Despite rare diseases in some cases only affecting hundreds to thousands worldwide, the market for drug treatments has been speculated to hold a potential $1 trillion a year price tag. Orphan drug status benefits and unique intellectual property are certainly attractive draws to this market, in addition to direct revenue increase. Insurance reimbursements for drug treatments and developing world markets, however, make the $1 trillion figure unlikely to come to fruition. These hurdles have not stopped bigger pharmaceutical interest in acquiring small, rare disease companies to add to their portfolios. Recent examples include Alexion (NASDAQ:ALXN), which acquired privately held genetic metabolic disorder drug maker Enobia Pharma Corp. for over $1 billion as 2012 came to a close. Investors may be wise to start looking at smaller cap rare disease companies with takeover potential.
Why Rare Disease Takeovers Now?
In the climate of unsolicited bids, such as GlaxoSmithKline's (NYSE:GSK) play for Human Genome Sciences (HGSI), and chatter of other companies offering themselves for acquisition, such as Amylin (AMLN), takeover fever may be spreading. HGSI and AMLN have seen sharp increases in share price with this news. With generic competition looming, Big Pharma is on the hunt for new patents. Monday's news of AstraZeneca (NYSE:AZN) buying out Ardea (NASDAQ:RDEA), gaining its solid Phase III gout treatment added to the hype. Investors saw an upside in excess of 50%. The Hepatitis C sector has popped with competition in the pipelines of small to mid-level pharmaceuticals showing success in treatment for this widespread disease. Gilead (NASDAQ:GILD), Vertex (NASDAQ:VRTX) and Inhibitex have drawn the attention of the market as well as bigger pharmaceutical companies with their Hep C candidates. Most recently, Idenix Pharma (NASDAQ:IDIX) shares rose sharply on speculation of a buyout with its promising but rocky data on its Hep C drug IDX184. A touch of the early 2000's have hit the biotech sector of late.
Rare disease stocks may be next in the M&A fever. The genre is ripe for the picking based on its nature. Its market is reliant on emerging areas, insurance/healthcare coverage support and financial backing for the extensive R&D and launches. Big Pharma specializes in these areas. This symbiosis between big and Small Pharma offers the larger of the two feel good PR and completed leg work on high priced R&D and the smaller player a best-case-scenario financial end game given its inability to create sustainable profit on its own.
Potential Takeover Targets
SynaGeva BioPharma (NASDAQ:GEVA) shares sky rocketed at the end of last week with Morgan Stanley initiating the stock with an overweight rating and a $76 price target. The firm cited GEVA's unique platform and its ultra-orphan drug status as benefits. Though orphan drug markets are not always lucrative and GEVA has yet to reach profitability, the feeling appears to be that the company can call its shots more easily within its rarest of niches. The $832 market cap stock is at its 52 week high.
GEVA's platform utilizes transgenic chicken vectors to produce human therapeutic proteins. It uses this method for the production of its own compounds as well as for those of partner companies. It's main pipeline product, SBC-102, is an enzyme replacement therapy for Lysosomal Acid Lipase Deficiency. SBC-102 has been given orphan status in the U.S. and EU. It has 4 other protein based rare disease therapies in pre-clinical phase. The company announced a recent expansion of its partnership with the Mitsubishi Tanabe Pharma Corporation for an undisclosed rare disease target.
Despite the high hopes for the stock, it is hard to conceive that it can maintain this momentum without more than one prospect in later stage clinical trials. Any bumps in the rocky road of clinical trials may see GEVA drop sharply. With a drop, the company may be looking like a more economical takeover target on its way down. As medicine becoming more personalized though, SynaGeva's platform becomes more attractive in considering the wide range of human proteins that can be synthesized. What it might lack in pipeline it makes up for in technology and the ability to produce these biologically based therapies and enzymes. Similar to the Ilumina (NASDAQ:ILMN)/Roche (OTCQX:RHHBY) scenario, acquiring an associated tool in house may create major leverage in the future of pharmaceuticals. A large pharmaceutical company could benefit significantly from this platform and receive a rare disease pipeline with some future potential as well.
BioMarin Pharmaceutical (NASDAQ:BMRN) is the $3.98 billion market cap company which has made a name for itself focusing on rare lysosomal diseases. Unlike more speculative companies, BMRN enjoys more substantial revenue than many companies in its genre. It has four marketed, orphan status drugs which are expected to bring in over $500 million in revenue in 2012. Naglazyme ®, its most successful drug bringing in over $250 million in 2011, is a recombinant enzyme treating lysosomal disorder MPS IV. The drug is patented through 2022 and holds approximately half the market share in treatments in this area.
The company's pipeline has solid potential upside with a focus on the genetic basis for cancer as well as rare diseases. In April 2011, BioMarin partnered with Myriad Genetics (NASDAQ:MYGN) to perform BRACAnalysis ® for its Phase I/II of BRM-673, a PARP-inhibitor drug for genetically defined cancers. The company is branching out of its niche with this cancer drug, which may have wide application.
Additionally, its BMN-701 for the treatment of Pompe disease holds promise in Phase I/II trials. BRMN itself acquired the drug from ZyStor in early 2012. Treatment for Pompe disease holds a lucrative potential just under $1 billion. The company expects the drug to enter Phase III trials in 2013.
Also in the pipeline in Phase II trials is PEG-PAL which focuses on the treatment of PKU that is resistant to its Kuvan ® co-factor treatment. With diagnosis available in routine newborn screening, PKU is a somewhat common rare disease, affective 1/10,000 live births. As the condition can be controlled with a strict diet though, treatments have been met with some resistance in reimbursement. PEG-PAL PKU treatment could benefit from a marketing boost highlighting its benefits in neurocognitive and mood function in sufferers.
The nearest term potential belongs to its BMN-110 GALNS drug for the treatment of Morquio-A Syndrome (MPS-IVA). This enzyme replacement therapy is in Phase III and data is expected to be available by the fourth quarter 2012. Regulatory filings for this drug are expected in the first quarter 2013.
The company releases first quarter earnings April 26th with an estimated EPS of -$0.14. It has recently been initiated to buy by research firm UBS. Trading nearer its 52 week high with a portfolio that is equal parts unique as it is on the verge of profitability, BRMN could be a target itself for Big Pharma. The lynch pin may be the success or failure of BRM-673. If BRMN shows effective results in its cancer pipeline, it may see stand-alone success long term. If not it may make a tasty rare disease takeover target.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.