What’s Really Driving Horizon’s Valuation?



Factors that may lead to surge in the valuation multiple

As we discussed above, based on forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, Horizon Pharma (HZNP) has remained significantly undervalued. And remember, in the capital-intensive pharmaceutical business, the EV-to-EBITDA multiple is ideal for comparing drug manufacturers such as Horizon.

In the first quarter of 2016, HZNP’s sales on a YoY (year-over-year) basis grew by 81% to $205 million. During that period, its adjusted EBITDA jumped annually by 122% to $72 million. The further transition from its primary care business to orphan drugs will likely present a significant margin expansion opportunity for HZNP. By fiscal 2020, its adjusted EBITDA is expected to be ~60% of net sales from 48% in fiscal 2015.

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HZNP’s recent share repurchase announcement to buy five million shares should boost investor confidence. A strategic acquisition target would meanwhile allow it to expand and diversify its portfolio further. Horizon has grown inorganically over the period, and strategic acquisitions are still first priority. (For a look at its acquisitions, please refer to “How Horizon Became a Growth Stock.”)

Opportunity with Actimmune

Horizon intends to file a supplemental Biologics License Application for Actimmune for the ultra-rare disorder Friedreich’s ataxia in 1Q17. If Actimmune is approved for the disorder, it would present a significant opportunity to HZNP.

Still, to remain on the safer side, investors often choose ETFs like the SPDR S&P Pharmaceuticals ETF (XPH), which has ~4.4% of its total holdings in Horizon. Other major stocks in XPH’s portfolio include Johnson & Johnson (JNJ), Bristol-Myers Squibb (BMY), and Merck & Company (MRK). JNJ, BMY, and MRK account for 4.96%, 4.87%, and 4.85%, respectively, of the fund’s total assets.

Continue to the next part for a look at the performance of Horizon’s major revenue contributors.


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