Horizon Therapeutics (HZNP) has successfully transformed into a unique entity in the lucrative rare-disease space. The company burst onto the scene with its hit product Tepezza, which was designed to treat Thyroid eye disease (TED). Tepezza received initial approval from the FDA in January 2020, highlighting the fact that the product is early in its growth cycle.
A common mistake that investors make when it comes to valuing biotech entities such as HZNP is utilizing traditional valuation cash flow metrics. Value investors will often pivot into biotech plays late in the product growth cycle, not realizing that cash flows will diminish rapidly as the product loses patent protection. The optimal set-up is to invest early in the product’s growth cycle, in order to capture the bulk of the move after a successful approval and commercial launch.
Tepezza posted sales of $820 million in its first year on the market—a stellar number. The therapy’s rapid growth allowed HZNP to post EBITDA and earnings growth north of 100%, cementing HZNP’s place as a high growth entity in the biotech sector. That said, it is important to watch how sales develop over the next few years as management looks to build out the overall potential for Tepezza. Management is guiding for a total addressable market (TAM) of over $4 billion when combined with its other growth product Krystexxa, its treatment for uncontrolled gout.
Krystexxa is an older product with approval granted over ten years ago. To the HZNP management team’s credit, the company saw an underutilized asset that they could acquire and re-imagine into a far more productive asset. Sales of Krystexxa grew 19% in 2020 to over $400 million in sales. Management believes the upside is sales of more than $1 billion, netting the company a very attractive return on the initial investment.
Expanding The Pipeline
While HZNP seems to be well on its way to impressive growth, the company will need to pivot into other growth sectors. The company recently announced its acquisition of Viela, a former biologics division of AstraZeneca that received authorization for Uplinza, a treatment for Neuromyelitis Optica Spectrum Disorder.
Horizon is employing an innovative strategy to build upon its existing salesforce in TED to pivot into other optical disorders, avoiding the need to increase headcount. Viela’s other products focus on gout, which melds nicely with Krystexxa, with it also providing excellent synergy potential.
Risks
There are a few critical risks that an investor needs to be aware of when considering an investment in HZNP. While Tepezza is a solid product, a potential competitor is lurking in the background with a critical data readout in the next six months. If the product is as efficacious or superior to Tepezza, it will impact the share price. The biotech sector is volatile and highly competitive, and a new entry could hinder the growth trajectory of Tepezza, HZNP’s essential product.
Therefore, how HZNP manages to reinvest and expand its product pipeline is critical for long-term success. Thus far, the management team has proven adept at pivoting into highly profitable niche products. The team also should be commended for identifying and acquiring early-stage products and expertly leading them to ultimate approval. While the purchase of Viela seems promising, we will not know if the acquisition will stand the test of time until the products are approved.
Wall Street’s Take
Turning to the analyst community, HZNP earns a Strong Buy consensus rating based on 5 unanimous Buy ratings. At $113.20, the average analyst price target implies 29% upside potential. (See Horizon Therapeutics stock analysis on TipRanks)
Disclosure: Alexander Poulos held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
