Horizon’s focus on orphan drug portfolio
Over the past 18 months, Horizon Pharma (HZNP) has acquired access to three orphan drugs. The acquisition of Hyperion Therapeutics, which happened in May 2015, gave the company two orphan drugs, Ravicti and Buphenyl, whereas with the recent acquisition of Crealta, Horizon gained access to Krystexxa, an orphan biologic medicine.
As Horizon holds significant cash, it plans to hunt for more appropriate targets for acquisition in 2016. By fiscal 2020, the company plans to achieve the goal of being a majority orphan business company.
As the image above shows, the sales mix of the company has significantly changed in the past year. Orphan drugs, which contributed 4% of net sales one year previously, are expected to have a share of 60% by 2020.
How Horizon became a growth stock
Horizon’s market capitalization as of March 24, 2016, was almost $2.6 billion. Horizon earned $757 million in fiscal 2015. The orphan drug division alone presents an opportunity to generate $1.3 billion–$2 billion sales by fiscal 2020. In fiscal 2016, the company is expected to cross $1 billion sales. Whereas the average pharma industry price-to-sales ratio is expected to be around 3–4 times of its forward sales, the market capitalization of Horizon should be ~$6–8 billion, meaning the company could be undervalued.
Other companies that have shown strong inorganic growth include Sanofi (SNY), Valeant Pharmaceuticals (VRX), and Mallinckrodt (MNK). As the share prices of pharma and biotechnology companies can be volatile, it’s often safer to avoid direct exposure and choose ETFs like the SPDR S&P Pharmaceuticals ETF (XPH), which has 4.3% of its total holdings in Horizon Pharma.
Now let’s take a look at Horizon’s EV-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple.