For a pharmaceutical company that relies heavily on one product to generate revenue, the challenge from generic rival drugs can be devastating. That is the situation Jazz Pharmaceuticals (NASDAQ:JAZZ) might encounter in a few years' time. The company's top-selling product, the sleep disorder drug Xyrem, will face generic competition from Hikma Pharmaceuticals, a company whose subsidiary -- West-Ward Pharmaceuticals -- was granted the right to sell a generic version of Xyrem starting in 2023. During the third quarter, sales of Xyrem were a little over $425 million and accounted for 79% of Jazz's total revenue, which means unless the company can find a way to decrease its top line exposure to Xyrem, its revenue could decrease significantly once this generic rival hits the market. 

Still, 2023 isn't exactly around the corner, and as far as the current year is concerned, Jazz has been performing relatively well on the stock market, especially over the past two months. The company's shares are up by 25% since mid-October. The main reason behind this performance is that Xyrem keeps on generating double-digit percentage sales growth: During the third quarter, sales of Xyrem were up by 19% year over year, which led to the company's top line growing by 15% year over year. During Jazz's second quarter, sales of Xyrem climbed by 16% compared to the year-ago period, and its total revenue increased by 14% year over year.

Jazz's attempts to diversify its revenue stream are also noteworthy. And with that in mind, here are three reasons why, despite the stiff competition Jazz's current top-selling product will eventually face, the stock is worth a second look.

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1. Jazz's pipeline

Jazz has several promising candidates in phase 3 clinical studies or currently awaiting regulatory approval. In the latter category, Jazz's Sunosi -- which treats the sleep disorders narcolepsy and obstructive sleep apnea -- was submitted to the European Medicines Agency (EMA) and is waiting for marketing authorization. Narcolepsy affects an estimated 200,000 people in the U.S., and about 3 million people worldwide, only about 25% of whom have been diagnosed and are receiving treatment. Sunosi was launched in the U.S. in July, and during the third quarter, it generated $987,000 in sales.

Jazz's late-stage pipeline includes JZP-258, a medicine for cataplexy (muscle weakness) and excessive daytime sleepiness (EDS) that arise as a result of narcolepsy. JZP-258 recently showed positive results in a phase 3 clinical trial: In a study with 201 participants, the medicine was shown to be efficient in reducing both cataplexy and EDS in patients. JZP-258 is also being evaluated for the treatment of a sleep disorder called Idiopathic hypersomnia. Jazz's late-stage pipeline also includes Defibrotide for the treatment of Veno-Occlusive Disease (VOD), a complication that arises as a result of stem cell transplants. In addition to its late-stage products, Jazz's pipeline boasts about two dozen candidates in their early testing phases. 

2. The acquisition of Cavion

In August, Jazz acquired Cavion -- a clinical-stage biotechnology company -- in an all-cash transaction valued at $52.5 million, with potential additional payments of up to $260 million. With this deal, Jazz further strengthened its pipeline. Cavion focuses on the treatment of chronic neurological diseases, with its lead candidate being CX-8998, a potential treatment for a neurological disorder called essential tremor.

All of Cavion's candidates are still in their early testing phases, but Jazz is confident that this acquisition will be worth it. Robert Iannone, executive vice president, research and development of Jazz said, "The acquisition of Cavion demonstrates our commitment to further diversify our pipeline and product portfolio with the addition of CX-8998, which has the potential to provide a meaningful treatment option to patients." 

3. Attractive valuation

Lastly, Jazz is currently attractively valued. The company is trading at just 8.46 times future earnings, and its price to earnings growth (PEG) ratio is 0.86.  While a lot could go wrong for the company (such as negative clinical trial results or regulatory setbacks), with the combination of its current pipeline enriched by the acquisition of Cavion, and its rock-bottom valuation figures, Jazz's recent run on the stock market could continue. This pharma stock is worth considering for your portfolio at this price. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.