What happened

Despite having a billion-dollar drug in its portfolio, the potential for backdoor entry into the marijuana market, and being consistently profitable for years, Jazz Pharmaceuticals (JAZZ 2.80%) was battered about the head by the stock market last year with its stock falling 22.8%, according to data provided by S&P Global Market Intelligence.

The decline started during the summer when Jazz reported second-quarter earnings that showed sales of its top sleep disorder drug, Xylem, plunged 25% from the prior year. While that's because patients were being transitioned over to its next-generation drug, Xywav, combined sales were only 3% higher.

Image source: Getty Images.

So what

The market looks like it misjudged the biotech's potential by sending its stock down by nearly 25% in August. While the sales picture for the sleep disorder drugs was not exactly robust, Xywav is the future for Jazz and will provide many years of extraordinary returns as it's a big improvement over Xyrem. With virtually no sodium, it can offer a safer treatment option to patients with comorbidities such as hypertension and cardiovascular disease.

The market also ignored that Xywav was granted orphan drug status for the treatment of adult patients with cataplexy, or excessive daytime sleepiness in patients aged seven or older. That gives Jazz a seven-year window of exclusivity.

The potential was bolstered by the company's third-quarter results, which showed the combined sales of the two drugs totaled over $1.3 billion for the first three quarters of 2021.

Jazz Pharmaceuticals' acquisition of GW Pharmaceuticals also gave it access to Epidiolex, for tuberous sclerosis complex and two childhood forms of epilepsy. Based on cannabidiol, or CBD, the nonpsychotropic compound found in marijuana, it's a way for investors to get exposure to cannabis without having to buy a pure-play pot stock. It also has the potential to grow into another billion-dollar opportunity if it can expand the number of indications it's approved for.

Now what

The stock market seemed to finally realize the error of its ways and began bidding up Jazz Pharmaceuticals stock in December, a trend that has carried through to the new year. Shares are up 25% from its November lows and have tacked on 15% in 2022 alone.

That rally was sparked by Xywav gaining another orphan drug designation, this time for idiopathic hypersomnia, another chronic neurological disorder for excessive daytime sleepiness, this time just for adults.

Jazz also has a robust oncology platform that's generated more than half a billion dollars year to date.

At just eight times earnings estimates and 11 times the free cash flow it produces, Jazz Pharmaceuticals is a deeply discounted biotech with numerous paths to blockbuster status.