On June 29, 2016, Horizon Pharma (HZNP) was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 4.67x. On this operating efficiency measure, HZNP was trading at a discount when compared with peers.
The company has also been trading at a discount when compared with Mallinckrodt (MNK), Shire (SHPG), and Endo International (ENDP), which were trading at a forward EV-to-EBITDA multiples of 5.87x, 9.55x, and 5.48x, respectively.
Why such a discount for Horizon?
There has been significant pricing pressure on Horizon’s Primary Care segment. Higher co-pay and other patient assistance led to lowered net pricing for its drugs in 1Q16. That might be one of the reasons for a recent tumble in the valuation multiple.
The company is heavily dependent on its US sales, which contribute 99% to total sales. Such heavy reliance might be another reason for its discounted valuation as it exposes the company to business concentration risk. Similarly, as Europe and the UK don’t contribute much to its sales, it recovered faster following the UK’s Brexit decision.
Horizon’s average forward EV-to-EBITDA multiple for the past two years stood at 8.55x. Its enterprise value ranged from 4x to 16x of its forward EBITDA. The current multiple is at the low end of the range and seems significantly undervalued. Although it’s at a discount, in the long-run, HZNP’s valuation multiple should improve, leading to a jump in the share price.
Remember, it’s risky to invest directly in any equity. For this reason, risk-averse investors often invest in ETFs like the iShares US Pharmaceuticals ETF (IHE), which has ~1.7% of its total holdings in Horizon.
In the next part, we’ll discuss why Horizon is undervalued.