All that gain for Jazz

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When shares in Jazz Pharmaceuticals rose following an FDA rejection of a key pipeline product it came as a surprise; that the stock has more than doubled since then suggests the setback even came as a relief (Jazz feeling no market pain following FDA rejection, October 14, 2010).

With the stock now trading at $22 – having touched a record high of $23.10 last week – compared with $11 in October when the FDA rejected fibromyalgia treatment JZP-6, it seems shareholders had reservations about the potential of the product and the distraction it might become. Instead, investors appear to be realising the potential of Jazz’s narcolepsy drug, Xyrem, sales of which are driving the company into profit and forecast to benefit from price increases, off-label use and a new patent. With Jazz now valued at an impressive-looking $870m after its share price surge, exceeding analyst price targets, the question for investors is where the stock goes from here in the absence of major catalysts on the horizon.

Removing risk and hiking prices

Removing the uncertainty around JZP-6, a sodium oxybate-based drug and lower-dose formulation of Xyrem, appears to have had a marked effect. The FDA raised a number of question marks about the effectiveness and suitability of JZP-6, including potential confusion and abuse of two separate products with the same active ingredient.

The share price rally also resulted from Jazz's claims it could potentially double the price of $35,000 orphan drug Xyrem, a candidate that has already experienced a couple of price hikes in its lifetime, and still remains far below the average price of other orphan drugs. The company raised the price of Xyrem at the start of November, and increased its full year revenue guidance, causing a 21% share price gain to a two-and-a-half-year high of $14.97 at the time.

Since this latest price hike, Jefferies increased its forecast for Xyrem by 36% to $332m in 2015, valuing the product at $734m according to 'EvaluatePharmas NPV Analyzer. That Jazz's market capitalisation still exceeds even this bullish forecast and valuation suggests the share price is approaching full value. 

Exclusivity

The issuance of a new Xyrem patent, titled "Microbiologically Sound and Stable Solutions of Gamma-Hydroxybutyrate Salt for the Treatment of Narcolepsy", was another shot in the arm days before Christmas, and highlighted the importance of Jazz’s intellectual property for Xyrem.

While sodium oxybate itself lost patent protection some time ago, Jazz has exclusive patents on Xyrem’s restrictive distribution system, that limits overuse of this Schedule III FDA controlled substance, lasting until at least 2019. It also has orphan drug exclusivity until late next year for excessive daytime sleepiness in narcoleptics. Jazz reckons the intellectual property portfolio protects its exclusivity; however, a threat remains if generics are approved for non-orphan indications.

So, what now?

The company is still waiting clarification from the FDA on the way forward for JZP-6, and has not decided whether to push on. Investors would surely see any further development as little more than flogging a dead horse.

To tackle compliance issues with the liquid oral formulation of Xyrem, including alleviating a restrictive middle-of-the-night dosing regimen, Jazz is working on solid oral forms of the candidate, and a phase III trial against the liquid form completed last month. A phase I/II study of Xyrem in a niche indication of patients with alternating hemiplegia of childhood (AHC-SO) is also due to read out in August.

Otherwise, no new clinical trial readouts are visible on the horizon for this compound; data on intranasal anti-epileptic drug JZP-8 (clonazepam) are awaited, the only other product in Jazz's pipeline.

Jazz hit record lows of $0.60 in May 2009, after which it halted the majority of its drug development activities and cut its workforce by a quarter. Today the picture is very different; third-quarter results beat analyst expectations, driven by strong sales for Xyrem and Luvox CR, an antidepressant for obsessive compulsive disorder. For the full year, the company expects Xyrem sales to hit $140m, up 45% on 2009, while Luvox CR should also grow strongly, climbing 30% to $25m.

This growth means results for 2010 will reveal a profitable year and further fundraisings will probably not be necessary, unless the company decides it wants to expand its product portfolio in the immediate future.

Investors are clearly relieved to see the back of JZP-6, and encouraged by the prospects for Xyrem. However, the days of orphan drug exclusivity are numbered, and if the company wants to keep its share price on an upward trend it will need to use its swelling cash pile to buy new growth drivers.

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