Jazz Pharmaceuticals Could Be A Buy, Depending On Investment Strategy

| About: Jazz Pharmaceuticals, (JAZZ)
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Jazz Pharmaceuticals has significant earnings supporting its stock price.

Its pipeline and R&D budget are mediocre.

Leukotac Phase 3 data is the key event to watch for.

Motivation: I own 7 biotechnology companies that are among the top 10 holdings in iShares Biotechnology ETF (NASDAQ:IBB). I am looking to invest in companies I think can show Alpha over the IBB. Last week, I researched Pharmacyclics, Biomarin and Incyte. Going down the list, the next company that looks like it might make the cut is Jazz Pharmaceuticals (NASDAQ:JAZZ).


Jazz Pharmaceuticals has a market capitalization of $10.5 billion at close of market with share price of $172.79 on March 31. Jazz represented 1.64% of the IBB on March 24, 2015, ranking 15th by weight. Net income in Q4 2014 was $81.6 million GAAP and $153.1 million adjusted (non-GAAP). That gives a good impression versus PCYC, BRMN, and INCY which have larger market capitalizations and smaller, or even negative, net incomes. But it is still a lot of market capitalization, given current revenue levels.

Revenue in Q4 2014 was $328.1 million, up an impressive 39% from $235.8 million a year-earlier.

Net income was $81.6 million on a GAAP basis, but $153.1 million on an adjusted (non-GAAP) basis. Those numbers are up 48% and 44% y/y, respectively. So net income is growing faster than revenue, a plus. EPS for Q4 was $0.93 GAAP, $2.44 non-GAAP.

The R&D budget in Q4 was just $24.6 million, which seems low to me. It may be an indication that Jazz is not making much of an investment in its pipeline.

Cash and equivalents ended at $684 million, but that has to be weighed against long-term debt of over $1.5 billion.

Jazz acquired Gentium, and with it Defitelio and other therapies, in January 2014.

Approved Product Sales

Jazz has four products with commercial revenues, plus a group it lists as psychiatry products, and products classified as Other. Revenues are listed in Table 1:

Product Indication Q4 2014 revenue,
Q4 2013 revenue % y/y
Xyrem narcolepsy $222.5 $164.2 36%
Erwinaze acute lymphoblastic leukemia 52.8 43.5 21%
Defitelio (Defibrotide) Hepatic veno-occlusive disease 19.2 12.7 51%
Prialt pain 10.0 6.4 56%
Psychiatry schizophrenia 8.4 9.1 -8%
Other 11.3 12.8 -12%

Of the current product pipeline, only Defitelio appears to be set for significant label expansion, in its case to less narrowly defined veno-occlusive disease. Xyrem is in a Phase 3 trial to extend the label to pediatric patients.

While revenue expansion of Xyrem, Prialt and Erwinaze seems to be strong, it appears to be likely to become more limited over time because of the limited number of people needing these products. Note that these drugs are still getting approvals in international markets.

Pipeline Value

At the forefront of the Jazz pipeline is Leukotac for steroid refractory AGVHD (acute graft versus host disease), which has completed Phase 3 enrollment. Top line data may be reported as early as the middle of this year. GVHD is a growing indication as more organs and stem cells are transplanted, so this could become a significant source of revenue if approved by the FDA.

In the current quarter, Jazz expects to start a Phase 3 trial of JZP-110 for EDS (Excessive Daytime Sleepiness) in narcolepsy, as well as a Phase 3 trial for EDS in OSA (Obstructive Sleep Apnea). Given the success of Xyrem, these are trials where Jazz's expertise seems likely to pay off with positive results.

A newer molecule, JZP-386, for EDS in narcolepsy is in Phase 1, with data to be out soon.

Rounding out the pipelines is JZP-416 for ALL, which is currently in a halted pivotal Phase 2 trial. The cause of the suspension was hypersensitivity reactions in some patients. The trial may be resumed after analysis of the problem. JZP-416 is a recombinant asparaginase that differs in detail from the currently available asparaginase, in the hope that it can be given to patients who are hypersensitive to the current version. So this may not be a viable pathway to the goal.

2015 Guidance

Jazz Pharmaceuticals is guiding to 2015 revenue of $1.31 to $1.37 billion, which would be up about 14.5% from 2014 revenue of $1.17 billion.

2015 EPS is expected between $5.17 and $5.70 on a GAAP basis, but $9.45 to $9.75 per share on a non-GAAP basis.


Jazz Pharmaceuticals looks quite reasonably priced to me, given that in 2016 its non-GAAP EPS should go over $10 per share and its current stock price is under $200 per share. Positive Phase 3 data for Leukotac would be a big plus.

That short-term projection should provide Jazz with some down-side protection. But I am looking to beat the IBB, not just the S&P. So I am looking for a company with a stronger pipeline in relation to its market capitalization. I think Jazz could become a must-have stock for me if it acquired more compelling Phase 1 or near-Phase 1 candidates that could be bigger revenue generators if they were ever approved.

I'd like to see Jazz invest more in R&D, though of course that would hurt profits in the short run.

For investors less risk-prone than I am, but still wanting to invest in biotechnology, I would think Jazz would be a good buy, especially if even safer stocks like Gilead (NASDAQ:GILD) are already in the portfolio.

So at present, I am adding Jazz to my watch list. That means I'll start taking notes on Jazz Pharmaceuticals analyst conferences, and digging deeper into the potential of the GVHD market. I also like the fact that Jazz has scientific expertise on hypersensitivity reactions and designing therapies that do not invoke them.

Disclosure: The author is long GILD.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.