Horizon Pharma: Primary Care Segment Remains A Burden And Should Be Sold


Horizon Pharma (HZNP) made solid progress over the last six months. The primary segment stabilized in Q2 and Q3 after a disastrous first quarter while the orphan and rheumatology segments continue to perform well with all products growing sequentially in Q3 (except for Procysbi, but the sequential decline was related to the divestment of EMEA rights). Management only briefly commented on the primary care business and confirmed in the Q&A part of the call that all options are on the table, including the sale of the business, and I continue to believe that this would be the best possible outcome for the company and a catalyst for the stock as it would complete the companys transformation to an orphan/specialty-only pharma company. The teprotumumab-related comments were also encouraging, and the company now believes the market opportunity for this product candidate is much larger than initially thought.


Q3 report not good enough to push the stock materially higher

The third-quarter report was a solid one considering expectations heading into it. The company beat the analyst revenue consensus by $12 million, and most orphan and rheumatology products posted solid Y/Y and sequential growth. Procysbi was the only exception (I’m not really counting Buphenyl and Lodotra given their small contribution) with a sequential decline in sales, but the decline is related to the divestment of EMEA rights earlier this year, which Horizon estimated would reduce this years sales by approximately $15 million. Krystexxa and Ravicti continued to deliver healthy sequential and Y/Y growth while Actimmune net sales also grew sequentially and Y/Y, marking a return to growth for this product.


Source: Horizon Pharma earnings reports

The primary care business performed in line with the companys expectations but posted a sequential and Y/Y decline in net sales. Given the markets reaction to the earnings announcement, it appears that this segment remains a burden on Horizons share price and the companys valuation, which remains depressed despite the significant improvements in the orphan/rheumatology segments and the reduced reliance on primary care sales (from 59% of total net sales in Q3 2016 to 35% of total net sales in Q3 2017). Management barely talked about the segments performance on the earnings call and clearly indicated in the Q&A part of the call that all options are on the table, including a potential sale. It remains to be seen whether the company is able to get rid of this segment, but reading between the lines, there is no doubt that this would be managements first choice if they are given one.


I believe that selling the primary care business would be the best decision the company can make in the near-term, and I believe it would lead the market to revalue the stock based on the potential of the orphan and rheumatology segments. It would also provide a cash infusion that the company could redirect to orphan/specialty M&A.

Krystexxa sales team expansion on track, 50%+ growth in 2018, TRIPLE and RECIPE trials to lead to expanded utilization and better competitive position in the long run

It was not surprising to hear management talk about Krystexxa extensively on the earnings call. The onboarding of additional 100 people is on track to finish in Q4, which will enable the company to cover approximately 75% of the rheumatology market and to expand into the nephrology market. The expansion into nephrology should be a significant growth driver in 2018 and beyond as it effectively doubles the market opportunity, as the company estimates the addressable market is now 100,000 patients, up from 50,000 previously estimated for rheumatology. Only 1,500 to 2,000 patients will be treated with Krystexxa in 2017, which translates to 1.5% to 2% market penetration, and means Krystexxa can reach $400 million in annual sales by reaching 5-6% market penetration. Based on the data Selectas (SELB) SEL-212 reported to date (and discussed in my recent article on Selecta), the $400 million estimate and 5% market penetration seem appropriate, but absent a competitor like SEL-212, Krystexxas peak sales potential would be substantially higher.


Source: Horizon Pharma presentation

But Horizon is not sitting on its hands and waiting for SEL-212 to reach the market and kill Krystexxa. Horizon reported the initial data from the TRIPLE trial, which showed that adding a tolerizing dose of Krystexxa between the first and second biweekly administration leads to a significant reduction in the rate of infusion-reactions less than 1% compared to 26% observed in the phase 3 trial. Out of 315 doses of Krystexxa administered, only one mild infusion reaction occurred in a single patient, which did not meet the criteria for anaphylaxis. Horizon is seeking to update the label to include the new safety data based on the additional analysis of phase 3 clinical trials, post-marketing safety data, and data to-date from the TRIPLE trial.


Horizon also reported that another investigator-initiated trial, called RECIPE, will evaluate immunomodulation with CellCept. This is obviously the companys reaction to SEL-212 and, according to management, significant physician interest. The use of immunosuppressive agents has already yielded some positive results. An open-label study evaluated 7 organ transplant recipients with gout. These patients were on immunosuppressive therapy and only 1 of the 7 patients developed anti-drug antibodies and the other six patients proved to be persistent responders. Its a small sample, but indicative of a potential positive outcome with the use of immunosuppressing agents. And after all, SEL-212 achieved solid results on its own by incorporating SVP-Rapamycin into the treatment regimen.


Teprotumumab could become Horizons largest product in the 2020s

With all the attention the primary care segment is getting, most investors are forgetting the companys transformation. That transformation started with Vidara (Actimmune) acquisition in 2014 and a pivot toward marketed orphan products and teprotumumabs acquisition earlier this year marks another important milestone – this was the first acquisition of a development-stage asset. Horizons initial projection was that teprotumumab has $250 million in peak sales potential in the U.S. and that there are approximately 10,000 patients in the U.S. Since the acquisition, the company has done additional research and now believes that the number of patients could be as high as 20,000 and that the peak sales opportunity could be a multiple of the initial estimate. Additional research will be conducted over the next few months after which the company will come out with new market size and peak sales estimates.


Horizon announced the enrollment of the first patient in the phase 3 trial in late October, which was slightly ahead of schedule (previous guidance was by year-end), and based on management comments, it appears there is excitement in the community regarding teprotumumab and enrolling 76 patients should not be that hard. We should see the results from this trial in 2H 2019 and an approval and launch by mid-2020. Teprotumumab has Orphan Drug Designation, Fast-Track, and Breakthrough Status Designation, which should allow faster turnaround time at the FDA and a quick approval.


And this is a trial that has a high probability of success. There are no major changes compared to the phase 2 trial and the efficacy in the phase 2 trial was robust with clear separation from placebo. We can see in the chart below that placebo barely moves when it comes to the primary endpoint and that teprotumumab achieves strong response early on.


Source: Horizon Pharma presentation

Given Horizons history with drug pricing, I do not believe that they will underprice teprotumumab. I think the likely annual price of the drug will be at least $200,000, which puts the addressable market in the U.S. to at least $2 billion based on 10,000 patients and to as high as $4 billion based on 20,000 patients. It stands to reason to expect sales to be considerably above $250 million, especially if teprotumumab repeats the results from the phase 2 trial. I think teprotumumab could become Horizons largest product in the 2020s.


And as a reminder, in addition to teprotumumab, the company is conducting several clinical trials with Actimmune (phase 1 and phase 2) in cancers, which, if successful, could significantly boost Actimmunes sales in the 2020s. However, without seeing any supportive data yet, I cannot rely on Actimmune to create additional value for Horizon and label-expansion remains a free call option at this point.

We should see Horizon make additional deals in 2018

Horizon ended Q3 with $625 million in cash and equivalents and gross debt of approximately $2 billion. The company should end 2017 with roughly $700 million in cash, which doesnt give it too much capacity to do additional deals (up to $500 million based on management comments), but in-licensing of development-stage assets, like the one with teprotumumab earlier this year, is possible as it does not require substantial upfront commitments like an outright acquisition, and the payout is potentially larger (but so are the risks). The capacity could improve if the company completes the sale of the primary care business. The market is still not treating Horizon as a company that has a pipeline, and I expect that to change as it adds additional pipeline assets and once it, hopefully, sells the primary care business and completes the transformation to an orphan/specialty-only company.


Conclusion

It wasnt easy being a Horizon shareholder over the last two years, but I believe the company is heading in the right direction. The primary care business is still a burden and might keep the valuation depressed for a while longer, but I believe the market will eventually reward the progress in other areas. The sale of the primary care business is the most important potential catalyst for Horizon in the near-term, though there are no guarantees that a deal will happen. Continued execution on the orphan/rheumatology side and additional M&A are the upside drivers for the stock in the following quarters while the main risk remains on the primary care side.

This article (edited for changes that happened in the meantime) was available to Growth Stock Forum subscribers on November 6. Please consider joining our growing community where I publish regular and detailed updates on Horizon Pharma and other stocks in my Coverage Universe. To receive e-mail notifications for my public articles and instablogs, please click the follow button. I am looking forward to working together.

Disclosure: I am/we are long HZNP, SELB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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