Horizon Pharma (NASDAQ: HZNP) currently has 2 FDA approved products, one of which is also approved in select EU countries. I view this company as significantly overvalued given their products have no data suggestion superiority claims over cheap generics.

Products

Duexis is a combination of ibuprofen 800 mg and famotidine 26.6 mg, indicated for rheumatoid arthritis (RA) and osteoarthritis (OA). It is essentially a formulation of Aleve/Motrin and Pepcid. Unsurprisingly, when Horizon ran the trials for DUEXIS, they only compared DUEXIS vs Ibuprofen alone, instead of Ibuprofen plus Pepcid or any other preventative ulcer medicine. There really is no benefit to using DUEXIS over generic Ibuprofen and Pepcid. Additionally, 800mg of ibuprofen doesn’t allow for much flexibility in dosing patients.

RAYOS(or LODOTRA in the EU) is a delayed-release tablet pf prednisone (1 mg, 2 mg and 5 mg) to treat a broad range of diseases including rheumatoid arthritis (RA), polymyalgia rheumatica (PMR), psoriatic arthritis (PsA), ankylosing spondylitis (AS), asthma and chronic obstructive pulmonary disease (COPD). (Note, Horizon only has trials conducted in rheumatoid arthritis patients.) RAYOS was formulated to be taken before bed, with the drug kicking in close to 4 am to relieve morning pain and stiffness of arthritis. This is already a dosing regimen doctors/patients are aware of and is nothing new.

Labeling, Competition and Unrealistic sales projections

Even worse for Horizon, the FDA provided no direct comparisons between RAYOS and IR prednisone in the efficacy section of the RAYOS label. It specifically makes no claims of RAYOS being superior to regular Prednisone for reducing morning stiffness. This isn’t surprising given the highly subjective endpoint. Pair this with their DUEXIS label, sales representatives for Horizon really have nothing to stand on.

Besides DUEXIS, several other cheap options exist to prevent stomach ulcers in patients taking NSAIDS that are better than Duexis. Proton-pump inhibitors (PPIs) such as like Nexium(omeprazole) and Prilosec are widely available over-the-counter and more effective than Famotidine. Additionally, Horizon is competing against Astra-Zeneca’s VIMOVO(Nexium/Naproxen), which has performed quite poorly. With an even smaller sales force, we can’t even imagine Horizon moving the needle on sales.

Several investment bankers touted the stock heavily as having large peak potential sales that were entirely unrealistic. Stifel Nicolaus somehow predict peak sales by 2016 of $80-100 million for RAYOS/LODOTRA and $200M for DUEXIS. Even more ludicrous estimates come from Cowen & Company, who see Duexis franchise generating $257M peak sales in 2016 and estimate U.S. revenue from Rayos to be $106M by then as well. These projections are based on an incredibly flimsy assumption that insurers will pay for it, doctors will prescribe it and pharmacists will fill it. We imagine most formularies won’t carry the product because of the cost. Horizon also has no credible plan for managed care.

Generic prescription famotidine 40 mg twice daily costs about $10/month and generic ibuprofen 800 mg costs about $8-10/month at a three times daily dosage. DUEXIS at three times daily costs about $150/month. This is for a convenience of 3 vs. 5 pills daily. Horizon reps provide coupons to reduce maximum copay to $25, but this still hurts their business when all is said and done.

DUEXIS only brought in $1.1 million of revenue in Q1 2012. During 2009, 2010, and 2011, LODOTRA achieved sales of $6.6MM, $6.8MM, and $16.5MM, respectively. Meanwhile, executive compensation at Horizon over that time period was $1.41M, $6.14M and $5.18M; their SG&A over that period was $8M, $24M and $35M. These are quite shocking numbers for a company selling reformulated products with no advantages over current generics or competitive products.

Sub-prime loan

In February of this year, Horizon took on a $60 million loan. This debt accrues interest at 17% annually(!), resulting in quarterly loan payments of roughly $4.5 million. They also doled out 3.3M warrants at an exercise price of $0.01 that become exercisable on August 22nd. Notably, the loan has a worrisome revenue covenant that seems unattainable by Horizon given their very slow sales and potential.

From their filing:

(b) Minimum Net Revenue. Consolidated revenue of Horizon Pharma and its Subsidiaries on a trailing twelve month basis (“TTM Revenue”), tested quarterly as of the last day of each quarter set forth below, of not less than the corresponding amount listed opposite each such quarter. TTM Revenue will include all net revenue (net of promotions, coupons and other similar programs) of Horizon Pharma and its Subsidiaries, and with respect to DUEXIS during 2012, all deferred revenue recorded on the consolidated balance sheet of Horizon Pharma and its Subsidiaries during such period, net of discounts, allowances, returns, and other adjustments substantiated by the Horizon Pharma’s books and records, with the exception of extraordinary or non-recurring revenue and revenue from asset sales, licenses (other than ordinary course royalty or similar payments based on product sales) and other transactions outside the ordinary course of business.

Quarter Ended TTM Revenue
June 30, 2012 $10,000,000
September 30, 2012 $20,000,000
December 31, 2012 $30,000,000

TTM revenue increases by $10M every quarter, we omitted the later dates. We suspect they will just sneak by on the TTM ending June 30th because of the “deferred revenue” in the calculation. However, the increase to $20M for the period ending September 30th is completely unattainable under the current sales ramp.

How is Horizon going to pay off this loan? We suspect the recent filing of $175 million mixed shelf is management’s plan to pay the loan and raise more cash while massively diluting shareholders. They need to raise roughly $100M in order to cover the loan and extend their cash runway.

Conclusion

Horizon currently has 33.7MM shares outstanding, cash ~ $80.4M (as of 3/31/12), debt of $60M. With shares hovering close to $4.65, it has a marketcap of ~$156M. We suspect they continued to burn cash at roughly the same rate as Q1, so they likely end Q2 with roughly $60M and have no reason to believe sales will be meaningfully higher. We look forward to their earnings report tomorrow morning.

Disclosure: Author is long Aug $5 puts and Nov $2.50 puts.