Since my last writing on Horizon Pharma (NASDAQ:HZNP) last month, the company's share price has climbed 29%. The company anticipates an approval decision by the FDA on July 26, 2012 for Rayos (also known as Lodotra in Europe), a treatment of moderate to severe active rheumatoid arthritis in adults when accompanied by morning stiffness.
Recently, I had the opportunity to interview one of the best analysts around the biotechnology field, Edward H. Nash. Mr. Nash is a Director, Senior Research Analyst, and member of the biotechnology equity research team at Cowen and Company. He had most recently been a senior research analyst at ROTH Capital Partners and Merriman Curhan Ford. In the interview, we discussed the major challenges facing Horizon Pharma.
Ben Yoffe: Mr. Nash, can you share with us your expectations regarding the upcoming PDUFA date of July 26, 2012 for Rayos?
Nash: We are optimistic with regard to the potential of Rayos being approved on or before its upcoming July PDUFA date. We believe the rheumatology community is comfortable with the use of low-dose prednisone for the chronic treatment of RA and we believe Horizon has submitted the necessary PK/PD data on the drugs release profile from the Phase III studies to make the FDA comfortable with the approval as well. In our minds, it is all about the release profile since the safety profile of prednisone is well documented and understood.
Yoffe: Do you think the company can handle the competition with other pharmaceuticals on the market to treat Rheumatoid Arthritis?
Nash: Horizon has definitely not chosen the easiest areas to go after when it comes to competition (e.g. Duexis and Rayos/Lodotra). I believe the answer is yes. Horizon doesn't have to have as large of a sales force to compete with the bigger competition, but instead it has to have a differentiated product that can be marketed wisely. We have always said we believe both Horizon products are greatly differentiated from their peers and most importantly they have a strong management team that knows importantly what to do, but more importantly what not to do with regard to marketing mistakes.
Yoffe: How many sales from Rayos, if approved, you expect to see in the U.S.?
Nash: We expect a modest amount of sales in 2012, mainly from wholesaler stocking, of approximately $1.9MM. That revenue grows in 2013 in the U.S. to $15.6MM and the out-year of our model is 2016 in which we estimate U.S. revenue from Rayos of $106.1MM.
Yoffe: Are you satisfied with the sales of Lodotra in Europe so far?
Nash: I am pleased with the sales in Europe to-date. Of course, I would rather the drug be selling in the nine figure range, but selling into Europe is an entirely different animal as pricing in each country is so different. Europe is definitely a harder territory to get my hands around from a modeling standpoint.
Yoffe: What do you think about the patent infringement lawsuit against Par Pharma (NYSE:PRX) seeking to block a generic version of Duexis?
Nash: I see it as the standard course of business for this area. I would have been surprised not to have seen a Paragraph IV filing against Duexis. At the end of the day, I am very confident that Duexis' patent's will hold as combining famotidine and an H2 antagonist is no easy job and Horizon did it successfully after many attempts and has done a great job surrounding their efforts with IP.
Yoffe: What are your expectations regarding the ongoing commercial launch of Duexis in the U.S.?
Nash: Well the company will begin to add the additional salespeople in the second half of 2012 which will double their sales presence. I see Duexis franchise generating $257.7MM in my out year of 2016. Pricing is a bit of a complex issue with these types of drugs. AstraZeneca (NYSE:AZN) keeps their price of Vimovo relatively high as they do not want to undercut their Nexium franchise. Doctors can be very sensitive to pricing in this area and rebate cards and sampling can't go on forever without draining a small company dry. I would like to see Duexis priced very cheap and make their revenue up on volume. Given the COGS associated with the drug I would think this could be done and still make 90% gross margins. You wouldn't have to fight the insurers to move up on formulary as the drug would be so cheap and most patients could probably pay for it out of pocket. Realize there are probably real reasons why this cannot be done, but pricing seems to be the area where Horizon could really win most of their battles.
Yoffe: Do you expect to see European approval for Duexis in the next months?
Nash: Currently our model does assume a ROW launch of Duexis in 2012, but perhaps early 2013 is more realistic.
Yoffe: Early this year, insiders bought almost 8 million shares of Horizon stock. Should investors need to take it as a bullish sign?
Nash: I always see insider buying as a bullish sign, especially at levels such as this. The stock has been trading so far off of its IPO price and nowhere near an even fair valuation that it makes a lot of sense to average down the cost basis of one's position.