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Can The Buying Frenzy In Orphan Drugs Continue?

Jul. 19, 2013 2:05 AM ETACAD, ALXN, BMRN, ONXX, SNY
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Orphan drug shares have been the best performing stocks in the market for the past year and in the last month they have really been on fire. Takeover rumors are running rampant and fueling the rally even further, but the obvious question is, "can this momentum continue, or have we seen the end for now?"

Roche has been rumored to be seeking financing to buy Alexion Pharmaceuticals (ALXN) causing shares to soar from $88 to $114. Oppenheimer expects a deal for Alexion to be priced at between $148 and $208 leaving quite a bit more on the table if they are right. If they are wrong, it could cause a whopping loss to those who pay these lofty prices. Solaris is Alexion's only commercial drug, and analysts project sales up to $1.5 billion this year. Considering that Alexion is already trading at a valuation of $20 billion, the price seems very risky at these levels; but as we have seen in the past, that may mean nothing at all; and we may see shares trade higher for reasons unknown at this time.

BioMarin Pharmaceuticals (BMRN) is certainly no stranger to buyout rumors. Since 2006, it was believed that Genzyme was eyeing them for a buyout. No buyout has occurred yet, but rumors continue to persist and since 2006, shares have risen from $3.87 to over $70. The Orphan Drug pipeline of BioMarin has been growing so rapidly that the company continues to be the object of many takeover rumors. Further supporting a potential buyout is that Genzyme has been acquired by Sanofi (SNY), and Sanofi has expressed a strong interest in Orphan Drugs and even stated that they are a good pharma model. If Sanofi's Genzyme unit successfully acquires BioMarin, it will add greatly to Sanofi's pipeline of fast growing Orphan Drugs and help position Sanofi even stronger into this very high growth area.

In January 2012, BioMarin CEO, Jean-Jacques Bienaime, said in an interview that BioMarin is seeking to buy smaller companies to expand its pipeline for treatment of rare diseases, but not to be acquired itself. Bienaime further said, the company will follow a similar acquisition strategy to one used for purchases such as Zystor Therapeutics Inc., which BioMarin bought in 2010 for $22 million in upfront cash. That acquisition gained the company a medicine now being tested for Pompe disease, a muscle-disabling disorder.

Sticking with their acquisition plan, BioMarin has purchased a number of strategic companies that have greatly expanded their pipeline and accelerated growth. The company purchased LEAD Therapeutics with their pre-clinical oral oncology drug for genetically defined cancers. In 2009, BioMarin acquired Huxley Pharmaceuticals for approximately $22.5 million and $36 million in royalties from future sales of Firdapse for the treatment of Lambert-Eaton Myasthenic Syndrome, LEMS.

In January 2013, BioMarin acquired Zacharon Pharmaceuticals for $10 million (plus additional undisclosed milestone payments), which gave BioMarin control of Zacharon's heparan sulfate synthesis inhibition platform, which BioMarin plans on researching in the treatment of MPS III, other MPS disorders, and ganglioside diseases such as Tay-Sachs.

In October 2012, BioMarin may have made the single best investment in their entire history by investing only $5,000,000 for a 17% chunk in Catalyst Pharmaceutical Partners. At the same time, they out-licensed the North American rights for Firdapse to Catalyst that has already begun the Phase III clinical trials. It is especially important to note that Catalyst also owns CPP115 that is likely very attractive to BioMarin because it appears to be a serious contender for several Orphan Drug indications such as, Epilepsy, Refractory Epilepsy, Tourette Syndrome, Infantile Spasms, Movement Disorders, Post Traumatic Stress Disorders and other indications. CPP115 was designed by the well-known Dr. Richard Silverman, who also designed the blockbusters Lyrica and Neurontin for Pfizer. Pfizer is also seeking opportunities in Orphan Drugs and they know how successful Dr. Silverman has already been for them so it would not be a surprise if Pfizer also becomes interested in BioMarin if CPP115 becomes part of their pipeline.

With BioMarin's resources, CPP115 would be an extremely valuable addition to their pipeline that could increase their valuations substantially in the next two to three years because CPP115 could almost double the size of BioMarin's already robust pipeline. Catalyst is therefore another logical potential takeover target for BioMarin.

Acadia Pharmaceuticals (ACAD) is the most surprising orphan drug company of the lot because this company came from out of nowhere as a micro-cap stock only one year ago and is now approaching mid-cap status with its $1.5 billion market cap quickly approaching $2 billion. Acadia shares dazzled investors by trading from $1.36 to over $20.00 in less than 12 months. Its lead drug pimavanserin surprised Valeant, which had let it go back to Acadia after an early failure. Acadia redesigned the trial; it passed; and the rest is ground breaking history. Acadia is now becoming one of the big players in the orphan drug space and looks to have a very bright future and much more room on the upside. With all the opportunities in small-cap orphan drug company space, it would not be surprising to see Acadia acquiring a few companies for itself.

Buyout rumors have also been circulating about Amgen buying Onyx Pharmaceuticals (ONXX) rocketing shares from the low 80's to the $130's in less than one month. The Financial Post said that documents it had seen said that Amgen had sent material to Onyx in which it said it would propose a cash acquisition worth about $10 billion and requested due diligence and a document review period.

The Financial Post said that Amgen had sent the documents to Onyx about two weeks ago. Both companies are based in California. Amgen had sales of $17.3 billion in 2012, while Onyx brought in revenue of $362 million.

Large biotech companies, once the targets of big pharmaceutical companies, have become acquirers themselves of smaller biotechs as their own stocks have run up and they have used low interest rates to bankroll their drug development.

According to the Financial Post, the documents sent to Onyx said that Amgen was prepared to "move quickly to negotiate and execute a combination with you" and that the proposal did not have financing conditions on it.

"Although we have reviewed Onyx extensively, our review has been limited to publicly available information. We would propose a focused, confirmatory due diligence and document review period," the documents said, according to the Financial Post.

It also said the proposal is subject to negotiation, conditions and board approval.

In a research note, ISI Group analyst Mark Schoenebaum said that were a deal to occur, Onyx's Kyprolis cancer drug would fit well into Amgen's cancer drug sales and marketing infrastructure and complement Amgen's portfolio of cancer drugs.

Onyx is sporting a healthy market cap of $10 billion today, and that seems high when compared to its 2012 sales of under $400 million. Onyx, however, does have a large pipeline of advanced drugs that could justify higher prices. It is also believed that Gilead, Pfizer, and Bristol Myers are all evaluating Onyx at this time and that could lead to higher prices.

Orphan drugs are in strong demand by big pharma to replace their expiring drugs falling off the patent cliff and are expected to continue their unusually high growth rate for years to come. There may be bigger percentage returns in the dozens of higher risk small-cap orphan drug stocks as the mid-caps gobble them up to enhance their pipelines. This is where research will pay very big dividends to those who take the time to look carefully into this explosive area of orphan drug stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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