Jazz Pharmaceuticals plc (NASDAQ: JAZZ ) soared to new highs on Friday with gains of 8% after announcing plans to acquire Gentium S.p.A (NASDAQOTH: GENTY ) . At first glance, this acquisition seems a bit pricey, but provides Jazz with new growth opportunities and a bright future. However, the real question is whether or not Jazz is still a buying opportunity at new highs?
Jazz Pharmaceuticals is a diversified biotechnology company that markets nine products for narcolepsy, oncology, psychiatry, pain, and other segments in health care.
It is a fast-growing company, one that's expected to grow total sales 49% this year and another 22% next year . However, approximately 85% of the company's $870 million in expected full-year sales come from two products: Xyrem and Erwinaze, which are marketed in the company's narcolepsy and oncology divisions.
Therefore, despite its rapid growth, the company doesn't have a great deal of diversification in its products, which is likely why investors responded so favorably to the acquisition of Gentium.
Gentium is a company that's seen its valuation soar more than 400% in 2013 alone. These gains have come as a result of growth in the company's drug defibrotide, which treats an orphan condition called called veno occlusive disease, or VOD.
In the company's last quarter it saw sales of $16.2 million for a year-over-year gain of 64% . Yet, the company recently received a positive opinion from the European agency for the drug to treat severe VOD, which should boost sales significantly.
Already, defibrotide is believed to earn a large portion of its revenue from off-label uses, as management stated in the company's third-quarter conference call that a third of defibrotide's usage came from prophylaxis. Therefore, the company itself has been a Wall Street favorite in 2013, as investors are optimistic that defibrotide could become a real growth driver.
What's this mean?
Clearly, the acquisition of Gentium gives Jazz a fast-growing orphan drug that's being used for several indications. Jazz has already said that defibrotide is highly complementary to its focus on orphan diseases in hematology and oncology, suggesting that some synergies will be created.
Still, at first glance it looks like a rather pricey acquisition at $865 million.
Due to the expanded indication of severe VOD, analysts expect that Gentium will produce sales of $117 million in 2014 for growth of 113 %. Therefore, Jazz paid about eight time next year's sales, but the real upside is created if in fact defibrotide reaches its peak sales potential of $500 million.
However, this estimate only accounts for VOD indications.
Gentium is also developing defibrotide for the treatment of Graft-versus-Host disease (GvHD), a larger indication, and multiple myeloma. If successful, defibrotide could very well become a blockbuster product. Given the rate at which it has grown in the last year suggests that it will be a continued marketing success, and that Jazz made a wise acquisition for future growth.
Is Jazz presenting a value opportunity?
Orphan drugs historically produce higher margins than those that treat common diseases. The orphan indication allows for premium pricing due to the rarity of the diseases being treated, which equals a higher return. Therefore, it's no surprise that in the infancy of Gentium's drug launch it has already created operating margins of 15.4%
With that said, both are European companies, Gentium based in Italy and Jazz in Ireland. For Jazz, it operates in a country with one of the lowest corporate tax rates in the world, at just 12.5% versus 35% for the U.S. In Italy, the corporate tax rate is even higher than the U.S. at 37.25%, thus Jazz will be able to squeeze even higher profits from sales of defibrotide.
Therefore, after including the acquisition of Gentium, Jazz will be expected to produce sales of $1.2 billion in 2014, going from growth of 22% to more than 30%. This means that Jazz is trading at less than six times sales, and given the tax rate differential between the two countries, Jazz's operating margin of 40.8% is unlikely to alter.
In comparison, Regeneron Pharmaceuticals (NASDAQ: REGN ) , another orphan company with multiple FDA approved products is expected to grow 26.9% in 2014 . Like Jazz, Regeneron's fundamentals are driven by one key product, Eylea, which treats rare eye diseases that cause blindness. However, following Jazz's acquisition, it is not only expected to grow faster than Regeneron, but is priced significantly cheaper.
If Regeneron earns $2.61 billion in sales next year, which is expected , then it's trading at 10.4 times sales, and a forward P/E ratio of nearly 50 versus 15 for Jazz. Hence, in an orphan drug space that often trades at greater multiples than the biotechnology sector, Jazz does in fact appear to be presenting investment value.
While there's no way to know for certain whether defibrotide will ever produce sales of $500 million or earn approvals in treating other diseases, its initial growth and success provides reason to be optimistic over the next 12 months. At that time we'll have to revisit the analysis, but as of today, Jazz looks quite attractive.
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