Do Orphan Drug Candidate Companies Have A Home In Your Portfolio?

Includes: AEZS, NPSP
by: Chemistfrog

January 4th, 1983 was a significant date for pharmaceutical companies, their investors and most notably the patient base that would be helped due to the day's significance. It was on that date that the Orphan Drug Act was passed. The legislation enabled the FDA to begin giving the special designation to product candidates that were being developed and subsequently marketed that targeted rare diseases and conditions that would normally remain unaddressed by therapy, medical food and medical device developers. The purpose of the Act was to give incentives to companies to target the smaller indication market groups by providing tax incentives and marketing exclusivity of up to 7 years with no competition for the targeted indication. The European Medicines Agency (EMA) followed suit with its own version, and the two agencies agreed in 2007 to utilize a common application process for both entities. Although they would still operate separately, the programs are very similar between the two agencies with subtle differences, such as a 10 year marketing exclusivity for the EMA's recipients.

From an investor's standpoint, assignment of an Orphan Drug Designation is a significant achievement for a company's candidate as it has short-term and longer-term implications for the product's financial returns. Normally not a desirable indication to target, an Orphan Drug candidate can now prove to be a large share price mover due to the less cost prohibitive trials and virtually non-existent competition during the period of market exclusivity. The designation now adds a little extra "kick" to the regulatory process and opens investors' eyes to the possibilities when new drug applications (NDA's) are submitted for a candidate or when FDA advisory panels or PDUFA catalysts approach. For Q4 2012 and Q1 2013 there are two notable candidates with key decision dates coming with the obvious implications of increased investor interest and likely share price increases. Following are two companies which present near-term catalysts for their orphan drug candidates. Both of these companies have approved products and multiple products at various stages of development and should provide multiple catalysts over the next year and beyond.

Perhaps the purest Orphan Drug play for the near term is that of NPS Pharmaceuticals (NASDAQ:NPSP). The company boasts a growing pipeline of products and product candidates addressing rare gastrointestinal and endocrine disorders. With the nearest catalyst of the companies presented, NPS has an FDA advisory panel meeting on October 16th with notes likely being released this Friday, October 12th, in advance of the meeting. The panel will discuss NPS's GATTEX® for short bowel syndrome, a condition resulting from a least half of patients' small intestine being removed due to disease, injury or birth defect. It manifests itself in diarrhea or malnourishment as nutrients and fluids are inadequately absorbed in the remaining portion of the small intestines.

A positive recommendation by the advisory panel, although not a regulatory decision, would be construed as a huge positive for this growing company as it could indicate a probable ruling by the FDA on or before its prescription drug user fee (PDUFA) date of December 30th. Giving a little more optimism going into the October 16th panel, NPS recently received marketing approval from the European Commission (EC) on September 4th for the drug, marketed under the name Revestive®.

Adding to the company's growing attention, NPS has also completed phase 3 trials for Natpara™, (recombinant human parathyroid hormone (rhPTH [1-84])) with the company planning on submitting its Biologic License Application (BLA) for the product in mid 2013. Designated as a biologic-device combination, Natpara™ has been developed to be used in patients with Hypoparathyroidism, a rare endocrine disorder in which the body produces insufficient levels of parathyroid hormone, the primary regulator of calcium and phosphorous levels in the patients' bodies. Having no FDA-approved therapies, the indication is a significant unmet need giving Natpara™ a better chance at approval with positive data as well as having no approved competition for its targeted group.

With several analysts covering the stock, the general consensus is a $14 price target, 53% higher than Tuesday's closing $9.14 share price. From a share structure perspective, the company's common shares have a 90% institutional ownership, a short interest of 6.6 million shares and a $790 million market capitalization. Trading at the lower Bollinger, the share price can be construed as "oversold" so far going into next week's major catalyst.

Having its fair share of "growing pains" in 2012, Aeterna Zentaris (NASDAQ:AEZS) appears to be righting its ship by first regaining compliance with NASDAQ's listing price by performing a 1:6 reverse split. Typically seen as a negative event for shareholders, the reverse split should be seen as the lesser of two evils, with the other option being delisted and being forced to trade instead on the OTCBB with less liquidity and more propensity of share price manipulation. Moving forward, the company appears to have significant catalysts, known and unknown, that should keep share price stable and pull in more investors for the long term. With a diverse pipeline ranging from preclinical candidates to an approved and marketed product, the company should have multiple catalysts keeping investor interest high in 4Q 2012 going through 2013. Throwing a bit of diversity into the mix, Aeterna is developing not only drugs for multiple indications, but is also developing its own product line of diagnostic tests, the latter of which is the company's next likely provider of a significant catalyst.

Aeterna's most advanced product candidate is AEZS-130, a diagnostic test for Adult Growth Hormone Deficiency (AGHD). Deficiency of growth hormone during childhood is a bit more obvious with observed symptoms including reduced height for their ages, increased body fat in the face and waist, delayed onset of puberty, overly youthful appearance and delayed tooth development.

However, in adults the physical attributes are usually not there to assist in diagnosis. The symptoms, often misdiagnosed or undiagnosed for years include low energy levels, decreased strength and endurance, weight gain or difficulty losing weight, emotional/psychological changes, anxiety and difficulty sleeping. The ailment affects roughly 35,000 adults in the U.S. with about 6,000 new diagnoses annually. With proper diagnosis, patients can begin the treatment process of receiving hormone replacement therapy and live a normal or near-normal life.

Like NPS, Aeterna has a very near-term catalyst for its lead product candidate, AEZS-130, in October. The company will be presenting final phase 3 data October 17th-20th at the 6th International Congress of the Growth Hormone Research (GRS) and Insulin-like Growth Factor (IGF) Society in Munich, Germany. With data already presented in June, the results were deemed to be "safe and effective in diagnosing AGHD". Accuracy data were stated as having 82% sensitivity, 92% specificity and a 13% misclassification rate. Remember, this is an unmet need- having no FDA-approved product. Data will be viewed from a regulatory standpoint with that in mind. The upcoming data presentation will likely give shareholders a better idea of the test's chances of approval after its NDA, "early next year" as indicated in a recent press release. Investors could also get a better idea on a more precise NDA deadline and perhaps gather additional potential partnership or other pipeline developments depending on what the company chooses to divulge. Impressive data here could help to catalyze the share price into the NDA and leading up to the designated regulatory decision date. Having worldwide rights to the product, successful regulatory navigation in the U.S. could be just the beginning for the product's marketing potential.

Far from a "one trick pony", Aeterna already has one approved product in the form of Cetrotide® to assist with in vitro fertilization. The product is administered to women to prevent premature ovulation and maximize fertility success. It was approved in Europe in 1999, the U.S. in 2001 and now boasts approvals in more than 90 countries. With currently-targeted indications in its pipeline of candidates addressing cancers and endocrine diseases, catalysts anticipated and otherwise should continue for the foreseeable future. On a speculative front, the company has partnerships with multiple pharmaceuticals that help to offset expenses and share technical expertise. These partnerships also serve to help the company's networking ability and provide fuel for speculation on further arrangements, licensing, product purchases, company buyout and milestone payments.

In Q2, Aeterna issued 2.6 million shares for total proceeds of $1.9 million via its January ATM Program. The company had $39.8 million in cash and equivalents on June 30th with a cash burn rate of $9.0 million for 1H 2012. Net income for the quarter was $4.5 million relative to a loss of $10.6 million for the same period in 2011. As its financials stabilize, there are five "hold" ratings by analysts, one "buy" and one "strong buy" recommendation. On October 9th, Maxim Group initiated coverage on the company with a "buy" recommendation. The price target set was $9.00, a 185% premium over closing day price on October 10th of $3.15. Please note that the other analyst price targets in the Maxim Group PR were before the 1:6 reverse stock split, and those values should be adjusted accordingly. The current consensus among analysts for a 1-year price target is now $4.50, still a hefty 43% above current trading values. Adjusted for the reverse split, technical support is at the $3.00 level, affording good entry for shareholders wishing to invest in the company in the near term. Valued at a modest market capitalization of $59 million, short interest in the security is now low with shorts holding 2.1 million shares.

Presented were two promising, low market capitalization companies with impressive pipelines focusing on many current and probable Orphan Drug designation therapies and diagnostic tests. Catalysts for both of these companies are very near-term with each offering many potential catalysts in 2013 and beyond. The pipelines and other clinical data from this year were not investigated as they were beyond the scope of this article. However, investors strongly considering positions in either of these companies should perform additional research into the companies' financials, product candidates and markets targeted (including international) and even contact the companies directly to answer any questions or obtain additional information.

Disclosure: I am long NPSP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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