THE ORPHANS IN YOUR PORTFOLIO

John Kehoe, Biotech Analyst

The development of drugs and medicine can be a long and an expensive process for the companies and investors involved. This process involves numerous steps and tests in order to ensure that the drug is clinically proven to be effective and safe for the general population. It only makes sense that any company involved with this arduous process would like to sell its product to a large customer base in order to recover some of the funds they have invested into the drugs development. This assumption runs into trouble when a drug is developed for a disease that affects a small population of people. It would make little sense for a company to devote its money and resources towards developing a drug for a rare disease if they are only able to sell it to a select few people. In order to alleviate some of this risk, the U.S passed the Orphan Drug Act in 1983 to stimulate the development of drugs for these rare diseases. This legislation helped provide incentives to develop these kinds of drugs by offering premium prices for these products, decreased marketing costs, tax breaks, and even the potential for reimbursement if the market for the drug were to disappear. There is also an extended period of exclusivity for these drugs for 7 years after FDA approval which is two years longer than the exclusivity window of 5 years for other drugs. Following the approval of the Orphan Drug Act, there has been a rapid increase in the production of these drugs over the past 40 years. 

Orphan drugs now have huge potential for profitability and this portion of the market is being attacked by both smaller biotechs and Big Pharma companies. After developing an orphan drug, the company has the ability to set a high price for their product and develop a strong and loyal reputation among their patients and health care providers during their period of exclusivity. Some of the most expensive drugs in the United States are classified as Orphan Drugs and the companies that are developing these drugs are seeing massive success. While much of the focus surrounding these orphan drugs is centered around the large price, it is necessary to consider the benefits that these drugs present to society as a reason for these high prices. Many orphan diseases, while targeting a small group of victims, are extremely deadly and debilitating. Developing a cure for these diseases gives many people a second chance at life and should be valued greatly. 

Alexion Pharmaceuticals

One of these companies that is seeing massive returns on their investment in orphan drugs is Alexion Pharmaceuticals ($ALXN). The most expensive drug in the United States is an orphan drug. This drug, Soliris, treats paroxysmal nocturnal hemoglobinuria and is developed by Alexion Pharmaceuticals. The drug costs more than $400,000 for a year of treatment per patient. This expensive price may seem unjustified, but prior to the development of treatment, patients with PNH had a life expectancy of 10 years after their diagnosis. Now, these same patients can live without the dramatic daily effects of this disease and live a much longer life. Soliris has accounted for approximately 63% of Alexion’s total 2021 first quarter revenue and it alone is enough to bolster Alexion into a biotech giant. Alexion’s share price has steadily increased over the past year and that is likely due to the developments of another orphan drug called Ultomiris.

Ultomiris treats the same disease, paroxysmal nocturnal hemoglobinuria, but as of June 7, 2021 it is the first and only medicine that is approved to treat children and adolescents with PNH. This is obviously great news for any investors in Alexion as they will have exclusive access to the portion of the market due to the medicine’s orphan drug classification. Alexion is an extremely profitable operation but is looking towards Ultomiris for its future growth. In the past year, the revenue produced by Soliris did not increase and was at 0%. In that same year the revenue that Ultomiris produced increased by 56% (from 223 million to 347 million). This growth will likely increase due to the recent news of Ultomiris’s ability to treat children, making it a catalyst for future growth. 

Both of these orphan drugs that are being produced by Alexion are also benefiting from relatively low development costs and expenses when compared to the hefty price tag for which they are sold. In the first quarter of 2021, Alexion recorded a 39% operating margin (GAAP), leaving them with large amounts of cash for future developments. It seems as if Alexion Pharmaceuticals is set for a luxurious future as they continue to improve their value-creating pipeline through the sale of orphan drugs.

Vertex Pharmaceuticals

Similarly to Alexion Pharmaceuticals, Vertex Pharmaceuticals ($VRTX) has found great success in its treatment of a particular disease through the use of orphan drugs. Vertex is the clear leader when it comes to the treatment of cystic fibrosis. Prior to the development of treatment, cystic fibrosis was an extremely fatal disease. This disease causes severe damage to the lungs and can make life extremely uncomfortable and difficult for those infected. Vertex’s role in the development of drugs that combat CF has completely changed the narrative surrounding this disease. It already has three approved drugs (all of which are orphan drugs), Kalydeco, Orkambi, and Symdeko, which treat this disease and provide the company with massive profits in return for this incredible treatment. These three drugs are all able to reap the rewards of orphan drug status and are therefore generating revenues of more than hundreds of millions of dollars each, but Vertex’s most popular drug is Trikafta, another cystic fibrosis treatment. In the first quarter of 2021, Kalydeco, Orkambi, and Symdek all saw decreases in revenue, while Trikafta’s revenue increased by 33% when compared to last year. This awkward product performance has caused dips in Vertex’s share price but this will likely change after recent news concerning Trikafta.

Vertex’s most popular drug, Trikafta, has just been approved for use in children ages 6-11 after previously being restricted to children and adults ages 12 and older. Eerily similar to Alexion and Ultomiris, this opens up an entirely new target population and will greatly benefit the company as they can provide services to this exclusive market. Unsurprisingly, Vertex has an incredible operating margin of 51% (GAAP) due to their production of orphan drugs and is doing a very good job at capitalizing on this growing market and its product’s high prices. 

Vertex Pharmaceuticals has built its reputation and wealth on the backs of the orphan drugs that it has developed. These drugs may have never been produced if they had not been granted status as orphan drugs and allowed for this company to take a risk on its success. Trikafta is not only used to increase the life expectancy of people with CF, but it changes the way they can live their everyday life. One patient described their experience with Trikafta as giving her, “Deeper breaths to having more time and energy to lay on the floor and play blocks with my daughter”. The relaxed expenses and facilitated development period have increased Vertex’s profits and disposed of much of the potential competition, and their product has saved the lives of many people. This is a company that will likely see increases in their stock value in the near future so long as their developments with Trikafta continue to attack this niche market. 

Provention Bio

Not all orphan drugs are developed by hugely successful biotechs that have a history of success in this lucrative industry. Many of these drugs are in Phase 3 of development and are awaiting their clinical research and trials. It is easy to focus on the monstrous successes and high profit margins within the orphan drug industry, but there is also a tremendous amount of risk that goes along with developing these rare disease drugs.

 A company’s stock can skyrocket or plummet depending on rulings and decisions given by the FDA on one drug. An example of this financial dependence on one drug can be found in Provention Bio Inc. which is a biopharmaceutical company developing novel therapeutics aimed at intercepting and preventing immune-mediated diseases. In 2018, Provention Bio ($PRVB) purchased a drug that had issues achieving FDA approval in an attempt to pick up the pieces and develop it into a functioning medicine. This drug, Teplizumab, is an orphan drug and thus receives all of the market benefits necessary to become a blockbuster medicine. Teplizumab helps treat, prevent, and delay the diagnosis of type 1 diabetes.

Prevention Bio’s journey with this drug has been a rollercoaster. After continuing its development and making improvements in order to get FDA approval, PRVB has seen its price increase for roughly two years while showing occasional dips (most likely due to the uncertainty surrounding the approval of Teplizumab). In April of 2021, Provention Bio suffered a substantial dip in their share price due to the filing of a class action lawsuit against their company. They are being accused of failing to disclose that: “Provention Bio’s teplizumab BLA (Biologics License Application) was deficient in its submitted form and would require additional data to secure FDA approval” and that they “lacked the evidentiary support Provention Bio had led investors to believe it possessed”. This led to a 27% drop in the share price. The sizable repercussions of the filing of this lawsuit demonstrates the effect that one drug can have on a company’s ability to succeed. 

Luckily for Provention Bio, there is some light on the horizon. On May 27th the FDA held an advisory meeting to review Provention Bio’s BLA for Teplizumab for the delay of clinical type 1 diabetes. This meeting went very well as the agency stated that Teplizumab “successfully demonstrated the treatment effect of teplizumab in delaying T1D diagnosis in at-risk relatives of T1D patients for a median time of approximately 2 years”. The treatment, like most orphan drugs, will likely be expensive but it will help people avoid the effects of a life altering disease. This news has investors excited and has caused the stock prices to slowly increase. Given that this drug is able to continue to pass the final stages of approval, Provention Bio will likely see sharp increases in value in the foreseeable future, all due to the success of a single orphan drug. 

Finding a Home for Orphans

The orphan drug market has become one of the more profitable areas of the biotech industry. The amount of orphan drugs approved by the FDA has increased each year during the past two decades. Companies are desperate to find ways to classify their medicine as orphan drugs in order to take advantage of the massive benefits that this classification gives. If a medicine treats a rare disease (defined as those affecting fewer than 200,000 people in the U.S) it is no longer considered an unnecessarily precarious investment. Searching for companies with potential orphan drug catalysts in their future is an intelligent way to identify stocks within the biotech industry.