What: Horizon Pharma's (NASDAQ:HZNP) shares rose by more than 25% today on heavy volume after the company released its third-quarter earnings report. The specialty pharma company blew away consensus for its adjusted non-GAAP earnings by a whopping 75% and for revenue by 22%, leading the drugmaker to significantly raise its annual guidance as well. Most of this upside surprise stemmed from particularly strong sales of Horizon's arthritis treatment Duexis, which saw its sales jump 150% to $56.9 million, compared to the same period a year ago.
So what: Horizon has taken a fair amount of flack in the media lately for Duexis' reported $1,500 a month price tag. The issue is that Duexis is a branded combination of Ibuprofen and famotidine. As such, the drug's components, if purchased separately, would normally cost around $40 a month. So it's little surprise that Horizon has in many ways become the poster child for the raging debate over drug prices in the United States.
Now what: Horizon reported an adjusted gross profit of 92.1% for the third quarter of 2015, making it one of the most profitable companies in the entire pharmaceutical industry. Going forward, shareholders will therefore need to consider whether the political will now exists to force companies to lower the prices of their branded combination drugs -- thereby cutting into their impressive profit margins.
Alternatively, lawmakers could simply make it more difficult for pharmas like Horizon and Valeant Pharmaceuticals (NYSE:BHC) to use so-called "mail-in" specialty pharmacies to distribute some of their higher-priced medicines and thus circumvent pharmacists' ability to recommend cheaper generics when they're available.
Another potential threat is the possibility that pharmacy benefits managers will play a more active role in discouraging such practices. Recently, three of the top pharmacy benefits managers in the U.S. stated that they would no longer pay for prescriptions from Philidor Rx Services, one of Valeant's top specialty pharmacies. After this news, Valeant subsequently dropped Philidor Rx Services.
The bottom line is that politicians and payers alike are closely eyeing the profit margins of specialty pharmas like Horizon, implying that major changes could be coming down the pike. That's why you may not want to jump into this highflying biopharma stock right now.
George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. 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.