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Highlights of Lone Pine Capital's positions in 1Q 2014

Part 6
Highlights of Lone Pine Capital's positions in 1Q 2014 (Part 6 of 8)

Lone Pine Capital buys a new stake in Jazz Pharmaceuticals

Lone Pine Capital and Jazz Pharmaceuticals

Lone Pine initiated new positions in Actavis PLC (ACT), LPL Financial Holdings (LPLA), Adobe Systems Inc. (ADBE), Equinix Inc. (EQIX), and Jazz Pharmaceuticals PLC (JAZZ). Top positions the fund sold were Dollar Tree Inc. (DLTR) and American Express Co. (AXP).

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Lone Pine initiated a new position in Jazz Pharmaceuticals PLC (JAZZ) last quarter that accounts for 1.41% of the fund’s total 1Q portfolio. Jazz is also part of the iShares Nasdaq Biotech ETF (IBB).

The Ireland-based Jazz Pharmaceuticals PLC is a specialty biopharmaceutical company with a diverse portfolio of products in the areas of narcolepsy, hematology and oncology, pain, and psychiatry.  The company’s U.S.-marketed products include the Xyrem oral solution for narcolepsy, cancer drug Erwinaze, and pain reliever Prialt. In 2013, net product sales of Xyrem were $569.1 million, which represented 65.8% of Jazz’s total net product sales.

Under psychiatry treatments, Jazz owns a portfolio of products, including FazaClo HD and FazaClo LD, orally disintegrating clozapine tablets indicated for treatment-resistant schizophrenia, and Versacloz, an oral suspension clozapine for severely ill treatment-resistant schizophrenia patients. The company also has product candidates in development in its sleep and hematology and oncology franchises. In January, Jazz acquired rights to ADX-N05 from Aerial BioPharma. The company recently said it will proceed with a Phase 3 clinical study for JZP-110 (formerly ADX-NO5), a potential new treatment for the symptoms of excessive daytime sleepiness (EDS) in adults with narcolepsy.

Total revenues for 2013 were $872.4 million, an increase of 49% over total revenues of $586.0 million for the year ended December 31, 2012. Total revenues for the fourth quarter of 2013 were $235.8 million—an increase of 28% over total revenues of $183.7 million for the fourth quarter of 2012, driven primarily by increased net sales of the Xyrem oral solution and Erwinaze.

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Jazz is rumored to be an acquisition target

The healthcare space has been seeing increasing consolidation. News reports have speculated since last year that Jazz Pharmaceuticals is an attractive target for pharma companies seeking an Irish domicile due to the low 12.5% corporate tax rate. Tax-driven deals in the sector include generic drugmaker Actavis’s $8.5 billion acquisition of the Dublin-based Warner Chilcott and Perrigo Company PLC’s $8.6 billion acquisition of Elan.

Jazz expects to drive growth via the addition of Defitelio in drug portfolio

Jazz Pharmaceuticals also has a number of products marketed outside the U.S. and expects to launch its rare liver disease drug, Defitelio (defibrotide), in the European Union over the course of 2014. Jazz acquired Defitelio via the $993 million acquisition of Italy-based Gentium in February. Defitelio is the only treatment approved in the European Union for severe hepatic veno-occlusive disease (VOD) in adults and children. VOD is a potentially life-threatening condition, which typically occurs as a significant complication of stem cell transplantation. Jazz said in March that the drug will be launched in Germany and Austria and in 27 additional European countries on a rolling basis in 2014 and 2015. A Canaccord Genuity analyst said they expect peak sales of ~$480 million for Defitelio.

Jazz misses on earnings and revenue estimates in 1Q 2014 and lowers its outlook

Shares fell after Jazz missed estimates for 1Q earnings and revenue. GAAP net loss was $92.7 million, or $1.58 per diluted share, compared to GAAP net income of $43.4 million, or $0.71 per diluted share, for the first quarter of 2013. The loss included an upfront license fee and milestone payment of $127.0 million for JZP-110. Total revenues for the first quarter of 2014 were $246.9 million, an increase of 26% from $196.2 million for the first quarter of 2013. Xyrem net sales increased by 36% to $160.4 million. Erwinaze net sales increased by 12% to $46.9 million in the first quarter of 2014. Pro forma net sales of Defitelio were $15.1 million in the first quarter of 2014, an increase of 75% from $8.6 million in the first quarter of 2013.

Net sales of Prialt and psychiatry products declined. Prialt sales fell due to the timing of shipments, while psychiatry product sales decreased due to the launch of a generic version of Luvox CR in March 2013 and the continued impact of authorized generic product sales for FazaClo LD.

For fiscal 2014, Jazz forecast net earnings of $1.81 to $2.30 per share—lower than the previous guidance of $2.31 to $2.84 per share. The company expects adjusted earnings of $8.00 to $8.25 per share and revenues of $1.1 billion to $1.16 billion.

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