Orphan Drug Biotechs Do It Best

Source: The Motley Fool

By Terry Chrisomalis

There are many biotech stocks to choose from that have long-lasting value. Each one can potentially have huge value, but there is a group of biotech stocks that focus only on orphan drugs. You might ask why you should bother investing in this type of biotech stocks? Because these companies treat rare diseases with limited treatment options.

In my opinion, these biotech stocks perform better than their peers, and will do better for the foreseeable future. They have an advantage over other biotech stocks. The orphan drug biotechs that are leading the way in the sector are BioMarin Pharmaceutical (NASDAQ:BMRN), Alexion Pharmaceuticals (NASDAQ: ALXN), and Vertex Pharmaceuticals (NASDAQ: VRTX).

Advantages of Orphan Drugs

The first advantage of being an orphan drug biotech is that the Food and Drug Administration (FDA) allows drug makers to get seven years of exclusivity for their drugs. Also, they may obtain tax benefits in certain situations. Other drug biotechs only receive fives years of exclusivity for their drugs.

The second advantage is that there’s limited competition. To me this is one of the most important advantages. If you are the only biotech that treats a rare disease you have no competition. No competition means that the drug maker sets the price, and all money goes exclusively to it.

The final advantage is that the FDA is more lenient when it comes to the efficacy of the drug. The FDA may approve weak drugs because patients would have no therapy option otherwise. These several key advantages are why I think orphan drug biotech stocks have a better chance in the biotech sector.

Which companies have orphan drug status? Orphan drug companies have to treat diseases that affect fewer than 200,000 patients. Recently the market has gone up a lot, and it seems that these orphan drug biotech stocks have given investors many reasons to be happy.

BioMarin Pharmaceuticals

BioMarin has a pipeline of drugs that target unmet medical needs. The company has generated about $500 million dollars from its three approved drugs that treat rare genetic diseases. These drugs are Aldurazyme, Naglazyme, and Kuvan.

The CEO claims the company can be more profitable with more marketing, but is putting more effort into researching more drugs that treat rare diseases. I think this is good for the long term. The genetic disorder drugs that are approved by the FDA from BioMarin treat patients that have deformed bones or mental impairments.

BioMarin has a market cap of $8.6 billion dollars, and currently trades close to its 52-week high of $64.98 per share. Despite this, the company still has a huge pipeline of orphan drugs that it is currently working on. The company has an average 50-day volume of 1.2 million, so it is a very volatile stock to invest in. I think it is a strong buy because of the partnerships it has generated thus far, with Genzyme, Merck Serono, and Alliant Pharmaceuticals. These partnerships establish BioMarin as a strong buyout candidate. Investors should definitely keep an eye on this stock.

Vertex Pharmaceuticals

Vertex has done very well over the last few years, and it has many drugs in the pipeline. It targets a rare disease known as cystic fibrosis. Cystic fibrosis is a severe disease that causes young children and young adults to get a life threatening buildup of sticky mucus in the lungs. There are about 30,000 people in the United States with cystic fibrosis, and 70,000 people worldwide.

The drug that Vertex uses to target cystic fibrosis is called Kalydeco. Investors should take a look at scooping up some shares of Vertex, because analysts estimate that this company has a $4 billion market opportunity in cystic fibrosis.

Vertex had its cystic fibrosis drug approved by the FDA on Jan. 31, 2012. By the end of 2012, Vertex reported net product revenues for Kalydeco of $171.6 million, andKalydeco will generate good revenue over the next few years. The company has a market cap of $11.8 billion dollars. It is close to its 52-week high of $66.10 per share, but with its other drug Incivek for hepatitis C it still can go higher from here. Hepatitis C has a potential $20 billion market. Long term investors should check this biotech out for inclusion in their portfolios.

Alexion Pharmaceuticals

Another rare disease drug maker is Alexion. This company only has one approved drug, Soliris, but is approved for two indications. The FDA first approved Soliris for paroxysmal nocturnal hemoglobinuria (PNH) in 2007. PNH is a life-threatening disease that destroys red blood cells.

In 2011 Alexion was approved for Soliris treating aHUS, or Hemolytic Uremic Syndrome. This disease is life threatening, and can damage vital organs leading to stroke, heart attack, kidney failure, and death.

Alexion is a great company to invest in. Soliris is expected to keep generating more revenue over the next few years. For 2013, the company gives amazingly positive guidance–the company states that it will end 2013 with earnings per share in the range of $2.82 to $2.92 per share. Net product sales for its products are expected to be between $1.49 billion to $1.5 billion.

Alexion pharmaceuticals has a market cap of $18.8 billion. The stock currently trades at $96 per share, and has plenty of room to grow with its Soliris drug. It is trading at a high price-to-earnings ratio of 75, but given the fact that its approved drug has no competition it is still in good shape. It trades a little below its 52-week high of $119 per share, and therefore I think it is a good buy given the current price.

Final thoughts

Orphan drug companies are biotechs that are worth investing in for the long term. As described above, the risk is much less compared to other biotech stocks. This is because these biotech stocks get more leniency from the FDA. As we have seen over the last few years, orphan drug biotech stocks trade higher compared to other biotech stocks.

When considering a speculation play for your portfolio, I feel that you can’t go wrong in choosing one of the stocks above. They are already established, and the treatments they sell face hardly any competition, allowing them years of product revenues, and many years of market exclusivity. Plus, other drugs in their pipelines now have a chance to obtain accelerated approval, meaning that drugs can be approved earlier than ever. Orphan drug biotechs do it best in the biotech sector.

Infography by EvaluatePharma

Infographic-EvaluatePharma-Orphan-Drug-Report-2013

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