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Jazz Pharmaceuticals, (NASDAQ: JAZZ  )  which spent nearly $1 billion buying orphan drug maker Gentium (UNKNOWN: GENTY.DL  ) in December, just inked another deal to lock up Aerial BioPharma's promising mid stage narcolepsy drug, ADX-N05

Jazz is giving Ariel -- a small biotech firm that admitted in October it was seeking a partner to bring its sleep-inhibiting drug into phase 3 trials -- $125 million up-front after ADX-N05 in a phase 2b trial successfully met its endpoint of reducing sleepiness in narcolepsy patients.

Bolstering its anti-sleep franchise

Jazz is also promising to pay Aerial up to $272 million in milestone payments if the drug is successful in phase 3 and wins FDA approval.

The move to lockup global rights to ADX-N05 eliminates a potential competitor for Jazz's successful narcolepsy drug Xyrem, which is a class 1 controlled drug that is also known by the name GHB.

Sales of Xyrem were up 50% to nearly $154 million in the third quarter. That's more than double the revenue Xyrem generated for Jazz in the second quarter of 2011 and just about triple quarterly levels from 2010. That growth has come in part thanks to a 200% plus lift in Xyrem's price between 2008 and 2011. But its also coming thanks to rising adoption of its use. The company reported 11,000 were treated with Xyrem in the third quarter, up from 10,200 a year ago.

The only regions Jazz won't control ADX-N05 rights to are in Asia, which are held onto by South Korean drug maker SK Biopharmaceuticals when it licensed the compound to Ariel.

Jazz also thinks ADX-N05 might have label opportunities in other sleep causing disorders, such as obstructive sleep apnea. As a result, Jazz plans to start exploring those possibilities too.

It's an important market given daytime sleepiness is common in both narcolepsy and obstructive sleep apnea. Roughly 150,000 people in the United States suffer from narcolepsy, with about 50,000 of them receiving wake-promoting drugs. OSA is even more common, with approximately a half million people receiving wake promoting drugs in the U.S. alone.

On to the next idea

Aerial's founders are likely happy with the news. But it's not like they're newcomers to inking deals. Previously, they sold Neuronex to Acorda Therapeutics (NASDAQ: ACOR  ) for as much as $134 million if incentives are reached.

Similar to Aerial, Neuronex's attractiveness was tied to technology licensed from SK Biopharmaceuticals that resulted in a nasal spray version of epilepsy drug diazepam, formerly marketed as Valium. Acorda has filed for FDA approval of the compound. If approved, the drug would complement its multiple sclerosis drug, Amprya, which generated sales of roughly $300 million this year for Acorda, up 12% from last year.

Ariel's deal with Jazz for ADX-N05 frees it up to focus on its next target, a pre-clinical pain compound, prostatic acid phosphatase, which Ariel hopes to bring into human trials soon.

Fool-worthy final thoughts

Despite being rumored to be an acquisition target itself, Jazz continues to use its strong balance sheet to build out its specialty drug business. Treating small patient populations remains widely profitable thanks to orphan patent protection and pricing power. So, a bigger company could still show up knocking on Jazz's door. In the meantime, the company seems content to keep expanding its product lineup.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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8/27/2015 4:00 PM
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