If you own Jazz Pharmaceuticals plc (JAZZ) stock, you may be having some mixed emotions right now. The same cannot be said for shareholders of Celator Pharmaceuticals Inc (CPXX), who are likely already hoarse from celebratory screaming.
Jazz Pharmaceuticals agreed to pay $30.25 per share for CPXX stock, or roughly $1.5 billion for the entire company. That’s more than a 70% premium to Celator’s closing price of $17.53 on Friday.
JAZZ stock owners have the right to feel conflicted, as evidenced by the wavering share price in early trading on Tuesday. On one hand, the company is acquiring a late-stage pipeline drug in Celator’s Vyxeos that should really diversify its revenue stream.
On the other hand, $1.5 billion is a tidy sum, especially considering the relatively modest size of the acquirer, which had $980 million in cash at the close of the first quarter and is valued around $9 billion.
JAZZ Stock: CPXX Is a Big Risk
If you hold stock in Jazz Pharmaceuticals, you should know that the Celator acquisition didn’t come cheap. As I mentioned, Jazz Pharmaceuticals has just under $1 billion in the bank, and will finance the deal with a combination of cash and credit.
Translation: No more big deals are in the works anytime soon.
That said, this is a calculated risk: Celator’s golden goose is Vyxeos, an acute myeloid leukemia treatment the company is prepping for submission to the Food and Drug Administration in the U.S. after shockingly good Phase-3 trial results in March. CPXX is also planning to apply for European approval later this year.
Celator previously projected sales between $200 million and $270 million in the U.S. and European markets; although sales could top out between $690 million and $780 million if Vyxeos is approved to treat AML patient populations outside of the subset used in the Phase-3 study.
The only reason paying a 73% premium for CPXX stock isn’t a boneheaded move for JAZZ stock owners is because it ostensibly solves a serious problem: Jazz Pharma’s star drug, Xyrem, which hauled in $955 million last year (over 70% of overall sales), is losing patent protection in 2019.
That means a flood of lower-cost generic competition, and a massive hit to the Jazz cash cow. Something had to be done. And although JAZZ stock owners may be pinching themselves over the fact that CPXX stock is fetching $30 a share despite trading well below $2/share prior to its Phase-3 trial results, Celator truly does have something special on its hands.
Bottom Line on the CPXX and JAZZ Deal
Vyxeos appears to be a virtual lock for FDA approval, and after publishing its trial data in March, biotech guru Adam Feuerstein applauded the company as “the first in 40 years to develop a drug which improves upon the standard of care for elderly patients with high-risk acute myeloid leukemia.”
JAZZ stock owners will also note that the company expects the CPXX buy to boost non-GAAP earnings per share by 2018. Plus, if Vyxeos achieves $270 million in annual revenue, the $1.5 billion price tag will amount to 5.6 times sales; Jazz Pharmaceuticals itself currently trades for 6.8 times sales.
The difference (if we’re splitting hairs) is that Jazz has already recorded its sales, while the Celator calculation uses projected future sales. In any case, if the company can expand the addressable patient population to more optimistic sizes, that $1.5 billion will only be about twice its future sales — and JAZZ stock owners will be sleeping much easier as Xyrem goes off patent.
So while $1.5 billion is nothing to scoff at, someone was going to snatch Celator up sooner or later, and Jazz Pharmaceuticals could certainly use the top-line assistance.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow John on Twitter at @divinebizkid or email him at email@example.com.
More From InvestorPlace
- President Donald Trump: The U.S. Economy’s Winners and Losers
- 4 Ways to Invest Without Sacrificing Your Values