Why Is Horizon Trading at a Premium on a Price-to-Sales Basis?



Horizon’s valuation

On March 24, 2016, Horizon Pharma (HZNP) was trading at a forward PS (price-to-sales) multiple of 2.18x. The company appears to be trading at a premium compared with Valeant Pharmaceuticals (VRX), Mallinckrodt (MNK), and Endo International (ENDP), which were trading at a forward PS multiples of 0.95x, 1.73x, and 1.38x, respectively.

Why Is Horizon Trading at a Premium on Price-to-Sales Basis?

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Why PS multiple?

Dublin-based Horizon Pharma is a development-stage biopharmaceutical company that crossed the revenue mark of $100 million in fiscal 2014. For this reason, the PE (price-to-earnings) ratio won’t provide a justified comparison for the company—until 2014, the company was incurring losses and just turned profitable.

On the other hand, as the company’s sales have huge growth potential, a comparison based on sales should be appropriate.

Why Is Horizon Trading at a Premium on Price-to-Sales Basis?

Why the surge and fall in Horizon’s valuation metric?

Horizon’s valuation metric and share price have moved in line over past two years. The surge in the valuation multiple and share price from March 2015, thus, might be due to the Hyperion acquisition news, which was completed in May 2015.

Valeant, a major specialty pharmaceutical company, was involved in the Philidor scandal that drove the recent fall in the pharmaceutical and biotech industry. As a result, Horizon’s share price tumbled. But since September 2015, we’ve seen a recovery in the share price. As it’s a growth-driven industry, optimism over potential sales growth might explain this recovery.

To get exposure to Horizon and control excessive company-specific risks, investors can choose to invest in the iShares Nasdaq Biotechnology ETF (IBB). Horizon accounts for 0.53% of IBB’s total holdings.

In the next part, we’ll explore Horizon’s valuation drivers.


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