Updated View On Jazz Pharmaceuticals’ 2025 Goals (NASDAQ:JAZZ)

Shares of Jazz Pharmaceuticals (NASDAQ:JAZZ) have traded flat to somewhat lower since my November 2022 article and this was largely in line with what the average biotech stock was doing until early November of last year, the time when biotech stocks began to recover and Jazz’s share price made no progress.

My view at the time was that the stock was worth approximately $190 per share and more if the company could execute well against its 2025 and long-term goals of reaching $5 billion in revenue, but my view was also that the company would come up short of that goal as my revenue estimate was $3.9 billion at the low end of the range and $4.95 billion at the high end of the range, or around $4.4 billion at the mid-point.

In today’s article, I will provide an updated view on Jazz’s 2025 goals. I still believe the company will come up short of its $5 billion revenue goal unless it acquires a product capable of adding more than $600 million in annual sales in 2025.

Even so, I still see the stock as undervalued and with the potential to re-rate higher from the current very low EV/revenue multiple of slightly above 3 to at least 5, driven by the market seeing a modestly to moderately declining oxybate business instead of it falling apart, the continued growth of Xywav in idiopathic hypersomnia and of Rylaze and Epidiolex, and finally, by some of the upcoming pipeline readouts (primarily zanidatamab in GEA in late 2024) and business development. I am slightly increasing my net present value of Jazz from $190 to $205, on passage of time and adjusted revenue expectations.

Current product portfolio and pipeline cannot drive total revenues to $5 billion by 2025

Back in November 2022, I maintained my view that Jazz could generate $3.9 billion in revenue in 2025 and up to $4.95 billion despite the discontinuation of the development of nabiximols and the sale of Sunosi because I expected Xywav in idiopathic hypersomnia (‘IH’) and Rylaze would make up for the $600-$650 million estimated shortfall created by the disappearance of the two products.

I am still quite pleased by the performance of Xywav in IH, and the growth of Rylaze has been exceptional and has significantly exceeded my expectations even before it became available outside the United States.

There was limited erosion of the oxybate business despite the availability of an authorized Xyrem generic and the June launch of Avadel Pharmaceuticals’ (AVDL) Lumryz which is a more convenient once nightly high sodium oxybate and which is so far having a pretty good launch with 1,900 narcolepsy patients enrolled in Avadel’s RYZUP hub and with over 1,000 patients already receiving Lumryz at the end of 2023.

Jazz has done a good job converting patients from Xyrem to Xywav and the latter will likely end 2023 with an annualized net sales run rate of approximately $1.4 billion. The growth of Xywav was also helped by the successful IH launch and while I do anticipate Xywav will start losing more narcolepsy patients to Lumryz, I now anticipate it will hold up better than I previously expected and that was the oxybate franchise generating between $1 billion and $1.5 billion in annual sales in 2025. I am revising that estimate to $1.5-$1.7 billion with 35% to 40% of total sales coming from the IH indication and the rest being narcolepsy.

Epidiolex has been a disappointment since Jazz completed the acquisition of GW Pharmaceuticals in 2021. Epidiolex’s annualized net sales run rate was above $600 million in the last quarter before the acquisition closed and Jazz only managed to get the run rate to just over $800 million. I would have expected Epidiolex to be a product with net sales close to or above $1 billion by the end of 2023, so, this reduces my total 2025 revenue estimate by $200-$300 million.

Zepzelca is doing more or less as expected and there are no changes there, nor are there changes for Defitelio and Vyxeos.

Putting these changes together, and adding some modest contribution from zanidatamab, assuming it is approved by early 2025 for the treatment of biliary tract cancer, my estimate range goes from $3.90-$4.95 billion to $4.0-$4.4 billion.

This leaves business development. Jazz had $1.6 billion in cash and equivalents at the end of Q3, another $500 million in undrawn credit, and $5.7 billion in total debt. It is reasonably likely the company will generate more than $1 billion in operating cash flow in 2024 and 2025, and unless the company uses its (undervalued) equity, I do not see how it can come up with an asset that can make up the difference to meet the $5 billion revenue goal in 2025. It seems more likely Jazz will do in-licensing deals for mid/late-stage clinical assets with relatively modest upfront financial commitments, but such deals cannot drive revenue growth in the next 2-3 years.

Pipeline overview – too soon to contribute in the next two years, but good growth potential in the second part of the decade

It’s been a long time since Jazz had an important clinical catalyst. But that is about to change as we should see multiple important readouts by early 2025.

The first expected readout is of suvecaltamide in patients with moderate to severe essential tremor in the late first half of the year. Suvecaltamide or JZP-385, was gained through the 2019 acquisition of Cavion for $52.5 million upfront and with potential for up to $260 million in additional milestone payments. Suvecaltamide was called CX-8998 before Jazz renamed it and is a modulator of T-type calcium channels.

My probability of success estimate for suvecaltamide is low based on the proof-of-concept trial results as it showed no difference on the primary endpoint – the video-rated The Essential Tremor Rating Assessment Scale (‘TETRAS’). It did show an effect on some secondary endpoints, including the TETRAS subscale that is the primary endpoint in the phase 2b trial instead of the video-rated endpoint and was likely the reason Jazz acquired Cavion and continued development of suvecaltamide. However, mixed data and switching of endpoints are often not a good sign. The safety profile is also somewhat questionable with high rates of dizziness (21%).

Even so, I believe the risk-reward is good here as I anticipate a greater upside move in the unlikely scenario of suvecaltamide working in this phase 2b trial versus a likely modest and temporary downside move if it fails and is discontinued.

The phase 3 results of Epidiolex in Japan in currently approved indications in the U.S. are expected in the second half of the year as well. This trial is likely to show positive results but is also unlikely to move the stock due to the expected positive outcome and the fact this is a trial in Japan with a limited addressable market.

The most important readouts for Jazz are the two phase 3 oncology readouts.

Jazz expects to report the phase 3 results of zanidatamab as a first-line treatment in patients with advanced or metastatic gastroesophageal adenocarcinoma (‘GEA’) in late 2024. The company decided to increase the targeted enrollment from 714 to 918 patients to increase the power of the trial to detect a positive overall survival signal. However, the primary endpoint is progression-free survival (‘PFS’) and it is based on the original targeted enrollment population of 714 patients.

Zanidatamab previously reported positive results in patients with biliary tract cancer (‘BTC’) and Jazz initiated a rolling BLA submission to the FDA in late 2023 which it expects to complete in the first half of 2024. The GEA trial is far more important as the addressable market in major geographies is estimated to be approximately 63,000 patients versus 12,000 in the BTC indication.

There are three arms in the GEA trial:

1. Zanidatamab plus chemotherapy.
2. Zanidatamab plus chemotherapy plus PD-1 antibody tislelizumab.
3. Trastuzumab (Herceptin) plus chemotherapy as the control arm.

The GEA treatment landscape has evolved with Keytruda generating positive results in combination with chemotherapy and trastuzumab. This is effectively the bar for success and it seems likely that zanidatamab would need to show strong data in combination with tislelizumab and chemotherapy.

The trial is also very relevant for partner Zymeworks (ZYME) and Zymeworks’ presentation slide shows the bar for zanidatamab plus chemo (left side of the slide below showing data of trastuzumab and chemotherapy) and for zanidatamab plus tislelizumab plus chemotherapy (right side of the slide below showing data of Keytruda plus trastuzumab plus chemotherapy).

I expect this trial to show positive results as zanidatamab is likely a better HER2 drug than trastuzumab and this should make a difference in the outcome of the trial. And the data generated in the phase 1b/2 trial look good – in 33 patients, after 18 months of follow-up, zanidatamab in combination with tislelizumab and chemotherapy generated an overall response rate (‘ORR’) of 75.8%, median duration of response of 22.8 months and median progression-free survival (‘PFS’) of 16.7 months. The ORR is similar to the 73% achieved by Keytruda plus trastuzumab plus chemotherapy but the median duration of response was 11.3 months and the PFS of this combination was 10.9 months.

If zanidatamab’s combination data look as good as in the phase 1b/2 trial, Jazz will have a competitive product for 63,000 patients globally. The results of the triple combination with tislelizumab would be very positive for partner Zymeworks, but also BeiGene (BGNE) as it would benefit from the global use of tislelizumab in GEA patients and it holds the Greater China rights for zanidatamab.

Positive results from the GEA trial should also increase Jazz’s confidence to further develop zanidatamab for other indications and breast cancer would be next, with an addressable market that is approximately double the size of the GEA and BTC indications, combined. Jazz sees zanidatamab as a $2 billion+ a year drug, although I am not sure whether this is based on the GEA and BTC opportunities or if it includes breast cancer. To me, it looks like BTC and GEA should be sufficient for at least $1 billion in peak annual sales even if the market penetration in the two indications is in the 15-20% range – that is assuming a net price per patient per year of $100,000 (and the price will likely be higher).

The second important readout from the oncology pipeline is of Zepzelca in combination with Roche’s (OTCQX:RHHBY) Tecentriq (atezolizumab) in first-line small cell lung cancer (‘SCLC’) patients. The outcome of this trial is hard to predict because Zepzelca is approved for the treatment of second-line SCLC but based on data from a single-arm trial and it stayed on the market despite failing to show an overall survival benefit compared to the control arm in a confirmatory trial, although it did show better safety compared to the control arm.

This phase 3 trial is comparing Zepzelca plus Tecentriq compared to Tecentriq monotherapy and I have no data to estimate the probability of success. Given the lack of overall survival benefit in the prior trial, I assume the treatment benefit of Zepzelca when added to Tecentriq will be minimal and that the trial is more likely to fail.

Risks and other considerations

The key risk in the near- and medium-term for Jazz is the disruption of the oxybate franchise. Lumryz is off to a strong start, the authorized generic version of Xyrem is already eating into Jazz’s revenues, and we are likely to see increased competition in both the narcolepsy and idiopathic hypersomnia markets in the following years. Revenue erosion is my base case, but it could be worse than I am anticipating, and while Jazz is developing a once-nightly version of oxybate to compete with Lumryz, this effort may also fail.

The upcoming readouts also add clinical risks and while Epidiolex’s trial in Japan is likely to show positive data, it is not very important for Jazz given the limited opportunity relative to the size of the company, and the other trials are higher risk and none have a very high probability of success – especially the trials of suvecaltamide and Zepzelca.

It does not seem likely, but if Jazz is hit by several negative outcomes, both clinical and commercial, it may become harder for the company to service its $5 billion+ debt position.

There is an upside consideration I want to add here: the litigation upside against Avadel. Jazz is suing Avadel for patent infringement and the FDA for what it considers an unlawful approval of Avadel’s Lumryz as it believes the approval violates the orphan drug exclusivity of Xywav. I already wrote about this in my article on Avadel and this being a tail risk for Lumryz, and if Jazz prevails (I view this as unlikely, but I am no legal expert and cannot be certain), we could see Xywav do better than the Street or I either one think it will do.

Conclusion

The difficult period for Jazz might be coming to an end. The fears of the oxybate franchise disintegrating are not being realized. While I do expect to see revenue erosion for this franchise in the following quarters and years, driven by Xyrem generics and the successful launch of Avadel’s Lumryz, I expect the growth of Xywav in idiopathic hypersomnia, the growth and continued international expansion of Epidiolex and Rylaze, as well as pipeline maturation and progression (especially of zanidatamab), and business development to make up for the shortfall and I can see Jazz returning to stronger growth in the second half of the decade.

I see the stock as worth approximately $205 per share at the moment based on the assumptions laid out earlier in the article, with potential for upside revisions should zanidatamab and/or other clinical candidates generate strong data, or if the company makes value-creating deals in the following quarters and years. Alternatively, downside revisions are possible if the erosion of the oxybate franchise is worse than expected, if the other growth assets come short of growth expectations in the following years, if pipeline productivity is poor, or if business development activities fail to lead to desired outcomes.