Horizon Pharma's Unsustainable Business Model

| About: Horizon Pharma (HZNP)

Horizon Pharma (NASDAQ:HZNP) currently has two FDA approved products, one of which is also approved in select EU countries. I view this company as significantly overvalued given that its products have no data suggestion superiority claims over cheap generics. Its recent Q2 sales numbers continue to disappoint and its expenses put the company's future in jeopardy.


DUEXIS is a combination of ibuprofen 800 mg and famotidine 26.6 mg, indicated for rheumatoid arthritis and osteoarthritis. It is essentially a formulation of Aleve/Motrin and Pepcid. Unsurprisingly, when Horizon ran the trials for DUEXIS, they only compared DUEXIS vs. Ibuprofen alone, instead of Ibuprofen plus Pepcid or any other preventative ulcer medicine. There really is no benefit to using DUEXIS over generic Ibuprofen and Pepcid. Additionally, 800mg of Ibuprofen doesn't allow for much flexibility in dosing patients.

RAYOS, sold under the name LODOTRA in the EU, is a delayed-release tablet pf prednisone to treat a broad range of diseases, including rheumatoid arthritis, polymyalgia rheumatica, psoriatic arthritis, ankylosing spondylitis, asthma and chronic obstructive pulmonary disease. Note, Horizon only has trials conducted in rheumatoid arthritis patients. RAYOS was formulated to be taken before bed, with the drug kicking in close to 4 a.m. to relieve the morning pain and stiffness of arthritis.

This is already a dosing regimen doctors/patients are aware of, and it is nothing new. Investors should consider that prednisone has been around since the 1950s, so if there was sufficient demand for this product, it would have come long ago.

Tepid Sales Numbers Vs. Gross Overspending

For Q2 2012, DUEXIS net sales were $1.6 million and Q1 net sales were $0.9 million. Now, for the first six months of 2012, DUEXIS has done $2.5 million in net sales. LODOTRA sales are not even directly reported, but Q1 sales appear to be around $1.6 million, and Q2 sales around $2.2 million. In total, $6.3 million in net sales for the first half of 2012.

When we visit the company's expenses, things get really ugly -- its interest expense alone for 2012 was $7.7 million. That's more than its net sales of all products for 2012! The company also had a net loss over those six months of $43.3 million.

Looking back at 2009 thru 2011, LODOTRA achieved sales of $6.6 million, $6.8 million, and $16.5 million, respectively. Meanwhile, executive compensation at Horizon over that time period was $1.41 million, $6.14 million and $5.18 million, while SG&A over that period was $8 million, $24 million and $35 million. These are quite shocking numbers for a company selling reformulated products with no real advantages over current generics or competitive products.

Labeling, Competition And Unrealistic Sales Projections

Even worse for Horizon, the FDA provided no direct comparisons between RAYOS and IR prednisone in the efficacy section of the RAYOS label. It specifically makes no claims of RAYOS being superior to regular Prednisone for reducing morning stiffness. This isn't surprising, given the highly subjective endpoint. Pair this with the company's DUEXIS label, sales representatives for Horizon really have nothing to stand on.

Besides DUEXIS, several other cheap options exist to prevent stomach ulcers in patients taking NSAIDS that are better. Proton-pump inhibitors (PPIs) such as Nexium (omeprazole) and Prilosec are widely available over-the-counter, and are more effective than Famotidine. Additionally, Horizon is competing against Astra-Zeneca's VIMOVO (Nexium/Naproxen), which has performed quite poorly. With an even smaller sales force, we can't even imagine Horizon moving the needle on sales. We also don't imagine that the recent deal between Pfizer and Astra-Zeneca for OTC Nexium will help Horizon either.

Still, several investment bankers have touted the stock heavily as having large peak potential sales that were entirely unrealistic. Stifel Nicolaus somehow predicts peak sales by 2016 of $80-100 million for RAYOS/LODOTRA and $200 million for DUEXIS. Even more ludicrous estimates come from Cowen & Company, who see the DUEXIS franchise generating $257 million in peak sales in 2016, and estimate U.S. revenue from RAYOS to be $106 million by then as well. These projections are based on an incredibly flimsy assumption that insurers will pay for it, doctors will prescribe it and pharmacists will fill it. We imagine most formularies won't carry the product because of the cost. Horizon also has no credible plan for managed care.

Generic prescription Famotidine 40mg twice daily costs about $10/month, and generic Ibuprofen 800mg costs about $8-10/month at a three times daily dosage. At three times daily, DUEXIS costs about $150/month. This is for a convenience of three vs. five pills daily. Horizon reps provide coupons to reduce the maximum copay to $25, but this still hurts business when all is said and done.

Sub-Prime Loan

In February of this year, Horizon took on a $60 million loan. This debt accrues interest at 17% annually, resulting in quarterly loan payments of roughly $4.5 million. The company also doled out 3.3 million warrants at an exercise price of $0.01 that become exercisable on August 22.

Notably, the loan has a worrisome revenue covenant that seems unattainable by Horizon given its very slow sales and potential. Hedge fund manager Martin Shkreli elucidated his concerns over the company's debt quite nicely. You can see the terms of the loan here. We agree with Shkreli's assessment that the trailing twelve month revenues are unlikely to be met for the period ending September 30 ($20 million) under the current sales ramp and marketing activities.

The company recently filed a $175 million mixed shelf to raise cash by massively diluting shareholders. Horizon needs to raise roughly $100 million to cover the loan and extend its cash runway, given the poor sales numbers. Just this afternoon, the company posted a filing for a $75 million "at-the-market" offering with Cowen. These kind of at-the-market offerings will serve to continue to put pressure on the stock over the next few months. A recent SEC filing also freed up over 20 million shares to be sold by previous offering buyers.


Horizon currently has 33.7 million shares outstanding, and ended Q2 with cash of around $63.5 million and debt of $60 million. With shares hovering close to $4.65, it has a market cap of $156 million. We suspect the company will continue to burn cash at roughly the same rate as Q1/Q2 if not more, given the additional 70 sales reps the company is bringing on.

Nonetheless, Horizon is still an attractive short at these levels, given the poor sales and financials.

Disclosure: I am short HZNP.