Interview – Acquisitions to brighten Horizon
It is many a small biotech’s dream to become that most elusive of beasts, a "fully integrated" life sciences company, and the UK’s Horizon Discovery is no stranger to this desire. The group’s rash of acquisitions and partnering deals since it debuted on the London stock market has, however, made it look more serious than most.
In the seven months after its IPO Horizon has bought two companies and struck one significant distribution agreement, enabling it to promise profitability by 2016. Yet despite these efforts Horizon’s share price, after peaking briefly, has remained stubbornly below the 180p float price, something that its chief executive, Darrin Disley, puts down to general issues in the market. “We are not worried about it in the short term,” he says.
Alongside market malaise, another element to the stock price drift is the number of shares that were not locked in at float and have in recent months dripped out into the market. Forced sellers of Horizon shares have also taken their toll. “Once we clear out that supply we feel the demand will go up,” Mr Disley says.
Horizon expects future demand to be driven by internally revised growth forecasts after its acquisition spree, which started with CombinatoRx in May. The deal saw Horizon capitalise on the ailing Zalicus’s misery (Zalicus in agony after painkiller failure, November 12, 2013), and snap up one of the profitable bits of the business for just £4.7m ($8m).
CombinatoRx adds the ability to screen existing and new drugs in combination, tapping into the trend to mix drugs to combat disease resistance while supporting companies’ efforts to extend products' life span.
“Take a drug that has a known patient population and you could see where else it has impact in terms of synergies with other drugs in your inventory, so you can find combinations that not only give you better results for the genetic patient population you are targeting, but maybe stack up against other patient populations to give you a broader market,” says Mr Disley.
Horizon’s second acquisition, of US-based Sage Labs in September, was struck at the higher potential cash and share price of $48m, a reflection of the increasing competition in a space that has seen Merck KGaA buy Sigma Aldrich for $17bn and Pfizer strike a $110m collaboration with Cellectis, though the latter was primarily product-driven.
Strategically, Sage completes the circle of being able to offer both in vitro and in vivo cell models, and is part of Horizon's aim of covering all stages of healthcare from “sequence to treatment”. More recently, Horizon has also struck a distribution agreement with Haplogen Genomics, giving it the ability to sell an affordable knockout cell line production service to academics and companies.
Both CombinatoRx and Sage are expected to add to revenues immediately and could keep Horizon on track to reach profitability by 2016. However, analysts at N+1 Singer believe that this aggressive target might only be achieved if Horizon puts the brakes on its R&D investment activities.
The R&D investments, which Mr Disley says are only carried out “if there is a strong business case”, typically involve outlays of £500,000 to £1m to take projects forward before they are licensed out. This and its core service business, of providing gene editing technology and cell line development in return for future revenues, has helped Horizon rack up potential milestones of £158m, including a $74m deal with AstraZeneca.
This figure should, however, be put in the context of development timelines of 15 years plus. The nature of very early drug discovery also means that Horizon will realistically only see a tiny fraction of this impressive-sounding amount.
The numbers game
However, by adding to its businesses Horizon beefs up its ability to offer more services and hopefully strike more deals with pharma partners. By playing this numbers game and using its technology, which is designed to reduce the number of clinical failures, there will hopefully be even more winners to counter the natural attrition in drug candidates and provide the growth Horizon is forecasting.
Whether this will shift Horizon’s shares in the medium term is another matter, especially given the illiquidity of the stock. Jonathan Milner, founder of Abcam and Horizon's non-executive director, holds 13.2%, and the US private equity owners of Sage own a further 13%.
With the first big milestone from AstraZeneca expected in distant-looking 2016, more deal making or a very strong showing from the newly added businesses might be the only way to give Mr Disley the stock lift he wants.