Raptor Buy Bolsters Horizon's Orphan Business As Primary Care Foots The Bill

Horizon will boost its orphan drug business through the acquisition of Raptor, using a combination of debt and cash from its primary care and other assets to fund the transaction.

Horizon Pharma PLC will continue to grow its orphan drug portfolio through acquisitions like the $800m purchase of Raptor Pharmaceutical Corp. announced on Sept. 12, but Horizon's primary care business still generates most of the cash that the company's using to expand its rare disease expertise.

Horizon Chairman, President and CEO Timothy Walbert said during a conference call to discuss the Raptor deal that the company has no plans to buy additional primary care assets, even though that business is on track to deliver more than $500m in sales this year, "driving significant cash flow that allows us to do these types of [orphan drug] business development deals that further diversify the company and that will continue to be our focus."

Dublin, Ireland-based Horizon reported $462.1m in net sales during the first half of 2016, including $261.7m in primary care product revenue, $60.6m from rheumatology medicines and $139.8m from orphan drugs.

Meanwhile, Raptor's two products – Procysbi (cysteamine bitartrate) and Quinsair (inhaled levofloxacin) – generated $59.5m in sales during the first two quarters of this year. The two drugs would increase Horizon's orphan drug business from 30% of its net sales during the first half of 2016 to about 38%, although the company said Raptor's first quarter sales would have made rare disease medicines about 45% of pro forma revenue.

Either way, Horizon is getting closer to generating 60% of its revenue from orphan products – a goal that the company cited in December when it revealed the $510m cash purchase of Crealta Pharmaceuticals LLC to access the specialty gout drug Krystexxa (pegloticase).

"The acquisition of Raptor demonstrates continued execution of our business development strategy, which is to acquire clinically differentiated long-lived assets that further diversify and build Horizon into a predominately orphan medicines company over time," Walbert said during Horizon's conference call. (Also see "Post Depomed Deal Flop, Horizon Buys Crealta For $510m" - Scrip, 12 Dec, 2015.)

Investors supported Horizon's orphan drug-dominated business plan by sending the company's stock price up 9.4% on Sept. 12 to $18.89 – about the same level where the stock was trading when Horizon ended its unsuccessful $1.7bn pursuit of Depomed Inc. The stock's high when the Depomed drama started in mid-September was $31.92. (Also see "Horizon Seeks Other Deals As Depomed Thwarts Takeover" - Scrip, 20 Nov, 2015.)

Raptor, which has seen steady sales growth for Procysbi, gained 20.5% to close at $8.98 in response to Horizon's purchase price. The transaction value of $9 per share represents a 21% premium over Raptor's Sept. 9 closing stock price.

Leveraging Cash And Debt To Build Orphan Business

The Raptor buyout is an all-cash deal that's expected to close soon – in the fourth quarter of this year – but Horizon will use just $125m in cash from its balance sheet and $675m in debt to finance the transaction. The company had $424.5m in cash as of June 30 and almost $1.3bn in debt, including loans and secured notes used to finance prior transactions.

In addition to Crealta, Horizon committed up to $1.1bn to buy the rare disease specialist Hyperion Therapeutics Inc. in 2015 and paid $600m for Vidara Therapeutics Research Ltd. in 2014. (Also see "Horizon Pharma signs $1.1bn deal to buy Hyperion" - Scrip, 30 Mar, 2015.) The company moved its corporate headquarters from the US to Vidara's tax-friendly Dublin domicile after that transaction. (Also see "Horizon buying Vidara for Actimmune, Irish HQ" - Scrip, 20 Mar, 2014.)

Hyperion gave Horizon Ravicti (glycerol phenylbutyrate) and Buphenyl (sodium phenylbutyrate) for urea cycle disorders (UCDs), while Vidara brought over Actimmune (interferon gamma-1b) for chronic granulomatous disease (CGD) and severe, malignant osteopetrosis (SMO). Horizon had exclusive rights to Actimmune in the US, Canada and Japan until May when the company agreed to pay Boehringer Ingelheim GMBH €25m for Actimmune rights in the rest of the world. The biologic is in Phase III testing as a treatment for Friedreich's ataxia. [See Deal]

Procysbi is approved in the US and EU to treat nephropathic cystinosis (NC), a rare metabolic disorder with about 500 patients in the US and 2,000 worldwide. Quinsair is approved in the EU and Canada to manage chronic pulmonary infections caused by pseudomonas aeruginosa in adults with cystic fibrosis. Raptor expects the two drugs to generate $125m to $135m in 2016 sales. Procysbi generated $94.2m in sales last year, which was a 36% gain from $69.5m in 2014.

"Procysbi has been the primary growth driver for Raptor and we believe it offers significant long-term potential with global peak sales potential of more than $300m annually," Walbert said. "Horizon Pharma has consistently demonstrated strong commercial execution and the ability to generate volume growth for our clinically differentiated medicines, including identifying patients and steadily growing the orphan medicines we have acquired."

Horizon will work to increase Procysbi revenue by getting more early-onset CN patients transitioned from the first-generation medicine Cystagon – about 100 patients in the US and 500 in the EU still take the four times daily drug – and by boosting the late-onset CN market through Raptor's ongoing screening program. The company anticipates a long-term revenue stream from Procysbi, which costs about $400,000 per year per patient, since the drug has patent protection through 2034.

The acquisition also has the potential to boost sales for Horizon's other orphan drugs, since Raptor already has a commercial and clinical presence in Europe for its two products.

Also, Quinsair has potential to add value beyond its EU market if Horizon is able to pursue approval and commercialization in the US. Raptor is waiting for US FDA feedback on the required path to approval and Horizon will provide an update on those discussions later this year.

Raptor also is developing RP103 – a delayed-release version of Procysbi – in Phase III for Huntington's disease and in Phase II for mitochondrial diseases, but Horizon did not provide any information about the potential value of that asset for its business. The company will discuss its plans for Raptor's pipeline when the deal closes in the fourth quarter.

Raptor discontinued development of RP103 in the treatment of non-alcoholic steatohepatitis (NASH) a year ago after the drug failed in an investigator-sponsored Phase IIb pediatric NASH clinical trial. (Also see "Raptor Falls On Failed Investigator-Run NASH Study" - Scrip, 15 Sep, 2015.)