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Epizyme (NASDAQ:EPZM) announced last week that the company has received "orphan drug" status from the FDA on its leukemia drug EPZ-5676. A drug can be designated with orphan status if it treats fewer than 200,000 people in the United States. Orphan designation was granted because EPZ-5676 treats a rare acute leukemia that is characterized by a re-arranged MML gene. Typically, when there is such a narrow potential market for a drug, pharmaceutical companies become hesitant to expend research and development dollars. The orphan drug program alleviates some of that concern.

The Orphan drug designation allows special incentives. These incentives can include tax credits, research and development grant funding and reduced filing fees during development or at the time of application for marketing approval. Once approved, the orphan designated drug or treatment may qualify for seven years of marketing exclusivity independent of any other intellectual property (in contrast to the typical 5 year timeframe).

Orphan drugs can be very costly for patients and insurance companies. From a business perspective the creator of such a drug can become very profitable. By example, Isis Pharmaceuticals (NASDAQ:ISIS) and Genzyme developed an orphan drug Kynamro to treat a rare form of cholesterol. The monthly price tag for treatment is estimated at $15,000. In many cases, the more rare the disease, the higher the treatment cost.

The importance of orphan drug status should not be overlooked by investors. Development of a drug and trials can be time consuming and costly. A typical drug might cost over $1 billion to develop and test. An orphan drug can run a few hundred million. The difference is time savings and fewer patients in clinical trials. If an orphan drug can reach just 1% of 200,000 patients at $200,000 per year, the revenues can be a staggering $400 million. At 3% market penetration you could have a blockbuster. It is estimated that about 1 third of orphan designated drugs reach the blockbuster status of over $1 billion in sales.

If you contrast an orphan drug with a more typical drug, the numbers can get interesting. Consider Vivus (NASDAQ:VVUS) and Arena Pharmaceuticals (NASDAQ:ARNA) in their quest to enter the anti-obesity space. It is estimated that some 100 million obese people exist in the United States. Both companies have a drug that has a huge potential market, but annual treatment costs will likely come in somewhere between $1,500 and $2,000 (potentially 10 times lower than what happens with an orphan drug).

EPZ-5676 is a small molecule inhibitor of DOT1L. It was created using Epizyme's proprietary product platform, for the treatment of acute leukemia's in which the MLL gene is rearranged due to a chromosomal translocation (MLL-r). Due to the translocation, DOT1L is recruited to specific locations in the chromosome where it would not normally be present. As a result, DOT1L causes inappropriate methylation at these locations, which results in the increased expression of genes causing leukemia.

In September 2012, Epizyme initiated a Phase 1 clinical trial for EPZ-5676. The company believes EPZ-5676 is the first HMTi to enter human clinical development. This month the program has entered the dose escalation phase. In the next few months Epizyme is expected to initiate an expansion phase that will exclusively enroll MLL-r patients.

Epizyme retains all U.S. rights to EPZ-5676 and has granted Celgene (NASDAQ:CELG) an exclusive license to EPZ-5676 outside of the United States. The orphan drug designation applies to the U.S., where Epizyme maintains all rights. Epizyme has partnered with Abbott to develop a companion diagnostic to identify MLL-r patients. The diagnostic will generate revenue of its own, while accomplishing the goal of identifying patients that are most likely to respond to treatment.

MLL-r is an aggressive subtype of two of the most common forms of acute leukemia, acute myelogenous leukemia (AML) and acute lymphoblastic leukemia (ALL). It is estimated that only about 25% of those afflicted will survive more than 5 years. Epizyme estimates that the potential patient pool is about 4,900. The company has not discussed pricing at this point. There is currently no specific treatment for this condition.

For investors the orphan drug designation can be important because it can translate to less cash burn, faster approval, and a virtual treatment monopoly in a specific market segment. All of these qualities can help with equity appreciation and further development of the pipeline. Epizyme has partners on board, trials ongoing, and all of the ingredients of a company with potential. Add this company to your watch list.

Source: Epizyme Gets Orphan Drug Designation On Leukemia Drug

Additional disclosure: I have no position in other equities mentioned.