3 Reasons I’m Still Buying After a 5-Year 775% Return

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Jazz Pharmaceuticals (NASDAQ: JAZZ) has been one of the very best performing biotechnology stocks over the last five years. Yet despite these large gains, there are still reasons to buy.

#1. Growth That Doesn’t Appear To Be Slowing

The growth of Jazz Pharmaceuticals is simply incredible, as revenue has increased almost 800% during the last five years. During its last quarter, the company beat expectations as revenue grew 91.4% year-over-year.

The company currently has operating margins of 39.6% -- but last quarter it did see its gross margin decline to 86.0% from 92.4% in the year prior. This decline was mostly related to the acquisition of EUSA Pharma, an acquisition that is expected to produce long-term growth for the company.

In the pharmaceutical sector, you rarely see a company with almost $700 million in revenue that is still seeing almost 100% sales growth. In my opinion, this level of growth is a definite reason to explore an investment.

#2. Xyrem Continues To Become Less Relevant

Jazz Pharmaceuticals’ lead product is Xyrem, which is a prescription medicine used for the treatment of narcolepsy to reduce too much daytime sleepiness. One of the fears surrounding Jazz have been the potential for generic competition, as Jazz has produced the majority of its revenue from sales of Xyrem for the last several years.

In a sense, investors fear a repeat of Spectrum Pharmaceuticals. Back in March, Spectrum saw its valuation decline more than 35% in one day. The company had been projecting sales of $300 million for 2013 – but many feared that a generic for its best-selling drug Fusilev could lead to large loss.

Turns out, those fears were correct, as the company abruptly cut full-year guidance to $170 million, which was $130 million less than expectations. The reason was generic pressure. Now, with Jazz Pharmaceuticals fighting the creation of a generic for Xyrem, many believe that Jazz could experience a similar fate.

Luckily, because of Jazz Pharmaceuticals’ diversification – including 10 marketed drugs and a large pipeline – it has reduced its reliance on Xyrem. Back in 2011, Xyrem was 88% total sales. In 2012, it was 65% of total sales. During its most recent quarter, sales of Xyrem accounted for less than 60% of total sales.

Due to the transition we are seeing with Jazz Pharmaceuticals, the company is no longer as vulnerable to potential generics. The company is seeing growth elsewhere, including Erwinaze for acute lymphoblastic leukemia (ALL).

Therefore, this should be a bonus to investors – and also the fact that no generic has been introduced or is scheduled to be approved for Xyrem. Thus, the company could still have another two years of exclusivity. By that time, new products will come to the market and newly launched products will be producing growth.

#3 The Company Is Still Cheap

Jazz Pharmaceuticals reached new all-time highs last week at $66.93 after producing a one-month gain of 15%. Yet, despite these gains, the stock is still cheap. To better explain, I’ll compare it to Alexion Pharmaceuticals (NASDAQ: ALXN), which I have done in the past.

<table> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Jazz Pharmaceuticals</strong></p> </th><th> <p><strong>Alexion Pharmaceuticals</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap (millions)</p> </td> <td> <p>$3,890</p> </td> <td> <p>$19,410</p> </td> </tr> <tr> <td> <p>Trailing P/E Ratio</p> </td> <td> <p>13.23</p> </td> <td> <p>68.36</p> </td> </tr> <tr> <td> <p>Forward P/E Ratio</p> </td> <td> <p>8.79</p> </td> <td> <p>30.55</p> </td> </tr> <tr> <td> <p>Price/Sales</p> </td> <td> <p>5.77</p> </td> <td> <p>16.08</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>39.58%</p> </td> <td> <p>35.54%</p> </td> </tr> <tr> <td> <p>Return on Equity</p> </td> <td> <p>28.23%</p> </td> <td> <p>17.66%</p> </td> </tr> <tr> <td> <p>2013 Growth Expectations</p> </td> <td> <p>50%</p> </td> <td> <p>40%</p> </td> </tr> <tr> <td> <p>Lead Product</p> </td> <td> <p>Xyrem</p> </td> <td> <p>Soliris</p> </td> </tr> <tr> <td> <p>Lead Product’s % of Total Sales</p> </td> <td> <p>60%</p> </td> <td> <p>100%</p> </td> </tr> </tbody> </table>

Jazz Pharmaceuticals is cheaper than Alexion Pharmaceuticals -- but is also growing faster, is less dependent on one product, and is more efficient with better margins and higher returns on its investments. Jazz Pharmaceuticals trumps Alexion Pharmaceuticals on all of these key metrics. Thus, I believe that it is still undervalued despite trading at new highs and that its five-year 775% return is just the start of this stock’s trend higher. 

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Brian Nichols is long 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus