Why Jazz Pharmaceuticals Is an Attractive Buyout Candidate

Despite a high volume of European acquisitions Jazz Pharmaceuticals is yet to join the party, but why not, and will it ever?

Jun 18, 2014 at 9:41AM

A tax inversion plan among large U.S. companies has grown evident as they attempt to find lower tax rates and higher profits via relocation into various countries within Europe. Already, Elan, AstraZeneca plc, Alliance Boots, and now Covidien plc have either been attempted or successfully acquired. Yet, the most surprising might be a lack of action surrounding Jazz Pharmaceuticals plc (NASDAQ:JAZZ) -- Why is this biotech being avoided?

The offers come rolling in
AstraZeneca shares have soared 25% this year. These gains were tied directly to Pfizer's failed bid for the company..

AstraZeneca surprisingly rejected the offer despite stagnant growth and concerns of an impending Crestor patent expiration. England's 21% corporate tax rate, which compares favorably to the U.S. tax rate of 35%, was a key driver behind Pfizer's attempt to buy Astra.

However, if you thought a 21% tax rate was good, then check out Ireland where the corporate tax rate is only 12.5%. Over the last weekend news hit of a $40 billion Covidien takeover offer, making it another large attempt at a European company. Unlike AstraZeneca, Covidien does have some anticipated growth, as revenue is expected by analysts to increase in the low-to-mid single digits over the next couple of years.

AstraZeneca and Covidien are two extremely large companies to receive buyout offers, showing a sense of urgency on behalf of large U.S. companies to relocate.

Another opportunity?
Looking at the acquisitions and those already attempted we can clearly see where the greatest risks lie, and also assume that the companies with the most value have already received a bid or have been acquired. This certainly brings up the question of Jazz Pharmaceuticals, an Ireland-based biotech.

Jazz markets about a dozen products across a variety of industries with annual revenue of $923 million, and analysts are estimating revenue growth of 30% and 20%, respectively, in 2014 and 2015. With a market capitalization of $8.4 billion it would seem the tax benefit alone would be enough to attract a larger pharma company, yet still no offers.

For 2014 Jazz expects revenue of $1.13 billion with its narcolepsy drug Xyrem accounting for around $765 million of that. Its top three drugs are expected to account for nearly 90% of total sales, meaning its remaining drugs have little impact fundamentally.

Why avoid Jazz?
So why would a company looking to lower its tax rate avoid Jazz Pharmaceuticals? The most obvious reason is potential competition to Xyrem both generic and from pipeline development. So far no generics have been approved, and Jazz now has a phase 3-ready candidate called JZP-110 that produced solid clinical results in treating narcolepsy. The drug performed well in a phase 2b trial, giving Jazz additional opportunities in the narcolepsy space even if generics eventually attack Xyrem.

The other concern revolves around Jazz's $1 billion purchase of Gentium. With this acquisition Jazz gained Defibrotide, a drug that treats an orphan disease called veno occlusive disease that's expected to generate $50 million in sales this year. The hope is that Defibrotide proves successful in treating larger indications such as Graft-vs-Host disease and multiple myeloma. If so, sales could eventually reach $500 million, but Jazz needs a lot of data to fall in its favor.

With that said, if Jazz were to lose patent protection on Xyrem or if the Gentium acquisition turns out to be a flop then the company would appear significantly overvalued. While its pipeline is not the largest, Jazz does have a number of intriguing assets like JZP-110 that could hopefully help counter any potential revenue losses.

Foolish Thoughts
I like Jazz's pipeline, and I think it's got some exciting growth opportunities over the next few years. It's hard to imagine that Jazz isn't on someone's radar given the big potential benefits of revenue growth and a potential tax inversion in Ireland. Nonetheless, as many investors learned earlier this year, it's important to invest in a company based on its growth drivers and not takeover speculation. I would encourage biotech-savvy investors to dig deeper into Jazz, and stay tuned for more news -- maybe health care's buyout bonanza isn't done yet!

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need to Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Brian Nichols owns shares of Jazz Pharmaceuticals. The Motley Fool recommends Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers