Horizon Pharma Moving Ahead Of FDA Decision

Shares of the pain drug developer Horizon Pharma (NASDAQ:HZNP) have recently seen some huge moves to the upside as the FDA’s decision looms for the company’s rheumatoid arthritis treatment RAYOS gets closer. Even after a virtual doubling of the shares since June, the company is valued at modest $265 million.

The two major firms that cover the stock (Stifel Nicolaus and JMP Securities) have price targets that exceed the current price of $7.12/share by significant margins. According to an article by Bret Jensen of Seeking Alpha, Stifel Nicolaus has a target of $10/share while JMP sees $16/share. These price targets imply 40% and 125% upsides respectively.

In addition to bullishness from analysts, insider buying has warranted some investor attention to the stock as well. Although it wasn’t recent, we saw a huge round of buying in early March by directors Jeffery Bird, Jeff Himawan (of Essex Woodlands), and Jean Francois (of Atlas Venture). The buying spree brought 4.4 million shares out of the market, which is quite enormous given the small number of shares floated (at 33.7 million).

Despite steep operating losses, investors are noting the huge potential value of the rheumatoid arthritis RAYOS in the ~$11 billion market for prescription pain medication and the huge revenue growth potential for the osteoarthritis and rheumatoid arthritis drug DUEXIS. DUEXIS only brought in $1.1 of revenue in Q1 2012 but this is expected to explode higher in coming years (the real question is whether or not it would be enough to offset the operating losses). There are also two preclinical-stage compounds that the market will largely ignore until they move on to clinical trials.

Some are saying that RAYOS lacks blockbuster potential since it’s merely a reformulation of low dose prednisone that can only satisfy a niche market. In addition, Horizon lacks the marketing rights for this drug in Europe which cuts its peak revenue potential quite drastically. The question of market potential can be asked of DUEXIS, (ibuprofen/famotidine), which is another reformulation compound that will struggle against drugs that already dominate the osteoarthritis/rheumatoid arthritis market.

Until July 26, 2012 I expect that both sides of the market will induce some volatility as the players (primarily institutions) place their last bets on the table before the FDA decision. The question of whether or not RAYOS and DUEXIS will be able to penetrate the market sufficiently to meet analyst expectations will surely return later on.

To recap, HZNP is a purely speculative trade until the PDUFA action date of July 26th. After the approval (or rejection), it will be a matter of evaluating DUEXIS (and potentially RAYOS) for their rate of sales growth and peak potential. Remember that Horizon is operating at steep losses, and needs to market DUEXIS effectively to justify its current market capitalization. Insider buying and analyst targets suggest huge under appreciation of RAYOS/DUEXIS, although these ought to be taken with a grain of salt.