Horizon Pharma (HZNP)

Investment Analysis Clubs Saul’s Investing Discussions
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Hi all,

I have been looking at a company called Horizon Pharma (HZNP), which has seen a phenomenal 500% share price appreciation in the past year.

About HZNP

Horizon Pharma develops products that target osteoarthritis and rheumatoid arthritis diseases. The company is currently marketing Duexis, Rayos/Lodotra, and Vimovo.

Duexis is a prescription drug that combines famotidine and ibuprofen. This is an expensive drug, costing approximately $400/month for a patient, but revenues from this drug have been growing fast: Q2:13 was 10M, Q3:13: 24M.

Rayos/Lodotra is a delayed-release formulation of low dose prednisone. It is known as Rayos in the US and Lodotra elsewhere. Revenues have grown from 1.7M to 2.9M between Q2:13 and Q3:13.

Vimovo was acquired AstraZeneca (AZN) in Nov 2013, for $35 million. This is another drug for arthritis treatment, so effectively a competitor for Duexis.

Horizon issued convertible senior unsecured notes @ 5% coupon rate due in 2018 to raise $150 million.

Horizon isn’t profitable, not yet. Revenue estimates for 2014 are in the $190 - $205 million range, which if met should make the company profitable. The company has guided for Q4:2013 revenues of $32 million, which would bring 2013 revenues to 92 million. The company is expecting to double the revenue in 2014.

Useful References

The following articles provide a good overview of this small cap company:
http://seekingalpha.com/article/2069783-buy-horizon-pharma-o…

http://www.fool.com/investing/general/2014/02/27/ask-a-fool-…

http://www.fool.com/investing/general/2013/11/23/3-humongous…

Anirban

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Another article on HZNP:

http://seekingalpha.com/article/1849961-horizon-pharma-specu…

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Hi Anirban, I’m just curious if you picked up HZNP from my post 8 days ago (#381) called My Current Positions in which I wrote

…
PSIX --------average
LOCK (MF RB) average
HZNP -------average
AFOP ------- average

…

I added LOCK, Z (again), HZNP and APPY. APPY is a very small company, not yet producing significant revenue. I wouldn’t buy much. HZNP is an interesting small pharma company, which is already selling three products, which are increasing sales rapidly.

I hope you found it on my list, as that is one of the points of listing my positions. No one has mentioned it though since I posted and I wondered if it had just passed by.

Saul

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Here are some notes I took from a presentation they made in February:

Feb 2014 – Presentation
Three products on the market

1- Duexis – Ibuprophen with famotidine. For osteoarthritis and RA without causing ulcers. Prescriptions up 13% sequentially from quarter before! Sequential sales in millions of dollars have been $0.9, 1.6, 2.6, 4.6, 5.3, 10.5 (price increase), $23.5 million (price increase)!!! Incredible sales growth. Added 200+ new prescription writers every week for the last 16 months. Average Rx size has gotten bigger and refill rate has increased.

2- Rayos – Delayed release prednisone, for rheum arthritis and other indication. Prescriptions up 18% sequentially from quarter before!

3 - Vimovo – naproxen and esomeprazole, for RA and OA and ankylosing spondylitis, also without causing ulcers (acquired Nov 19. Starting to market full court press as of Feb 3rd Will be accretive in 2014.)

Outlook for 2014

Revenue of $190 to $205 million.
Will be non-Gaap profitable.
Existing cash will be enough.

Huge NSAID market (100 million Rx’s per year). 107,000 hospitalizations for GI side-effects, and 16,500 deaths! They should do well selling Vimovo and Duexis!

85% of claims approved
93% of patients pay less than $20 copay

Cash Sept 30 was $59 million. Cash Dec 31 was $80 million

Patent protection to about 2023.

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Hi Saul,

I found it via Fool Funds. It’s one of their holdings. It’s great that you hold it, and I not sure how I missed spotting it amongst your holdings.

I 'm liking what I am seeing, plus you hold it. Time to May be take a small bite!

Anirban.

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Hi Saul,

Thanks for sharing your notes. This certainly helps and it appears this small cap should be seeing strong revenue growth going forward. I 'm going to do some more digging today but I 'm getting comfortable enough to start a position.

There’s another one I sort of found interesting. Again from Fool Funds - ticker BABY. It’s on my list of things to check out. If you know something, please share if you can. Will give a head start to the research :slight_smile:

Thanks again,

Anirban.

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Anirban, Note that while part of their revenue increase comes from signing up more prescribers, another part comes from big price increases, which probably can’t be duplicated. I like them though and have a good-sized position.

Best,

Saul

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Hi Saul,

Thanks for the point re. increased revenue from price increases.

Looking at it a bit more, Duexis, which contributed a lot to the revenues, is essentially a combination of Ibuprofen (800mg) and Famotidine (27mg). If I understand this correctly, too much Ibuprofen in one go is not good for the stomach, and they are circumventing these via the Famotidine. Both Famotidine and Ibuprofen are available over the counter and are pretty cheap. Why wouldn’t a doctor simply prescribe a combination of these two? Save money for the patients? I might be missing something here, since Horizon has not only been able to grow prescriptions but also increase price!

What’s the secret sauce here? Is it an excellent sales team that has been able to convince doctors to prescribe this drug? And, patients have not complained because arthritis is a debilitating disease and Duexis is working for the patients.

Anirban

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Anirban,
Can you tell me if they are cash flow positive? Also when did they IPO and have they had a secondary offering? How much debt do they have on their books? Who are their competitors.

Thanks,
Andy

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Hi Andy,

See my response inline.

Can you tell me if they are cash flow positive?

I think they are burning cash faster than they are bring in cash, at this time, but I haven’t looked at the financials closely.

Also when did they IPO and have they had a secondary offering? How much debt do they have on their books? Who are their competitors.

With the senior notes, they have repaid debt. There’s no debt on the book. Regarding competition, see my question to Saul regarding their drug essentially being a combination of two over the counter (and common) drugs. What’s not clear to me is - why would doctors not prescribe the generics instead? Probably, Saul has some insights on this. Further, the Ibuprofen dosage seems very high (800mg at one go …)!

Anirban

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I had been in POZN the company which created Vimovo and is now getting royalties from Horizon for it. I got in around $5.50 (pre $1.75 cash return) and sold it around $8.5 (after $1.75 cash return) a while ago.

They have an April PDUFA date for another drug which they have partnered with Sanofi. On approval of that, they get a decent milestone from Sanofi and then they get very good royalties from Sanofi for selling that drug.

I got out because there was a 3 month delay (Jan PDUFA date was extended to April) and thought that the stock would take a bigger hit. It hasn’t.

So, I got back in just below $8 last week.

POZN has cut its staff to just 16 employees and will make a lot of money from sales of Vimovo and the new drug (when approved). They have made it clear that they are not developing any new drugs and that they want to return most of the profits to their share holders through dividends / cash return (similar to the $1.75 cash return two months ago).

Most likely they will be acquired outright by Horizon or Sanofi.

http://finance.yahoo.com/q/ae?s=POZN+Analyst+Estimates

They are expected to earn 0.83 in 2014 and 1.07 in 2015. It could easily beat that if Vimovo sales are much higher. With just 16 employees and a 30 million float, the profits will explode even if Vimovo royalties were to come in $3-5 million higher than expected or if their new drug start selling better than expected. (provided it gets approved in April).

Note: POZN should start running as we approach the April 25th PDUFA date.

Here’s an excellent article on POZN by the Zack’s analyst Jason Napadano who has been suggesting POZN as an investment right since it was in the mid 4s (pre $1.75 cash return) last year. He thinks that the new drug ¶ could be making huge money for Pozen (12.5% to 22.5% royalties)

http://seekingalpha.com/article/2069373-pozen-looking-very-a…

We think PA is a $300 million product in the U.S. Pozen management expects Sanofi U.S. to put forth a “first class” effort with PA, piggy-backing off the success in this area by the company with mega-blockbuster Plavix. We remind investors that besides the $20 million in pre-commercialization milestones, Pozen is entitled to sales milestones and royalties from Sanofi U.S. ranged between 12.5% and 22.5% on sales.

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Looking at it a bit more, Duexis, which contributed a lot to the revenues, is essentially a combination of Ibuprofen (800mg) and Famotidine (27mg). If I understand this correctly, too much Ibuprofen in one go is not good for the stomach, and they are circumventing these via the Famotidine. Both Famotidine and Ibuprofen are available over the counter and are pretty cheap. Why wouldn’t a doctor simply prescribe a combination of these two? Save money for the patients? I might be missing something here, since Horizon has not only been able to grow prescriptions but also increase price! What’s the secret sauce here?

Anirban,

Here’s how I see it (which could of course be wrong).

Famotidine isn’t another medicine in the same class as ibuprofen (the NSAID’s or Non-Steroidal Anti-Inflammatory Drugs). Famotidine is the generic for Pepsid, and it’s a stomach-liner protective medicine.

Now if you bruise your elbow and need ibuprofen for one or two doses, or even one or two days, you can get away with it. But if you have arthritis you have to take it chronically and there is a very good chance it will irritate your stomach. This causes lots of patients to stop their meds and their arthritis gets worse, leading to more expensive treatments (perhaps).

You can tell patients to take pepcid with their ibuprofen and some will, some will sometimes, and some will never get around to it.

A certain number of patients get stomach ulcers. Some perforate (which is serious). 107,000 are hospitalized annually with GI side-effects. That’s expensive. 16,500 die (probably after very expensive treatments to try to save their lives).

If you give the combined medication, ALL the patients will get the pepsin with the ibuprofen, and very very few will get ulcers. That explains why the insurance companies are willing to pay for the combined treatment.

Now we come to the question of why other companies don’t do it too. Somehow HZNP patented the combination and ran the studies showing that the combined treatment works using the combination that they concocted. I presume another company running another combination, or combining the same meds a different way, would have to run expensive double blind studies to demonstrate it (but that’s just my guess). I do know that other drug companies have combined other generically available meds into combinations and patent them, and sell them at higher prices, so this is not just HZNP doing something odd.

HZNP also has a big lead, getting lots of doctors to prescribe this combination medicine. Since it works, they are unlikely to switch to a competitive combination.

All this is just my musings, so please take it as such.

Saul

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DoubleBagel,

I looked into POZN at your recommendation and see it as a good dividend play. My question though, is since it is partly dependent on HZNP vastly increasing sales of Vimovo, why not just invest in HZNP? POZN isn’t developing any more medications and is just sitting back to take in the royalties, which doesn’t sound as if they will grow much on their own.

Just wondering.

Saul

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Saul,

Good question. But POZN is not just Vimovo US sales which is what they have partnered with HZNP.

They get royalties from Astra Zeneca for Vimovo sales in Europe. They have done a far better job of selling this in Europe. The royalties (percentage) goes up next year

If / when they get approval for the PA drug in April, that opens up a second source of revenue (12% to 22.5% royalties from Sanofi). Also, they get $20 million in two separate milestones for approval and then the first sale of the drug.

In addition they have full rights for the drug in Europe. So, another partnership looms in the Horizon :slight_smile: for that.

A biotech stock makes the biggest jump when they go from a research company to a company with actual products to sell.

Take a look at ANIK that went from single digits to mid 40s in less than two years. Likewise look at VRTX, AEGR, ALXN etc when they did the transition.

http://finance.yahoo.com/q/bc?s=ANIK+Basic+Chart

True, most of the above own full rights to their drugs while POZN gets royalties. However, 4 separate royalties could add up to huge profits when you have almost no expenses. That, the tiny float and their plans to return most profits to share holders keeps me very interested in POZN.

Note: There is a risk until the approval for PA is granted by the FDA. However, the fact that the company returned $50+ million to shareholders before the approval seems to suggest that the company is fairly confident of approval.

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Saul,

I suspect you are exactly right concerning what HZNP has done with their generic drug combination.

In my field, dentistry, one of the “miracle” analgesics I’ve used with great success for many years is the simple combination of 800mg of ibuprofen with 1000mg of acetaminophen taken every 6 hours….two generic drugs every one already has in their medicine cabinet. Obviously, taking one pill is easier than taking 6 pills from two different bottles. It has been shown to be almost as effective as 2 tylenol #3s without the unwanted side effects of codeine. I’ve often wondered why some drug company has not combined these 2 commonly used drugs into a single one pill dosage.

Again, thank you for showing the likely model HZNP is doing with great success.

Jim

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Thanks Anirban I appreciate your help. So do they only have one drug they are selling or do they have more?

Andy

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Thanks Saul that’s some great information.

Andy

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Thanks Saul, that’s helpful.

Anirban

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We had a fairly extended discussion of HZNP on this long thread a month ago. It was one of my positions and then Anirban discovered it independently. It was selling at about $11.50 - $12.50 at the time and I hope that some of you took a position in it as it had drifted up to $14.70 as of yesterday, and now is up another $2.00 to $16.80 on an acquisition today.

Saul

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I hope that some of you took a position in it as it had drifted up to $14.70 as of yesterday, and now is up another $2.00 to $16.80 on an acquisition today.

I’m one that did, Saul - and have you to thank!

On a side note, the market spooks me these days. I’m not sure
which way is up…as in, I’m more expecting a down on the horizon.