Could This Biotech Be on Big Pharma's Radar?
Drugmaker Jazz Pharmaceuticals reported solid results last quarter. The company has been a multi-year growth story, and given Perrigo's recent acquisition of Elan, one has to wonder if Jazz could also be an interesting acquisition target for big pharma? Let's take a closer look at Jazz's story.
Jazz Pharmaceuticals is a well-established market leader in several segments of health care, having 10 products on the market, three-of-which are driving the company's growth.
In the company's most recent quarter, it easily surpassed expectations in both revenue and earnings per share with top-line growth of 33% and total revenue of $232.2 million. This growth was led by Xyrem (50%), Erwinaze (39%), and Prialt (103%).
While the company's pain drug Prialt achieved sales of just $11 million, it is helping the company to become more diversified. Xyrem remains Jazz's best-selling drug, with quarterly sales of $153.7 million. That accounts for just 66% of total revenue, however, which is significantly lower than the 88% share it claimed back in 2011.
In addition, the company upped its full-year revenue guidance for Xyrem, Erwinaze, and total sales. Jazz expects full-year Xyrem sales of $568 million (consensus), which would be 65% of the company's guided $870 million in total sales for 2013.
Location matters to pharma
One encouraging fact about Jazz is that it trades at just 15 times this year's earnings and 6.2 times its guided sales. With the company's growth and valuation, looks to be a value stock. In this case, Jazz might also be on the radar of big pharma acquirers.
Jazz has a trailing-12-month profit margin of 41.8%. This margin is not because Jazz operates at an efficiency that is so much greater than other biotechs, or because its pricing is so much greater than its peers. Instead, it's due to the company's location.
Jazz is located in Ireland, a country with a corporate tax rate of just 12.5%. In comparison, the U.S. corporate tax rate is 35%. If you don't think this is meaningful, then think back just a few months to the bidding war that took place with Elan.
Elan's valuation soared from $5 billion to nearly $9 billion before Perrigo won the war. Sure, Perrigo gets a double-digit royalty on sales of Tysabri and the $2 billion in cash that was on Elan's balance sheet. However, tax savings is what really separates Elan from its peers, which analysts estimate could save Perrigo $700 million annually in the next few years.
Last month, Perrigo guided for full-year EPS guidance of $6.35-$6.60. The acquisition of Elan is expected to be minimally accretive. In 2014, though, Elan will add $0.70-$0.80 in EPS, mainly from cost savings. In retrospect, that is massive savings and a large fundamental impact that completely changes the outlook for Perrigo. It is this reason that shares of Perrigo have soared 15% since releasing this guidance, despite little revenue growth. This fundamental benefit is also why Jazz might be looking attractive as an acquisition target.
Back when the bidding war for Elan was reaching its end, there was a fair amount of buzz regarding which Ireland-based company would be next, Jazz or Alkermes . Without question, Alkermes is an interesting possibility as well. The company does not develop its own drugs, but rather uses a technology to improve and extend the release of other commercial products. Currently, Alkermes has more than 20 products using its technology, and with patents being so important, and Alkermes's technology having the ability to expand patent protection, the company might be important to some companies.
However, Alkermes depends on royalties between 2% and 10% on any given product, and has high expenses due to constant pipeline development. Thus Alkermes has operating margins of just 12%, and while its 47.8% three year revenue growth rate is impressive, it hardly compares to Jazz's 65.9% rate. Hence, there might still be some buzz regarding which Irish company is next, although with higher profits, more cash, and greater growth, it seems logical that Jazz would be most attractive.
Best in class
The list of companies that could acquire Jazz stretches pretty far. Potential buyers include Royalty Pharma, Forest Laboratories, and Mylan, all of which showed an interest in Elan. There are also others such as Valeant and Vertex, though, which are acquisitive companies that may be interested in a lower tax rate and higher margins. However, the operative word here is "could." This is speculation, and investors shouldn't necessarily get interested in companies that have the potential to be acquired. With that said, I believe that Jazz is a top-tier company among mid-cap multi-product biotechs, and given the tax benefit and growth of this company, it seems logical that a number of companies could have their eyes on this Irish biotech.
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The article Could This Biotech Be on Big Pharma's Radar? originally appeared on Fool.com.Brian Nichols owns shares of Santarus and Jazz. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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