Has Jazz Pharmaceuticals Played Its Last Note?

Jazz Pharmaceuticals (Nasdaq: JAZZ  ) recently reported some impressive revenue growth -- but strong sales don't necessarily mean that this company is a solid long-term investment. Jazz has an impressive array of marketed drugs, but generic competitors are threatening to tear into its revenue. Let's dig into Jazz's latest earnings report and find out whether this stock strikes a chord with your portfolio.

Overture
Jazz's year-over-year revenue doubled to reach $129.5 million this quarter. This surge is certainly impressive, but that's pretty much the only good financial news in the report. Selling, general, and administrative expenses almost tripled compared to the same quarter last year and cost of goods sold jumped to more than $15 million this quarter. Those jumps, along with a spike in non-cash amortization expenses, cut net margin by more than half.

These numbers might be alarming at first glance, but it's not time to press the panic button just yet. Jazz is still in the process of optimizing its production after merging with Azur Pharma and acquiring EUSA Pharma this year, so margins should rebound soon.

Bravo! Encore!
Jazz has historically been a solid investment. Its stock has appreciated almost 170% since the company went public, and its share price is up almost 25% year to date. Jazz's recent success largely comes down to its product diversification and rich drug pipeline.

Jazz acquired the schizophrenia drug FazaClo through the merger with Azur, and this product brought in $17.5 million for the first half of 2012. Jazz also acquired Azur's pain medication Prialt and EUSA's leukemia drug Erwinaze, which together have had sales of more than $20 million so far this year.

The key to Jazz's massive sales, however, has been its drug Xyrem. This is a dual treatment for narcolepsy,  a disease that causes patients to fall asleep irregularly, and cataplexy, which is characterized by muscle fatigue. Xyrem is currently the only drug that can treat both of these conditions, and, with $162.5 million in sales for the first half of 2012, it comprises almost 70% of Jazz's total revenue.

Will Roxane get a red light?
Xyrem has helped Jazz corner a lucrative niche market, but European drugmaker Roxane Laboratories is aggressively moving in. Roxane tried to get FDA approval for a generic version of Xyrem in 2010, and litigation between the two companies is ongoing. Depending on the legal decision, Roxane might be able to market its drug as early as mid-2013.

Generic competition could potentially cut Xyrem's sales in half and devastate Jazz's revenue. Just look at what happened with Pfizer's (NYSE: PFE  ) Lipitor; its patent expired last autumn and sales were more than halved after Ranbaxy Laboratories released its generic counterpart. Mylan (Nasdaq: MYL  ) and Dr. Reddy's Laboratories (NYSE: RDY  ) started producing their own Lipitor generics in the last few months, and Pfizer's sales will undoubtedly continue to fall this year.

The bottom line
Jazz has everything you'd want in a mid-cap pharmaceutical stock: strategic growth through acquisitions, diverse products, and a track record of strong financial returns. However, its margins are down and its legal dispute with Roxane could devastate its revenue in the near term. Its future is tough to predict right now, but I'll be tracking Jazz's margins, product launches, and patent disputes in upcoming quarters.

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Fool contributor Max Macaluso holds no position in any company mentioned. You can follow him on Twitter @TMFMassimo. The Motley Fool has a disclosure policy.
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