Horizon Pharma: Thoughts On The Updated Guidance And My 2017 Outlook

| About: Horizon Pharma (HZNP)

Summary

Horizon Pharma was down last week after saying FY revenues will be at the low end of the guidance and after reducing the FY EBITDA guidance by almost $45 million.

Increased investments are responsible for the lower EBITDA guidance.

The updated guidance has no meaningful impact on my thesis on Horizon Pharma.

Looking at 2017 growth expectations.

Actimmune's FA trial readout is the most important near-term catalyst.

Horizon Pharma (NASDAQ:HZNP) preannounced Q3 revenue and EBITDA and updated the FY revenue and EBITDA guidance last week. Increased investments were blamed for the lower EBITDA guidance. Although the stock was down after the announcement, the update has no meaningful impact on my thesis. The Q3 revenue preannouncement and the updated guidance imply solid sequential revenue growth and the increased investments in Q4 should not have a meaningful long-term impact on profitability. This article sheds more light on the updated guidance and provides an initial 2017 revenue and EBITDA outlook.

Horizon Pharma updates guidance and ramps up spending

Horizon provided several important updates last week. The company expects:

  • Q3 non-GAAP revenues in the $272-274 million range, which was slightly above the analyst consensus at mid-point. GAAP revenues will be $65 million lower due to the settlement with Express Scripts.
  • Q3 EBITDA between $139 million and $141 million.
  • FY non-GAAP revenues at the low end of the $1.025-1.050 billion range. GAAP revenues should be around $960 million.
  • FY EBITDA between $450 million and $460 million, down from $495-510 million. The downward adjustment is due to increased spending on the expansion of the managed care organization (the company is preparing for better access for its primary care products in 2017) and investments in Krystexxa and Actimmune.
  • Cash and equivalents at the end of Q3 at $550 million compared to $424.5 million in Q2.

The only disappointment for me was the FY revenue guidance. The increased spending and lower FY EBITDA are not a serious issue since the higher spending is intended to boost top and bottom line growth in 2017 and beyond. The company is preparing for a year of better access for its primary care products. I covered this issue in my previous article (subscriber-only post), but some things are worth repeating.

Horizon announced a settlement agreement with Express Scripts in late September. The agreement eliminates two-thirds of the liability (Express Scripts sued Horizon for $166.2 million) and the two parties remain in active discussions regarding Duexis' and Vimovo's formulary exclusion. I think the $65 million settlement is a way for Horizon to get its two primary care products back on Express Scripts' formulary and that it makes a positive outcome more likely. Express Scripts covers around 30% of commercial lives in the U.S. and this would be a huge win for Horizon after the recently announced deals with CVS/Caremark and Prime Therapeutics, which cover around 35% of commercial lives in the U.S.

So, the increased spending on the expansion of the managed care organization is intended to accelerate the growth of the primary care segment in 2017 and beyond, and it is encouraging to see the company increasing its focus on Krystexxa as it seems that there is more potential there than previously thought. Horizon stated that benefit investigations (a leading indicator of new patient starts) continue to increase.

What should 2017 look like?

I believe 2017 should be a good year for both the primary care and the orphan segment. The primary care segment should benefit from better access considering the CVS/Caremark and Prime Therapeutics deals and the situation could be even better if Horizon secures better access through Express Scripts and maybe even Optum. Duexis and Vimovo should benefit the most and I expect a 20-25% increase in sales for all primary care/specialty products when compared to Q2 2016 revenues (annualized).

The orphan segment should benefit from:

  • Continued patient adds for Actimmune. I expect single digit revenue growth for Actimmune in 2017 (FA indication not included).
  • Ravicti's launch in Canada and the EU and continued patient adds in the United States. I think Ravicti should generate at least $200 million in net sales in 2017.
  • Increased spending on Krystexxa, which should result in at least $110 million in net sales in 2017.
  • Quinsair and Procysbi should add $160 million in net sales, which is the current analyst consensus.
  • Buphenyl revenues should decline as the company continues to switch patients to Ravicti.
Product Q2 Revenue (annualized) 2017 Revenue
Duexis 182 230
Rayos 48.4 60
Vimovo 125.6 150
Pennsaid 2% 290.8 350
Actimmune 120 130
Ravicti 157.6 200
Buphenyl 16.4 10
Krystexxa 79.6 110
Raptor Products 128 160
Total 1148.4 1400
Click to enlarge

Source: Horizon Pharma earnings reports, author's estimates, Yahoo! Finance

Of all the products, Duexis, Vimovo, Ravicti and Krystexxa could provide upside surprises to my 2017 revenue expectations. My 2017 revenue estimate is $80 million above the current analyst consensus, but I am not sure if analysts have included Raptor's contribution to next year's sales. I think $1.4 billion is achievable since the annualized run rate based on the Q4 guidance is $1.16 billion already and $1.2 billion if we add Raptor's revenues.

I expect 2017 EBITDA in the 47-50% range, which is 200-500 basis points higher than the estimated EBITDA margin for 2016. The increase should be based on increased scale and higher orphan segment contribution to total revenues based on the Raptor acquisition. This means that next year's EBITDA should be between $660 million and $700 million.

Horizon should generate at least $800 million in free cash flow over the next six quarters, which means that it will exit 2017 with around $700 million in net debt (assuming no acquisitions). This means substantially increased financial flexibility over the next few quarters and between $1.5 billion and $2 billion in fresh M&A funds over the next 18-24 months.

FA trial readout remains the most important near-term catalyst for Horizon

Horizon Pharma should report phase 3 trial results of Actimmune in FA in late 2016. This remains the most important near-term catalyst for Horizon since the FA indication could add $500 million to $1 billion in annual revenues in the U.S. alone. Horizon acquired the worldwide rights for Actimmune earlier this year, which represents a relatively cheap call option for the FA indication. If all goes well, Actimmune could receive FDA approval in late 2017. This is really a 2018 growth driver for Horizon in terms of top and bottom line contribution, but the results could really move Horizon's share price in early 2017 and can only provide upside to my valuation since my valuation model assumes no contribution from Actimmune in FA.

Conclusion

The updated guidance doesn't have a meaningful impact on my thesis on Horizon. The company is setting the foundation for a very successful 2017 and I expect solid top line growth for both the primary care and the orphan segment. Horizon remains substantially undervalued relative to its growth prospects and I am reiterating my bullish view and $39 price target.

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Disclosure: I am/we are long HZNP.

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.

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.