What Should Worry You About Horizon Pharma's Long-Term Business

• Shares of Horizon Pharma PLC HZNP have surged 68 percent since November 27.
• Morgan Stanley’s David Risinger resumed coverage of the company with an Underweight rating and a price target of $23.
• Payers may exert greater pressure on the primary care business volume and net price, Risinger stated.

Analyst David Risinger expects greater payer pressure on Horizon Pharma’s primary care business in out-years. There is also the possibility of Actimmune failing in Friedreich’s ataxia at the end of 2016.

Risinger believes that Horizon Pharma's stock multiple could be restricted by the ongoing payer scrutiny of the company's primary care/specialty business, which is expected to contribute nearly 69 percent of the company’s 2016 revenues and a majority of its profits.

Horizon Pharma's primary care/specialty products, including Vimovo, Duexis and Rayos, are high-priced formulations. Risinger added that cheap, generic alternatives are available for these formulations at a fraction of their list prices.

Although management has successfully maintained a gross-to-net discount of 65-75 percent, its net prices may worsen in out-years due to additional payer actions such as formulary exclusions. The company's primary care net sales are expected to decline from an estimated $681 million in 2016 to $607 million in 2020.

Risinger expects the Phase 3 STEADFAST trail for Actimmune for FA to fail because the Phase 2 results included only 10 patients, had no control arm, and improvement was mostly in upper extremities and there did not appear to be a correlation with frataxin levels.