Horizon Pharma Deal Ramps Up Profitability Timeline

24/7 Wall St.

Horizon Pharma Inc. (HZNP) is having a stellar day after breaking news that it entered into a pact with AstraZeneca PLC (AZN) for the U.S. rights to VIMOVO. The move aims to expand Horizon's focus on key primary care physician targets in the United States. The difference between this and most emerging pharma and biotech deals is that this ramps up the company's profitability faster.

What is important here is that VIMOVO is already approved by the U.S. Food & Drug Administration to relieve the signs and symptoms of osteoarthritis, rheumatoid arthritis and ankylosing spondylitis. It is also approved to decrease the risk of stomach ulcers in patients at risk of developing stomach ulcers from treatment with NSAIDs.

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AstraZeneca will retain ex-U.S. rights to VIMOVO. Horizon now expects that sales in 2014 will be $190 million to $205 million, and it expects that it will be profitable on an operating basis.

Horizon will make a one-time upfront payment of $35 million to AstraZeneca for the U.S. rights to VIMOVO. It will also pay a 10% royalty on net sales to Pozen, subject to annual minimum royalties of $5 million in 2014 and $7.5 million each year thereafter.

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Full details are available in the release, but the company used cash on hand and also sold some $150 million of convertible senior notes with a 5% coupon to help fund the deal. Thomson Reuters was calling for sales of almost $74.2 million in 2013, up 277%, and then sales growth of 112% to $157.5 million in 2014. The difference is that Thomson Reuters was calling for it to post a small loss for 2014 and earnings not to begin until 2015.

Horizon was up 33% to $5.95 Tuesday and hit a new year high of $6.08 earlier in the day. Keep in mind that the market cap here is still just under $400 million. As of noon, the trading volume was 8.8 million shares, and that is about 10 times a full day's normal trading volume. The consensus price target is $7.50, and that may be headed higher now.

Acquisitions can sometimes leverage a company up and can come at a big cost. This is an acquisition that is ramping up the company's profitability faster and adding sales starting in 2014.

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