A few years ago, the cannabis industry attracted much interest from investors following significant regulatory changes in Canada and anticipated progress elsewhere in developed countries. However, this interest has now died down, and many of the major companies in the industry have largely flopped. Even so, the sector has attractive opportunities, and some companies seem in good positions to pounce. Let's look at one of the more prominent cannabis players around: Jazz Pharmaceuticals (JAZZ -1.01%). Here's why this is my top marijuana stock to buy and hold.
The regulatory advantage
Let's first review how Jazz Pharmaceuticals entered the cannabis market. In May 2021, the company acquired GW Pharmaceuticals, a drugmaker focusing on developing cannabidiol (CBD)-based medicines. The key asset from that transaction was Epidiolex, a CBD-based therapy indicated to treat a couple of rare forms of childhood epilepsy.
Epidiolex has a claim to fame: It was the first CBD-based treatment to win approval from the U.S. Food and Drug Administration (FDA), an honor it earned in 2018. There lies the difference between Jazz Pharmaceuticals and other cannabis companies. Jazz operates in biotech, a highly regulated industry. The company needs to meet strict standards when developing its products, and once it does so, it can launch its medicines on the market.
However, marijuana remains illegal at the federal level in the U.S.
While most states have much more welcoming laws, at least for medical uses of cannabis, it is illegal to transport the substance across state lines, which complicates the job for pure-play pot growers operating in multiple states. One way to get around this problem is for these companies to become vertically integrated (or own their entire supply chains) in each state where they do business when the states' laws allow for that. But that is an expensive solution.
Furthermore, it can be difficult for pot companies to access traditional banking services, and there are severe restrictions on being listed on major stock exchanges in the country. Jazz Pharmaceuticals doesn't deal with any of these issues, which grants it a significant advantage over other marijuana companies that offer cannabis flower and similar products.
Jazz Pharmaceuticals' lineup and prospects
Jazz Pharmaceuticals' portfolio is more than just Epidiolex. The company's lineup includes cancer drugs Zepzelca and Rylaze, as well as Xywav and Xyrem, both of which target narcolepsy, a sleeping disorder. The first three of these products, along with Epidiolex, will be the most important for Jazz Pharmaceuticals' mid-term performance. In 2022, the biotech reported total revenue of $3.7 billion, an 18% year-over-year increase.
The company did report a net loss for the year, which came in at $3.58 per share, slightly better than the net loss of $5.52 reported in the year-ago period. The red ink in Jazz Pharmaceuticals' bottom line over the past two years was partly due to expenses and costs related to the acquisition of GW Pharmaceuticals. The good news is that the biotech will return to delivering positive profit this year, with EPS of between $5.90 and $7.90.
Jazz Pharmaceuticals' most important medicines are still relatively new, or at least they aren't anywhere close to encountering patent cliffs. Epidiolex earned approval in 2018, Xywav and Zepzelca in 2020, and Rylaze in 2021. That will let them grow for years to come, especially as there will be new approved uses coming for some of them.
Jazz Pharmaceuticals boasts nearly two dozen pipeline programs, some of which are brand-new products that would expand its lineup and revenue base.
One of the best cannabis plays
Jazz Pharmaceuticals' stock is down by 14% over the past 12 months, but that is a significantly better performance than the cannabis industry over the same period, and not all that much worse than the broader market.
Data source: YCharts
That's not surprising considering its advantages over its marijuana peers. And with a strong lineup and pipeline, the company is well positioned to continue generating growing revenue and earnings during the next 10 years. Jazz Pharmaceuticals may not have the explosive potential smaller and riskier cannabis companies do, but it also will be a much steadier performer.
Risk-averse investors looking to profit from the fast-growing cannabis market can hardly do better.
