Are you a wild-eyed optimist? You might need to be one to find anything good related to the recent events with Horizon Pharma (Nasdaq: HZNP ) . The company announced details on Thursday of a new share offering. Shares promptly fell by 24% the same day.
The bad news was easy to spot. As many as 36.9 million new shares could be sold. There are only 33.79 million shares outstanding. Dilution works like a charm in driving share prices down.
But is there any good news for investors with Horizon's share offering? Let's take a look.
Sometimes news can be good relatively because the alternatives are bad. That seems to be applicable with Horizon Pharma's share offering.
As of June 30, Horizon's cash stockpile totaled around $63 million. The company is burning nearly $8 million per month. Without something happening, the money runs out in early 2013.
Actually, the practical timeframe is shorter than that. Horizon's current lending agreement requires the company to maintain a minimum liquidity of $30 million as of Dec. 31, 2012. Additional cash had to be found to stay in compliance with the agreement.
With the clock ticking, Horizon faced three alternatives: run out of money, borrow more or issue more shares. Running out of money is certainly the worst option. The company's lending agreement restricts its ability to incur more debt. Therefore, in view of the alternatives, issuing more shares looks pretty good.
The other sliver of good news for investors is in what the $75 million that will be generated from the share offering might accomplish. Essentially, the offering gives Horizon at least another seven months. Those additional months hold potential.
Horizon launched its Duexis drug in late 2011. Duexis is used in the treatment of rheumatoid arthritis and osteoarthritis. In June, the company announced a partnership with Covidien (NYSE: COV ) to market the drug in the U.S. and Latin America. This joint marketing arrangement, combined with Horizon's plans to nearly double its Duexis sales force, could spur increased sales over the next year.
The company also received FDA approval for its second product, Rayos, in July. Rayos is used in the treatment of several diseases, including rheumatoid arthritis, polymyalgia rheumatica, psoriatic arthritis, ankylosing spondylitis, asthma and chronic obstructive pulmonary disease. Horizon expects to launch Rayos in the U.S. in the fourth quarter of 2012.
The additional funds made possible by the share offering gives Horizon the opportunity to move both products forward. That's good news, right?
It does take some wild-eyed optimism to find positives in a huge stock plunge. And yet, if you own shares in Horizon Pharma, the best hope for good news is in the success of Duexis and Rayos. That success isn't possible without additional cash.
However, Horizon still faces significant challenges. Par Pharmaceuticals (NYSE: PRX ) wants to move forward with a generic version of Duexis. The two companies are in litigation.
Other competitors also threaten with their own products. Abbott Labs (NYSE: ABT ) could see its Humira become the world's top-selling drug this year. Pfizer (NYSE: PFE ) hopes to gain FDA approval soon for tofacitinib, a drug targeted for treating rheumatoid arthritis.
And Horizon could very well be in the same position of running out of money in late 2013 even with moderate levels of success for Duexis and Rayos. While there is at least the prospect of good news even with the recent stock plunge, Foolish investors should hold off on buying Horizon. Open-eyed pragmatism outperforms wild-eyed optimism over the long run.
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