Acquisitions Add To Jazz Pharma's Diversity


Fighting off the Sandman is no easy task.

The struggle can be particularly grueling for the 157,000 Americans who suffer from narcolepsy. More than 10,000 have turned to Xyrem in an attempt to win that battle.

The drug has delivered stellar revenue growth forJazz Pharmaceuticals ( JAZZ ). In Q1, sales of Xyrem soared by 60% from the prior year quarter to $117.5 million. Although it is not the only drug in Jazz's arsenal, it did account for 65.7% of product sales.

Jazz has a portfolio of drugs that target conditions including obsessive compulsive disorder and schizophrenia. Its No. 2 seller, Erwinaze, is used in the treatment of childhood cancer.

To augment the growth from Xyrem sales, Jazz has been proactive on the M&A front. At the start of last year, the company merged with Azur Pharma in a $576.5 million all-stock transaction. The deal resulted in the company becoming a tax resident of Ireland with headquarters in Dublin.

Degree Of Diversity

Jazz followed that move with a $678.4 cash purchase of EUSA Pharma in June 2012. That transaction added Erwinaze to the company's lineup. Both acquisitions have brought an added degree of diversity to the company's earnings composition.

Last month, Jazz announced a 54% jump in Q1 adjusted diluted EPS when compared to the year-ago quarter. The uptrend was powered by a 91% pop in total revenue.

The company's CEO, Bruce Cozadd, highlighted volume gains in a conference call discussing the results. "Xyrem remains a key driver of our growth," he said. "In the first quarter of 2013, we were pleased to achieve 15% volume growth compared with the same period of 2012. The average number of active Xyrem patients grew to approximately 10,550 compared to 9,500 in the same period of 2012."

The profit growth that has resulted from Xyrem sales has also put a charge into the company's stock price. Shares of Jazz have rallied 31.1% so far this year and are up 61.1% over the last 52 weeks.

The path of expansion at Jazz is expected to continue. The consensus among analysts is that the company will generate EPS growth of 28% on a 45% increase in sales for its full-year results. Next year, Wall Street is calling for the company to check in with a 22% rise in EPS and an 19% spike in sales.

These estimates reflect favorably upon the outlook for gains from existing products. "There is visibility into strong double-digit top line growth for both Xyrem and Erwinaze, in our view," said Irina Rivkind, an analyst for Cantor Fitzgerald. "This is coupled with significant operating leverage."

Xyrem will be called upon to do much of the heavy lifting in the quarters that lie ahead. "We believe that Xyrem will comprise over 70% of the company's revenues over time based on modest volume growth and pricing assumptions," Rivkind said. "If Jazz acquires other assets then this percent contribution could be smaller."

Over the long term, Xyrem may have more upside than what the market is expecting. "I feel that the sustainability of Xyrem sales is probably underappreciated," said Louise Chen, an analyst for Guggenheim Partners. "I think that people feel that generic competition for the product is imminent, and I don't think that's the case."

Chen believes Jazz's low average tax rate may appeal to suitors. "They have a very smart and nimble management team," she said. "They've thought a lot about the future growth of the company. They've gone and got a lower tax rate now, which makes them more competitive and also makes them a potential acquisition target in a consolidating space."

To keep its growth prospects intact, Jazz has led a vigorous defense against the potential for generic competition. Roxane Laboratories and Amneal Pharmaceuticals have both submitted applications with the Food and Drug Administration seeking to market generic versions of Xyrem.

Jazz, in turn, has sought permanent injunctions to prevent the companies from infringing on its patents.

Generic Alternative

It could be some time before a generic alternative makes it to market. "We continue to believe that a settlement is the most likely outcome," wrote Ken Cacciatore, an analyst for Cowen and Co., in a May 8 research report. "Any agreement, given the complexities of the patents and the regulatory hurdles, would be for a generic to launch at the earliest in 2018 or beyond."

Legal measures are just one component of Jazz's strategy to protect its Xyrem platform. The company has also been proactive with its research and development efforts.

In February, Jazz announced a licensing agreement with Concert Pharmaceuticals aimed at developing an enhanced version of the drug.

"In essence this product would make the twice-nightly Xyrem into a once-nightly formulation," Cacciatore wrote. "Assuming that the drug enters Phase II in 2014, we would anticipate likely clinical trials in 2015, with an approval in 2015-2016, which should be sufficient to transition the franchise ahead of generic introductions."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: JAZZ

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