Ultra rare diseases have become big business for both pharmaceutical and biotechnology companies, such as Alexion (ALXN).
The specialty drug market is growing faster than the non-orphan drug market.
Last year, orphan drug sales climbed 7.1% to $83 billion. And sales of drugs used to treat rare disorders and diseases may grow a compounded 7.4% annually through 2018 - roughly double the rate of the broader branded prescription market.
While the number of patients diagnosed with each disease is small, the overall population suffering from rare diseases totals some 25 million in the United States alone. As a result, 347 orphan drugs have been approved since the Orphan Drug Act of 1983 passed and last year 15 of the 43 drugs approved by the FDA were categorized as orphan drugs.
According to a 2013 study by Thomson Reuters, orphan drugs' higher price tags and better patent protections yield faster payback periods and greater ROI. The study also claims the compounded annual growth for orphan drugs was 25.8% last decade, outpacing non-orphan drugs by more than 5%.
Alexion's Soliris is one of the world's most expensive drugs.
Orphan drugs typically command higher prices than mass market drugs and Alexion's Soliris is no exception.
At nearly $410,000 per year for treatment, Soliris has the distinction of being one of the world's costliest medicines.
The pricing power drugs like Soliris command offsets any revenue headwinds tied to small patient sizes. For example, Soliris generated $338 million in revenue for Alexion last quarter despite the ultra rare designation of its market.
But the real incentive for Alexion shareholders isn't simply Soliris' high price. Instead, it's in Soliri's ability to effectively extend the lives of patients.
These longer living patients - along with those newly diagnosed -- suggest an ever increasing number of scripts written annually.
Diseases treated by Soliris are extremely rare with significant unmet need.
Up until last fall, Soliris was approved solely as a treatment for paroxysmal nocturnal hemoglobinuria ("PNH"), a chronic disease which destroys red blood cells, causes anemia and in many cases damages organs such as the kidney.
Only about 4,000 to 6,000 people are diagnosed with PNH in the United States and sadly, five years after diagnosis some 35% of untreated patients have died.
As a result of its chronic nature - the average person lives 10-15 years after diagnosis - and morbidity, Soliris is an important weapon in battling the disease.
In a long range study of Soliris in PNH patients, those being treated for a mean of 39 months had similar survival to the normal population. Additionally, of 64 patients treated for at least one year, 66% became transfusion independent for at least 12 months. The data were updated last December with similarly strong results.
Last fall, both the FDA and the European Union's EMA approved the drug for a second indication covering atypical hemolytic uremic syndrome ("aHUS'), a chronic disease often resulting in kidney failure.
While the population of PNH patients is small, the number of patients diagnosed with aHUS is even smaller, with only a few hundred Americans diagnosed with the condition.
Since roughly 50% of those diagnosed with aHUS either die, suffer kidney failure or are on dialysis after 12 months, the medical need for treatment is also very high.
In data from a two year study of Soliris in aHUS patients, the formation of blood clots typically associated with kidney damage significantly declined for patients receiving the drug.
Importantly, of nineteen patients entering the long-term extension phase of the study, there was only one death, which was determined unrelated to Soliris.
The nature of these two diseases and Soliris' success in treating them provide investors with a stable and growing market.
High priced ultra-orphan push-back is priced into shares.
Of course, investors are concerned Soliris pricing power could be disrupted as healthcare costs are reined in globally.
For example, the U.K. took a fairly unprecedented move of rejecting a recommendation by an advisory group tasked with determining whether to approve Alexion's Soliris for aHUS in January.
Instead, the drug was referred for reimbursement review typically reserved for drugs treating larger patient populations.
Despite only 5% of global aHUS patients living in the United Kingdom, the news weighed on shares, which fell from $103 in January to a low of $81 in mid February.
However, the tide appears to be turning for Soliris.
In March, Canada approved Soliris for aHUS. And the drug's cost will be covered in Belgium beginning in July.
While reimbursement is likely to remain an issue in the U.K. in the short run, it's unlikely the stalemate will last given Soliris efficacy.
Investors appear to be warming up to the idea price negotiations will simply be a short term headwind.
Alexion's shares have moved back to their January highs, returning 23% since their February low versus a 9.5% gain in the S&P 500 ETF (SPY).
Future label expansion offers Alexion revenue growth.
While atypical HUS differs from the externally triggered STEC-HUS, there's growing evidence Soliris can be effectively used to treat those patients too.
Alexion has been compiling data tied to the 2011 E-Coli epidemic in Germany to bolster its case for approval as a treatment for STEC-HUS.
During the first week alone, the HUS outbreak resulted in 250 cases in Germany - just about the entire reported number of cases across the EU reported in 2009.
In total, the number of affected people rose to 3,846, with 691 clinically diagnosed with HUS. Given the size and severity of the outbreak - and Soliris' success in treating aHUS - Alexion provided the drug to German patients as an alternative therapy.
In November, Alexion reported 28 week data from the outbreak suggesting Soliris efficacy was better than current best supportive care, offering higher rates of renal and neurological improvement at both week 8 and week 28.
If Soliris is increasingly used as a treatment for STEC-HUS, the company may benefit given the higher incidence rate of regular HUS versus aHUS, opening up yet another revenue stream for the drug.
Alexion plans to file Soliris for STEC-HUS in the U.S. later this year.
New geographic markets also offer upside for Soliris.
A good portion of Soliris' future growth will come from expanding the drug into new geographic markets.
Currently, Soliris is approved as a treatment for PNH in 40 countries. However, Alexion plans to expand into Korea and Latin America this year and next.
Investors can assume the company will follow a similar geographic rollout as a treatment for aHUS. A lot of the heavy lifting has already been done to establish Soliris for PNH in those markets.
As a result, analysts project Soliris sales may increase to as much as $2.6 billion from $1.5 billion as its label expands and more countries approve reimbursement.
Additional Soliris indications support future sales growth
Alexion doesn't appear to be done exploring other potential uses for Soliris.
Currently, the company is studying the drug as a treatment for additional rare diseases, including severe and relapsing neuromyelitis optica ("NMO"), myasthenia gravis and acute humoral kidney rejection ("AHR").
In NMO, ongoing trials have shown promise, including data reported last fall showing 12 of 14 patients were free of attacks over 12 months.
Soliris also met its endpoint of a clinically meaningful trend in treating myasthenia gravis in a study reported in late 2011. Alexion announced plans for a MG registration trial last quarter to further evaluate the indication.
Alexion also reported last quarter it had completed enrollment in a deceased donor kidney transplant trial aimed at patients with an elevated risk of AHR. Soliris has seen some prior success in helping block the immune system from damaging transplanted kidneys.
Sales growth is flowing to the bottom line.
So far, Alexion has done a nice job of translating market penetration into earnings per share growth.
This year, analysts expect earnings per share will jump 37% to $2.92 per share and analysts expect earnings per share will grow 12% to $3.26 in 2014.
These expectations may prove too timid given Alexion has a strong record of under promising and over delivering. During the past four quarters, Alexion has beaten Wall Street forecasts each time.
The company's tight fisted spending helped cost of sales drop to 10.4% in Q1, down from 11.6% in Q1, 2012.
And the company's cash and equivalents are building despite acquisitions to bolster its pipeline. Exiting Q1, the company had $1.02 billion in cash, up significantly from the $359 million it had on hand a year ago.
The cash build has happened even as the company has cut its debt.
As of the end of Q1, Alexion had $101 million in long term debt, down from $247 million the prior year. And the company's current ratio is 5.24, which is better than Gilead (GILD), United Therapeutics (UTHR) and Vertex Pharmaceuticals (VRTX).
Finally, outside of Soliris, the company is also working on treatments for an ultra-rare genetic disorder, MoCD Type-A, a fatal genetic deficiency fatal to newborns and currently untreatable.
And the company hopes to file its asfotase alfa treatment for patients with hypophosphatasia ("HPP") in 2014.
Overall, the major risk remains push-back on Soliris' high price tag and the company's reliance on a single drug.
But given the potential label expansion and solid balance sheet, investors should consider buying Alexion for portfolios.