Most cannabis companies sell marijuana to consumers, but there's more than one way to make money from the humble herb. Fresh off its recent acquisition of a cannabis-derived therapy maker, Jazz Pharmaceuticals (JAZZ +1.37%) is now a leader in the marijuana therapeutics space. Unlike some medicinal marijuana purveyors, Jazz is a serious pharmaceutical company that's determined to make drugs from cannabis to treat serious illnesses.
Retail traders looking for the next cannabis meme stock should probably look elsewhere, but investors looking for exposure to novel sources of growth in the pharma industry will be right at home. Jazz is likely to reap the returns from its acquisition in the near future, so it's worth paying attention to. And smart investors will likely have an opportunity to buy the stock at a discount quite soon.
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Cannabinoid therapies are game changers, and they're just getting started
The most important development for Jazz shareholders and potential investors is its newly established dominance in the field of cannabinoid therapies. The company earned that distinction when it closed its acquisition of GW Pharmaceuticals in early May. GW's claim to fame was its pipeline of drugs made from cannabinoids, which are chemicals derived from the cannabis plant. These cannabinoids aren't necessarily psychoactive, but some of them are capable of treating neurological diseases.
Now, Jazz has a bevy of those cannabinoid therapies in its pipeline, and they all seek to address illnesses that are traditionally quite difficult to treat. Among its planned and ongoing late-stage clinical trials are investigations of whether its drug nabiximols might be useful for conditions including post-traumatic stress disorder (PTSD), schizophrenia, autism spectrum disorder, and spinal cord injury spasticity. Some of these overlap with areas that Jazz was working on well before the purchase of GW, suggesting that there will be research synergies at play moving forward.
GW's biggest product is Epidolex, a medication approved by the U.S. Food and Drug Administration (FDA) for child-onset and treatment-resistant epilepsy. Thanks to Epidolex, Jazz now has another moneymaker drug, which had net sales of about $500 million in 2020. What's more, revenue from Epidolex will be growing for quite some time, given that it only launched in late 2018.
While there are a handful of other publicly traded companies developing drugs based on cannabinoids, none have cannabinoid pipelines as extensive as Jazz does. Nor do they have the benefit of having an approved product on the market. Plus, Jazz had its entire pipeline of oncology and neurology drugs in the works before it purchased GW to enter the cannabinoid therapeutics market. So, Jazz is really the only company of its kind in the cannabinoid space, and it has all the makings of a winner.
Is now the right time to buy?
In my view, Jazz Pharmaceuticals is a stock that's worth owning. Its leadership in the cannabinoid market will only continue to expand, and its portfolio of other approved drugs was more than enough to make it grow profitably before the GW acquisition.
With the income from GW Pharmaceuticals, Jazz expects to make total revenue of at least $3.02 billion this year, per its guidance update in mid-June. That's substantially more than the minimum of $2.55 billion it was projecting in early May. When a company is making so much money that it needs to revise its revenue projections sharply upward, it's generally a positive sign for investors.
And there's room for things to get even better over the next couple of years as Jazz fully incorporates the assets from GW.
In the aftermath of the purchase, Jazz also reported that its expected gross margin for 2021 had dropped from 93% to 86%, driven largely by an increase in selling, general, and administrative costs as a percentage of revenue. Management predicts that these additional costs will make the company report a net loss for 2021 rather than earnings growth. But it's also assuming that Jazz will return to reporting positive earnings again by the end of 2022.
So, investors will probably have an opportunity to purchase the stock at a slight discount in the near future. Once Jazz reports its first partial quarter of performance since the GW acquisition in early August, the market might react negatively to its losses, especially if they seem to be larger than management's most recent estimations. If the inefficiencies are resolved over the rest of the year, as management plans, investors who bought the dip will be rewarded.
