In the run-up to Rare Disease Day 2019, David H. Crean, PhD, Managing Director for Objective Capital Partners, reviews the investment and deal activity for orphan drugs in 2018 and delves into future forecasts for the rare disease space.
With drugs currently available for only about 5% of rare diseases, the future is wide open for investment in orphan drug development projects.
Organizations around the world people are observing February 28, 2019, as the annual Rare Disease Day. The main objective of Rare Disease Day is to raise awareness amongst the general public and decision-makers about rare diseases and their impact on patients’ lives. In keeping with this theme, the objective of this article is to provide an overview of investment and deal activity in 2018 for companies involved with developing treatments for rare disorders which have taken centre stage for R&D, partnerships and M&A in 2018.
Rare Diseases and Orphan Drugs
There are approximately 7,000 rare diseases affecting 25−30 million Americans and 4oo million worldwide. A large number of rare diseases remain without effective treatments despite over 500 orphan drug therapies having been approved by regulators in the United States. However, a growing focus by researchers and the Food and Drug Administration (FDA) on rare disease therapies have resulted in a dramatic increase in the number of new therapeutic options for these patients in the past two years. An orphan drug is a pharmaceutical product that treats a rare disease. The development of orphan drugs has been financially incentivized through US law via the Orphan Drug Act of 1983. The success of the original Orphan Drug Act in the USA led to it being adopted in other key markets, most notably in Japan in 1993 and in the European Union in 2000.
The creation of the orphan drug designation (ODD) with the passage of the Orphan Drug Act in 1983 has facilitated the development and approval of drugs for rare diseases, and years 2017 and 2018 were marked by the highest number of orphan drug and indication approvals to date. The FDA approved 80 new orphan indications in 2017 and 57 just within the first eight months of 2018, the highest numbers annually since the passage of the Orphan Drug Act.1
The number of orphan indications approved in the United States from 1983–2018, along with spending patterns in the USA for orphan drugs, are shown below. The combination of scientific advances along with accelerated product review and a growing commitment by policymakers to advance precision medicine is fueling the increased number of orphan therapies.
Orphan Drug Sales Forecast
Worldwide orphan drug sales are forecast to total $262B in 2024.2 The compounded annual growth rate (CAGR) of orphan drugs between 2018 and 2024 is forecasted to be 11.3%, approximately double that of the non-orphan market. Orphan drugs are set to be 21.7% of worldwide prescription sales by 2024. This is in comparison to 2017 when orphan drugs held just a 16% share of the market. The rapid growth in the orphan drug market share mainly stems from sales of currently approved therapies and not from expected sales, through to 2024, of R&D products.
Orphan Drug Designations (ODD)
The United States continues to lead the EU and Japan in granting orphan drug designations.2 The number of orphan drug designations granted by the FDA
in 2017 increased from 320 in 2016 to 459 in 2017. This 43% increase is likely due to a rise in the number of requests for ODD and to the implementation of the orphan drug modernization plan by the FDA, which aims to eliminate the agency’s backlog of existing designation requests and to ensure timely review of new applications. Conversely, the number of orphan drug designation granted in 2017 in the EU and Japan was lower than in recent years. Furthermore, the cumulative number of orphan drug designations granted by the FDA is more than double the number granted by the EMA and nearly 10 times higher that granted by the Ministry of Health, Labour and Welfare (MHLW) in Japan.
Vigorous patient advocacy, venture capital investment, industry collaboration, medical breakthroughs, and legislative incentives are dramatically changing the landscape of rare disease research.
Why Invest in and Pursue Orphan Drug Opportunities?
Hundreds of new rare-disease treatments have entered the market over the past few decades, and orphan drug development has become a highly profitable industry. Historically, these treatments have been a tough sell due to the small markets associated with them. The rise in orphan disease research is the result of several factors. Vigorous patient advocacy, venture capital investment, industry collaboration, medical breakthroughs, and legislative incentives are dramatically changing the landscape of rare disease research.
A recent MIT study made use of the observation that, taken collectively, rare diseases are not that rare and affect 25 to 30 million Americans. The team used data from 28 nonclinical orphan drug projects at the National Institute of Health’s National Center for Advanced Translational Sciences (NCATS) to assess the financial benefits associated with creating “megafunds” of orphan drug projects.5 The study’s objective was to provide hard data on risk and return associated with combining a large number of small projects into a single fund. They showed that by diversifying the risks associated with investing in orphan drugs, they could still achieve internal rates of return of 25%, similar to those seen with venture capital endeavours. With drugs currently available for only about 5% of rare diseases, the future is wide open for investment in orphan drug development projects.
For an orphan drug research company, the advantages of investing in orphan drugs are several-fold. There is a lack of competitors or strong competitive headwinds in the space. The main reason to develop an orphan is that most large pharmaceutical companies are discouraged from spending huge amounts of resources on what they consider a small group of patients, a minimum market.
Another benefit is the long patent protection periods offered by the authorities, for having decided as a company to invest in R&D. The introduction of an orphan drug on the market involves a considerable amount of investment, so the FDA gives these drugs seven years of exclusivity from the approval date. This means that the orphan drug is protected for a long time, so there will be significant resources for the company and its investors to have exclusivity.
Additionally, orphan drugs often carry very high price tags because of their rare nature and lack of competition. Expect Washington legislators to make progress on this issue before 2020. Overall, I think there is some level of balance needed on investment required versus pricing that must drive economic sense in the equation. While increased orphan drug research has undoubtedly helped patients, there are downsides to this trend. Some economists and scientists suggest that companies have abused the financial incentives for rare-disease drug development, and they predict a coming backlash to the hefty price tags of these medications.
Lastly, an important factor to consider is the approval time, which is faster. This could be the biggest advantage of getting orphan drug status as companies and the FDA work hand in hand to bring these life-changing treatments to millions of patients. Perhaps all these benefits go to reinforce why the stock prices of a company increase by 3.36% after the announcement of the ODD, increasing the value of the company.3 Another study demonstrated that companies with orphan drug market authorization are more profitable and are more attractive investment opportunities than non-orphan drug companies.4
Top Companies in Orphan Drug Research and Sales
Celgene (BMS) is expected to be the leading company in the orphan drug market in 2024 with sales of $18.4B; all other companies ranked in the top five are expected to achieve sales ranging from $13.4B to $15B. EvaluatePharma2 finds that anticipated strong sales of Revlimid Pomalyst (pomalidomide), Imbruvica (ibrutinib) and Darzalex (daratumumab) – all used to treat haematological malignancies – will result to Celgene and Johnson & Johnson being lead companies, by sales, of the worldwide orphan drug market in 2024. In fact, more than 60% of orphan drug sales assigned to the top 10 companies in 2024 are expected to come from sales in the oncology therapy area. The main source of revenue for Alexion Pharmaceuticals is Soliris, which is used in the blood therapy area. AstraZeneca will be ranked in 12th position in 2024, moving up 29 places from the company’s current position. This change is due to the expected strong uptake of Calquence (acalabrutinib) and increased sales of Lynparza (olaparib). Seven of the top 10 companies are major pharmaceutical companies and expect these companies to account for 35% of the total 2024 orphan drug market. Obviously, any consolidation in the arena will cause a shift in leadership (e.g., Takeda – Shire, BMS – Celgene)
Deal Making in Review for 2018
According to Clarivate Analytics/ Cortellis database7 (shown below), the industry continued to concentrate its deal-making activities in 2018 on areas of unmet medical needs, e.g. oncology and rare diseases. Rare disease/niche areas remain an attractive strategy which will continue to keep the spotlight on drug pricing. Two notable deal transactions that highlight the importance of developing therapies for rare disorders is Takeda’s purchase of Shire for $62B and BMS’s intended bid for Celgene. Takeda’s purchase was the world’s biggest announced acquisition of 2018, transforming the 237-year-old Japanese company into a top 10 drugmaker with lucrative therapies for rare diseases and a sizable footprint in the U.S. It’s part of a larger shift in the industry as drugmakers scramble to consolidate, seeking to bulk up to survive the increasing pressure from stricter regulations on drug prices and looming patent expirations. Already in early 2019, the Takeda deal has been trumped in size by Bristol-Myers Squibb (BMS) $74B bid to buy Celgene.
On a moving annual total basis over the past twelve months, deal-making in the rare disease space involving various non-M&A transactions such as discovery research, licensing, collaborations, development and commercialization partnerships and options to purchase continues to thrive. Median payments for deals continue to rise and payment streams are highly structured with sizeable upfront payments seen from the licensee to licensor. Increased M&A activity in the space appears to be driven by the presence of clinical data demonstrating clinical validation of the therapeutic approach for the treatment of rare disorders.
- IQVIA Institute, October 2018, Orphan Drugs in the United States Growth Trends in Rare Disease Treatments.
- EvaluatePharma, Orphan Drug Report 2018
- Miller, Orphanet Journal of Rare Diseases, (2017) 12:114 DOI 10.1186/s13023-017-0665-6.
- Hughes and Poletti-Hughes, Profitability and Market Value of Orphan Drug Companies: A Retrospective, Propensity-Matched Case-Control Study, PLoS One. 2016; 11(10).
- Fagnan, DE et al., Drug Discovery Today Volume 19, Number 5 May 2014.
- PhRMA 2017, The Biopharmaceutical Pipeline: Innovative Therapies in Clinical Development
- Clarivate Analytics, 2019
David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectivecp.com.
This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.