Jazz Hands For Jazz Pharma: Entering Underpriced Levels

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About: Jazz Pharmaceuticals, Inc. (JAZZ)
by: Winston Van
Summary

Blockbuster Xyrem may reach peak sales of over $1.3B.

Jazz is safeguarding Xyrem on 7 patent litigations, but we expect generics no earlier than 2023.

We model the revenue streams of Xyrem, Defitelio, Vyxeos, Erwinase, and recent sale of Prialt.

Solriamfetol for Parkinson’s, Narcolepsy, and OSA should supplant Xyrem’s revenue stream, PDUFA listed as Dec 20, 2018.

Target $190, buy and hold at $135.

Jazz Pharma

It’s holiday season and what better gift to give than a money-making buy recommendation? We’ve been watching $JAZZ and several of its contemporaries drop these past few months. With patience, many have fallen into buy territory. We’ll start with the financials, and then discuss the pipeline, so let’s get into it.

Jazz hands for Jazz Pharma (Source: The Office NBC)

Balance Sheet

Jazz owes $1.59B in total debt and has assets of $1.07B. It grew it’s assets from $600M last quarter right as the P/B ratio dropped to 2.9. The board implemented a share buyback program where they were authorized to purchase $300M. They have about $100M remaining to go and this dip is a good buying opportunity for them.

From the 10-Qs sales have grown from $376M, $394M, $412M, $436M, $445M, $500M, $469M from 1Q17 to 3Q18.

(Source: Koyfin.com). Large dip in P/B good for buyback program.

The Q3 Narrative

Jazz beat EPS by $0.26 with $3.58 and missed on revenue by $13.25M. Revenue was $469.4M or up 14% yoy.

Recently Jazz hit $140 on reduced Q3 guidance. Xyrem, Erwinaze, and Vyxeos projections each got reduced by about $20M. We now think that the shares are approximately $189.95 per share. If the shares fall to $133, then they would trade at a 30% MoS discount to this model which is an extremely attractive entry point. Future catalysts include Solriamfetol’s PDUFA in December and the Parkinson’s EDS data in early 2019.

Pipeline (Source: Q3 Investor Presentation)

Lowered revenue guidance as well as lowered expenses (Source: Q3 Investor Presentation)

The Xyrem Patent Cliff

Possibly the biggest fear investors have for this company is the heavy reliance on Xyrem (sodium oxybate) in their sales pipeline. It represents 75% of the revenues and there are at least 7 outstanding patent litigations going on to bring in a flood of generic competition.

But the problem is overstated. Q3 brought the end to Hikma’s litigation. They also settled a patent dispute with Amneal pharma.

(Source: Q3 Investor Presentation)

Here’s a view of the generic landscape, taken from Q3 slides. As predicted in our previous model, the earliest generic competitor enters the market in 2023. Our DCF model uses the patent cliff formula: Sales = A * Y ^ B where B = -1.032 and Y represents years after peak sales.

Solriamfetol, which had positive results from the TONES clinical trials, has a PDUFA date of December 20, 2018 and its indications of excessive sleepiness in OSA (obstructive sleep apnea) and narcolepsy will supplant Xyrem’s net sales. Solriamfetol is a selective DNRI and is also in trials for the management of Parkinson’s symptoms. The readout for Phase II EDS in Parkinson’s is expected early 2019. The discoverer SK Biopharmaceuticals maintains rights in Asia.

JZP-258 is a drug that is basically Xyrem with 90% less sodium. This patented drug has the same ingredient.

Fears of an undiversified pipeline are also placated by potential takeovers. In the past they acquired Celator pharmaceuticals for $1.5B . From their slides, Jazz is "actively evaluating wide range of attractive investment opportunities with $2.7 billion in capital ready to deploy."

Revenues (Source: 10-Q for Q3)

In the oncology field, Jazz is ramping up Vyxeos, a liposomal form of the classic cytarabine and daunorubicin combination that is typically delivered on a 7+3 schedule to AML patients. This improvement saw a significant improvement in response rates during clinical trials and showed tolerability in the safety arm of Phase 3. This excellent paper sums up the study and teaches a lesson on the importance of synergy. The results are pretty much everything you want to see in a cancer treatment. Higher absorption means higher efficacy. Acute Myeloid Leukemia is an aggressive cancer without a lot of promising treatment methods. Jazz bought this drug for $1.5B. Sales of Vyxeos increased by 116% q/q. Expect peak sales over $300M.

Defitelio (defibrotide sodium) is another interesting drug, which is made from the purified intestinal mucosa of pigs. for the treatment of hepatic Veno-Occlusive Disease with renal or pulmonary dysfunction after Hematopoietic Stem-Cell Transplantation. After stem-cell bone marrow transplant, small veins in the liver can become obstructed. It achieved orphan drug designation and fills an unmet need. Our model sets patent expiry around 2022.

Erwinaze, Jazz’s second best selling drug, has been facing supply outages, is less conventional than typical biologics or chemotherapy. L-asparaginase is used to treat ALL, AML, and non-Hodgkin’s lymphoma. It works by breaking down asparagine. Leukemic cells have difficulty producing the amino acid and typically use circulating L-asparagine. When it’s not available, the tumor cells die. Manufactured from E. Coli, scientists first found it’s anticancer properties from guinea pig serum. Another orphan, our model sets expiry around 2023. Revenues have been decreasing slightly each year.

Revenues

Sales forecasts. Sale of Prialt contributes 80k in 2018. Revenue from FazaClo (generic) and Solriamfetol not included. Termination year 2026. Forecasts are my own.

Conclusion

Jazz is likely to continue seeing impressive top-line growth, and the dip in guidance has been oversold. While it faces roadblocks, Jazz has the capital resources to overcome the challenges.

It’s top priority right now is the problem of sales. Jazz has stated they are increasing their salesforce for Solriamfetol. I think the current pricing is too bearish. It’s under as if under the assumption that Xyrem loses exclusivity and that Vyxeos, Erwinaze, and Defitelio miss on sales. With limited downside risk and strong fundamentals, it's not a bad idea.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JAZZ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.