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Horizon Pharma Remains Undervalued


Horizon’s growth story remains intact.

I take a look at Q4 earnings and provide a view on 2016 growth expectations for the current product portfolio.

I assess the potential impact of this year’s M&A activity on future growth rates.

Valuation remains very attractive for long-term holders.

I am adding more shares and holding for long-term gains.

The market keeps valuing some pharma stocks like their revenues and profits will fall off a cliff soon. Horizon Pharma (NASDAQ:HZNP) is one of them. Horizon caught the Valeant (NYSE:VRX) flu in September 2015 and has not been able to recover. The underlying growth trends remain quite strong and the company is generating significant free cash flow. Both the primary care and the orphan segment are doing very well. The company's net debt/EBITDA ratio is low, indicating significant M&A firepower. Valuations of targeted companies have come down over the last few months and the company is likely to pull the trigger on one or two smaller acquisitions in the following quarters. Orphan assets are a priority and a company with an EU infrastructure is preferable given the company's plans for Ravicti's expansion in Europe in 2017. Actimmune in FA and solid tumors remains a low risk/high reward play for Horizon and could unlock significant shareholder value in 2017 and beyond. I remain bullish on Horizon Pharma and am buying more shares to hold for the long-term.

Horizon's growth story remains intact

A look at Horizon's Q4 results reveals healthy growth trends across the board. The primary care/specialty segment has grown 9% Q/Q and 122% Y/Y (the Y/Y growth rate is reflecting the addition of Pennsaid 2% in Q1 2015). Duexis and Pennsaid 2% remain the top growth drivers for this segment while Rayos' growth seems to have plateaued in the $10 million to $11 million range over the last three quarters. Vimovo's Y/Y growth rates remained in single digits in the last few quarters, which is encouraging considering its removal from Express Scripts and CVS formularies in January 2015.

The orphan business remains a steady grower. The company has been adding 2 to 3 patients a month for both Actimmune and Ravicti over the past few quarters and the trends in 2016 should remain the same.

What to expect from the current product portfolio in 2016

Management guided on the Q4 call for a high single digit sequential decrease in net sales in the first quarter. The decline is seasonal and reflects the usual managed care plan changes and higher patient deductibles in January. The growth trends over the past few weeks are encouraging and the company has revealed that prescription growth has accelerated on a rolling four-week basis between 4% (Vimovo) and 8% (Pennsaid). I believe that it is reasonable to expect net sales growth of the primary care/specialty segment in the 5% to 15% range this year compared to the Q4 level on an annualized basis. The growth should be driven by an increased sales push of the expanded sales force and by increased productivity of the existing sales force. Horizon added 50 sales reps to its primary care team, which now has 375 reps (a 15% increase) and the new reps are on the field since late December 2015. The Q4 annualized run rate for the primary care/specialty segment was $695 million and I expect 2016 revenues for the segment to be in the $730 to $800 million range. Duexis and Pennsaid 2% should have higher contribution to revenue growth than Rayos and Vimovo.

On the orphan side, a steady increase in quarterly revenues should be expected since the company is adding just a few patients a month for Actimmune and Ravicti. I expect Actimmune's revenue in the $120 million to $125 million range (up from $107 million in 2015) and Ravicti's revenue in the $150 million to $155 million range. Ravicti's expansion to Canada in mid-2016 might add a bit to Ravicti's revenue later this year. Buphenyl's revenue should be around $25 million. The addition of Krystexxa this year should help with the growth of the orphan business and should offset the sequential decline in net sales in Q1. Horizon guided for Krystexxa's sales in the $70 million to $80 million range for 2016. When all these numbers are added up, we get $365 million on the low end and $385 million on the high end of the estimate range for the orphan segment.

My estimates for total net sales in 2016 are in the $1.095 billion to $1.185 billion range and compare favorably to the company's guidance for $1.025 billion to $1.05 billion. I think that the company has left some room to raise guidance and/or outperform expectations, which it has done in previous quarters.

Krystexxa - an unappreciated asset?

Horizon's acquisition of Crealta did not lead to a favorable investor response, although the share...