2 Pharma Stocks Winning with Orphans

06/05/2012 10:30 am EST


Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Most pharma companies look for the blockbusters in the sectors that get the most attention, but new legislation is helping boost firms that have built up a pipeline of drugs in niche sectors explains Benjamin Shepherd of Personal Finance.

Developing a new drug is a lengthy and costly proposition, taking as long as 20 years and potentially cost­ing billions of dollars.

As a result, pharmaceutical compa­nies tend to develop drugs that tar­get high-demand indications such as cardiovascular disease, which affects almost 12% of the US popula­tion, because they can recoup their investment—and make a profit—much more quickly.

Problem is, the greater the number of companies developing drugs for a single indication, the harder it is to get a new drug approved. That’s because in addition to safety and efficacy, the US Food and Drug Administration (FDA) also looks for a new drug to be more effective than other treatments on the market. This criterion is harder to prove as a treatment area becomes more crowded.

To improve the odds of getting a new drug approved, pharmaceutical companies are increasingly focusing on “orphan” diseases for which few, if any, treatment options exist. Drugs meant to treat orphan diseas­es receive an expedited review process at the FDA, allowing them to reach the market considerably faster.

At the same time, the FDA allows for the compassionate use of unap­proved drugs for the sickest patients, assuming the drug is relatively safe. But the crucial factor for drugmakers is price.

Drugs aimed at orphan diseases are rarely blockbusters that sell in huge volumes. However, if a company stuffs its pipeline with enough of them, this strategy can generate solid revenues.

The US Orphan Drug Act of 1983 conveys tax breaks and a seven-year monopoly on drug sales to induce companies to undertake the develop­ment and manufacturing of drugs that treat diseases which afflict fewer than 200,000 US citizens. The US government also lifts cer­tain statistical burdens in clinical trials, to maintain development momentum and ease the path to approval.

Without such incentives, these treat­ments might not be profitable because of the small potential market. The law has helped spawn the creation of valu­able new drugs for the treatment of rare diseases.

A Full Stable
As with most pharmaceutical com­panies, Forest Laboratories (FRX) has fallen out of favor because of a patent expiration. Forest Labora­tories’ antidepressant Lexapro, which brought in about half the company’s sales last year, has lost patent protec­tion and now faces competition from a generic version produced by Mylan (MYL).

Fortunately, Forest Laboratories is by no means a one-trick pony, with several promising drugs and drug candidates in its stable. The company’s Daliresp is one of only a handful of drugs available for sufferers of severe chronic obstructive pulmonary disease. The antidepressant Viibryd, which the company owns after its acquisi­tion of Clinical Data last year, also has seen a spike in sales because of its impressive efficacy and lack of sexual side effects.

Forest Laboratories has cooper­ated with Ironwood Pharmaceuticals (IRWD) to develop Lina­clotide, a drug nearing final FDA ap­proval to treat irritable bowel syn­drome accompanied by constipation. Forest Laboratories also is respon­sible for Namenda, one of only two drugs available to treat moderate to severe Alzheimer’s disease, a common illness as America ages.

Forest Laboratories has five other drugs currently in Phase III, or final stage, clinical trials. Another six compounds are in early stage trials, includ­ing a new antibiotic.

The antibiotic is particularly in­teresting. Drug companies often es­chew the development of new an­tibiotics because these products usually have lower margins. That said, there’s a pressing need for them, as antibiotic-resistant illnesses become increasingly prevalent.

There are no guarantees that all of Forest Laboratories’ potential new drugs will ultimately reach market, but the company is well-positioned to ride out any storm. Unlike virtually all of its peers, For­est Laboratories has no net debt. With $2.1 billion in cash on its bal­ance sheet, the company can finance research activities and perhaps acquire another drug company with solid product candidates.

Well financed and holding a promising drug pipeline, Forest Laboratories rates a buy under $40.

A Focused Strategy
Questcor Pharmaceuticals (QCOR) is taking a novel— and riskier—approach to treating or­phan diseases.

The company has two drugs on the market: Doral, which treats insomnia, and H.P. Acthar Gel, used to remedi­ate acute flares of multiple sclerosis, as well as certain forms of kidney disease and infantile spasms.

Rather than deepening its pipeline of potential new drugs, Questcor has opted to devote its resources to the development of additional new in­dications for its two existing drugs, with a focus on the treatment of or­phan diseases.

This high-risk strategy has paid off thus far. Questcor has grown the number of approved indications for H.P. Acthar Gel to 19, many of which are orphan diseases with few if any treatment options.

Moreover, the company continues to plow money into internal and ex­ternal research, to expand that list of indications. These efforts have gener­ated three-year average revenue growth of more than 43%, pulling the company’s earnings from a loss in 2006 to $1.27 per share in 2011.

Questcor Pharmaceuticals’ track re­cord of success makes the stock a buy under $42 for speculative investors.

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