Horizon Pharma's (NASDAQ:HZNP) Q2 report was better than expected. But that was not the most important piece of the puzzle. The company provided FY 2015 revenue and EBITDA guidance that implicate strong growth in 2015 despite the recent headwinds. This is encouraging, as management thinks that it can mitigate the downside risks of Duexis and Vimovo being taken off formularies by Caremark and Express Scripts in 2015. However, there are risks to these growth estimates, and they should not be taken lightly. I am lowering my price target from $28 to $20, as I am discounting the potential multiple on account of these risks. The long-term potential still seems compelling, although the growth may be lower. Downside risks are largely discounted in the share price, although additional downside from here is possible. The reward/risk is favorable at the current price, and the potential upside may be north of 100% in the next couple of years.
Horizon's Q2 earnings and revenue were above expectations. Q2 revenue was up 495% to $66.1 million and higher than analyst consensus of $58.35 million. Non-GAAP EPS was $0.21 which was $0.12 ahead of analyst estimates. Total net sales of Vimovo, Duexis and Rayos in the second quarter were $42.4 million, $17.8 million and $3.9 million respectively. The company had cash and equivalents of $128.9 million at the end of Q2, which was a $25.5 million increase from Q1. Operating cash flow was $20.1 million after excluding Vidara acquisition expenses.
The company reiterated FY 2014 revenue and EBITDA guidance. Full-year revenue is expected in to be in a range of $270 million to $280 million while the adjusted EBITDA is expected to be between $80 million and $90 million. Given the strong earnings and revenue beat in the second quarter, this is somewhat disappointing. However, the growth that the company is delivering is still outstanding.
The most important part of the earnings release was the 2015 guidance. Management seemed confident about the growth prospects in 2015 and guided 2015 revenue between $380 million and $405 million, while the adjusted EBITDA is expected to be between $150 million and $170 million. Analysts are currently expecting revenue of $367 million which is up by approximately $15 million since the Q2 report. If the company delivers in-line with these expectations, the current share price might be a bargain.
Management talked about the expectations for 2015 on the Q2 conference call. They are optimistic about the growth prospects in 2015 and beyond based on their research of the previous products being placed on the exclusion lists of Express Scripts and Caremark. Their analysis of the impact of the drugs being placed on the exclusion list shows that the average reduction in prescriptions in the six months period was 13% to 15% (management previously stated that 20% to 30% of prescriptions for Vimovo and Duexis could be affected). This decrease was partially offset in these products by an increase in the average costs per prescription among these products. Duexis has been in a non-preferred list of United Healthcare since its launch in 2012 with approximately 50% of its prescriptions rejected, and Duexis is growing nicely despite the high rejection rate. Rayos is already on the exclusion list of Caremark from January of this year, and the prescription growth was still in double digits and the rejection rates have not changed compared to the same period of last year. So, the company already has experience with its products being excluded and has managed to grow prescriptions and revenue despite the exclusions. Management stated that they have a comprehensive plan to mitigate the effects of actions taken by these PBMs, and that the company is well positioned to address this challenge.
One way to mitigate the effects is the ramp up in the Prescription Made Easy program (NASDAQ:PME). The company will expand PME, which enables the physician to write a prescription for the drug he or she believes is best for their patient without a PBM or insurer preventing him from doing so. In addition to PME program, the company plans to support the sales and marketing of Vimovo and Duexis through retargeting healthcare providers with less concentrated Express Scripts and Caremark exposure.
Overall, the guidance and the mitigation plan that the company provided are encouraging, and the company might be able to grow despite the formularies removal.
My previous price target on Horizon Pharma was $28. Given the change in circumstances, I am lowering my price target to $20. This still presents substantial upside from the current price, and the reduction in the price target is based on a lower 2015 P/E range than I previously anticipated. This is due to the overall uncertainty about the impact of Vimovo and Duexis being taken off formularies. The previous P/E range was between 20 and 30, and the new P/E range is between 15 and 25 with the price target being based on the middle of the new range (2015 P/E at 20). Horizon could trade anywhere between $14 and $26 based on that range and the low and high end of 2015 guidance. I am targeting 2015 EPS in $0.85 to $1.15 range, as opposed to the current consensus of $0.81, which is likely to move higher based on management guidance.
Source: Sentieo.com, Management guidance, Author's estimates and calculations
The downside risks are still present, and the stock could go down 20% to 30% from here, but Horizon is already trading at 7.7x its 2014 EBITDA and 4.2x its 2015 EBITDA. So, the additional downside should be limited and would make Horizon a bargain, notwithstanding the negative revisions in the next couple of months. The company should get more visibility about the potential growth in 2015 when it reports Q3 and Q4 results, although I believe that they are being conservative with their estimates about the growth in 2015. The growth in 2015 should be enhanced by full-year sales of Actimmune, which will be fully integrated by then. I like the reward/risk ratio here, but investors should be aware of the uncertainties the company is facing in the next six to twelve months.
The 2015 guidance and solid execution in Q2 are encouraging. The company seems prepared to mitigate the effects of Duexis and Vimovo being taken off formularies by Express Scripts and Caremark. The growth prospects still seem compelling, but I have reduced my price target to $20 to reflect the higher risk. The downside should be limited to 20% to 30%, while the upside is between 20% and 210% based on the expected 2015 P/E range and guidance based EPS and EBITDA range. I like those odds, but the investment carries risks that could be higher than anticipated, but management's comments in the conference call seem encouraging, as the company already has some experience with its products being on the exclusion lists of PBMs.
Disclosure: The author is long HZNP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.