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Jazz Pharma (JAZZ): Compelling Specialty Pharma Stock Spearheaded By Xyrem

 May 24, 2012 11:10 AM

(By Mani) Jazz Pharmaceuticals plc (NASDAQ:JAZZ) is expected to benefit from its lead product Xyrem that should bolster its topline as the company continues to leverage price increases with volume growth.

Dublin, Ireland-based Jazz is a specialty biopharmaceutical company with 22 marketed products, which focus largely on the central nervous system and women's health areas, as well as other specialty markets such as oncology and pain.

The company's key growth assets include Xyrem, which is used to treat cataplexy and excessive daytime sleepiness in narcolepsy patients, and the leading product in the company's high-margin business model focused on a large orphan market. Other products include cancer treatment Erwinaze and severe, chronic pain treatment Prialt.

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"We note the >55% two-year historical growth rate for Xyrem and anticipate future revenue growth will be supported by increased volumes leading to higher market penetration combined with consistent price increases," Oppenheimer analyst Christopher Holterhoff wrote in a note to clients.

Xyrem is the only product approved for the treatment of both cataplexy and excessive daytime sleepiness in narcolepsy patients, and the analyst sees potential for at least $1 billion in peak sales by 2020. Cataplexy, a rare disease, is a sudden loss of muscle tone, triggered by intense emotions.

"We believe Xyrem revenue growth will be driven by both price and volume, the former contributing a larger portion than the latter (Jazz has taken an average price increase of 20% every six months since 2008). We expect high single-digit to low double-digit volume growth, driven by increasing the number of active patients on therapy," Holterhoff noted.

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Meanwhile, Xyrem's patent portfolio, as well as the fact that the active ingredient, sodium oxybate, is a Schedule I controlled substance requiring an extensive REMS (Risk Evaluation and Mitigation Strategies) program, will prove to be high hurdles for generic filers including current filer, Roxane Labs.

Xyrem, which generated $233.3 million sales in 2011, is covered with seven Orange Book-listed patents, the last of which expires in 2024 and is also covered with a process patent and a distribution system patent relating to Xyrem's REMS program. Of note, the process patent expires in 2019, while the distribution system patent expires in 2024.

In addition, Jazz's pending $650 million acquisition of privately held EUSA Pharma will provide access to Erwinaze, a drug used to treat acute lymphoplastic leukemia,  cancer in the white blood cells. Erwinaze generates annual sales about $120 million, with about 75 percent of sales coming from the US, where the drug has been approved only since November 2011.

Jazz's acquisition of EUSA Pharmaceuticals not only provides an EU commercial footing but also serves as a basis for a cancer portfolio that it can expand on longer term.

"We believe JAZZ shares are undervalued based on our discounted cash flow valuation analysis, which implies a fair value of $66 per share (inclusive of the EUSA acquisition)," the analyst added.

Jazz Pharma currently trades at a material discount relative to its peer group, based on a price to earnings multiple analysis, for both 2012 and 2013. In addition, additional acquisitions would focus on approved or lower risk late-stage assets, potentially in niche specialty markets such as oncology, which leverage the company's existing commercial expertise and corporate structure.

"We believe the JAZZ shares could be poised for upside upon the completion of the EUSA Pharma transaction in June and the ensuing issuance of updated 2012 guidance. In general, we would expect shares to trade up upon release of positive earnings and better than expected sales trajectory for key products such as Xyrem and Erwinaze," said Holterhoff, who has an "outperform" rating on Jazz Pharma shares.

Shares of Jazz Pharma have gained 65 percent in the last year and 14 percent year-to-date. They have traded between $26.43 and $54.50 over the past year.

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