April 27, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of biopharmaceutical company Jazz Pharmaceuticals (Nasdaq: JAZZ ) shot up as much as 21% earlier in the trading session after it agreed to purchase EUSA Pharma.
So what: It's rare when a purchasing company heads higher on a buyout announcement, but this deal signals yet another win for Jazz, one of my "Mid Caps to Rule Them All." The company agreed to purchase EUSA for up to $700 million -- paying $650 million upfront (financed mostly through debt), and agreeing to pay an additional $50 million if EUSA's lead cancer drug, Erwinaze, which was approved by the FDA in November, reaches U.S. sales targets in 2013. According to Jazz, the transaction will add $210 million-$230 million in revenue and, more importantly, $0.75-$0.85 in EPS by 2013.
Now what: I stated earlier in the year that I felt Jazz could double yet again, and I stand by that assessment. Jazz continues to corner drugs in unmet areas of need which results in huge pricing power and little to no competition. EUSA's portfolio precisely meets those needs and appears that it will be immediately accretive to Jazz's rapidly growing bottom line.
Normally I would be concerned about financing the deal almost purely with debt, but Jazz's cash flow is so strong that I'm not remotely concerned. Assuming the mid-point of that $0.75-$0.85 2013 earnings boost, Jazz is on pace to produce nearly $5.50 in EPS and is still valued at less than 10 times forward earnings. Hands down, this is one of the best biopharma stocks out there.
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