Bio-pharmaceutical firm Horizon Pharma (HZNP 10.41, -5.17) trades about 33.2% lower this afternoon on the Q1 miss and lowered guidance from this morning. The company also announced an acquisition.
In terms of the results, HZNP missed market expectations on both the top and bottom lines for its Q1 report. The company reported Q1 earnings per share (EPS) of $0.21 on revenues which grew 7.9% to $220.9 million driven by strong growth from HZNP’s orphan and rheumatology business units, but offset by lower sales in the primary care business unit.
Net sales of medicines for rare diseases, which include RAVICTI, PROCYSBI, KRYSTEXXA, ACTIMMUNE, BUPHENYL and QUINSAIR, increased 75% compared to last year and represented 65% of total net sales. PROCYSBI and QUINSAIR were acquired on October 25, 2016; KRYSTEXXA and MIGERGOT were acquired on January 13, 2016.
Breaking it down by business, HZNP’s Orphan business which is comprised of RAVICTI, PROCYSBI and ACTIMMUNE saw net sales grow 70% as all three medications posted strong quarters. The Rheumatology business saw net sales from KRYSTEXXA increase 96% as improved commercial strategy and additional commercial investments have panned out well.
In the Primary Care business, HZNP saw net sales dip to about $65.6 million from $111.0 million a year ago. Management noted that during the second half of 2016, HZNP entered into rebate agreements with pharmacy benefit managers (PBMs) in an effort to secure broader inclusion of its primary care medicines on healthcare plan formularies. This transition to PBM rebate agreements, most of which became effective January 1, 2017, was a change to the commercial model of the company’s primary care business unit, and following this transition, Q1 primary care business unit net sales were lower than the company’s expectations.
The average net realized price (ANRP) in the Primary Care business was significantly below expectations due to higher patient assistance costs and higher PBM rebate levels than anticipated. This was a function of lower-than-anticipated adoption rates of the company’s primary care medicines onto certain healthcare plan formularies (custom clients), resulting in higher patient assistance costs to the company, as well as fact that PBM plans that covered the company’s primary care medicines are primarily plans that require a higher rebate (PBM-chosen formulary clients), resulting in higher rebate costs. Rebate amounts paid to the PBMs for custom clients are typically lower than rebate amounts paid to the PBM for PBM-chosen formulary clients.
Management noted the lower primary care business unit results were related to the implementation of the contracting model with pharmacy benefit managers, which has not performed in accordance with the company’s expectations. While the company is proactively addressing this underperformance, with greater visibility into the impact of this transition, they are revising their full-year 2017 net sales and adjusted EBITDA guidance.
That being said, HZNP now sees FY17 revenues in the range of $1.00-1.035 billion, down from $1.24-1.29 billion. The company also revised its FY17 adjusted EBITDA guidance to $315-350 million from $525-575 million, which assumes the lower net sales range and accounts for cost reductions, primarily in its primary care business, and a reinvestment of a portion of these reductions in KRYSTEXXA to maximize its long-term potential.
In addition to the results, HZNP also announced a deal to acquire River Vision Development and its development-stage medicine teprotumumab (RV001) for an upfront cash payment of $145 million, plus potential future milestone and earn-out payments contingent on the satisfaction of certain regulatory milestones and sales thresholds. The company anticipates a potential peak annual sales opportunity for teprotumumab, if approved, in excess of $250 million in the United States.