Goldman Likes Horizon Pharma's Emerging Orphan Franchise, Starts At Buy

Goldman Sachs started coverage of Horizon Pharma PLC HZNP with a Buy rating and $24 target price, implying 34 percent upside, on the strength of its emerging orphan franchise.

'Attractive' Story

"We view HZNP as an attractive SOTP story in transformation with management using the strong cash flows from the underlying primary care business to strategically acquire long-dated and high-barrier-to-entry orphan drugs," analyst Stephan Stewart wrote in a note.

Stewart model Horizon's "currently approved orphan indications growing at a 14 percent CAGR on continued market share penetration, versus a relatively flat base business."

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Following the sector-wide selloff, the analyst sees an attractive entry point, especially with Phase 3 data on Actimmune in Friedeich's Ataxia expected in the fourth quarter. Friedreich's Ataxia is an orphan disease with large unmet need causing nervous system damage and movement problems.

The analyst projects $503 million unadjusted sales potential in 2020 from this indication ($277 million on risk adjusted basis), which compares to his estimated 2016 company revenue of $1.016 billion. The analyst expects non-GAAP EPS of $2.44 for 2016.

Risks And Rewards

Further, Stewart highlighted that the risks around the company's primary care business are discounted and sees attractive risk/reward even after discounting primary care significantly.

"[W]e think the stock is reflecting very little value for a business that still represents over half of HZNP's current revenue and is currently benefitting from improving prescription trends," Stewart noted.

The analyst noted that despite Horizon's "acquisitive past," the company sees continued flexibility from its relatively healthy balance sheet, return profile and cash flow yield.

On the valuation front, the analyst said Horizon is the cheapest stock in his coverage on 2016 EV/DACF (6.0x vs group at 11.4x).

At the time of writing, shares of Horizon Pharma were up 2.47 percent at $18.25.