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Goldman Stanley

9 May 2014 Americas/United States Equity Research Specialty Pharmaceuticals

# Jazz Pharmaceuticals (JAZZ)

Rating:OUTPERFORM*
Price (9 May 14, US$):129.45
Target Price (US$):170.00
52-Week Price Range:55.28-174.98
Market Cap. (US$ m):8,196.0
Enterprise Value (US$ m):9,089.5
AI Table Summary
This table provides an overview of the investment rating and financial information for Jazz Pharmaceuticals (JAZZ). The company is rated as "OUTPERFORM*" by the analysts. The current stock price is $129.45 as of May 9, 2014, and the target price is $170.00. The 52-week price range for the stock is $55.28 to $174.98. The company's market capitalization is $8,196.0 million, and its enterprise value is $9,089.5 million.

*Target Price is for 12 months.

Research Analysts: Peter Sullivan, Ph.D. Seth Davis, M.D. John Tuld, M.D.

Figure Text:
| Date | Price (USD) | |------------|-------------| | Mar '13 | ~$60 | | Jun '13 | ~$80 | | Sep '13 | ~$100 | | Dec '13 | ~$120 | | Mar '14 | ~$160 | | Jun '14 | ~$180 | | Sep '14 | ~$140 | Note: The table provides approximate values at quarterly intervals. The actual chart shows more frequent data points and fluctuations throughout the year.

Figure 1 - JAZZ Stock Price Performance

ACCUMMULATE RECOMMENDATION / COMPANY UPDATE

# Jazz Pharmaceuticals (JAZZ) (cont.)

## Strong Q1 FY14 & Multiple Catalysts Ahead

  • - Q1 Results: Jazz Pharmaceuticals reported strong Q1 results on Thursday, with revenue of $247 million vs. $196 million in Q1 of FY 13, representing 26% YoY growth. The GAAP Net Loss was $93 million vs. GAAP Net Income of $43 million in Q1 of FY 13, but $127 million of that was due to an upfront license fee and milestone payment for JZP-110. Adjusted Net Income was $101 million vs. $84 million in Q1 of FY 13. These figures were slightly ahead of Goldman Stanley estimates of $240 million in revenue and $95 million in Adjusted Net Income.
  • - FY 14 Guidance: The Company reaffirmed its FY 14 guidance across the board, with revenue of $1.10 billion - $1.16 billion, Xyrem sales of $755 - $755 million, Erwinaze at $185 - $200 million, Defitelio at $42 - $52 million, and Adjusted Net Income of $496 - $520 million. While we believe the market has already priced in these expectations, we continue to see Jazz as an undervalued, high-growth story going forward, and we believe that its longer-term revenue, EPS, and EBITDA are likely to exceed consensus estimates in FY 15, FY 16, and beyond.
  • - Catalysts: 1) Possible price increases for Xyrem - Given the historical price increases and the price ranges for comparable orphan drugs, we believe the company is likely to announce another round of price increases at the end of FY 14 or early FY 15, and that there is significant room to grow pricing beyond the current levels. 2) Launch of new marketing campaigns for Xyrem - Jazz management is in the process of launching awareness campaigns for narcolepsy patients in key geographies, and has already reported 11,400 Xyrem patients in Q1, above our FY 14 estimate of ~11,300. 3) Settlement of Roxane lawsuit - We believe this will be decided in Jazz's favor, resulting in a delayed entrance for Xyrem generics. Current market expectations point to generics in FY 19 or FY 20, but we believe FY 21 is more likely (with peak sales of ~$3.0 billion in FY 20).
  • - Our $170.00 target price is based on an FY 14 EV / EBITDA multiple of 20.7x and an FY 15 EV / EBITDA multiple of 15.3x, vs. median peer company multiples of 21.8x and 15.3x, respectively. Given Jazz's higher revenue growth, margins, and EBITDA growth, we believe this is still quite conservative. A DCF analysis with our long-term FCF projections, a discount rate of 8.07%, and a Terminal FCF growth rate of 0.3% also produces an implied share price of $168.71.

    • # Jazz Pharmaceuticals (JAZZ) (cont.)

    ## Financial and Valuation Metrics

    Year12/12A12/13A12/14E12/15E
    GAAP EPS (US $)4.793.513.407.85
    GAAP P / E (x)27.036.839.117.0
    Revenue (US $m)586.0872.41,090.41,421.9
    EV / Revenue (x)15.510.48.36.4
    EBITDA (US $m)272.1426.4565.1760,7
    EV / EBITDA (x)33.421.316.111.9
    Number of shares (m)63.3
    BV / Share (US $)19,73
    Net Debt (US$ m)893.5
    Net Debt / Total Cap. (%)9.8
    Enterprise Value (US$ m)9,089.5
    Market Cap (US$ m)8,196.0
    Source: Company data, Goldman Stanley estimates.
    AI Table Summary
    This table provides financial and valuation metrics for Jazz Pharmaceuticals (JAZZ) over a four-year period from 2012 to 2015. The key highlights are:

    Source: Company data, Goldman Stanley estimates.

    9 May 2014

    Goldman Stanley

    Figure 8 - Jazz Projected P&L

    Income Statement:Projected
    FY 14EFY 15EFY 16EFY 17EFY 18EFY 19EFY 20EFY 21EFY 22EFY 23E
    Revenue:
    Existing Products:
    Xyrem Sales:$ 687.2$ 951.8$ 1,265.5$ 1,635.9$ 2,037.9$ 2,498.9$ 2,976.5$ 310.9$ 339.1$ 339.1
    Erwinaze Sales:203.4234.2266.6300.7336.7346.8385.8397.3439.6452.7
    Defitelio Sales:57.879.8107.1140.7182.0209.3240.7276.9318.4366.1
    Other Sales and Royalties:142.0156.2168.7182.1193.1204.7214.9225.6234.7244.0
    Risk-Adjusted Pipeline Drug Sales:
    JZP-110 Sales:---24.561.1112.5133.9210.6242.1319.0
    JZP-386 Sales:----------
    Total Revenue:1,090.41,421.91,807.82,284.02,810.83,372.23,951.81,421.31,573.91,721.1
    Revenue Growth:25.0%30.4%27.1%26.3%23.1%20.0%17.2%(64.0%)10.7%9.4%
    Operating Income (EBIT):304.2627.4813.31,033.21,273.01,534.71,778.6569.7636.1699.6
    Operating (EBIT) Margin:27.9%44.1%45.0%45.2%45.3%45.5%45.0%40.1%40.4%40.6%
    Net Income:$ 209.6$ 483.2$ 635.7$ 832.4$ 1,029.0$ 1,258.3$ 1,458.5$ 467.1$ 521.6$ 573.7
    Effective Tax Rate:18.0%18.0%18.0%18.0%18.0%18.0%18.0%18.0%18.0%18.0%
    Weighted Average Diluted Shares Outstanding:61.661.661.661.661.661.661.661.661.661.6
    Diluted Earnings Per Share (EPS):$ 3.40$ 7.85$ 10.32$ 13.52$ 16.71$ 20.44$ 23.69$ 7.59$ 8.47$ 9.32
    EBITDA:$ 565.1$ 760.7$ 946.0$ 1,171.0$ 1,413.7$ 1,665.7$ 1,918.8$ 686.0$ 755.7$ 822.6
    EBITDA Margin:51.8%53.5%52.3%51.3%50.3%49.4%48.6%48.3%48.0%47.8%
    AI Table Summary
    This table provides financial and valuation metrics for Jazz Pharmaceuticals (JAZZ) from fiscal year 2014 (FY 14E) to fiscal year 2023 (FY 23E). The table includes projected revenue, operating income (EBIT), net income, earnings per share (EPS), and EBITDA for the company.

    Source: Company data, Goldman Stanley estimates.

    We then calculated Unlevered Free Cash Flow as follows:

    Figure 9 - Jazz Projected Unlevered Free Cash Flow

    Unlevered Free Cash Flow Projections:Projected
    FY 14EFY 15EFY 16EFY 17EFY 18EFY 19EFY 20EFY 21EFY 22EFY 23E
    Revenue:$ 1,090.4$ 1,421.9$ 1,807.8$ 2,284.0$ 2,810.8$ 3,372.2$ 3,951.8$ 1,421.3$ 1,573.9$ 1,721.1
    Annual / Annualized Revenue Growth Rate:25.0%30.4%27.1%26.3%23.1%20.0%17.2%(64.0%)10.7%9.4%
    Operating Income (EBIT):304.2627.4813.31,033.21,273.01,534.71,778.6569.7636.1699.6
    Annual / Annualized Operating Margin:27.9%44.1%45.0%45.2%45.3%45.5%45.0%40.1%40.4%40.6%
    Less: Taxes, Excluding Effect of Interest:(54.8)(112.9)(146.4)(186.0)(229.1)(276.2)(320.2)(102.5)(114.5)(125.9)
    Net Operating Profit After Tax (NOPAT):249.5514.5666.9847.31,043.91,258.51,458.5467.1521.6573.7
    Total Adjustments for Non-Cash Charges:323.2213.3233.3263.8294.9315.2355.4196.3207.7219.1
    Total Changes in Operating Assets & Liabilities:(20.3)(50.1)(44.0)(54.1)(60.4)(65.7)(66.9)287.0(18.6)(18.3)
    Less: Capital Expenditures:(13.1)(18.5)(25.3)(34.3)(45.0)(57.3)(71.1)(27.0)(31.5)(36.1)
    Annual Unlevered Free Cash Flow:539.3659.2830.91,022.71,233.51,450.61,675.9923.5679.2738.3
    Unlevered Free Cash Flow for Remaining Quarters:459.1659.2830.91,022.71,233.51,450.61,675.9923.5679.2738.3
    Net Present Value of Free Cash Flow:447.7603.1703.4801.2894.1973.01,040.1530.4361.0363.1
    Normal Discount Period:0.6471.6472.6473.6474.6475.6476.6477.6478.6479.647
    Mid-Year Discount Period:0.3231.1472.1473.1474.1475.1476.1477.1478.1479.147
    Annual Free Cash Flow Growth Rate:58.4%22,2%26.1%23.1%20.6%17.6%15.5%(44.9%)(26.4%)8.7%
    Annual EBITDA:565.1760.7946.01,171.01,413.71,665.71,918.8686.0755.7822.6
    Annual EBITDA Growth Rate:32.5%34.6%24.4%23.8%20.7%17.8%15.2%(64.3%)10.2%8.9%
    AI Table Summary
    This table provides financial and valuation metrics for Jazz Pharmaceuticals (JAZZ) over a 10-year period from fiscal year 2014 (FY 14E) to fiscal year 2023 (FY 23E). The table includes projections for revenue, annual/annualized revenue growth rate, operating income (EBIT), annual/annualized operating margin, net operating profit after tax (NOPAT), total adjustments for non-cash charges, total changes in operating assets and liabilities, capital expenditures, annual unlevered free cash flow, unlevered free cash flow for remaining quarters, net present value of free cash flow, normal discount period, mid-year discount period, annual free cash flow growth rate, annual EBITDA, and annual EBITDA growth rate.

    Source: Company data, Goldman Stanley estimates.

    Attachment V

    Exhibit 4.1

    # ALLSTATE INSURANCE GROUP* OWNERS OHIO

    ## CALCULATION OF LOSS DEVELOPMENT FACTORS - LINK RATIO METHOD FIRE

    Incurred Losses +
    Fiscal Accident Year Ending 09/3012 Months24 Months36 Months48 Months60 Months72 Months84 Months$
    201137,023,446
    201239,239,11039,239,110
    201335,898,51135,895,99535,896,549
    201442,590,48242,618,52642,881,67242,919,319
    201539,091,21339,137,38339,251,17539,278,97639,275,966
    201638,652,35338,866,41738,975,20538,920,39838,915,34138,915,341
    201734,590,14838,411,95039,315,52839,339,63739,430,52639,855,297
    201839,130,46244,255,51244,802,05644,803,22944,721,864
    201948,139,57956,452,07757,156,32257,194,593
    202046,039,13351,965,84752,822,023
    202145,814,51451,874,978
    202249,909,902
    Link Ratios
    Development12 to 2424 to 3636 to 4848 to 6060 to 7272 to 84
    4th Prior1.1101.0061.0011.0011.0001.000
    3rd Prior1.1311.0241.0031.0031.0061.000
    2nd Prior1.1731.0121.0010.9991.0011.001
    1st Prior1.1291.0121.0001.0021.0001.000
    Latest1.1321.0161.0010.9981.0111.000
    5 Year Straight Avg1.1351.0141.0011.0011.0041.000
    Selected:1.1351.0141.0011.0011.0041.000
    Loss Development Period ( months ):12-8424 - 8436-8448-8460-84
    Loss Development Factor:1.1581.0201.0061.0051.004
    AI Table Summary
    This table presents the "Calculation of Loss Development Factors - Link Ratio Method Fire" for the Allstate Insurance Group* Owners Ohio. The table includes the Incurred Losses for various Fiscal Accident Years ending on 09/30, ranging from 2011 to 2022, with data available for up to 84 months.
    Allstate Property and Casualty Insurance Company
    YearIncurred LossFactor to UltimateUltimate Loss & ALAE
    2018$15,271,8551.004$15,332,942
    201914,429,8701.00514,502,019
    202010,411,1661.00610,473,633
    20216,408,3061.0206,536,472
    20227,382,4321.1588,548,856
    AI Table Summary
    This table presents the Calculation of Loss Development Factors using the Link Ratio Method for Fire insurance claims of Allstate Property and Casualty Insurance Company. The table covers the years 2018 to 2022, showing the Incurred Loss, the Factor to Ultimate, and the Ultimate Loss and ALAE (Allocated Loss Adjustment Expense) for each year.

    Includes ALAE Includes supplemental reserves in addition to case reserves *Allstate Insurance Group includes Allstate Insurance & Allstate Indemnity & Allstate Property and Casualty Insurance & Allstate Vehicle and Property Insurance Companies