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Shares of Horizon Therapeutics (NASDAQ:HZNP) surged in after-hours trading yesterday when the company announced it has entered “highly preliminary” discussions with three big pharma companies on potential takeover offers. These negotiations are usually not publicly disclosed, but since Horizon is domiciled in Ireland, the Irish takeover rules require the disclosure of such negotiations.
I have written extensively about Horizon for years, including the comprehensive article in August where I discussed why I believe the company was one of the best investments in biotech at the time. The stock is up approximately 70% since that article was written (the last trading price at the time of writing was around $103) and while Horizon may no longer be the best value in biotech today in terms of risk-reward, I believe its standalone value is still higher than the market is assigning today.
Since it is now known that three companies are interested – Amgen (AMGN), Sanofi (SNY), and Johnson & Johnson (JNJ), the focus of this article is a potential deal value, assuming a deal is to be consummated.
What has likely attracted the three companies is Horizon’s highly profitable revenue base – it will generate approximately $3.6 billion in revenues this year and $1.33 billion in adjusted EBITDA, and it has generated approximately $1.4 billion in non-GAAP operating cash flow in the last four quarters. The company is making heavy investments in the commercialization of Tepezza and pipeline expansion, and this should drive significant top and bottom line growth in the following years. But there is also probably some room for cost synergies and a big pharma company could squeeze more profit out of Horizon’s growing revenue base.
My valuation range on Horizon is $152 to $189 per share, but I am acknowledging that the high end of the range is unlikely to be reached if a deal is to be made in the near term. That is because the share price was so depressed prior to yesterday’s announcement.
I believe a deal value in the $135 to $150 range is realistic and it would represent a 70% to 90% premium to the unaffected share price. The low end is more or less the average buyout premium for biotech companies, and the high end represents a more optimistic scenario as it is publicly known that there are multiple bidders. And others may join the party – I am surprised AbbVie (ABBV) is not in the mix, but that could change in the following weeks, and Merck (MRK) and Pfizer (PFE) are potential suitors as well.
The other way to look at the potential deal value is the 5-year revenue multiple. As I wrote in my June article on Seagen (SGEN) when it was rumored to be acquired by Merck, the average 5-year forward revenue multiple is approximately 8x, but it is mostly based on companies that are in the earlier stages of launching their initial products, and a multiple in the 5x to 6x range seems more realistic and it puts Horizon’s value between $120 and $145 per share based on the 2027 Street revenue consensus of $5.82 billion. Applying a multiple of 8x would push the value to approximately $190 per share.
Now, it is also a matter of how realistic those revenue projections are and what Horizon’s internal projections are, and what the company believes it is worth. As I covered in my August article, I believe forward estimates significantly understate Horizon’s top and bottom line growth potential, and I am of the opinion that Horizon is not going to sell itself for a low valuation and that this rules out a sale at the low end of the wide $120-$190 range I outlined in these different scenarios, and as I said, I believe a potential realistic deal value is in the $135 to $150 range.
Of course, there can be no assurance that a deal will be made, but I bought Horizon for its standalone value anyway and believe the company could be worth more than $135 or $150 in a few years if it stays independent. That makes any scenario a win-win for me. If the company gets acquired, my portfolio gets a big cash infusion, if it does not, I continue to hold a potential long-term winner. For the time being, I have no intention of reducing my position, but absent a deal announcement and the stock moving closer to or above $120 per share, I would consider reducing my position.
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