Shares of Horizon Therapeutics (NASDAQ:HZNP) are down approximately 50% from late 2021 highs, a consequence of the prolonged biotech bear market, and more recently, the growth scare related to Tepezza. The company missed Q2 revenue estimates and reduced the 2022 sales growth guidance for Tepezza from the mid-30s to the high teens. There was also an at-risk launch of generic Pennsaid 2%, but that is more a nuisance than a very significant impact on the company’s fundamentals since the inflammation segment was in terminal decline for a couple of years now and this at-risk generic launch has only accelerated the inevitable.
I believe that Horizon Therapeutics represents one of the best investments in biotech today. The setbacks the company has experienced in recent months are either not significant (the Pennsaid 2% issue) or are temporary in nature (the Tepezza growth scare), and the company has multiple meaningful catalysts that will drive continued growth and multiple expansion in the following quarters and years.
The most important catalyst is Tepezza returning to stronger growth, driven by the company’s recently adjusted sales approach and increased investments to support its growth, and, more importantly, driven by the phase 4 results of Tepezza in the chronic thyroid eye disease (‘TED’) population in the first half of 2023. There is also a stealth but longer-term catalyst for Tepezza – international expansion, especially if the company can find a way to secure approval and good pricing in Europe. Retreatment is an additional opportunity since Tepezza is (for now) considered a one-and-done treatment.
Secondary catalysts include:
- Improved sales momentum of Krystexxa after the recent approval for the treatment of refractory gout in combination with methotrexate. The combination has achieved better efficacy and safety compared to Krystexxa monotherapy in a placebo-controlled trial, and Horizon is now free to promote the combination to rheumatologists and nephrologists.
- Pipeline hitting an inflection point in 2023 and 2024 with multiple readouts. Horizon has made considerable efforts to expand its pipeline in the last two years and the investments should finally start to pay dividends in 2023 and beyond.
- Continued business development activity. Horizon has built a strong track record of delivering shareholder value by making good deals. Tepezza and Krystexxa are clear examples of this approach with Horizon paying $145 million upfront to acquire River Vision which brought Tepezza (along with some downstream commitments) and $550 million to acquire Crealta which brought Krystexxa.
No investment comes without risks, and Horizon is by no means risk-free – the main risk being potential competitors coming to market, but as I will describe, the company is well-positioned to deliver significant shareholder value even in the presence of competitors, and I am sure it will not stand still and watch other companies threaten its leadership positions in the two most important markets – TED and refractory gout.
My valuation range is seemingly aggressive at $152 to $189, but I believe it reflects how undervalued the company is. And the valuation does not include Horizon’s pipeline, which the company believes has the potential to generate $10 billion in annual peak sales. And it will only expand going forward with Horizon making additional in-licensing deals or acquisitions. For the purposes of my thesis, the pipeline serves as upside to my valuation range, and alternatively, as a backup/compensating mechanism if the two main assets – Tepezza and Krystexxa, do not live up to my expectations.
Tepezza is Horizon’s key asset – why I believe it can grow to become (at least) a $5 billion a year product for Horizon by 2026
Horizon sold off when the company reported second quarter earnings, missing the analyst consensus and reducing the full-year revenue and EBITDA guidance and the sales growth guidance for Tepezza.
In the first half of the year, the company noticed the impact of Omicron on the growth trajectory of Tepezza, but it, in fact, masked the slowing growth of the product during this period and the post-Omicron recovery was not as strong as management had anticipated.
As a result, management now expects Tepezza sales to grow in the high teens this year and not in the mid-30s. Along with reiterating the confidence in the long-term outlook of Tepezza, the company said it expects 2023 net sales growth at least in the mid-teens.
That does not sound like a lot from where we stand today, but they are not assuming the potential positive impact of the chronic TED data that are expected in the first half of 2023. And I believe management opted for a hard reset of expectations that will set the stage for the start of a new growth cycle in the second half of 2022.
As a reminder, chronic TED is an on-label indication but clinical data in this population are lacking because Horizon focused on the active TED population in both the phase 2 and phase 3 trials. The data from a placebo-controlled clinical trial should significantly boost the confidence of all stakeholders and re-accelerate Tepezza’s growth in 2024 and beyond.
The risk of the trial failing is low because it is the same disease, but not in the flare-up phase and there is already decent real-world use and case series reports in over 50 patients suggest the efficacy of Tepezza is similar in chronic and active TED patients. Specifically, one study in 31 chronic TED patients showed:
- 28 of 31 patients had reduced eye bulging (proptosis) by at least 2mm in their more severe eye (the primary endpoint of the trial is a reduction in proptosis).
- Of the 15 patients with double vision, 10 showed improvements in double vision after taking Tepezza and 8 of those 15 had a complete resolution of double vision.
- All 31 patients with chronic TED had redness, swelling, and eye pain before taking Tepezza, and after taking Tepezza, 28 of 31 had little to no redness, swelling, and eye pain with 18 of 31 having their redness, swelling, and eye pain completely go away.
The page with the results I linked also shows the remarkable before and after pictures.
Overall, efficacy looks very similar to the efficacy observed in the active TED population in the phase 2 and phase 3 trials of Tepezza.
International expansion is another potentially significant growth driver for Tepezza. The initial targeted market is Japan with OPTIC-J results in the Japanese TED population expected next year and potential approval and launch in 2024. Horizon has guided for international peak sales of $500 million and it expects to generate most of these sales in Japan.
And in all the recent negativity, the market overlooked the good news – the company said on the Q2 earnings call that it is in the process of assessing the launch opportunity in Europe, a market where Horizon was not willing to go at all due to the lack of orphan drug designation and pricing power.
Beyond the significant opportunity in the US, we expect our global expansion to contribute meaningfully outside of the US beginning in 2025. While our current TEPEZZA peak annual net sales estimate does not assume a launch in Europe, we are finalizing our assessment of that opportunity and expect to be in a position to provide an update later this year. We expect this will provide upside to our peak annual net sales expectations for TEPEZZA.
This should significantly add to Tepezza’s long-term growth potential as Europe is a much larger opportunity than Japan.
Going back to this year’s commercial setback in the United States, the company has identified the issues and believes it can successfully address them:
We understand the dynamics impacting the pace of growth of TEPEZZA, and we are executing on our strategy to address them, including a more significant expansion of our TEPEZZA field force and implementing initiatives to drive further penetration. We are excited about the future prospects for Horizon, with our growth drivers, our expanding pipeline, and our global expansion initiatives.
The increased spending will not increase the overall costs and there will be a slight benefit going forward due to the wind-down of the inflammation business unit in the fourth quarter.
With an annualized net sales run rate of close to $2 billion, and with multiple growth drivers in the following years, from chronic TED data next year to international expansion, I do not see a reason why this product should not significantly exceed the company’s peak sales guidance of $3.5 billion (consisting of $3 billion in the U.S. and $500 million ex-U.S., primarily Japan). That is why I am maintaining my estimate range of $5 billion to $6 billion, but with the recognition it would come later than I originally anticipated – now by 2026.
To get to $5 billion in annual sales, approximately 17,000 patients need to take a treatment course of Tepezza per year. There are approximately 20,000 patients with active TED coming to market in the United States every year, and the company estimates the chronic TED patient pool in the United States is approximately 80,000 patients. And each of the 20,000 patients that are diagnosed every year who do not get treated goes into this pool and remains available to take Tepezza in the following years.
So, to get to $5 billion in annual sales in the United States alone, market penetration would be around 17-18%, assuming a net price per patient per year of approximately $300,000. I should note that the patient pool shrinks as each patient is treated, but as long as the number of patients per year does not exceed 20,000, this pool gets replenished each year with active TED patients who do not receive a treatment course.
This is not an aggressive assumption because the market penetration in active TED is already close to 20% and it is currently in the low single digits in the chronic TED market. I expect active TED market penetration to continue to increase going forward, and for the chronic TED penetration to rise in a more meaningful way after phase 4 data in the first half of 2023.
And while the treatment course of six months is considered a one-and-done, some patients relapse, and re-treatment is another opportunity the company, analysts, and I are not counting on, yet. This is another potential upside driver for Tepezza, but we need more long-term data to be able to estimate how large the retreatment opportunity is.
Open-label follow-up data indicate that 56% of responders maintained a response 48 weeks after treatment cessation. And although the patient numbers are small at just 8 to 9, retreatment has resulted in a 62% response rate.
With more than 40% of patients relapsing a year after the initial treatment course, the potential retreatment rate could conservatively be in the 20-30% range in the first year off-treatment. If the retreatment rate is 20% in the second year for each patient, this would represent an incremental opportunity of 20% of net sales in the prior year – $400 million in 2023 if sales are $2 billion this year, and $1 billion if net sales are $5 billion by 2026.
Before moving on, I should note that I described addressable market is U.S.-only. I believe the company can exceed its international peak sales guidance of $500 million, just as it did its own initial guidance – when it acquired River Vision, the company’s peak sales guidance for Tepezza was only $250 million. So, realistically, Horizon could get to $5 billion in annual sales by getting to approximately 14-15% market penetration in the United States and generating $4 billion in annual sales, and either achieving similar market penetration in Japan plus the additional modest contribution from other countries to get the additional $1 billion, or low single-digit ex-U.S. market penetration if Europe is included.
I should add that I am including a potential competitive impact in the mid/late 2020s as several potential competitors have emerged, attracted by the early and significant commercial success of Tepezza. But this market has room for multiple players, and I believe it is one of those that has the potential for very high penetration rates, and not just to get to 15% or 20%, especially in the active TED population where Tepezza’s market penetration is already approaching 20%. More on potential competition in the risk section of the article.
Krystexxa to see improved sales momentum after the approval of the combination with methotrexate
Krystexxa is an asset Horizon acquired in 2016 through the $550 million acquisition of Crealta. At the time of the acquisition, Krystexxa was a $60 million a year product and it was not growing much, if at all.
Horizon has put the proper infrastructure in place, and it placed a lot of effort on educating physicians about the efficacy and, more importantly, the safety of the product, because Krystexxa initially had a bad reputation due to the safety issues like severe infusion reactions. Introducing stopping criteria after the loss of serum uric acid control was critical to avoid these safety issues.
And it later emerged that the addition of immunomodulators to Krystexxa could substantially improve both efficacy and safety and Horizon sought to generate placebo-controlled data by comparing Krystexxa monotherapy to Krystexxa in combination with a well-known, cheap, and generic immunomodulator methotrexate. The results were outstanding:
- Krystexxa plus methotrexate achieved a 71% response rate compared to a 39% response rate for Krystexxa and placebo (Krystexxa monotherapy). Complete response rate is defined as serum uric acid less than 6mg/dL at least 80% of the time during month 6 of treatment.
- At 12 months, the response rate of the combination was 60% versus 31% for patients on Krystexxa and placebo.
- Infusion reactions dropped to only 4% of patients taking the combination versus 31% of patients on Krystexxa and placebo.
- Among patients with validated tophi at baseline, 54% of patients on the combination had a complete resolution of at least one tophus, no new tophus, and no single tophus showing progression at week 52 versus 31% of patients randomized to Krystexxa and placebo.
These are remarkable improvements in both efficacy and safety (substantially decreased infusion reactions). The results were known for quite some time and physicians have responded by increasing the prescribing of Krystexxa in combination with methotrexate, but also other immunomodulators, and Horizon reported that more than 50% of patients were already being prescribed the combination. This is a reason not to expect a massive sales inflection point.
However, Horizon is finally able to promote the efficacy and safety results of the combination, thanks to the early July approval. The significantly increased promotion efforts should result in improved sales momentum of Krystexxa. The year-over-year net sales growth in the last few quarters was around 30%, and Krystexxa will likely generate close to $700 million in net sales this year. I expect it to become Horizon’s second blockbuster product as soon as next year and believe Horizon will increase its annual peak sales guidance of more than $1 billion next year.
My estimate is for Krystexxa to reach at least $1.5 billion and up to $2 billion in annual net sales by 2026, and that there is room for upward revisions assuming there is growth acceleration driven by the expanded label. And there are two ways to achieve sales growth acceleration:
- Increased number of new patient starts, driven by the significant ramp in promotion by Horizon and physicians becoming more comfortable with the combination data being included in the product label.
- With more patients being prescribed the combination, the average length of treatment should continue to trend higher. As we can see in the 12-month data, the number of responders on the combination is double the number of responders on monotherapy. This is important because the loss of response triggers the stopping of treatment. With the average treatment duration increasing, the net sales per patient should increase as well.
Additional and unaccounted-for growth drivers for Krystexxa are:
- Shorter infusion time, either 45 minutes or 30 minutes versus 60 minutes. In addition, Horizon is testing every four-week administration of the combination with methotrexate as opposed to the existing every two weeks regimen. I do not expect this effort to make a significant impact, but the improved convenience could offer benefits to some patients and motivate others to start treatment if the dosing schedule is spaced out to every four weeks. These are separate open-label trials with results from both expected in 2023.
- Retreatment. One of the issues with Krystexxa is the development of anti-drug antibodies. Once that happens, the patient must stop taking Krystexxa due to loss of efficacy or risk of adverse reactions to the drug as the body’s immune system starts to attack the drug. The company is conducting a trial where it is introducing Krystexxa with immunomodulators such as methotrexate, and it is believed that this could lead to renewed efficacy and would mean patients could be retreated with Krystexxa. Results from this trial are also expected in 2023. This could be a significant development and could bring back many patients who lost response or have not responded earlier to Krystexxa monotherapy.
With all the focus on Tepezza, Krystexxa is now an overlooked growth asset and one that still has a long runway with the three above-mentioned opportunities for further enhancement of its clinical profile that could increase its peak sales potential in 2024 and beyond. Specifically, if the retreatment trial is a success, I believe Krystexxa’s peak sales potential would be at least in the $2 billion to $2.5 billion range.
Pipeline investments to start paying off in 2023 with multiple readouts
Horizon has made significant efforts to expand its pipeline in the last two years. Prior to 2020, the pipeline primarily consisted of Tepezza and the label-expansion opportunities for Krystexxa. The company now has more than 20 programs with annual peak sales potential of $10 billion and it expects 10 potential approvals in the second half of the decade.
The acquisition of Viela Bio last year brought an approved product Uplizna, and a very decent pipeline focused on autoimmune diseases. Uplizna itself has two additional shots on goal and dazodalibep and daxdilimab are both pipeline drug candidates with multiple indications in development.
The whole pipeline can be seen in the presentation slide below.
Since this presentation slide is a bit older, I should also mention the most recent deal Horizon made this month. The company announced a collaboration and option agreement with Q32 Bio to develop ADX-914 for the treatment of autoimmune diseases. ADX-914 is a fully human anti-IL-7Rα antibody that re-regulates adaptive immune function by blocking signaling mediated by both IL-7 and TSLP. Q32 has recently completed a biomarker-enabled phase 1 study characterizing pharmacokinetics, pharmacodynamics, and safety of ADX-914 that demonstrated pharmacological effect on T cells in healthy volunteers. Q32 expects to initiate a phase 2 trial in atopic dermatitis later this year and is planning a phase 2 trial in a second autoimmune disease next year.
Starting in 2023, we should start to see the results from these expansionary efforts. There are seven expected mid to late-stage readouts next year. In addition to the readouts of Tepezza (chronic TED trial) and Krystexxa (shorter infusion trials, treatment every month trial versus two weeks, and retreatment trial), there additional readouts are planned for 2023:
- Phase 2 results of daxdilimab in alopecia areata.
- Phase 2 results of daxdilimab in systemic lupus erythematosus.
- Phase 2 results of dazodalibep in Sjogren syndrome.
The number of readouts should further increase in 2024 as many trials are ongoing or about to be initiated soon. Of note are the two phase 3 trials of Uplizna in generalized myasthenia gravis and IgG4-related disease with both now expected to generate data in 2024 due to enrollment difficulties that recently surfaced due to the war in Ukraine.
Dazodalibep is a fusion protein designed to target the CD40 ligand (‘CD40L’), thereby blocking CD40L’s interaction with CD40 and other binding partners. This has the potential to result in decreasing autoimmune and inflammatory responses.
Several autoimmune diseases such as Sjögren’s syndrome and kidney transplant rejection are associated with the overactivation of immune cells through cell-cell or co-stimulatory interactions. CD40L is “a soluble or surface-bound protein expressed on T cells that interacts with CD40, a receptor protein expressed on a variety of immune cells such as B cells, dendritic cells, and macrophages.” The overstimulation of these immune cells triggered by the CD40/CD40L interaction leads to an immune response cascade and overproduction of molecules that mediate inflammation, resulting in autoimmune diseases. Dazodalibep was also designed to avoid thromboembolic side effects, which was a problem for earlier-generation monoclonal antibodies.
Dazodalibep was tested in two phase 1 clinical trials – a phase 1a study in healthy volunteers and a phase 1b study in patients with rheumatoid arthritis. The candidate was well tolerated in both studies with no evidence of platelet aggregation that resulted in thromboembolic side effects with earlier-generation antibodies. A dose-dependent reduction in autoantibody levels was achieved and so was clinical activity in rheumatoid arthritis patients, which suggests dazodalibep may effectively block CD40/CD40L interaction.
The above-mentioned indications, Sjögren’s syndrome and kidney transplant rejection were selected for evaluation. A phase 2b study in Sjögren’s syndrome was initiated in late 2019 and so was a phase 2 study in kidney transplant rejection. Results from the Sjögren’s syndrome trial are expected in 2023.
Dazodalibep was also successful in a phase 2 trial in rheumatoid arthritis patients, but we are yet to see details beyond the topline press release that only noted the trial was successful. However, rheumatoid arthritis is only a proof-of-concept study that was used to find the appropriate dose for future trials and Horizon will focus the development of dazodalibep on rare diseases and not rheumatoid arthritis.
Since acquiring Viela Bio, Horizon has expanded the clinical program of dazodalibep to include focal segmental glomerulosclerosis or FSGS, though the trial has not started yet.
Daxdilimab is a humanized monoclonal antibody in development for the treatment of autoimmune diseases where the pathology is driven by the overproduction of type 1 interferons and other cytokines secreted by plasmacytoid dendritic cells, or pDCs. Daxdilimab is designed to target and bind to ILT7, a cell surface molecule specific to pDCs, leading to their depletion.
Viela has completed a phase 1a single-ascending dose trial in patients with six different autoimmune diseases: systemic lupus erythematosus (‘SLE’), cutaneous lupus erythematosus (‘CLE’), Sjögren’s syndrome, systemic sclerosis, polymyositis, and dermatomyositis. The trial demonstrated that daxdilimab was generally well-tolerated and that it reduced pDC levels. The phase 1b multiple ascending dose trial includes a cohort of patients with the same diseases and separate cohorts of patients with CLE in the presence or absence of SLE.
Daxdilimab effectively reduced blood and skin pDCs, leading to reduced type I interferon levels in the blood and in the inflamed skin of patients with CLE. And more CLE subjects treated with daxdilimab than with placebo had a clinically significant improvement in the CLASI-A scores (this is a scale that quantifies skin disease activity). Rates of adverse events were similar between daxdilimab and placebo groups.
Based on the results from the phase 1b study, Viela has selected SLE as the lead indication and the phase 2 trial and Horizon completed enrollment in this trial in Q2 2022, and topline results are expected in 2023.
The rationale for the study is that pDCs are believed to be central to the pathogenesis of SLE:
- They infiltrate target tissues such as skin and kidneys.
- They relocate from circulation to target tissues during SLE flares.
- They activate the immune system through IFN-dependent and independent biological pathways.
Since the acquisition of Viela Bio, Horizon has significantly expanded the clinical program of daxdilimab to include the following indications:
- Alopecia areata, an autoimmune disorder characterized by nonscarring hair loss. A phase 2, open-label trial was initiated in May 2022. Results are expected in 2023. The rationale for the study is that pDCs have been detected in alopecia areata lesions and Type 1 interferon signatures are elevated in these lesions.
- Discoid lupus erythematosus (‘DLE’), a rare, chronic, inflammatory skin condition characterized by lesions that result in scarring. A phase 2, randomized, placebo-controlled trial will start soon, and we will probably see results in 2024. Similar to alopecia areata, pDCs are reported to be abundant in DLE skin lesions, and Type 1 interferon activity present in DLE is significantly elevated compared to healthy tissue.
- Lupus nephritis, a rare, autoimmune, and inflammatory condition of the kidney. A phase 2 trial is also planned to start soon, and we will probably see the results in 2024. Horizon says that early studies show decreased frequencies of pDCs in the blood and increased numbers in the kidneys, suggesting that pDCs are recruited from the circulation to areas of active inflammation in the kidney. Further, pDCs product Type 1 interferon which promotes kidney damage and is associated with more advanced disease when detected in kidney tissue.
- Dermatomyositis, a rare autoimmune disorder characterized by rashes, debilitating muscle weakness, and interstitial lung disease. A phase 2 trial is also planned to start soon with results no earlier than 2024. Dermatomyositis also shares the high interferon phenotype and high activity correlates with disease activity.
Daxdilimab looks like one of the highest-potential assets in Horizon’s pipeline considering the addressable markets it is targeting – if successful in more than two indications, its value could eclipse Krystexxa’s in the second half of the decade.
HZN1116 is a monoclonal antibody designed to decrease the number and function of antigen-presenting dendritic cells. A first-in-human clinical trial is expected to start in mid-2021. There is not much information available about this candidate.
HZN-825 came from the 2020 acquisition of Curzion Therapeutics. Horizon paid $45 million upfront and committed to additional payments contingent on achieving development and commercialization milestones.
HZN-825 was originally discovered and developed by Sanofi, which is eligible to receive contingent payments and commercialization milestones, and royalties on net sales.
HZN-825 is being developed for the treatment of diffuse cutaneous systemic sclerosis (dcSSc), a rare, chronic autoimmune disease marked by fibrosis, or skin thickening, in areas including hands, forearms, upper arms, and thighs. Compared with limited forms of the disease, people with dcSSc are often at higher risk of internal organ involvement, including interstitial lung disease (‘ILD’), and kidney and bowel disease. The U.S. incidence is approximately 30,000.
In five phase 1 studies conducted by Sanofi, HZN-825 was safe and well tolerated and a short-term exploratory phase 2a study in dcSSc was completed and showed evidence of potential clinical benefit in patients. I looked at the results (the candidate was called SAR100842 when it was in Sanofi’s hands) and HZN-825 was only numerically superior without reaching statistical significance, but it was a small study and of short duration (the placebo-controlled portion was just 8 weeks).
Since the acquisition, Horizon has initiated the phase 2b trial in dcSSc, and more recently, a phase 2b trial in idiopathic pulmonary fibrosis.
I have not seen enough evidence to really like HZN-825’s prospects, but both indications offer significant upside. The clinicaltrials.gov entries state both trials will complete in 2023, but management said we should not expect the results before 2024 for either trial.
Gout franchise in the making
I believe that gout will be a significant franchise for Horizon in the second half of the decade and that the growth potential is higher than Krystexxa could potentially achieve. The next-generation therapies are still in preclinical development, but with potential to expand the addressable market.
I believe the most promising approach is through RNAi with ARO-XDH that Horizon in-licensed from Arrowhead Pharmaceuticals (ARWR). As I explained in last year’s article to subscribers, I thought of this as a win-win deal for the two companies. Arrowhead will complete preclinical trials and deliver the candidate to Horizon, and Horizon will conduct clinical trials. Arrowhead received a $40 million upfront payment and is eligible for up to $660 million in additional development, regulatory and commercial milestones, and low to mid-teens royalties on net sales.
XDH is a genetically validated genetic target for ARO-XDH. Heterozygous loss of function mutation is associated with a 40% reduction in the risk of gout. And we should see clinical de-risking of this mechanism and target later this year when competitor Alnylam (ALNY) reports phase 1/2 results of ALN-XDH in healthy volunteers and gout patients. The target is the same, the mechanism is the same (RNA interference), only the candidates are different and positive results of ALN-XDH would offer a positive read-through to ARO-XDH and would make me incrementally more bullish on this candidate.
There is also clinical validation for the target as allopurinol and febuxostat (Urolic) are approved for the treatment of gout, and both are xanthine oxidase (‘XO’) inhibitors. Both XDH and XO are single-gene products, and they exist in separate but interconvertible forms. Most of the protein in the liver exists in the form of XDH where it will be targeted by RNAi therapies, but it can also be converted to XO.
Unlike allopurinol and febuxostat, RNAi candidates are liver-specific and Alnylam believes its candidate can address an unmet need – potent urate-lowering with tonic control, better safety, and tolerability, and all that with infrequent subcutaneous dosing (likely every three or every six months). Since the mechanism of action is the same, these are the potential advantages of the Horizon/Arrowhead RNAi candidate as well.
And the unmet need is there. Fewer than 50% of allopurinol patients achieve serum uric acid levels below 6mg/dL and febuxostat has a black box warning since 2019 due to increased risk of death compared to allopurinol. Provided there is superior efficacy compared to allopurinol along with good safety, this is a multibillion-dollar market for companies like Horizon/Arrowhead and Alnylam. And superior efficacy to allopurinol is a must as there is otherwise no market for a more expensive drug over a generic drug like allopurinol.
Beyond ARO-XDH, Horizon has a collaboration with HemoShear for the discovery of new targets for the treatment of gout and this collaboration is making progress, but details are scarce. And I think the company will continue to be active on the business development front to bring new and promising modalities to positively impact the life of gout patients.
Business development – another key growth driver no one is paying attention to lately
Horizon has built a strong track record of acquiring and successfully commercializing products:
- Vimovo was acquired in late 2013 for $40 million and it has generated $675 million in cumulative net sales through the end of 2021 (it is now generic with negligible sales).
- Pennsaid 2% was acquired in late 2014 for $45 million, and it has generated more than $1.4 billion in cumulative net sales to date (as mentioned, it too has recently gone generic).
- Actimmune was acquired through the $660 million acquisition of Vidara Therapeutics in 2014. Actimmune had a significant shot on goal in Friedrich’s ataxia, but it failed in a phase 3 trial. However, the benefit of the Vidara acquisition was the change in tax jurisdiction to Ireland and a resulting lower tax rate. So, this acquisition has paid off handsomely and Actimmune is still generating approximately $130 million in net sales per year.
- Ravicti was acquired through the $1.1 billion acquisition of Hyperion in 2015 and Procysbi through the $800 million acquisition of Raptor Pharmaceuticals in 2016. These two investments have not led to significant returns (although they have generated more than $2.2 billion in cumulative net sales to date), but have, along with Actimmune formed the basis of the orphan disease business, and the increased EBITDA has led to the company’s increased borrowing capacity to make additional deals. I would say these two deals have been moderately successful.
- Krystexxa was acquired through the $550 million acquisition of Crealta in 2015, and this is another investment that has paid off handsomely as Krystexxa has generated more than $2 billion in cumulative net sales to date and is on track to become a $1 billion-plus product for Horizon in 2023 or 2024 at the latest.
- Tepezza was acquired through the $145 million acquisition of River Vision and some downstream commitments in 2017. Horizon has subsequently acquired two-thirds of these downstream commitments for $110 million and it is safe to say that this is (so far) the company’s best acquisition as Tepezza has already generated $3.46 billion in cumulative net sales through Q2 2022 and currently has an annualized net sales run rate of just below $2 billion.
This provides confidence that the business development team at Horizon really knows what it is doing. The more recent acquisitions are yet to pay off, but so far, they are looking good.
It is too early to estimate the impact of the latest deals as the success or failure remain to be determined, and the only other larger one is Viela Bio last year for $3.2 billion. And so far, this deal is looking good as Uplizna is on track to become Horizon’s third largest product and with two additional shots on goal beyond the approved NMOSD indication, and the pipeline was significantly expanded with pipeline in a drug candidates daxdilimab and dazodalibep, and there is also HZN-1116 which has recently entered the clinic.
With the sales of Tepezza ramping in the last few quarters, Horizon’s cash flows have increased, and this should lead to continued business development activity and further pipeline and/or product portfolio expansion.
This leaves me confident Horizon can continue to create substantial shareholder value, but also decrease the competitive risks to its existing products and candidates by diversifying the product portfolio and pipeline, but also by in-licensing and acquiring products and candidates that could further strengthen the company’s portfolio and expand from a product like Krystexxa for gout to a gout franchise.
No investment is risk-free and Horizon is no different. The most significant risk for the company, in the long run, is competition.
With Tepezza being Horizon’s key asset, I will note that while no competitor is expected to reach the market before 2025 and potentially 2026, there are some threats longer-term. The most notable threat is coming from Viridian Therapeutics (VRDN), which is developing VRDN-001 that shares the mechanism of action with Tepezza – it too is an IGF-1R antibody.
I am long Viridian as well, not as a hedge on Horizon, but as a way for “pure-play” participation in the large and growing TED market. Viridian is also developing VRDN-002 and VRDN-003, also IGF-1R antibodies but with an extended half-life and the potential to be dosed as subcutaneous injections versus IV administration of Tepezza and VRDN-001.
Viridian has recently reported promising data from the phase 1/2 trial of VRDN-001, but the trial was small, consisting of six patients receiving VRDN-001 and two patients receiving placebo. The data were only out to six weeks, making it harder to interpret them, but the data suggest VRDN-001 acts faster than Tepezza as it reached higher efficacy levels at six weeks. I fully expect VRDN-001 will reach the market and take market share in the large TED market, and that is part of my sales estimate range for Tepezza and I anticipate the TED market will further expand with additional entrants.
There are other IGF-1R antibodies in development, but they are further behind Viridian’s candidates.
But Horizon is not standing by and watching. The company is developing subcutaneous versions of Tepezza, on its own and through collaboration with Halozyme (HALO), the go-to partner for conversion of IV-administered biologics to subcutaneously administered drugs. We are yet to hear more about these efforts as the company is keeping the details close to the chest for competitive reasons, but management said we should see a subcutaneous Tepezza on the market in 2025. I also doubt these efforts mark the end of Horizon’s potential response to competitors like Viridian and other companies developing competing IGF-1R antibodies.
The other potential competitor is Immunovant’s (IMVT) batoclimab, an anti-FcRn monoclonal antibody. However, the data Immunovant generated were inconclusive and looked inferior to Tepezza when compared at the same time point. Batoclimab’s proptosis response is in the 10% to 40% range at week 6, while Tepezza’s is already in the mid-50s at the time and rising above 80% after 24 weeks of treatment.
Immunovant itself seems aware of the issues and while they claim some patients will be treated with batoclimab first, its role seems to be more appropriate as a second-line treatment, for patients who do not respond to Tepezza or other IGF-1R antibodies like VRDN-001.
On the other hand, Krystexxa’s position in the refractory gout market looks strong and is unlikely to be threatened in a meaningful way in the next 4-5 years. Selecta Biosciences (SELB) and partner Sobi are developing SEL-212, with the same goal – adding an immunomodulator to an antibody with the same mechanism of action as Krystexxa. The difference is the antibody Selecta is using is a highly immunogenic antibody that does not work well on its own, and the addition of Selecta’s proprietary immunomodulator ImmTOR only brings the efficacy numerically slightly above Krystexxa monotherapy levels (54% versus 47% in the phase 2 trial). And as we know now, Krystexxa in combination with methotrexate has significantly better efficacy and fewer infusion reactions than Krystexxa monotherapy. As such, I do not see SEL-212 as a credible threat to Krystexxa.
The most notable long-term threat to Krystexxa is Alnylam’s ALN-XDH, but Horizon too has a candidate with the same mechanism of action thanks to the collaboration with Arrowhead Pharmaceuticals. Horizon and Arrowhead are not too far behind, and it remains to be seen exactly where this mechanism will be positioned – upstream or downstream of Krystexxa, but I see it as earlier line therapy than Krystexxa, and the success of these candidates could actually expand the addressable market and create a gout franchise for Horizon. And Horizon is already entrenched in this market with Krystexxa, and it will likely leverage its relationships with physicians and key opinion leaders to establish ARO-XDH as the market leader ahead of Alnylam, even if it is somewhat behind Alnylam now.
The company’s responses to potential competitive threats to Krystexxa show how it is taking a proactive approach:
- The threat of SEL-212 was addressed by the addition of methotrexate to Krystexxa that resulted in much better efficacy than Krystexxa monotherapy and SEL-212.
- The potential long-term threat of Alnylam’s ALN-XDH was addressed by the in-licensing of ARO-XDH from Arrowhead Pharmaceuticals.
And as mentioned, this does not mark the end of the company’s efforts in gout as it has the goal of creating a whole franchise with ARO-XDH, through the HemoShear collaboration and likely through additional business development activity.
Additional risks include:
- Pipeline failures going forward. However, at this point, there is little to no market appreciation for Horizon’s pipeline, and this will risk will become a more pronounced risk when Horizon gets more investor appreciation for its pipeline.
- M&A risks – Horizon could overpay for assets or whole companies, or the products or candidates it in-licenses or acquires could fail in clinical trials or fail to reach the required sales levels to generate a positive return on investment.
- Patent expiry. But for the most part, this is a fact, not a risk. The inflammation segment will close by the end of the year as nearly all products that mattered are already generic – Duexis, Vimovo, and Pennsaid 2%. Ravicti will go generic in 2025 and is no longer included in my valuation. But the most important product should enjoy market exclusivity well into the 2030s. Tepezza has biologics regulatory exclusivity until 2032, meaning no biosimilar could enter the market by then, and the additional patents Horizon has or that will be issued should protect its exclusivity until the late 2030s. Krystexxa’s last patents expire in 2030, but the company is prosecuting additional patents, and the addition of method of use patents with methotrexate should offer additional patent protection beyond 2030.
Valuation and upside potential
I am maintaining my view that Horizon is worth more than it was worth at its $120 peak last year. Yes, Tepezza’s growth will be somewhat slower in the next few quarters, but I have no doubt its growth trajectory will resume in the second half of 2023 and especially in 2024 with a greater push into the chronic TED market, and in 2025 due to international expansion.
Krystexxa remains an underappreciated asset. And so is the company’s pipeline and business development capabilities, both of which should enhance the company’s growth profile in the following years, and especially so in the second half of the decade.
Horizon has all the traits of a long-term winner. And it is now not trading as a company with significant growth potential with a price-to-sales ratio of less than 4 and a forward P/E of less than 13 as of this writing. These multiples are way too low for a company with a growth profile it currently has and with unaccounted-for upside drivers in the following years.
My valuation range is $152 to $189 and is based on:
- Tepezza reaching $5 billion in global net sales by 2026 at the low end of the range and $6 billion at the high end of the range. This will be achieved by continued market penetration in the active TED market, deeper expansion into the chronic TED market, and international expansion, and despite competitors coming to the market.
- Krystexxa reaching $1.5 billion to $2 billion in U.S. net sales by 2026, although I think this could come much sooner considering the growth rates in the last few quarters and the approval of the expanded label to include combination treatment with methotrexate.
- Uplizna generating $500 million to $600 million in global NMOSD net sales by 2026.
- Other products contributing $300 million to $350 million in net sales. These are primarily Procysbi and Actimmune, and any residuals from Ravicti which will go generic in 2025.
The value of each asset is summarized below. The valuation is based on the sum of the parts with a 15% annual discount rate from 2026.
This means annual sales should reach $7.3 billion by 2026 at the low end of the range and up to $9 billion at the high end of the range. And as covered previously, the valuation does not include any additional contribution from pipeline assets, and I am sure the company will have at least a few additional products on market by then, be it through internal pipeline progress and de-risking, or through M&A.
This compares favorably to the current Wall Street revenue consensus of $5.3 billion for 2026 and the analyst price target range of $71 to $144. I believe analysts are now far behind the curve as they are more influenced by recency bias and negative sentiment and do not want to have outrageous views compared to their peers. My goal is not to be conservative but as accurate as possible.
During the next few years, Horizon will also generate billions in cash flow, and although it will likely spend it on M&A, the cash flows in the next 4-5 years could amount to more than half of the company’s current market cap of $13.7 billion, even if the current TTM rate of $1.45 billion in operating cash flow is maintained.
I also have a high degree of confidence that the company will be able to make up for any shortfall in Tepezza and/or Krystexxa revenues through existing pipeline maturation and through M&A.
Finally, it makes no sense that Horizon should trade at lower or similar price-to-earnings and price-to-sales multiples to big biopharma companies that have low or no growth profiles. Below is a table of such multiples and the expected sales and earnings growth rates in the next five years.
As such, I believe that not only the upside is significant, but that downside risks are low – the risk of Horizon becoming a low/no growth biopharma company going forward. It is already trading below the valuation range of this group and is approximately 25% removed from the valuation of the company with the lowest multiples – Gilead on the 2022 P/E side and less than 20% on the 2022 P/S side.
This makes no sense at all, and I believe this situation will not persist for long and that Horizon will re-rate significantly higher in the following quarters and years. It really deserves to trade at Vertex or Eli Lilly multiples.
With everything taken into account, I believe the risk-reward is highly skewed to the long side.
Horizon is one of the most attractive M&A targets itself
While Horizon is a serial acquirer, the company is becoming an increasingly attractive buyout target itself. Big pharma is starving for growth assets and Horizon fits the bill perfectly given the expected growth and cash flows it will generate in the following years, and its expanding pipeline with what the company claims is $10 billion in potential peak sales and potentially 10 approvals in the second half of the decade.
And I believe that historical deals support a much higher valuation in a buyout compared to the company’s current market cap of $13.7 billion (or enterprise value of $14.4 billion if $700 million in net debt is included).
Taking a page out of my recent article on the potential buyout of Seagen (SGEN) by Merck (MRK), the 5-year forward revenue multiple is one of the ways investment bankers use to assess the value of the to-be-acquired company. The median 5-year revenue multiple is 8.2, based on the most recent filing of Acceleron Pharma which was acquired by Merck. However, since these are mostly younger companies, I argued then that Seagen is unlikely to get those kinds of multiples, and the same applies for Horizon which is also a more mature company.
Applying a 5x revenue multiple to Horizon’s 2027 revenue consensus of $5.8 billion, I get a deal value in the low 120s. And pushing it to 6x results in a deal value of up to $145 per share.
However, it is hard to imagine Horizon is willing to sell itself while its valuation is so depressed, and it is also hard to imagine management believes the current Street consensus is appropriate. I am sure their internal projections are at least in line with the lower end of my estimate range, and potentially above it because they are likely giving their pipeline proper attribution.
But any way I look at the situation, the company looks substantially undervalued at current levels and it has well-defined and significant commercial and clinical catalysts in 2023, and even more so in 2024 and beyond.
Summarizing the catalysts in the upcoming quarters
There is a clearly defined path for Horizon to get back above last year’s highs in the next few quarters.
Tepezza’s return to stronger growth is by far the most important catalyst for the stock in the next few quarters and consists of several events that could have a strong combined effect on Horizon’s share price:
- There is now substantial doubt about Tepezza’s growth potential in the next few quarters, and given the depressed valuation, for the long-term as well. The company has reset expectations by lowering this year’s guidance and for 2023 by guiding “at least mid-teens” revenue growth of Tepezza. This sets the stage for a series of beat-and-raise updates in the following quarters, although more so in 2023 than next quarter, although that’s possible as well.
- The results from the placebo-controlled trial of Tepezza in chronic TED patients are expected in the first half of 2023. This is an important catalyst as it would form the basis for growth acceleration in the second half of 2023 and in 2024 as the company will be able to show the data to all stakeholders and this should increase their confidence in prescribing Tepezza to chronic TED patients which represent a much larger population than active TED patients.
- Announcement of a sustainable path to market in Europe later this year. This is still not a certainty, but management hinted at this possibility on the Q2 earnings call. If this turns out to be the case, I expect management to increase its $3.5 billion peak sales guidance for Tepezza to include the potential contribution of Europe which is at least twice as large an opportunity than Japan and other potential markets that are included in the company’s $500 million ex-U.S. peak sales guidance.
- Retreatment is another opportunity that could add to Tepezza’s long-term peak sales potential.
Secondary catalysts include:
- Krystexxa’s growth acceleration. While I do not expect Krystexxa to be as strong a driver of Horizon’s valuation, its contribution should increase going forward due to the recently expanded label to include combination treatment with methotrexate which significantly increases Krystexxa’s efficacy and improves its safety. In addition to the expected growth acceleration, Horizon will also report results from three trials of Krystexxa that could further enhance its clinical profile – a shorter infusion trial, infusions every four weeks instead of two, and the most important one being the retreatment trial.
- Increased pipeline contribution in 2023. With the chronic TED trial readout of Tepezza, and three trials of Krystexxa generating results, Horizon’s pipeline should start to mature in a more meaningful way in 2023 with two phase 2 readouts of daxdilimab and one phase 2 readout of dazodalibep.
- Continued business development activity. Horizon should continue to be active on the business development front to further expand its pipeline and/or approved product portfolio. The company will also not be shy to do larger, transformational deals if the right one comes along. I suspect the main goal of such a transaction would be to accelerate the global expansion as Horizon is currently mostly a US-centric company that has only recently started to expand with the launch of Uplizna in Europe and with the expected launch of Tepezza in Japan in 2024.
My view is that Horizon represents one of the best investments in the biopharma industry today. The recent setbacks are just that – setbacks, and the market has significantly overcompensated by sending the stock down 50% from last year’s highs.
Tepezza remains the key growth driver in the next few years with clearly defined catalysts in the following quarters, closely followed by Krystexxa, and Uplizna’s contribution should steadily increase as well. In the medium and long term, pipeline productivity should significantly increase and result in more products reaching the market and generating additional shareholder returns. To that, I should add Horizon’s business development capabilities that should further enhance the company’s growth profile in the following years.
Horizon itself is an increasingly attractive buyout target for growth-hungry big pharma companies, and if the right offer comes along, I believe it is likely to be significantly above the current levels.