Jazz Pharma (JAZZ): After ~5,000% Return, Upgrade to Buy
Rating BUY (from HOLD)
Price Target $52.00 (from $29.00)
Price $40.47
Key Takeaway
The new Xyrem marketing initiatives that Jazz revealed at Jefferies HC Conference in June to grow patients, increase compliance, and increase Rx fill-rates has now paid off. Q2 already showed surprising volume growth, and we believe it’s sustainable, yielding dramatic upside to our Xyrem/EPS estimates. With JAZZ’s operating leverage, and unlikely Xyrem generics, a premium multiple and further stock appreciation is justified.
My question is with these margins why wouldn't a company come out with a generic. The drug is off patent
Pricing Power Was Appreciated, Volume Growth Wasn’t. Xyrem pricing headroom has been apparent, but the recent volume growth has been a surprise -- and one we now feel has legs. Y/Y growth had accelerated up through single digits last year, and Q1’11’s 12% benefited from easy comps, so we were startled by the 11% y/y growth in Q2. We had previously modeled only 5% volume growth in ’11-’13, then flat, but we now see higher and more sustainable double-digit volume growth in ’11-’13 and single digit thereafter. Xyrem still has low patient penetration – only 8.700 of the ~50,000 diagnosed (of the ~125-150,000 total U.S. narcoleptics) – and absolute volume growth should be supported by better targeting of new patients (especially Provigil/Nuvigil narcolepsy users), improving compliance given expanded nursing outreach programs, and reduction to the ~20% Rx non-fill rate with the “Patient Connection” program.
Increased Volume Makes Big Difference. Given Xyrem’s high price, and ~96% GM, a little volume goes a long way. We model a further 70% price increase by end'14, yielding an almost $50,000 value/patient/year. At that level, the difference between a 5-year 3% CAGR and our new 9% estimate is >$160M in 2015 sales. That would represent a 25% patient penetration vs. 19% (excluding market growth). With the concurrent op.margin expansion, since SG&A will grow only modestly, this yields >$1.80 EPS upside to our previous ’15 numbers, taking our fully-taxed ’12-’15 EPS CAGR to ~23% from ~9%.
Valuation/Risks
Upgrade to Buy with $52 target. Higher Xyrem, plus extreme operating leverage yields dramatically raised EPS and cash-flow. Jazz is a “one-trick pony”, but we’re confident Xyrem will not go generic anytime soon, hence we think a premium multiple is justified. We apply 19x multiple to taxed ’12 EPS of $2.64 (incl. stock comp) plus ~$2 NOL value. DCF yields same $52 target ($17.50/share net cash+CF through ’15, plus $34.50 terminal value assuming 4% term growth). The obvious downside risk is any Xyrem threat (generic, FDA safety move, etc.). Upside risk presents from potential accretive BD developments.
Corey Davis, Ph.D. *, Equity Analyst
(212) 336-7187 cdavis@jefferies.com
Oren G. Livnat *, Equity Associate
(212) 284-2214 olivnat@jefferies.com
Graig Suvannavejh, Ph.D. *, Equity Associate
(212) 284-2170 gsuvannavejh@jefferies.com
* Jefferies & Company, Inc.
