Seeking Alpha
Newsletter provider, dividend investing, ETF investing, long/short equity
Profile| Send Message| ()  

By Alexander Moschina

It wasn’t exactly the way that California-based Jazz Pharmaceuticals (Nasdaq: JAZZ) wanted to start the week.

On Monday, October 11, word came through from the Food & Drug Administration that it had rejected the company’s fibromyalgia treatment called JZP-6.

The reason? Turns out it contains sodium oxybate – an active ingredient in GHB, also known as “the date rape drug.”

But then a funny thing happened. Rather than Jazz shares getting clobbered (as you’d ordinarily expect after such news), the stock began to climb. From a closing price of $10.51 on October 11, the stock now sits at $19.08 (as of December 20) – a remarkable 81% gain, which included a 52-week high of $19.41 on December 17.

In addition, Jazz’s third quarter earnings results led the company to raise its full-year profit forecast by 38% to $1.45 – $1.50 per share.

Year-to-date, Jazz shares are up a whopping 142%. And going into 2011, this drug manufacturer shows no sign of slowing down…

Two Drugs… A 79% Combined Sales Jump – And Just a Taste of Things to Come…

Breaking down Jazz’s third quarter results, the company notched up total revenue of $44.8 million – a 45% jump over the $30.8 million during Q3 2009. The increase came as it saw a significant sales rise for two of its major drugs…

  • Luvox: The anti-depressant, used to treat Obsessive Compulsive Disorder, brought in $6.6 million for the quarter. Year-over-year, sales of the drug have increased more than 30%.
  • Xyrem: This drug is taken to prevent cataplexy attacks (episodes of muscle weakness) in patients with narcolepsy. It raked in $37.2 million for the quarter – a 49% increase over 3Q 2009. But this treatment will soon yield even bigger profits

Jazz Shares Are Flying… With Rising Sales and Prices Set to Fire Shares in 2011

Any day now, Jazz will raise the price of Xyrem by as much as 22%. And considering that the drug makes up more than three-quarters of the company’s total revenue, the hike is guaranteed to send 2011 profits soaring.

According to Jazz co-founder and President Robert Myers, “We could more than double that current price and still be below [the price] ceiling.”

And as prices go up, research and development costs are plummeting, making way for huge profit margins. During the third quarter of 2009, R&D expenses totaled $7.6 million, but in the same period this year, they fell to $7.3 million. Overall, costs have dropped by more than 40% this year.

So even though the FDA rejected Jazz’s fibromyalgia treatment, that’s not enough to squash this up-and-coming biotech. Unlike other one-trick companies, Jazz already boasts two major products with sales rising. Plus, it’s now cheaper for the company to develop the items in its pipeline.

In a recent conference call, CEO Bruce Cozadd described 2010 as a “pivotal” year for the company. And thanks to the strong momentum Jazz has built, 2011 is shaping up to be even bigger.

Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.

Disclaimer: The Oxford Club LLC/Investment U and Stansberry & Associates Investment Research are separate companies, and entirely distinct. Their only common thread is a shared parent company, Agora Inc. Agora Inc. was named in the suit by the SEC and was exonerated by the court, and thus dropped from the case. Stansberry & Associates was found civilly liable for a matter that dealt with one writer's report on a company. The action was not a criminal matter.

Source: Jazz Pharmaceuticals: When Is FDA Rejection a Good Thing?