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
). 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
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
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
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
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
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.
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
"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