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Summary

  • Horizon Pharma has recently acquired Vimovo from AstraZeneca (AZN) by issuing secured convertible unsecured notes.
  • The company has recently launched two new pain relief drugs, Rayos and Duexis, in the us.
  • Through its specialist marketing division it will be able to give its drugs penetration into the competitive pain market.

Introduction

Horizon Pharma develops and commercializes products that target arthritis, pain and inflammatory diseases. The company is currently marketing Duexis, Rayos/Lodotra and the newly acquired Vimovo to orthopedic surgeons and rheumatologists in order to meet the therapeutic needs of patients. All three drugs target two main diseases which are:

  1. Osteoarthritis (OA), a group of mechanical abnormalities involving the degradation of joints.
  2. Rheumatoid arthritis (RA), a chronic systematic inflammatory disease that affects many tissues and organs but principally attacks flexible joints/synovial joints.

Both the diseases lead to joint pain, tenderness, stiffness, locking and sometimes effusion.

Products

Duexis

Duexis is a combination of famotidine and ibuprofen. Ibuprofen is an anti-inflammatory drug that reduces hormones that cause inflammation and pain in the body. Famotidine helps in reducing the risk of ulcers in the stomach or intestines which can be caused by the long term use of ibuprofen. Duexis is used to treat osteoarthritis (OA) and rheumatoid arthritis . However, since its launch Duexis has not performed as expected because of generic manufactures taking over the arthritis market through cheap prices and flexibility of dosage to the patients.

Drug

Available Over the Counter

Dosage Flexibility

Ibuprofen and Famotidine

(Fixed Dosage)

DUEXIS

No

Ibuprofen-800mg

Famotidine-26.6mg

Ibuprofen

Advil or Motrin

200mg

400mg,600mg,800mg

Famotidine

Pepcid

10mg,20mg

10mg,20mg,40mg

The dosage is fixed in Duexis, which means that in taking three tablets a day a patient receives 2400mg ibuprofen and approximately 80mg of famotidine. The 80mg dosage of famotidine is important for a patient in order to reduce the ulcers from non-steroidal anti-inflammatories (NSAIDs) such as ibuprofen. However, the generic drugs (such as those listed above) can deliver doses that can suit an individual patient's requirements whereas the amount of ibuprofen in Duexis is considered quite high and may not be appropriate for many patients. Furthermore, Duexis costs around $700-$800 per month for a patient while generic drugs only cost a fraction of this price.

Even though Duexis has a high price, it also has the required elements to deliver results and is more effective than taking a combination of generic drugs. The REDUCE- 1 and REDUCE-2 trials showed that Duexis significantly reduced the risk of gastric ulcers when compared with ibuprofen alone.

According to EvaluatePharma's World Preview 2013, Outlook to 2018 the anti-rheumatics market currently makes up the second largest treatment area by sales, with worldwide revenues of $41.1 billion and over 73 million prescriptions for NSAIDs written annually. There is a lot of potential in the market for DUEXIS to generate revenues and the product seems to outperform many of the generic drugs. However, due to its steep price and fixed dosage it presents restrictions for many patients to buy, many doctors to prescribe and many insurance companies to cover.

Duexis doubled its revenues every quarter in 2013. This was due to the increased price of the drug, increased staffing of sales personnel to promote the product, more awareness of the drug in patients and doctors and an enhanced distribution network. Horizon is also seeking to license rights of Duexis in Europe to a commercial partner or partners which will add to the growing sales. However, we expect that with the current state of the pain products market in Europe and the revenues being generated by existing brands, it will be difficult for Horizon to extract material sales from Duexis from European markets.

Revenues of Duexis

Time

Q3:13

Q2:13

Q1:13

Revenue

$23.5 million

$10.5 million

$5.34 million

Growth Rate

123% increase

97% increase

Although the drug faces fierce competition from generic producers and has a high price, we expect it to generate increasing revenues for Horizon in the US market because it has shown promising results in patients undergoing treatment. Horizon has yet to realize the full potential of Duexis but we don't expect it to outperform by generating billion dollar peak sales as there are still many generic and proprietary drugs ruling the arthritis market in the US, and they will certainly continue to do so.

Rayos/Lodotra

Horizon's proprietary delayed-release formulation of low dose prednisone is known as Rayos in the United States and Lodotra in Europe, Africa, Asia and Latin America. It is used for the treatment of rheumatoid arthritis , polymyalgia rheumatic, asthma and chronic and obstructive pulmonary diseases and was approved by the FDA on 26th July 2012.

Rayos is unique from other generic drugs because it offers prednisone with a four hour lag time providing patients with immediate release formulation. The CAPRA-1 and CAPRA-2 trial results showed significant improvements in many symptoms associated with arthritis diseases, such as morning stiffness, if Rayos was taken overnight (around 10pm). The results also supported the overall safety profile of the drug.

Outside the United States the drug is known as Lodotra. Mundipharma has marketing rights in countries such as Europe, Asia and Latin American countries. On 11th November 2013, Horizon Pharma extended the agreement with Mundipharma to commercialize LODOTRA in the Middle East and Africa as well. Under this agreement Lodotra can cover 55 additional countries, expanding its worldwide market to a total of 85 countries.

Revenues of RAYOS (US)

Time

Q3:13

Q2:13

Q1:13

Revenue

$2.2 million

0.55 million

$0.375 million

Growth Rate

300% increase

47% increase

Revenues of LODOTRA (Outside US)

Time

Q3:13

Q2:13

Q1:13

Revenue

0.726 million

1.156 million

$3.45 million

Growth Rate

37% decrease

66.5% decrease

Rayos is a drug used for different pains, not just for arthritis, which indicates that it has a much bigger market than Duexis. However, there are still generic and branded drugs available to erode Rayos' market in the US but we expect that the revenues will continue to grow in the upcoming years for Horizon as it establishes its name in the drug market.

Lodotra on the other hand is experiencing declining revenues as it is marketed in Europe where the market of pain drugs generates much lower revenues and margins due to a greater amount of generic prescriptions and a worse climate for reimbursement. The higher price of the drug has also restricted its sales in most parts of Africa and Asia as most patients undergoing treatment are not insured and cannot afford paying such steep prices, opting for generic drugs instead. However, we still expect that with even unfavorable conditions outside the US, Lodotra will generate revenues because of a wider target population but one should not expect material sales out of it.

Vimovo

The company announced its acquisition of Vimovo's rights on November 19th 2013, a product of AstraZeneca (NYSE:AZN), for $35 million. Vimovo is also an arthritis pain tablet and is a competitor to Duexis as it is used for the treatment of the same diseases such as RA and OA. Vimovo is also used to treat ankylosing spondylitis, a chronic inflammatory disease which mainly affects joints in the spine and pelvis causing eventual fusion of the spine. With an upfront payment of $35 million and the agreement to pay 10% in royalties to Pozen from the sales of the drug, Horizon is required to pay a minimum royalty of $5 million in 2014 and $7.5 million thereafter. Vimovo has been available for patients in the United States since January 2014, with a price set at par with that of Duexis.

Revenue of Vimovo in 2013 (AstraZeneca)

Time

Q3:13

Q2:13

Q1:13

Total Revenues (Worldwide)

$23 million

$24 million

$20 million

Growth Rates

4% decrease*

20% increase

*The decrease of revenues was due to lower promotion of the drug, as it was decided to be acquired by Horizon Pharma

Q3 Revenue Breakdown

Revenue from US market

Revenue from Rest of the World

Total revenue

Q3:13

$5million

$18 million

$23 million

Vimovo generated $5 million in the US market. We expect that revenues will increase because of the dedicated sales specialists at Horizon that are specially hired to promote Vimovo in the market. As of the 2014 outlook, the company expects to expand its sales force from 150 sales representatives to 250. This will not only help Vimovo but also Duexis as they will be promoted side by side. The overall aim to acquire Vimovo is to maintain share in the pain market and to increase revenues in order to ensure profitability in the future.

Convertible Senior Unsecured Notes

Horizon Pharma, with its acquisition of Vimovo, also announced on 19th November 2013 that it had entered into an agreement with investors for the issuance of $150 million 5% coupons of convertible senior unsecured notes due in 2018. The company expects $143.8 million as net proceeds from sales after deducting relevant expenses. The proceeds will be used to pay off the $70.4 million senior secured loan, $35million for the acquisition of Vimovo and $19.7 million as cash for the funding of pipeline costs.

The issuance did lead to paying off the debt which had strings attached to it, without any need for dilution. Horizon Pharma has now four years to ensure that the pipeline produces enough cash at the time of redemption.

Financial Performance

Cash Burn Rate

Account Type

Q3:13 ($)

Q2:13 ($)

Cash & Cash Equivalents

78.4 million*

70.14 million

Revenue

26.218 million

12.254 million

Total Cash from Operating Activities

9.441 million

10.9 million

Average Cash Burn Rate (Two Quarters)

3.39 million per month

*Existing 58.7 million of Q3:13 and $19.7 million from senior unsecured convertible notes

With a burn rate of $3.39 million per month Horizon Pharma can survive till the third quarter of 2015, without taking into consideration the increasing revenues from the drugs which can make the company more profitable.

Revenue Estimates in 2014

Sales in Millions

Mean

High

Low

Q1:14

35.61

40.47

32.50

Q2:14

45.67

46.39

45.13

2014

199.03

204.32

192.75

Estimated Balance of Cash & Cash Equivalents in 2014

Period

Expected Revenue From Drugs($)

Cash Generated From Drugs ($)*

Cash Burn ($)

Remaining Cash Balance ($)

Q1:14

35.61

24.5

10.17

92.73

Q2:14

45.67

31.37

10.17

113.93

2014

199.03

136.7

40.7

174.4

Note: All figures are in millions.

*GP margin is 68.7%

According to these estimates Horizon Pharma is expected to generate revenues of around $190-$205 million, almost the same as the company's estimates. If Horizon meets its expectations, the revenue will be sufficient to make it profitable with a positive cash flow.

Conclusion

Horizon Pharma's revenue will continue to rise in upcoming years as Duexis and Rayos have been recently launched and have yet to stamp their existence in the market. The company has recently acquired Vimovo from AstraZeneca, which has shown stable revenues in the past and we expect that its revenues will rise under Horizon. Sell-side research has given an estimated price target of $15 and we believe that this correctly reflects the potential of the company. At current valuations the shares are a buy but investors should also realize that due to fierce competition from generic manufactures Horizon's drugs will eventually experience a decline in sales growth. To keep growing Horizon must develop drugs that have breakthrough capabilities in order to beat giant generic manufactures in the pain market.

Source: Buy Horizon Pharma On Upcoming Revenue Growth

Additional disclosure: Equity Flux is a team of analysts. This article was written by our Healthcare analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.