Why Does Billionaire Thomas Steyer’s Farallon Love This Pharmaceutical Company?

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In a 13G filing last week, billionaire fund manager Thomas Steyer of Farallon Capital Management announced that his firm now had 5.4% ownership of Horizon Pharma (NASDAQ: HZNP) after buying almost 1.9 million shares. Steyer founded Farallon in 1986, and previously worked for Goldman Sachs and Morgan Stanley.

The Farallon news came in conjunction with other recent reports that notable pharmaceutical investors Tang Capital and Sutter Hill Ventures took a 9.9% and 6.1% stake, respectively, in Horizon. Tang Capital is also a large shareholder in Penwest Pharmaceuticals and A.P. Pharma, and Sutter Hill is a notable investor in Threshold Pharmaceuticals (NASDAQ: THLD), which is up almost 500% year to date.

Threshold announced an agreement with Merck earlier this year to co-develop and commercialize TH-302—a hypoxia-targeted drug. Threshold is set to receive an upfront payment of $25 million, and could receive up to $35 million if additional development milestones are met during 2012. Next year EPS for the company is still in the red, with estimated 2013 EPS of negative $0.21, but this would still mean an 87% gain from the previous year.

The Horizon stake represents a new position for Farallon, which took positions in other biopharmaceutical companies during 2Q, such as Amylin Pharmaceuticals and Merrimack Pharmaceuticals (NASDAQ: MACK). Merrimack has a focus on developing medicines to treat serious diseases, with a particular focus on cancer. Up 50% year to date, the company is also, like the other pharmaceutical companies mentioned, operating at a negative EPS. Next year’s EPS is expected to be negative $0.91, but up 50% year over year.

Horizon, a biopharmaceutical company that is developing medicines that target arthritis, is flat year to date. Horizon’s 2Q results put the company’s revenues up to $3.8 million, compared to the same quarter in 2011 at $1.3 million. Also, the company continued its string of losses, posting a net loss of $22.8 million, or negative EPS of $0.68.

In July, Horizon announced FDA approval for RAYOS, a drug used to treat a broad range of diseases including rheumatoid arthritis and polymyalgia rheumatic, among others. The company still has a long way to go before offering the drug to consumers, and is still very speculative. Running tight on liquidity, Horizon recently announced a move to raise more capital that will allow it to offer as many as 36.9 million new shares, compared to the nearly 34 million shares that are currently outstanding.

A couple key competitors for Horizon include Par Pharmaceuticals (NYSE: PRX) and Perrigo (NYSE: PRGO). Both of these companies are a bit bigger than Horizon. Perrigo has beat EPS estimates every quarter last year and is expected to grow EPS next quarter by 18% from the same quarter last year. Perrigo has also decided to try its hand in the animal care market, purchasing Sergeant’s Pet Care Products for $285 million last week. This could be a key move for Perrigo to enter the $8 billion pet care industry, as it is already expected to add $0.12 to EPS next quarter.

Par missed last quarter’s estimates by 250%, but in July the private equity firm TPG announced plans to purchase Par for $1.9 billion. The deal, valued at $50 per share, pushed Par’s stock up 50% year to date. Even with the share price spike, the company trades at a forward P/E of 14, much less than it’s trailing P/E of 22.

As far as Horizon goes, the company should be considered a speculative play, but has attracted some large interest from other notable pharmaceutical investors. In fact, Farallon, Tang, and Sutter now collectively own over 20% of its outstanding shares. Also worth noting is the string of insider purchases between $3.49-$3.59 by a company director; considering the company currently trades around $3.50, investors can buy in for cheaper than an insider. For a complete look at the insider and hedge fund sentiment surrounding Horizon Pharma, continue reading here.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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