This Winning Biotech Stock Looks Like a Buy

Feeling sleepy is a big problem
Jazz has outperformed the market so handily thanks largely to the growth of Xyrem, the company's flagship narcolepsy medication. Narcolepsy is a chronic brain disorder in which patients have almost no control over their natural sleep-wake cycles. While narcolepsy affects about 160,000 people in the U.S., it's a challenging condition to properly diagnose, since there are a huge range of medical conditions that can disrupt a normal sleep pattern. It's believed that more than half of patients in the U.S. with narcolepsy remain undiagnosed. 

Patients with narcolepsy can experience a variety of unappealing symptoms, such as:

• Excessive daytime sleepiness, or EDS, which manifests as a persistent sense of mental cloudiness, a lack of energy, a depressed mood, or extreme exhaustion.
• A "sleep attack," which happens when a patient suddenly falls asleep at any time of the day -- an especially dangerous situation if it happens while the person is driving or operating heavy machinery.
• Cataplexy, which happens when the body suddenly goes limp and subjects find themselves unable to move.

Xyrem is successfully helping patients with narcolepsy control these symptoms. Currently, Xyrem is the only FDA-approved product to treat both cataplexy and EDS, and it has a broad range of patents protecting it from competition that mostly expire between 2019 and 2024.

Xyrem is fast approaching blockbuster status, as sales grew 37% in 2014 to more than $770 million. Despite this strong growth, as of the fourth quarter of 2014 Xyrem was being used by only about 12,250 patients in the U.S., a small fraction of the 160,000 that are believed to have narcolepsy, making me believe that Xyrem looks poised for continued growth in the years ahead.

A diversified revenue base
Although Jazz commands a strong position in the sleep market, it has smartly diversified its product offerings with a recent entry into the hematology and oncology markets. Jazz currently sells Erwinaze, a medication for treating acute lymphoblastic leukemia, or ALL, which is the most common form of childhood cancer. The American Cancer Society estimates that approximately 6,250 new cases of ALL are diagnosed in the United States each year.

While there are other medications on the market to treat ALL, about 20% of patients develop a hypersensitivity to E. coli-derived asparaginase, a common treatment option for ALL. Erwinaze offers patients with the sensitivity an alternative treatment option. In 2014, net product sales of Erwinaze grew 15% to $199.7 million.

Jazz also has a product that's approved in Europe and currently pending FDA approval, called Defitelio. This product treats severe hepatic veno-occlusive disease in adults and children undergoing hematopoietic stem-cell transplantation therapy. This condition is rare, as it affects only a few thousand patients in Europe and the U.S. each year, but it's an important potential therapy option for those patients, and the FDA has given it fast-track designation. Sales in Europe for Defitelio hit $70 million in 2014, and peak sales estimates for this drug are currently around $480 million, representing a nice opportunity for Jazz to continue to diversify.

A strong pipeline
Jazz looks to have a nice pipeline of opportunity that leaves the company poised to extend its leadership position in the sleep market.

Source: Jazz Pharmaceuticals.

Jazz is looking to expand the labeling for Xyrem to include pediatric patients with narcolepsy, and it has already initiated phase 3 trials. If the company can successfully expand labeling for Xyrem to include pediatric patients, then Xyrem is poised for significant growth.

Beyond Xyrem, JZP-110 looks like it could be another winner in the sleep space, and Jazz is currently running multiple phase 3 studies to show how the compound works at combating excessive daytime sleepiness in both narcolepsy and obstructive sleep apnea. Peak sales estimates for this drug are about $450 million.

An attractive price
Despite the huge run in Jazz's stock over the past five years, I have a hard time calling the stock expensive. Profits have compounded at a 51% rate over the past five years and look poised to grow strongly in the years ahead as Xyrem, Erwinaze, and Defitelio continue to roll out. Yet shares are currently trading for around 16 times 2016 estimated earnings.