As we look through the healthcare sector, one of the great places for investors has been ultra-rare diseases. The reasons for this are commonly known, but to elucidate: (1) there is a direct and favorable regulatory pathway for approval; (2) once approved, concern of generics and/or competition is greatly diminished; and (3) the companies get to charge outlandish prices without question.
Alexion (ALXN), for example, is now a $19B dollar company based on the sales of one drug that sells for a price in excess of $350K/year. A second example is BioMarin Pharmaceutical (BMRN), a $5B dollar company that doesn't even make money, but has value based on high hopes in its pipeline and the three points above.
Naturally with this backdrop, one would love to find another ultra-rare disease company, but one has to be very careful in searching out such gems. Just because it is an ultra-rare disorder doesn't mean treatment for it is a moneymaker. Additionally, the excitement over this space could leave one out to dry as realization sinks in that the specific disorder the company is trying to treat doesn't actually require $350K+/year drugs. The best example of this type of over hyped and therefore overpriced company in the biotech sector is Synageva (GEVA).
GEVA seeks to develop a drug that can be used to treat lysosomal disorders with enzyme replacement therapy. They have a drug that is very effective, and I believe will work to treat the patients it targets. The issue, however, is the patients it targets. There are two categories of patients: Children (Wolman's Disease) and adolescents/adults (Cholesteryl Ester Storage Disease (CESD)). The cure is in the children, but the hype and pipe dreams of profits is in the adults.
Wolman's results from a deficiency in Lysosomal Acid Lipase (LAL). With the lysosome not removing lipids properly, there is an early onset of lipid buildup in organs and in the blood. If left untreated, it is fatal to the child within the first year. GEVA's SBC-102 is highly effective at treating these children, or at least seems to be based on the one child that has been treated with it. Even though this is a potential cure-and is indeed an ultra-rare disorder-it isn't a profitable treatment.
That may be hard to believe, but the devil is in the details. Wolman's isn't an ultra-rare disorder; it is an ultra, ultra, ultra-rare disorder. This has been shown quite strongly via a lysosomal study that looked at live births in Australia over a 26 year period! In this study, it was found that Wolman's occurs only once every 700K live births! So in the US--where there are about 4M births a year-- there would be about 4-8 possible patients a year. Let's assume the outrageous and say 100% pick up the drug at a price of $400K/year. That brings in a whopping $1.5-3M dollars per year in revenue. (Of course, the patient has to stay on it for quite some time, and most likely for life.)
So why is the company an $890M dollar company? Well, that answer is found in the hype and lies of analysts and large fund investors--e.g. Morgan Stanley, JPMorgan, Canaccord, and Wedbush--who are trying to make money doing offerings and selling options and shares. Remember that adult disorder CESD? Well, the funny thing is there was a genetics study in Germany done in 2007…(again, this is a single study looking purely at statistical analysis of what the population should look like based on genetics). There were no CESD patients actually found. In this study, the incidence rate should be about 1:42K or simply put about 25 for every million people. If we just do a quick extrapolation to the US who has about 300M people that means there are 7,500 people who might pay crazy money for this drug.
But wait, why, then do I think it is an over hyped and overpriced company? Well, again, the devil is in the details. If one looks at the actual number of cases ever reported, they find only 80 cases have ever been reported in the history of medicine on PubMed as of 2009. You read it correctly: only 80.
So now comes the spin by management, analysts and anybody who owns a large share of the stock in the company. Analysts say that this is because it is undiagnosed and if they focus on liver doctors who treat Nonalcoholic steatohepatitis (NASH) and use the handy blood test GEVA is developing, that number will rise dramatically. However, the reality is that this LAL enzyme is not gone like it is in Wolmans; in fact, it isn't until they are adolescents or adults that they even begin to get high lipid levels in the blood or fat deposits on their liver. There is a wide spectrum of this CESD disorder that is so large that only 80 cases were reported. The reality is statins, and now new Triglyceride medications coming on from companies such as Amarin (AMRN) and others that will treat the large majority of these patients.
Do you know how complicated this is going to be to explain to insurers that they need to pay $350K+/year to treat CESD when a large percentage can be treated with much cheaper drugs? Not to mention that SBC-101 probably won't make it to market for another three or four years and by then there could be even more cholesterol and TG lowering medications.
Amazingly, GEVA is out raising more money - to the tune of $80M - and is being bought up hand over fist. This is a great case of a bunch of MBAs looking at the ultra-rare market and saying, "Oh wow, look at GEVA," and then going and talking some PhDs into it. There is going to be some serious insurance issues with CESD. Wolman's is a sure thing, but the CESD angle is overhyped.
Disclosure: I am not long or short GEVA, and do not plan to invest in GEVA. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.