ZYME - Jazz Pharmaceuticals' Zanidatamab Promises Growth Amidst Market Undervaluation

2023-12-21 07:24:53 ET

Summary

• Jazz Pharmaceuticals' market valuation is fairly conservative overlooking its promising potential.
• Zanidatamab's Phase 2a success boosts Jazz's oncology market potential.
• Despite challenges, Jazz's strategic positioning and conservative market valuation provide deep value for interested investors.

Jazz Pharmaceuticals' (JAZZ) current market valuation suggests shareholder pessimism, not fully reflecting Zanidatamab's significant market potential. This undervaluation overlooks Zanidatamab's promising addressable market in oncology, Jazz's overall financial health, and its strategic execution capabilities, potentially underestimating the drug's impact on the company's future growth.

Introduction:

Jazz Pharmaceuticals is a biopharmaceutical company focused on developing and commercializing innovative therapies for diverse medical needs. It specializes in neuroscience and oncology, offering a range of products aimed at treating conditions like narcolepsy, cancer, and psychiatric disorders. The company's portfolio includes both marketed products and a robust pipeline of developmental drugs, positioning it as a key player in the pharmaceutical industry. The company's focus on advancing Zanidatamab for various cancers, with potential peak revenues exceeding $2 billion, signals a significant push towards oncology.

Zanidatamab is a novel bispecific antibody that simultaneously binds two non-overlapping epitopes of HER2, resulting in multiple mechanisms of action, potent immune activation and encouraging antitumor activity in patients.

In December 2022 , Jazz has exercised its option to continue with its exclusive development and commercialization rights to Zymeworks' zanidatamab in key markets, including the U.S., Europe and Japan. As a result, Jazz holds exclusive license to develop and commercialize zanidatamab in the United States, Europe, Japan and all other territories except for those Asia/Pacific territories that Zymeworks previously licensed to BeiGene, Ltd.

Zymeworks received $375 million payments from Jazz as of today, may receive up to $1.76 billion for total consideration, including $525 million for regulatory milestones and $862.5 million for commercial milestones. Upon zanidatamab's approval, Zymeworks will get 10-20% royalties on Jazz's net sales.

On December 8, Jazz Pharmaceuticals announced positive results from their Phase 2a clinical trial of Zanidatamab in patients with HER2/HR metastatic breast cancer.

The Phase 2a trial results for Jazz's Zanidatamab showed promising outcomes for patients with heavily pretreated HER2/HR metastatic breast cancer. Key highlights include:

• a 67% six-month survival rate without disease progression, indicating most patients didn't see their cancer worsen in this period
• The average time patients lived without the disease worsening was 12 months
• A 35% response rate means this proportion of patients saw their cancer shrink or disappear after treatment, lasting on average 15 months.

These results highlight Zanidatamab's potential effectiveness and safety, possibly offering better outcomes or fewer side effects than current treatments, making it a promising option for market share in breast cancer therapy.

For investors, these results suggest strong potential for Zanidatamab in a competitive market, marked by existing therapies like trastuzumab, pertuzumab, and T-DM1. Zanidatamab's efficacy and tolerability could position it favorably for market share capture.

Revenue in the Oncology Drugs market is projected to reach $188 billion in 2023 and $360 billion in 2028 (annual growth rate of 13.79%) while most of this revenue is generated from the United States and territories that Jazz has exclusive license in.

Other Key Pipeline Highlights

The anticipation of five late-stage readouts ( JZP150, Suvecaltamide (JZP385), JZP441, JZP815, JZP898) by the end of 2024 suggests a robust pipeline, positioning Jazz for future growth. Furthermore, the company's confidence in Epidiolex reaching blockbuster status and the continued growth of Xywav in narcolepsy and idiopathic hypersomnia indicate strong future prospects in neuroscience. Their commitment to strategic capital allocation and operational excellence supports the aim of achieving Vision 2025, aiming for sustainable growth and diversified revenue streams.

Valuation:

Zanidatamab's success can significantly boost Jazz's valuation, as it diversifies their oncology portfolio and taps into a lucrative market segment.

The company's market capitalization as of December 18, 2023, stands at $7.6 billion . The market cap amounts to only 68% of the total assets as of September 30, 2023, and is merely twice the value of its current assets, or 2 times 2022 annual revenue ($3.66 billion). Furthermore, considering Jazz's operational cash flow, which was approximately $1.27 billion in 2022 and is expected to exceed that in 2023, the market cap is about six times the cash flow from operations. These figures suggest that Jazz's market valuation, relative to its asset base and operational cash flow, might be viewed as conservative, especially in the context of Zanidatamab's strong potential among others in the pipeline. Not to mention, Zanidatamab's potential peak revenue is over 50% of current total revenue. This valuation could be reflective of the market's pessimistic assessment of Jazz's future growth prospects, especially given the potential revenue contribution from Zanidatamab.

Challenges:

1. Market Competition: The entry of high sodium branded and generic competitors in the narcolepsy market presents a challenge for Jazz's oxybate franchise.
2. R&D Investment Impact: The increase in R&D investments, particularly in Zanidatamab, while crucial for long-term growth, has led to decreased adjusted net income and EPS in the short term.
3. Regulatory Hurdles: The success of pipeline products, especially in late-stage development like Zanidatamab, hinges on regulatory approvals which are inherently uncertain.
4. Tax Rate Fluctuations: Future increases in effective tax rates, as mentioned in the earnings call, could impact net income.

Conclusion:

Jazz Pharmaceuticals, bolstered by the promising outcomes of Zanidatamab's Phase 2a trial, is poised for significant growth in oncology. This aligns with the initial thesis that the market's current pessimism may undervalue the drug's potential and Jazz's overall prospects. The company's strategic focus, backed by Zanidatamab's potential to capture a substantial market share in breast cancer therapy, positions it for a transformative leap, making it an attractive prospect for long-term investors.

Editor's Note : This article was submitted as part of Seeking Alpha's Top 2024 Long/Short Pick investment competition , which runs through December 31. With cash prizes, this competition -- open to all contributors -- is one you don't want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!

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