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This year, one of many trends in the world of biotech investing is the increasing popularity of orphan drugs on Wall Street.

An orphan drug is a special designation that is given to drugs that are intended to treat very rare diseases (in the United States this means less than 200,000). In the past we've seen drug companies avoid the targeting of certain diseases because of the very small number of patients that would be providing sales revenue, but things have changed.

The Orphan Drug Act of 1983 provided great incentives that made it more economical for pharmaceutical companies to develop orphan drugs. First, a few tax incentives were initiated to lower clinical development costs for any prospective orphan drug. Second, the window of exclusivity for orphan drugs was increased from five to seven years (it's ten years in the EU by the way). While two years isn't an eternity in the pharmaceutical world, it's a nice perk that adds substantial expectations to future cash flows of any orphan drug.

Drugs that treat rare diseases generally cost a lot more as well, which means that orphan drugs can be extremely high-margin sources of income.

Here are promising orphan drugs and their parent companies that have garnered a lot of interest from investors this year.

Eteplirsen (AVI-4658) - Sarepta Therapeutics (NASDAQ: SRPT)

Sarepta hadn't caught my attention until the morning of October 3rd, when shares caught on fire (in a good way). The phase IIb results for their orphan drug etiplirsen showed that the drug was effective in the treatment of Duchenne Muscular Dystrophy with a six-minute walk test and measurement of patients' dystrophin fibers (muscular dystrophy mutates the gene and adversely affects production of the vital dystrophin protein.).

SRPT stock tripled on October 3rd, and got cut down throughout the month of October (as expected.) Many will argue that the profit-taking after etiplirsen's phase IIb results was overdone, and point to a possible FDA approval before phase III results are in due to certain exceptions made in the PDUFA (or Prescription Drug User Fee Act.)

Going forward, investors have to weigh the expected future revenues of eteplirsen (which would bring SRPT close to the average analysts' price target of $44.20/share) with the time that it may take to get there. Although an early approval is likely, it isn't guaranteed at this point. SRPT is a decent orphan-drug value play, but may require some patience.

Gattex (teduglutide) - NPS Pharmaceuticals (NASDAQ: NPSP)

NPS has an orphan drug for short bowel syndrome that has already submitted its NDA and is waiting for the (extended) PDUFA action date of December 30, 2012.

NPSP got overheated, and showed up on my radar on October 12th due to a 19% rally that started due to news of a Gastrointestinal Drugs Advisory Committee meeting that would be held on October 16th to discuss and vote on the approval of Gattex. The vote turned out to be excellent - there was a unanimous vote in favor of approval on December 30th. This means that it's almost guaranteed to see approval, although NPSP didn't move up on the news. It actually drifted lower, possibly due to profit taking and some skepticism over the company's $780 million valuation.

The average analyst has a price target of $15.30/share, which implies severe undervaluation of NPSP relative to its expected future cash flow from Gattex. Investors who can wait until the end of the year should anticipate an FDA approval, and a lengthy period of exclusivity for Gattex once it does hit the market.

GALNS -BioMarin Pharmaceuticals (NASDAQ: BMRN)

News on the phase III results of BioMarin's orphan drug GALNS created a huge upward surge in shares of BMRN - 31% on November 5th.

GALNS treats an extremely rare condition known as Morquio A Syndrome (or MPS IVA) which only occurs in about 1,500 people in the United States. After meeting its primary endpoint, we can expect BioMarin to submit GALNS' NDA relatively soon. Due to the rarity of the disease and the lack of any treatment, I expect that the FDA will grant priority review to the GALNS NDA as well, which will shorten the review time from ten to six months. This means that we should expect a FDA decision some time in the middle of year 2013.

Although it seems that GALNS is a virtually done deal in terms of approval, BioMarin has gotten quite expensive after the news hit as described in a recent article I wrote. GALNS isn't really worth the $1.4 billion that the market added to BioMarin's market cap due to the extremely small number of Morquio A Syndrome patients, and looks a bit expensive.

Perifosine - AEterna Zentaris (NASDAQ: AEZS)

AEterna Zentaris has seen a particularly painful 2012, especially after the failure of perifosine in phase III trials back in April which tanked shares so badly that AEZS was almost delisted from the NASDAQ. To alleviate this, however, AEterna Zentaris performed a reverse split on the stock and continues to spend its remaining cash on its development programs. More on that here.

Perifosine, a cancer drug, was already deemed a total failure by Wall Street after its cancelled program for colorectal cancer, but AEterna Zentaris has not let go yet and has phase III results for multiple myeloma due for release in Q1 2013. We don't know just how badly this orphan drug failed its phase III trial earlier this year, which is why skepticism still prevails over AEZS.

Although we can't claim Perifosine as a dead drug/program quite yet, investors should be especially cautious about this one. The drug has disappointed before and blown up a lot of dollars for faithful AEZS shareholders. It's probably better to buy AEZS for the other drugs in its pipeline.

VX-809 - Vertex Pharmaceuticals (NASDAQ: VRTX)

VX-809 is a cystic fibrosis drug that had some pretty interesting results in recent phase II clinical trials, as described here.

Although it seems to be useful, VX-809 is best used in conjunction with Vertex's FDA-approved and market cystic fibrosis drug ivacaftor (also called VX-770 or Kalydeco commercially.) Ivacaftor is only meant for cystic fibrosis patients with particular mutations, which doesn't include patients with a particularly common f508del (homozygous) mutation.

VX-809 is catered specifically to these homozygous f508del cystic fibrosis patients, but still achieved much better trial results when used with ivacaftor. We're all trying to wrap our heads around the reasoning for the results, but we do know that the FDA rarely gives orphan drugs (especially for diseases like cystic fibrosis) any trouble given that their efficacy and safety data are reasonably good. A combination VX-809 and ivacaftor treatment for the large number of cystic fibrosis patients with the f508del mutation could potentially reach the market before the completion of phase III results if VRTX investors get lucky.

VRTX shareholders also need to pay attention to the company's financial results, which have recently brought renewed concerns over the company's growth aspects. Vertex has swelled to almost $10 billion in market capitalization, and requires more to provide large percentage-based returns.

Source: For Biotech Investors: 5 Orphan Drugs And Their Parent Companies