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TEPEZZA

-HZNP’s Tepezza drug for thyroid eye disease showed stronger than expected 1Q20 growth -Even after a post-1Q20 report jump, HZNP shares still reasonable value vs growth potential -Both Tepezza an Krystexxa medicines show promise; stock could rise up to 30% If the stock market recovery is for real, and we think it is, some investors might move away from more defensive equities such as healthcare shares. That’s understandable, but all portfolios can benefit from balance and diversity, so don’t eschew healthcare stocks completely. That’s doubly true if the healthcare stock in question appears to be on the cusp of fast growth and potentially turning sustainably profitable.  And what if it has the only U.S. Food & Drug Administration (FDA) approved drug to treat the debilitating thyroid eye disease (TED)? TED is a rare, progressive and vision-threatening autoimmune disease that heretofore has been treated with steroids and surgery.  Throw in a promising pipeline and you are describing Horizon Therapeutics Plc (HZNP). Source: FS Insight, Bloomberg The Ireland-domiciled biopharma company specializes in treatments—some of the orphan drugs for rare diseases—and currently has 11 approved medicines, for diseases such as gout, urea cycle disorders, rheumatoid and other inflammatory illnesses, among other disorders. HZNP  began in 2011 with $7 million in sales and two medicines and last year recorded $1.3 billion in revenue. Two of its drugs, in particular, could bring in $2 billion at peak –more below. What I find exciting about HZNP is that Wall Street underestimated the potential earnings power of HZNP, particularly its Tepezza infusion treatment for TED. And even though the stock popped on May 6 on news of a big and unexpected rise in Tepezza 1Q20 sales, it appears that the market still doesn’t fully recognize the long term potential.  Perhaps because this biopharmaceutical deals with orphan drugs—which  among other things, are for diseases that affect less than 200,000 people in the U.S.—some investors might pass over HZNP, not seeing the possibility of the “blockbusters,” or medicines that can ring up $1 billion in sales and beloved by investors. Nevertheless, Tepezza, the first FDA approved orphan drug (last January) for TED, just might be a blockbuster. It received orphan drug designation, which means the FDA may not approve another application for the same drug for the same indication for seven years except in limited circumstances. This doesn’t block the approval of a different drug for the same rare disease or condition, but it does give HZNP a head start. “It’s a company that is meeting unmet medical needs,” and doing so at a better than expected growth rate, says Marshall Kaplan, who runs the Fundamental Equity Advisor unit of Ingalls & Synder and is a fan of the stock. On May 6 the stock rose to $47 from $37 after the 1Q20 results where Tepezza brought in $23.5 million in sales, far higher than the $30 million to $40 million annual run rate that the company and Wall Street were previously expecting. I believe investors are likely still not entirely familiar with both Tepezza and HZNP’s other drugs.  Kaplan’s firm owns HZNP shares for clients since early April and is purchasing shares for new clients. The surprise rise in Tepezza helped HZNP beat 1Q20 EPS estimates. What some investors could be missing, adds Kaplan, is that even though Tepezza is an orphan drug it has been approved for broad indications of TED. It’s an illness that is physically debilitating, hard on pregnant women, and sometimes requires multiple surgeries.  The sales ramp up is much stronger than even the company expected, he adds.  Indeed, HZNP increased its guidance for Tepezza in 2020 to $200 million, despite the fact that the coronavirus epidemic forced to company to, as it says in its 10Q filing, “move its sales force into virtual mode.” And probably some patients could not get to the infusion centers where the drug is administered. Yet the take up of the drug was strong. Now the company says it could be a blockbuster drug and the Street is moving to a potential $1.5 billion estimated peak sales for Tepezza.  Along with Krystexxa for gout, where sales rose 78% in the first quarter, the company says together they could produce $2 billion peak sales. In both cases the company is seeking approvals for additional indication uses for the drugs.  In the first quarter, total HZNP sales rose 27% to $356 million. HNZP produced EPS of 40 cents, beating estimates by 19 cents, driven by Krystexxa and Tepezza growth. Since then some analysts have raised their respective EPS projections and target prices. At $47 per share, the stock trades at about 18 times consensus analyst estimates of $2.61 next year, which I think is inexpensive given the growth possibilities. I’m leaving out 2020 EPS projections because investors are generally ignoring 2020 numbers for most companies, thanks to the COVID-19 outbreak and the economic shut down. Some investors will note that HZNP shares have about doubled since the Covid-19-induced bear market share price of $24 but for a more fair comparison about the recent stock jump, investors should note the stock was almost $39 in January. If the 18x price/earnings ratio holds and is applied to the $3.34 estimate for 2022, which investors will be looking to in about six months, I think the price could eventually reach $60, a nearly 30% rise.  Once the economic shut down is cleared, I think it’s possible that HZNP will surprise on the upside again with the 2Q20 results. Source: FS Insight, Bloomberg The company says 200 patients were using Tepezza in the first quarter and that another 1,500 had completed patient enrollment forms. According to a recent report from Cowen: “one of the largest unmet questions in any orphan disorder is the actual size of the market… but these initial start metrics are solid.” The report adds that management has confirmed confidence in its 15,000-20,000 annual TED treatment population. The price for a complete course is $200,000, which is mostly paid for by the health insurance company.  Moreover, sales projections from the Street and the company in general tend to include only the active TED sufferers, Kaplan adds.  There are many patients with inactive TED, where the disease could flare up and the use of Tepezza increase. He sees “powerful” growth in 2021 and 2022 as the take up of Tepezza and Krystexxa increase, and the potential achievement of additional approvals for new indications. HZNP has other attractions, including a solid balance sheet with about $700 million in net debt, a return on equity over 30% and Ebitda margins that could rise from 30% towards 40% with the success of the two main drugs. That doesn’t include the other drugs in the pipeline even as these two get much of the attention. Besides potential indications for both, HZNP is developing HZN-825, a drug for in diffuse cutaneous systemic sclerosis (dcSSc), a rare, chronic autoimmune disease with a high unmet need and a relatively high mortality rate. There is no FDA-approved treatment. While HZNP has a head start, investors should take into account that companies like Immovant (IMVT) and Alexion Pharmaceuticals (ALXN) are working on competing therapies for TED. But by comparison, they are at the beginning stages and it might be some time before another TED treatment is approved. If the company shows another blowout quarter in the second quarter, I think the stock could go up again.  Where I could be wrong:  There are competitors working on new formulations, and the HZNP growth story relies on two drugs currently.  Additionally, investors might decide healthcare in general is less attractive if the economic cycle recovers quickly. Bottom Line:  HZNP’s drugs show a great deal of promise. With a still reasonable valuation, if Tepezza and Krystexxa begin to ramp up as expected, the stock is likely to become more attractive. 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