Don’t Sleep on This Stock

Earlier this week we picked the brain of Eric Bannasch, founder and portfolio manager of Cadian Capital Management, and added Jazz Pharmaceuticals (Nasdaq: JAZZ) to our Brain Trust Portfolio.

Jazz is a biopharmaceutical company whose core product, Xyrem, delivered $1.1 billion in revenues in 2016. Xyrem treats cataplexy (sudden loss of muscle strength) and reduces daytime drowsiness in patients with narcolepsy. Through the first half of this year, Xyrem sales were $570.4 million, 7.5 percent ahead of last year’s pace. The $570.4 million also accounted for roughly 75 percent of the company’s 2017 first-half revenues.

Earlier in the year, Jazz settled with Hikma Pharmaceuticals (OTCMKTS: HKMPF) on a patent dispute. The litigation had been pending since 2010 when Roxane Labs—later acquired by Hikma—sought regulatory approval to market a generic version of Xyrem. Hikma is currently the only company with an FDA-approved generic version of Xyrem.

Under the terms of the settlement, Jazz agreed to authorize Hikma to sell generic Xyrem though Jazz’s Risk Evaluation and Mitigation Strategy program beginning in January 2023 for an initial term of six months—Hikma has the option to extend the deal to as long as five year—or earlier if certain conditions are met. Jazz will be entitled to a “meaningful” piece of Hikma’s future authorized generic Xyrem sales in the form of royalty payments. The agreement essentially eliminates the risk of generic competition from Hikma for more than five years.

Besides Hikma, Jazz has several other ongoing lawsuits against other companies seeking to make generic Xyrem. But Hikma is believed to be the greatest threat, and the settlement was a good one for Jazz, which relieved much of the generics concern surrounding Xyrem because it suggests positive outcomes for Jazz regarding the other ongoing lawsuits.

Internally, Jazz is working on the next generation of Xyrem to reduce the generic threat to Xyrem. For example, two prospective drugs currently in clinical trials, designated JZP-258 and JZP-507, respectively, are reformulated with 90 percent and 50 percent less sodium than Xyrem. JZP-258 is in Phase 3 trials and JZP-507 in Phase 1.

Additionally, Jazz has another product in late-stage clinical trials to treat symptoms related to another sleep disorder. Its JZP-110 has demonstrated good efficacy and a relatively clean safety profile in Phase 3 trials in treating excessive sleepiness in patients with obstructive sleep apnea. Assuming no adverse side effects emerge in the continuing studies, JZP-110’s strong profile could set it aside from expected rival drugs such as Provigil and Nuvigil, currently marketed with FDA-mandated cardiovascular warning labels.

JZP-110 is also separately being evaluated as treatment for excessive sleepiness in Parkinson’s Disease patients.

Besides Xyrem, Jazz has two other products, Erwinaze and Defitelio, that each generated more than $100 million in sales.

Erwinaze, which generated sales of $200 million last year, treats acute lymphoblastic leukemia (ALL) patients who suffer from hypersensitivity to E.coli-derived asparaginase. Erwinaze itself is a form of asparaginase, a chemo drug, but it is derived from a different bacterium and thus does not trigger the immune response in those patients who are allergic to the E.coli-derived version of asparaginase.

Early this year, the manufacturer of Erwinaze, Porton Biopharma, was warned by the FDA for repeated GMP (Good Manufacturing Practices) violations—traces of certain contaminants like cardboard fiber and metal were found in Erwinaze. While Porton works to clean up its act, Erwinaze supply became limited in certain markets and thus limited sales. By next year, however, we expect supply to return to normal.

Defitelio is smaller ($109 million 2016 sales) than Erwinaze but it’s faster growing. Sales are expected to increase to about $140 million this year. The drug treats a rare liver disorder called veno-occlusive disease (VOD, small veins in the liver are obstructed) in patients who have undergone stem cell transplant. It’s estimated that about 5,100 patients in the United States and the European Union suffer from VOD annually. Defitelio is currently the only approved therapy for VOD.

Additionally, Jazz is testing Defitelio as a potential prevent therapy for patients at high risk for VOD and as a prevention for acute GvHD, a reaction to stem cell transplant that could result in serious infection and possibly death.

Just last month, the FDA approved Vyxeos, a combination of two drugs, cytarabine and daunorubicin, as treatment for two types of acute myeloid leukemia (AML), a cancer of the bone marrow that causes it to make abnormal blood cells and platelets.

Vyxeos is delivered via Jazz’s proprietary CombiPlex technology, which administers the drug in a way that clinical evidence indicates to be more optimal than the traditional intravenous administration of chemotherapy. During clinical trials, Vyxeos lengthened median survival to 9.5 months from 5.9 months seen in patients who received standard care regimen.

Jazz acquired rights to the drug in 2016 when it was still in late-stage trials. Early estimates project peak sales at $200 million to $400 million but if the label expands there is further potential upside.

And less than a month ago, Jazz also agreed to collaborate with ImmunoGen (Nasdaq: IMGN) to develop and commercialize two early-stage (one in Phase 1 study, the other pre-clinical trial) hematology-related antibody-drug conjugate (ADC) programs and one ADC additional program to be named later. ADCs are a class of biopharmaceutical drugs that are designed to, unlike chemotherapy, only target and kill cancer cells—in this case, ImmunoGen’s programs target cancers of the blood.

Under the terms of the agreement, ImmunoGen will responsible for the development of the three ADC programs, and Jazz will pay a total of $175 million over seven years to help fund the programs. Jazz will have the right to opt into any of the programs prior to a certain time by paying a fee no higher than low triple-digit millions. After opt-in, Jazz would then share the cost of development with ImmunoGen and in the event of approval, Jazz would have commercialization rights for the drug(s) in exchange for payment of milestone payments and royalties to ImmunoGen. Under certain circumstances, ImmunoGen could elect to co-sell the drug(s) instead of receiving milestone payments and royalties.

The move marks Jazz’s attempt to continue to expand its portfolio in hematology and oncology. Purchasing rights to the early-stage products carries a higher risk of failure, but on the other hand, the strategy has greater return potential compared to buying a late-stage drug candidate with a higher chance of regulatory approval because the initial outlay is far lower (initial commitment of just $175 million).

The market currently values JAZZ at 12-times projected forward 12-twelve earnings, a low valuation for a biotech company, indicating that the market doesn’t expect a tremendous rate of growth and remains somewhat cautious of the generic Xyrem risk. We think the Hikma settlement sets a very good precedent for Jazz, however, and expect Jazz to be capable of delivering average annual earnings growth at least in the low teens for the next several years.

On Wednesday, we closed out BYD Company (OTCMKTS: BYDDF) and booked a 43.2 percent gain. The shares have soared in recent days, driven by euphoric reaction to news that China plans to eventually phase out fossil fuel car production completely. Although the plan bodes very well in the long run for BYD, the world leader in new-energy car production and sales, China’s target date will be decades in the future and implementing such an immense undertaking won’t be easy. The plan probably won’t change BYD’s sales or earnings very much from current levels in the near term, making the stock vulnerable to a pullback.

We could revisit the stock in the future.



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