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In our follow up article on Horizon Therapeutics PLC (HZNP), we will use a SA Quant Rating tool to determine whether this stock is a buy at record level these days or not. SA Quant rating is an outstanding new feature, which helps SA subscribers to identify new investment ideas or to have more confidence in their bullish or bearish sentiment of an existing position. We have already covered this stock in our article here, following the positive phase III clinical results of Tepezza back in 2019. Our bullish thesis has been proven to be right, as Tepezza has created one of the best commercial launches in the rare disease space ever. Even though the market price has increased more than 130% year-to-date, we remain bullish about the future stock performance, primarily driven by its positive technical picture as reflected in the SA Quant Rating analysis. In addition, we like the underlying business of the company as both key drugs Krystexxa and Tepezza have been performing extremely well over the last couple of quarters. That enables the company to fund future expansions of both drugs in new indications or even regions and to fund new growth candidates in the pipeline as well.

SA Quant Rating

(Source: Seeking Alpha)

HZNP has an average quant rating of 4.93 out of 5.0, which makes it a ‘very bullish’ rating. If we take a look at Quant Rating Breakdown, on the right side of the figure above, momentum and revisions are the biggest contributors as they are both rated A+. The stock has been up more than 130% year-to-date driven by a better than expected launch of the Tepezza drug at the beginning of this year. In addition, Krystexxa has also been performing very well so far in 2020 despite the drop in sales as a result of lockdown restrictions in the U.S. earlier this year. Nevertheless, Wall Street analysts have been revising their estimates upward over the last year, as they remain bullish about the commercial opportunity of Tepezza and Krystexxa. In general, they believe that both drugs can reach a double-digit revenue growth rate over the next couple of years.

Growth and profitability SA quant metrics are rated A, which is still a very high value, given that it is a high-growth biotech company, involved in the rare disease space. Therefore the company is facing continuous challenges to improve the safety and efficacy of their existing drugs to improve the response rate of patients over the course of their treatment. That usually results in better confidence of doctors who are more prone to prescribe f.i. Krystexxa throughout the entire course of treatment of a patient compared to some alternatives on the market or any kind of newly approved drugs that might enter the market in the near future.

In addition, the company has to expand its existing approved drugs to other indications like for example a combo of Krystexxa + Methotrexate in Chronic uncontrolled gout to improve its growth rate. That involves a significant investment in R&D, which definitely drains on the end profitability of the company. In addition, once new products hit the market the company has to allocate significant sources into sales & marketing to offer a competitive price to existing treatments on the market. In the case of HZNP, it has a competitive advantage as both Krystexxa and Tepezza are now the only approved drugs on the market, as alternatives are usually a combination of existing drugs, use of steroids, or some other biosimilars.

Now let’s take a look at a more detailed analysis of each individual quant metric, separately.

Value

(Source: Seeking Alpha)

SA Quant metric Value consists of some of the most popular multiples used in the fundamental analysis including PE ratio, EV/EBITDA, P/Sales, etc. In the case of biotech companies that already have a couple of products on the market while still some promising candidates in the pipeline, we find the most appropriate metrics – PE ratio an EV/Sales.

(Source: Seeking Alpha)

HZNP is currently trading at a PE GAAP (TTM) ratio of 32.73 compared to the sector median of 34.90. This makes up a SA quant rating of B-, given that a lower value usually makes a stock more affordable for investors. Nevertheless, such a high PE GAAP ratio has been primarily driven by the increase of the stock price for more than 200% after the initial stay-at-home orders in mid-March 2020.

(Source: Seeking Alpha)

Likewise, the EV/Sales ratio has been also driven by a strong performance in the stock price. It is also at a very high level of 12.45 compared to historical data over the last year. The sector median comes at 6.29 or almost 50% lower than HZNP’s EV/Sales value which definitely reflects a high valuation of HZNP at the moment. That is the reason why SA Quant assigns a C sector relative grade. We prefer EV/Sales over P/Sales in biotech stocks, as it incorporates debt as well and not only market cap. For instance, some companies might have a large pile of debt on their balance sheet to fund future clinical trials or to ramp up their sales effort for newly approved drugs, which puts a large pressure on the EPS growth over the long run.

Growth

(Source: Seeking Alpha)

SA Quant Growth includes some of the most popular financial metrics including revenue growth, EBIT growth, or EPS growth. HZNP has a B or higher sector relative grade for all of the three previously mentioned metrics and a very high gap compared to the sector median.

(Source: Seeking Alpha)

This chart indicates that the company has been very successful when it comes down to driving revenue growth over the last 5 years. It has increased its total revenue from roughly $800 million in 2015 to $1.52 billion in 2020, which makes up a CAGR of approximately 13.7 % over that time period.

(Source: Q2 ‘20 10-Q Filing)

Based on the most recent earnings results, Tepezza which was successfully launched earlier this year has generated a revenue of $165.9 million in Q2’20, while the revenue of the second most important drug – Krystexxa came out at $75.2 million or down 6% y/y. Even the management of the company has been surprised by the strong commercial launch of Tepezza in 2020.

“TEPEZZA is turning out to be one of the most successful rare disease medicines launches ever. Second quarter net sales of $166 million significantly exceeded expectations.”

(Source: Q2’ 20 Earnings Transcript)

However, the company has been facing some issues because of the COVID-19 pandemic as Krystexxa could not be administered during the very strict stay-at-home orders in March 2020, while some physicians have decided to delay a prescription of Tepezza.

“We continue to see rheumatologists being one of the specialties most impacted by COVID-19, as rheumatology patients tend to be immunocompromised and more at risk, and many of them have been hesitant to leave their homes to visit their physicians.”

(Source: Q2’ 20 Earnings Transcript)

Given the commercial success of both Tepezza and Krystexxa – orphan segment net sales make up 82% of total net sales compared to 63% a year ago, some investors might be nervous to hold a stock of such a highly concentrated company into only one division. However, we remain confident about the future performance of the particular segment because of the following reasons: (1) management has lifted its peak U.S. net sales estimate from $1 billion to $3 billion for Tepezza, (2) Tepezza and Krystexxa have a strong competitive advantage over existing alternatives on the market, (3) competitors like Selecta Biosciences (NASDAQ:SELB) with its SEL-212 product will face challenges to report better clinical trial results compared to Krystexxa. Our readers can find even more information about the recent SEL-212 related clinical results from our fellow SA contributor ONeil Trader in this article here.

(Source: Seeking Alpha)

Notwithstanding the strong revenue growth rate over the last 5 years, shareholders have been facing a negative EPS growth between 2015 – 2018. However, the management has done an excellent job with both acquisitions of Krystexxa and Tepezza to return the revenue growth back to the company and also drive margin expansions.

“Our success is a testament to the value of our unique biopharma model where the cash flow we have generated from our legacy business allowed us to significantly invest first in the relaunch of KRYSTEXXA, and the success of KRYSTEXXA has allowed us to optimally invest in the launch of TEPEZZA. The continued strong performance of both KRYSTEXXA and TEPEZZA will provide us with the cash to build our clinical development pipeline to generate growth in the years ahead.”

(Source: Q2’ 20 Earnings Transcript)

Profitability

(Source: Seeking Alpha)

According to the figure above, we can identify that HZNP has a very strong profitability profile compared to its sector median peers, as most of the metrics have a B or higher sector relative grade. In the biotech and smaller pharma field, we find the most important gross profit margin and net income margin, given the business model of drug manufacturing and sales. In general, gross margins are very high as there is a very small cost per unit for manufacturing-related expenses, while biotech companies can charge a very high price per unit.

(Source: Seeking Alpha)

HZNP has a gross profit margin of 73.4% compared to the sector median of 55.28%, which makes it one of the most profitable companies in the field. In addition, we anticipate that the company will be able to improve its gross margin once it scales in its size and ramps up sales of Tepezza which is still away from its peak annual revenue potential of more than $3 billion. Over the last couple of years, HZNP has been able to recover its gross margin from a low 60% in early 2017 to present level of 73.4%, primarily driven by successful acquisitions of Krystexxa in 2014 and Tepezza in 2017, which have been both a very strong contributors to revenue growth and improved scale of the company.

Likewise, the net income margin comes at 34% compared to the sector median of -2% which is one of the highest in the biotech field we have come across over a long time. Logically, it makes an A-plus sector relative score, and we definitely put a very high weight on this metric for the overall sentiment of the stock. We believe that such a high net income margin comes as a result of a very sophisticated strategy of management to acquire promising drug candidates in development phases like Krystexxa and Tepezza. Then they can use their knowledge of being a public company since 2011 and make the drug pass the FDA regulatory pathway and later use network connections to ramp up sales of newly approved drugs. That definitely improves the profitability of the company and burns less cash for shareholders, than to develop in-house new candidates, which can later fail in phase II or phase III clinical trials.

Momentum

(Source: Seeking Alpha)

As we have mentioned previously, the stock price performance of HZNP has been one of the best in the biotech field year to date. Likewise, it has generated an outstanding performance in terms of both 3M, 6M, 9M, or 1Y compared to historical HZNP’s 5Y average, as it is reflected in the figure above.

(Source: Seeking Alpha)

This chart indicates that the stock has outperformed both the biggest ETF on the market – the SPDR S&P Biotech ETF (XBI) and the S&P 500 market index (SPX) by a wide margin over the last year.

(Source: Seeking Alpha)

In addition, HZNP has outperformed both XBI and SPY over the last 5 years, with a significant gap occurring after the outbreak of the COVID-19 pandemic in the U.S.

(Source: Seeking Alpha)

Now as we know HZNP has very strong momentum, a technical analysis using simple moving averages can help us out to identify potential entry points or even stop losses depending on the investment style that fits an individual. In our view, the most important are both 50 days SMA and 200 days SMA, as they reflect a bit a longer-term trend of the historical average stock price performance. For instance, the current 50 day SMA is now at 75.07 or roughly 11% lower than the current stock price. This level we find as a great entry point for investors who believe in the technical bullish trend of the company. Especially in the case, if major stock market indexes collapse between 10% to 20% in a short period of time. In addition, the current 200 day SMA is now at 49.45 or roughly 40% lower than the current stock price. A particular level is a more suitable entry point for value investors who believe in the continued overall business performance of the company over the next couple of years but would like to take advantage of a significant dip in the stock price. We believe that this level of 200D SMA might be reached over the next couple of months if some investors decide to take profit at the end of the year or with potential another case of global turmoil of major stock market indexes as the result of the second wave of stay at home orders due to the global COVID-19 pandemic.

(Source: Seeking Alpha)

Another very popular momentum-related technical indicator is the relative strength index or RSI, which is basically an oscillator as it uses a value of 0 to 100. In general, a value below 30 shows that the stock is undervalued, while a value above 70 shows that the stock is overvalued. Now, HZNP has an RSI (14-day) value of 65.14, which is close to being overvalued. If we take a look at historical data of RSI (14) over the last 6 months, then we can identify that even though the stock price performance has been very strong over the particular period the RSI value has remained in the range of 50 – 70. Therefore we believe that some investors which have decided to take a profit in the recent stock price outperformance could be better off if they would rely on the RSI indicator, as it has pointed out that the stock price is still not at an extreme overvalued level.

Wall Street Analysts

(Source: Seeking Alpha)

In addition to a ‘very bullish’ SA Quant rating for the company, Wall Street analysts are also bullish about the future performance of the stock. Based on SA data, 10 out of 11 analysts have placed a bullish or higher rating. As of 09/10/2020, the stock has a consensus price target of $102.27 over the next 12 months, which makes up a roughly 21.2% upside potential. That is in our view a very optimistic target, given that the stock price has surged over 130% year-to-date.

(Source: MarketBeat)

Nevertheless, most Wall Street analysts that are coming from prime brokerage firms like Morgan Stanley(MS.PK), Guggenheim, or Piper Sandler(PIPR) have been boosting their price target over the last couple of months, especially after the better than expected Q2 ‘20 earnings results in August 2020.

For instance, Guggenheim analyst Dana Flanders stated the following:

“He raised the firm’s price target on Horizon Therapeutics to $100 from $64 and keeps a Buy rating on the shares as he “significantly” increased his Tepezza sales estimates and pace of overall margin expansion for Horizon following the company’s second quarter report. The analyst, who said he sees Tepezza being “squarely on pace for blockbuster status in 2021,” now estimates $3B in annual sales for the drug by 2025.”

(Source: The Fly)

In addition, Cowen analyst Ken Cacciatore has been excited about the future performance of the company as well.

“Tepezza results were stunning, and importantly, management’s commentary matches our clinician checks, with the solid efficacy/safety leading to higher compliance, as well as accelerating use in chronic patients.

(Source: Street Insider)

EPS Trend is another very important indicator, which shows us how analysts have been changing their estimates based on the most recent market action and news releases.

(Source: Finance Yahoo)

In the case of HZNP, analysts have been revising their EPS estimates upward over the last 90 days. For instance, 90 days ago they estimated an EPS of 1.81 for FY 2020 and after the upbeat Q2 ‘20 earnings release that estimate has been lifted to 2.79. If we take a look into EPS revisions for the next year 2021, those have been lifted as well from 2.7 to 4.39 over the last 90 days. This is a clear sign that analysts have been supportive over the most recent business development of the company and anticipate a bullish run to continue over the next couple of quarters.

Conclusion

SA Quant Rating analysis offers a very sophisticated tool for investors to dig deeper into the most important basic fundamental and technical factors of the historical and also future stock performance. HZNP has a very bullish rating by both SA Quant tool and Wall Street analysts. In this article, we have tried to support the particular bullish outlook by our own analysis of the company and its historical performance. Indeed, we remain bullish about the future performance of the stock over the next 12 months but would like to warn our readers about the potential short-term correction because of the potential profit-taking at the end of the year or due to the COVID-19 pandemic. In terms of key risks, we see them as the following: (1) excessive share dilution, (2) unjustified increase in compensation package of management board members, (3) Teppeza and Krystexxa might lose their market leadership to newly approved drugs or treatment alternatives, (4) the COVID-19 pandemic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article does not constitute a bid or an invitation to bid for the purchase or sale of the financial instruments in question. Neither is it intended to provide any kind of personal investment advice, therefore, readers should conduct their own due diligence. Investing in financial instruments may always be associated with risk. Please contact your personal financial or investment advisor for any additional questions or materials regarding this article. We shall not be liable for any type of damage or loss arising from the use of the information contained in this article.