I'll freely admit that it's a pain in the butt trying to properly value a biotech stock sometimes. How exactly do you factor in potential growth, pipeline innovation, the potential for partnerships, or the possibility of a drug being rejected or failing a clinical trial? Most of the time it winds up being a shot-in-the-dark guess.

Then, every once in a while, a Cinderella biotech comes along that's as easy to understand as the difference between night and day. The stock I'm talking about that fits this description is none other than Jazz Pharmaceuticals (Nasdaq: JAZZ). 

Jazzed up
If the name sounds familiar, that could be because I highlighted Jazz as one of my 10 Mid Caps to Rule Them All in May. Since then the stock has responded by gaining 62%.

What's behind the move higher in Jazz?

First, the company's strength in its primary drug, Xyrem. Directed at treating narcolepsy, Xyrem sales are expected to grow by a whopping 40% in 2012. Expected to account for around 70% of Jazz's sales in 2012, Xyrem's high gross margins (in excess of 90%) and its growing acceptance caused Jazz to dramatically bump up its 2012 full-year EPS guidance to $4.00‒$4.15, well ahead of Wall Street's consensus figure of $3.37. This isn't Jazz's first rodeo, either, when it comes to raising guidance. In fact, when I gave my initial recommendation on the stock back in May it expected 2011 EPS to be in a range of $2.95‒$3.10. Just eight months later, that estimate now sits at $3.45‒$3.50.

Second, it's all about execution. As Fool Brian Orelli has often reminded us about the biotech sector in general, it's no longer just about getting a drug approved by the FDA, it's also about effectively bringing a drug to market and getting it accepted by doctors. Dendreon's (Nasdaq: DNDN) prostate cancer drug Provenge stumbled out of the gate in 2011 because the company failed to realize how difficult it would be to convince doctors to pony up $93,000 per patient and then wait for reimbursement. Likewise, Human Genome Sciences' (Nasdaq: HGSI) lupus drug Benlysta has suffered from disappointing sales as doctors have been slow to prescribe the drug for a disease in which symptoms wax and wane. With volume up 11% in 2011 and sales expected to jump by 40% in 2012, it's safe to say that Xyrem has been well accepted.

Finally, it's about acquisitions. Concerns persisted in September when Jazz announced it was purchasing privately based Azur Pharma in an all-stock deal. Since then calmer heads have prevailed and it's clear that the deal could be more accretive to Jazz than originally anticipated. The combined entities will also have no debt and a cash balance of around $250 million.

Foolish roundup
So with Jazz Pharmaceuticals' stock up 96% in 2011 the question begs: could it have a repeat performance in 2012? I think the answer is most decisively "Yes!" With organic growth of 40%, a history of exceeding even its most upbeat expectations and the acquisition of Azur which will almost certainly make the company stronger, I anticipate that Jazz has the potential to nearly double yet again in 2012. Mark your calendars, folks, and we'll see how right or wrong I was a year from now. In the meantime, I will maintain my CAPS call of "outperform" on Jazz throughout 2012.

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