Jazz continues to produce sweet music

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Jazz Pharmaceuticals’ remarkable share price run so far this year is testimony to the power of some good old fashioned marketing techniques. Shares in the Californian company have more than doubled and reached a record high last week of $43.61, valuing Jazz at a quite staggering $1.8bn, all on the back of renewed vigour in Xyrem, a narcolepsy drug launched nine years ago.

Drug price hikes, patient and physician education programmes and sales force incentive plans appear to be Jazz’s recipe for success. With Xyrem’s performance continuing to surprise even the most bullish of analyst predictions, the question now is how sustainable is the current share price momentum. And with Xyrem starting to generate healthy profits another conundrum is what Jazz decides to do with a burgeoning cash pile. Essentially a one-trick pony, at some point the company will have to bolster its portfolio so picking the right deal is crucial if Jazz is to retain such a high level of investor confidence.

Single-minded

Ironically, it was the FDA’s rejection 11 months ago of Jazz’s attempt to extend its Xyrem franchise that provided the catalyst for the astonishing share price gains (Jazz feeling no market pain following FDA rejection, October 14, 2010).

Xyrem is an oral formulation of sodium oxybate, a schedule III FDA controlled substance also known as GHB, which has been abused as a ‘date-rape’ drug. Jazz had tried to gain approval to use a lower dose version of the drug as a treatment for fibromyalgia – a candidate dubbed JZP-6 or Rekinla – but the FDA was not convinced that use of such a potentially dangerous substance in a much broader population could be adequately controlled.

As it turns out the development of JZP-6 was a massive distraction from realising the full potential of Xyrem as a narcolepsy drug. It is the only one approved to specifically treat cataplexy, a severe form of narcolepsy resulting from sudden loss of muscle tone which can cause patients to completely collapse.

Cataplexy affects roughly 70% of people who have narcolepsy but is very much a rare disease so Xyrem has gained orphan drug exclusivity in this setting, which expires in November 2012. As such, Jazz has managed to push through some impressive price hikes for the drug, which currently costs around $30,000 per year but which Jefferies analysts believe could reach $50,000 by the end of 2014.

Effective marketing

On Jazz’s second quarter conference call the company outlined some of the reasons why Xyrem is performing so well, with volumes of the drug gaining an impressive 11% over the second quarter last year.

Aside from the price increase, the company is seeing decent growth in new patients receiving Xyrem – up to 8,700 from 8,000 a year ago – coupled with greater compliance from existing patients.

Jazz is also initiating nursing programmes, to ensure they reach patients at what they perceive to be a critical period between being prescribed Xyrem but before filling out their prescriptions, a mentoring scheme to connect new patients with those already using Xyrem to share their experiences, as well as new sales force incentive packages.

Despite the high price of the drug, Jazz has stated that reimbursement remains excellent, with 80% of patients covered by commercial insurance, with the need for prior authorisations consistently around one-third. In addition, the average monthly co-pay amount for 70% of patients is less than $50, a level that has been consistent over the last 12 months.

And although Xyrem’s orphan drug exclusivity expires in just over 12 months time, there appears to be increasing confidence that the drug’s FDA Orange Book listed patents, which do not start expiring until 2019, will keep generics off the market for some time to come.

All these factors appear to be coming together nicely for Jazz, with analysts now predicting sales in excess of $500m by 2015. Impressive results from the last two quarters in particular forced Jefferies to significantly increase their 2015 forecasts to $539m from $375m.

To some extent Jazz’s rapid rise is mimicking the impressive gains that Questcor Pharmaceuticals has built on the back of a similar strategy of maximising the potential from an ageing but also orphan drug (EP Vantage Interview - Questcor fighting Acthar's corner, May 28, 2010). Questcor is valued at close to $1.7bn and its shares have also consistently broken record highs this year.

Sustainable?

As to how much further Jazz can go, previous assessments that the stock might have hit a ceiling in the absence of any real catalysts may have been premature (All that gain for Jazz, January 17, 2011). Even the most bullish of analysts have hade to massively upgrade their price targets this year; some now predict $51-$52 per share.

With expectations now so high, one of Jazz’s challenges now will be to meet and manage these lofty targets. Any sign of weakness in prescription or volume growth for Xyrem could hit hard, as could any renewed generic threat, given the company’s over-reliance on Xyrem. Jazz also markets Luvox CR for obsessive compulsive disorders and social anxiety disorder but sales of the drug are pretty negligible compared to Xyrem’s potential.

As such, Jazz, which is now debt-free after paying off a $33m loan, is likely to come under increasing pressure to use what will become a rapidly swelling cash pile to license or acquire a complimentary product or two.

Given the importance of the decision, Jazz is likely to bide its time to make sure it strikes the right deal. The impressive performance of Xyrem these past 12 months have given Jazz the breathing space and capability to do just that.

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