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Jazz Pharmaceuticals (NASDAQ:JAZZ) caught a lot of buzz in 2011 amid a rumored buyout by Pfizer (NYSE:PFE), which turned out to be a confirmation of a merger with Irish Pharmaceutical Azur Pharma. While news of a Pfizer buyout could have offered shareholders one of the sought after sector wins, news of Jazz's merger played more indicative of its financial consistency in the ever-volatile biotech genre. Picking up Azur meant picking up its 10 marketed drugs and their approximate $100 million revenue. Just as what's in the name, Jazz plays by its own rules and somehow comes out on top despite lacking the flash of others in the sector.

Estimates Going into Earnings

JAZZ releases earnings Monday February 27th. Analysts expect over $80 million in earnings from the most recent quarter. EPS estimates suggest anywhere from a $1.01 - $1.09 value. The stock is up over 31% year to date and was up nearly 5% Friday on high volume going into earnings. Jazz has had greater than 10% year over year revenue increase for the past 4 quarters to support its stock interest.

You Won't Fall Asleep on Jazz's Success…

Xyrem, the company's oral sodium oxybate narcolepsy drug, is its biggest revenue generator, bringing in some 80% of quarterly revenue. Jazz's collaboration with recent earnings release success Express Scripts (NASDAQ:ESRX) for its Xyrem Success Program ® has further solidified its place in the market, working to answer some concerns with potential abuse of the drug. The drug, with orphan status, is the only treatment for a narcolepsy with cataplexy diagnosis. The company's quarter 3 profits doubled largely as a result of Xyrem sales rising 68% with estimated 2011 sales value reaching near $235 million. Jazz's patent on Xyrem extends to 2024.

Additional revenue producers for the company include sales of OCD drug Luvox CR, which grew 46% in quarter 3. The Controlled Release version of the drug was developed in partnership with ELAN (NYSE:ELN). Patents for this drug expire in 2020. This OCD medication competes with the likes of other SSRI's, many of which are moving to generics.

…But There is a Drowsy Side

Competitive concerns may superficially center upon Teva Pharmaceutical's (NYSE:TEVA) acquisition of Cephalon in 2011, which added narcolepsy drug Provigil (modafinil) to its profile. Provigil netted Cephalon approximately $1 billion annually as it is typically first prescribed to patients due to its lower addiction profile. While TEVA is a pharmaceutical giant, with a recent EPS of $1.59 and a strong generics line, Provigil's pharmacological mechanism does not compete in the same diagnostic indication for narcolepsy with cataplexy as does Xyrem. Merck (NYSE:MRK) has its orexin targeting drug suvorexant in phase III clinical trials and will ask for FDA approval this year. Only 0.05% of the population has a form of narcolepsy, limiting this market.

Other concerns with Xyrem include limited label extensions. Xyrem is also known in non-prescription terms as GHB, or Gamma-Hydroxybutyric Acid, commonly referred to as the "date rape drug". In 2007, the company saw legal action regarding off-label promotion of Xyrem for the treatment of additional conditions. Abuse indications have more recently limited Jazz's ability to extend use of Xyrem to conditions such as fibromyalgia despite positive indication of pain reduction.

For Jazz, It's Eat or Be Eaten Time

In the end stages of the pipeline are variations on the company's anti-psychotic FazaClo® dosing options. An NDA has been submitted to the FDA for these increased dosing options. There is not much else in the pipeline and it doesn't appear that Jazz is trying to overplay what little there is.

Like an aging championship team with stars that are effective but embroiled in some controversy, it's time for Jazz to find some new blood. Jazz's unique position as a cash flow positive pharmaceutical company gives it ability to shop for a smaller, IP rich biotech. The Azur acquisition in the midst of Pfizer take-over rumors is, in my opinion, Jazz's statement that it wants to be a major player in the field and not a buyout target itself. Look for JAZZ to potentially make an offer on a smaller CNS based drug company with a rich pipeline in 2012.

An easy pick up target in the sleep disorders field might include San Diego based Samaxon Pharmaceuticals (NASDAQ:SOMX) which currently has non-habit forming Silenor® marketed. The microcap stock has limited pipeline itself but estimates a 2011 revenue of $25 million from Silenor®. The $0.60 a share company has partnered with Paladin Labs Inc. for the commercialization of its drug internationally.

Rexahn Pharmaceuticals (NYSEMKT:RNN) of Maryland offers a 10 drug pipeline consisting of psychiatric drugs as well as cancer treatments could beef up Jazz's line. With 4 drugs in Phase II trials, the future could spell revenue in the growing fields of Depression, Alzheimer's and Parkinson's and Erectile Dysfunction. While aiming to be world class in its field, this $50 million market cap company may be a world class target.

$100 million market cap Zalcius Inc. (ZLCS) offers another interesting pipeline, rich in immuno-inflammatory and pain management possibilities. With Jazz's interest in moving Xyrem into the fibromyalgia market, this may be a potential shift for the company. Exalgo ™ the company's pain management to market drug with Covidien (COV) moved interest in the stock in 2011. Recent sales force reductions and concern about Novartis' (NYSE:NOV) contract renewal with the company have raised questions about its direction.

If Jazz doesn't supplement its pipeline, it could be an attractive target addition for Large Pharma, which has cut its R&D budget across the board. With the "patent cliff"aprroaching, some big names may go hunting. Eli Lilly (NYSE:LLY) is losing Zyprexa, an anti-psychotic, and nearly $5 billion in sales in 2015. Jazz's FazaClo ® and its potential new dosing approval may lessen the sting. Seroquel, the AstraZeneca (NYSE:AZN) anti-psychotic has a patent that expires later this year. It will be looking to fill its $5 billion sales loss as well.

While it's eat or be eaten for Jazz, investors could win either way. A buyout could bring interesting gains to investors and an acquistion could strengthen the pipeline. The future looks bright for this financially stable pharmaceutical company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Jazz Pharmaceuticals Can Hit An Interesting Note In 2012