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Jazz Pharmaceuticals (JAZZ - Free Report) is a $9 billion drug company focused on developing and commercializing innovative products to meet unmet medical needs in neurology, psychiatry, and oncology.

On August 8, Jazz reported a weaker-than-expected quarter and guidance which knocked the shares down from $155 to $140. But I was licking my chops at the opportunity to buy this key franchise trading at just 11X next year's projected EPS of $13. This article will explain why.

First, you have to understand where JAZZ has been successful. Their top commercially-successful drug is Xyrem for the treatment of narcolepsy. Xyrem will comprise nearly 75% of JAZZ's total projected sales this year of $1.64 billion.

JAZZ's second most-important revenue generator is Erwinaze, part of a chemotherapy program to treat patients who have acute lymphoblastic leukemia, or ALL, a type of blood cancer that affects the white blood cells that help fight infection. Erwinaze is used in patients who have had an allergic reaction to a different type of asparaginase treatment.

Erwinaze is an alternate form of asparaginase. It is thought to help prevent leukemia cells from surviving and works in a similar way as other asparaginase treatments.

And Erwinaze is part of the oncology pipeline that JAZZ is expanding rapidly and holds the most promise as JAZZ brings new drugs to market and reduces dependence on Xyrem for growth.

Reaction to Q2 Report Overwhelmed by New FDA Approval

Wells Fargo analyst Ike Bucherow reiterated his Outperform rating on shares of JAZZ and trimmed his price target just a half-percent, to $177 from $178, after the company reported Q2 EPS of $2.56, missing the consensus of $2.75, and missing on the top line too by about $10 million.

The analyst stated "revenues were lighter than what we expected, spending in line with our expectations, resulting in EPS lower than we forecast, but nothing seems to be significantly astray. Jazz reaffirmed its full year revenue guidance of $1.625 billion to $1.7 billion."

But it was the news of August 3 that most large biopharma investors were focused on.

That day, the U.S. Food and Drug Administration (FDA) approved the Jazz Pharmaceuticals drug Vyxeos for the treatment of adults with two types of acute myeloid leukemia (AML), a rapidly progressing and life-threatening blood cancer. Vyxeos is a fixed-combination of chemotherapy drugs daunorubicin and cytarabine.

Designed with Jazz's CombiPlex proprietary technology, Vyxeos is a unique liposomal formulation that delivers a fixed-ratio of daunorubicin and cytarabine to the bone marrow that has been shown to have synergistic effects at killing leukemia cells in vitro and in animal models.  Vyxeos is the first product developed with the company's proprietary CombiPlex platform, which enables the design and rapid evaluation of various combinations of therapies.

"Vyxeos is the first new chemotherapy advance in more than 40 years for adults with newly-diagnosed therapy-related AML or AML with myelodysplasia-related changes," said Bruce Cozadd, chairman and chief executive officer of Jazz Pharmaceuticals. "The FDA approval of Vyxeos reflects our commitment to addressing unmet needs within the hematology oncology community."

“This is the first approved treatment specifically for patients with certain types of high-risk AML,” said Richard Pazdur, M.D., director of the FDA’s Oncology Center of Excellence and acting director of the Office of Hematology and Oncology Products in the FDA’s Center for Drug Evaluation and Research. “Vyxeos combines two commonly used chemotherapies into a single formulation that may help some patients live longer than if they were to receive the two therapies separately.”

AML is a rapidly-progressing cancer that forms in the bone marrow and results in an increased number of white blood cells in the bloodstream. The National Cancer Institute at the National Institutes of Health estimates that approximately 21,380 people will be diagnosed with AML this year and approximately 10,590 patients with AML will die of the disease in 2017.

T-AML occurs as a complication of chemotherapy or radiation in approximately 8 to 10 percent of all patients treated for cancer within an average of five years after treatment. AML-MRC is characterized by a history of certain blood disorders and other significant mutations within cancer cells. Patients with t-AML or AML-MRC have very low life expectancies.

The safety and efficacy of Vyxeos were studied in 309 patients with newly diagnosed t-AML or AML-MRC who were randomized to receive Vyxeos or separately administered treatments of daunorubicin and cytarabine. The trial measured how long patients lived from the date they started the trial (overall survival). Patients who received Vyxeos lived longer than patients who received separate treatments of daunorubicin and cytarabine (median overall survival 9.56 months vs. 5.95 months).

Analysts Look to an Impressive & Profitable Future

Following this important FDA approval, several Wall Street investment banks updated their thesis on JAZZ. Janney Montgomery Scott analyst Ken Trbovich raised his price target on $192 from $180 while maintaining a Buy rating.

Trbovich believes the company can benefit from Vyxeos technology by internally developing an oncology pipeline for which the company is not currently receiving credit. He says clients should expect JAZZ to raise guidance on Vyxeos, which boosts his own confidence in the company outlook for 2018 and beyond.

Cowen analyst, Ken Cacciatore, reiterated his Outperform rating on shares of JAZZ and raised his price target to $190 after the company provided perspectives from KOLs, or Key Opinion Leaders, on Vyxeos. Here was one such view...

"Vyxeos is the first chemotherapy to demonstrate an overall survival advantage over the standard of care in a Phase 3 randomized study of older adults with newly-diagnosed therapy-related AML or AML with myelodysplasia-related changes," said Jeffrey E. Lancet, MD, Chair of the Department of Malignant Hematology at Moffitt Cancer Center.  "The prognosis for these patients is poor, so the FDA approval of this new drug provides a welcome therapeutic advance."

Cacciatore noted "the impressive data that led to its approval, its place in the AML treatment paradigm, the addressable market, the pricing strategy & the value proposition. This commentary – in addition to our clinical consultants' – reinforces our conviction on this potential $300 million drug. We continue to believe the totality of these assets are undervalued."

BMO Capital analyst Gary Nachman reiterated an Outperform rating and $196 price target on JAZZ, noting that approval timing was on the earlier side of expectations, and there are no age restrictions in the indication, which is an upside surprise.

The JAZZ R&D Pipeline Continues to Rapidly Expand

On August 29, Jazz Pharmaceuticals and ImmunoGen (IMGN - Free Report) announced that the companies have entered into a collaboration and option agreement granting Jazz Pharmaceuticals exclusive, worldwide rights to opt into development and commercialization of two early-stage, hematology-related antibody-drug conjugate (ADC) programs.

The programs covered under the agreement include IMGN779, a CD33-targeted ADC for the treatment of acute myeloid leukemia (AML) in Phase 1 testing, and IMGN632, a CD123-targeted ADC for hematological malignancies expected to enter clinical testing before the end of the year.

Under the terms of the agreement, ImmunoGen will be responsible for the development of the three ADC programs prior to any potential opt-in by Jazz.  Following any opt-in, Jazz would be responsible for any further development as well as for potential regulatory submissions and commercialization.

As part of the agreement, Jazz will pay ImmunoGen an upfront payment of $75 million.  Additionally, Jazz will pay ImmunoGen up to $100 million in development funding over seven years to support the three ADC programs.  For each program, Jazz may exercise its opt-in right at any time prior to a pivotal study or any time prior to a biologics license application (BLA) upon payment of an option exercise fee of mid-double digit millions or low triple digit millions, respectively.

Most analysts really like this partnership and SunTrust reiterated their $210 price target on JAZZ shares, citing "The ImmunoGen deal makes strategic & financial sense, adding optionality to Jazz’s global Hematology/Oncology portfolio."

Smart Money Still Buying Around $150 in Q2

For nearly as long as I have been following BioPharma stocks, I have been a fan of following top hedge fund managers as they pick their way through thousands of ideas, across dozens of industries, with ready cash.

And so I am thrilled to find when an idea I have is being also supported by the best of the best money masters. A few days after I bought JAZZ shares for my Healthcare Innovators portfolio I received the SEC 13F quarterly filings showing who was adding to their JAZZ holdings in April, May, and June.

Looking at the price chart for Q2, it looks like they could have been buying anywhere between $145 and $160, where most of the price action took place. Here are their stakes and shares added...

Viking Global, the $45 billion fund run by Norwegian-born Andreas Halvorsen, a Tiger Cub disciple, raised their haul from 197,830 shares to 992,901 shares, a 4-fold increase at all-time highs!

And Maverick Capital, the $16 billion fund run by Lee Ainslee, raised their holding of JAZZ from 10,180 shares to 15,690 shares.

Yes, the Maverick position is very small for a hedge fund, but I liked the commitment of increasing their stake by 50%. And I like Lee Ainslee.

On a bigger note, Janus Henderson, which is the new name after the recently completed "merger of equals" between Janus and London's Henderson plc, now manages a combined $330 billion (as of March 31, 2017).

Apparently they hold 867K shares and this looks like it was a new buy. But I still have to verify if they actually added in Q2 or if this is simply a restatement of positions since the merger, and thus their books, was finalized mid-quarter on May 3.

And of course the usual "whale" suspects were gobbling up shares in the deep with Fidelity adding 850K to bring their haul to 8.3 million and JPMorgan adding 410K to a position that now totals 1.4 million shares.

Bottom line: Investors and analysts really like this steady pharma profit-machine, among biotech gambles still years away from bringing drugs to market. And I happen to agree.

Disclosure: I own JAZZ shares for the Zacks Healthcare Innovators portfolio.

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