Q4? It seems like your 2022 TEPEZZA guide implies that you only need flat patient adds in Q3 to Q4 to hit? And then can you give us some color on sales force expansion and how many of the total 140 TEPEZZA reps will be ready to go by Q4? How many of these are true sales reps versus reimbursement/access agents, would love any sort of breakdown there?
And then finally, on your low-CAS TED study, do you know on a blinded basis where baseline proptosis score could be trending for this? Is there a risk that if baseline proptosis could be lower, we could see a lower net change of proptosis in the chronic versus active?
Tim Walbert
So a bunch of questions. The numbers we talked about are our sales reps and don’t include the other parts of the organization. For our fourth quarter guidance, we expect modest sequential growth.
And Liz, do you want to talk about the low CAS and baseline entry criteria?
Liz Thompson
Yes. I’ll just comment that we have constructed this trial to ensure that patients have an adequate amount of abnormal baseline proptosis to ensure that we would be able to show a meaningful improvement from there.
Tina Ventura
Great. Thanks, Liz. And Yes. Thanks, Chris. That concludes our call this morning. A replay of this call and webcast will be available in approximately 2 hours. Thank you.
Operator
This concludes today’s conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.
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