Shares of Jazz Pharmaceuticals (JAZZ) are up 77% this year, and the stock remains cheap. The company is growing earnings and revenue considerably, and is not being priced accordingly. This is due to its main product Xyrem and concerns that generic competition is a serious threat. However, Jazz is working on product diversification, and the company made two strategic acquisitions last year. Jazz is also working on an enhanced version of Xyrem, which might transition the franchise ahead of generic introductions. I believe that Jazz is seriously undervalued and trades at a significant discount to growth. The company has a strong balance sheet and may use it to make new acquisitions and further diversify its product offering, and may be an acquisition target itself.
A totally different company today
2012 was an important year for Jazz as it made a strategic merger with Azur Pharma and the EUSA Pharma acquisition. The Azur Pharma merger enabled the company to move its headquarters to Ireland and reduce its tax rate by two thirds, and gain ten marketed specialty pharmaceutical products in the U.S. in the central nervous system and women's health areas. The EUSA Pharma acquisition expanded Jazz's global footprint and marketed product portfolio, which includes Erwinaze, a treatment for a life threatening form of leukemia, as well as other highly specialized products. Erwinaze is now the second top-selling product in Jazz's product portfolio, with $44.86 million revenue in the second quarter, which represents a 36% increase over the same period last year (on a pro-forma basis).
With these two strategic moves, Jazz has made an important diversification of its product portfolio, with a clear attempt to expand its marketed product portfolio and its pipeline of potential new products. This will enable the company to be less dependent on its key product - Xyrem, and reduce concerns over Xyrem's potential generic competition, and the impact of such competition on the company's future revenues and earnings.
Xyrem concerns are overblown
Jazz has led a vigorous defense against potential generic competitors. Jazz has sought permanent injunctions to prevent Roxane Laboratories and Amneal Pharmaceuticals from infringing on its patents (both companies have submitted applications with the FDA seeking to market generic versions of Xyrem). However, most analysts believe that the generic competition would not be able to launch a generic version of Xyrem until 2018 or beyond. Jazz is also going beyond legal measures. The company announced a licensing agreement with Concert Pharmaceuticals in February. The agreement aims to develop an enhanced version of Xyrem. If everything goes as planned, Jazz would transition the product ahead of generic introduction. In the end, the barriers to entry are higher than expected, and Jazz should reap long-term benefits of its leading product.
Jazz reported second quarter earnings that missed analyst estimates. But the company raised full year revenue guidance to $860 million to $880 million from the earlier range of $830 million to $860 million. Both Xyrem and Erwinaze sales expectations were raised. Full year adjusted earnings guidance was also raised to $6.20 to $6.40 from $6.10 to $6.30. At the mid-point of company guidance, earnings and revenue are slated to increase 30% and 48%, respectively. I believe that the company will continue its excellent execution and we should see continued strong sales of Xyrem and Erwinaze going forward.
Jazz has delivered double and triple digit earnings and revenue growth in the last couple of years. The company is trading at a significant discount to growth, with earnings growing north of 30% and with trailing P/E of 17.8 and a forward P/E of 11.8. Jazz's growth phase is far from over, and the valuation is depressed because of the before mentioned Xyrem generic competition concerns. However, these concerns are quite possibly highly overblown, and the company's future prospects are brighter than previously expected. Although the share price is up more than 70% this year, there is still ample room for improvement, and Jazz remains undervalued. Jazz also might be an acquisition target due to its strong balance sheet, robust marketed products, promising pipeline and the fact that the company is based in Ireland, and thus has a favorable tax rate.
Jazz remains undervalued due to fears of Xyrem generic competition coming to market. I believe that the company's legal actions and work on an enhanced version of Xyrem will yield results, and that the company will be able to prevent generic competition coming to market in the next couple of years. The company is also diversifying its product line with the Azur Pharma merger and EUSA acquisition, which positions the company for long-term growth and to reduce its reliance on Xyrem. Jazz might also use its strong balance sheet to make more acquisitions, which might further enhance the company's pipeline, and Jazz itself might be an acquisition target.