Big Pharma Eyes Rare-Disease Revenue Stream

Once avoided like the plague by Big Pharma, so-called orphan drugs are suddenly in favor as large drug makers search for sources of revenue to offset sales declines of blockbuster treatments losing patent protection.

GlaxoSmithKline (NYSE:GSK) is among those pursuing orphan drugs, which are so named because they target a rare medical condition that often makes the normal economics of research and development not cost effective. Last fall, the company received an exclusive license from San Raffaele Telethon Institute of Italy for an investigational gene therapy for ADA-SCID (severe combined immune deficiency), commonly referred to as ‘bubble boy disease’. Recently, Glaxo signed a two-year, 5.5 million euro deal with MolMed, which will develop a production process for the gene therapy that is in late-stage trials.

Pfizer (NYSE:PFE) is ready to make a treatment for Gaucher disease, a rare genetic metabolic disorder, available in the U.S. once it receives FDA approval. Last month, the company’s partner on the drug, Protalix BioTherapeutics (AMEX:PLX), said the FDA had agreed to review its resubmitted application for the drug.

In another example, Fabry Disease is a rare inherited lysosomal storage disorder that affects about 5,000 to 10,000 people around the world. Glaxo partner Amicus Therapeutics (Nasdaq:FOLD) has a treatment for Fabry in Phase III trials, while Shire (Nasdaq:SHPGY) and the Genzyme unit of Sanofi-Aventis (NYSE:SNY) have replacement enzymes for the disorder.

The Orphan Drug Act of January 1983 was passed in the U.S. to encourage pharmaceutical companies to develop drugs for diseases that have a small market. Under the law, companies that develop such a drug for a disorder affecting fewer than 200,000 people in the U.S. may sell it without competition for seven years and may get clinical trial tax incentives.

The caveat “small market” was not a term that resonated with the big drug companies. Most of their R&D efforts have been focused on medications to treat the big disease areas such as cancer and cardiovascular disease. Their reason was the same as that given by Willie Sutton when asked why he robbed banks: “Because that’s where the money is.”

But with generics eating away at sales and profits, orphan drugs have become popular with Big Pharma. These new proprietary technologies can quickly create new revenue streams. And orphan drugs offer the advantages of expedited approval by the FDA and fewer patients for clinical trials. Expanding the period of marketing exclusivity is also being discussed. What’s more, if the drugs work and offer better health advantages to patients, insurers are more likely to cover them.

Recently, a bipartisan group of House members proposed to broaden exemptions for drug makers that pay a fee on sales made to government health insurance programs. And those fees, which are due by Sept. 30, could generate at least $2.3 billion this year, according to Bloomberg News.

Orphan drugs also have the potential to turn into blockbusters. For instance, the cancer treatment Avastin from Roche’s Genentech unit became a billion-dollar seller. In fact, 27 orphan medications exceeded $1 billion in sales, according to MPM Capital managing director Gary Patou.

So maybe in doing good, those firms pursuing orphans can also do well for themselves and their investors.


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