Rare diseases, orphan drugs and parent companies

Catherine McLoughlin

Pannone LLP

Continuing our rare disease theme, Catherine McLoughlin shares her thoughts on the orphan drug market and how pharma / biotech companies may change their focus to rare diseases in the future.

If, early on in my career as a lawyer in the life sciences sector, I had a £1.00 for every deal that I did for a biotech company that involved a “potential blockbuster” product, I would probably have retired by now. Back in the day, when money flowed more easily and venture funds appeared to be awash with money for major drug projects, it was all about the really big breakthrough, the aforementioned “blockbuster”.

Now, as the economic cycle has turned, leading to much less funding available for drug discovery and generally a much higher bar being set by funds, pharma companies and other would-be investors, the trend is radically different. A greater proportion of the companies receiving funding today are focused specifically on the orphan drug market.

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“…biotech investors are keen to consider investments in companies targeting their drug development at rare diseases…”

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Usually, the disease being targeted is one of which the general public will have rarely heard about and for which the patient population is small. Today, when a term sheet arrives on my desk, I may not be aware of the existence of the condition for which the drug is being developed. So why are venture capitalists increasingly focused on investing in the development of drugs to treat rare diseases, with their small patient populations and why now?

The Genzyme legacy?

It is no coincidence that as big pharma confronts the patent cliff, they are casting around for the next big thing in drug discovery, and more and more frequently they are looking at the rare disease approach as the way forward. With this trend in mind, biotech investors are keen to consider investments in companies targeting their drug development at rare diseases, as they seek less risky investments, where the drug candidate has a shorter time to market and comes with considerable incentives and potentially fewer obstacles. In addition, the emergence of the current trend of big pharma acquiring companies, such as Genzyme, Genentech and MedImmune to name but a few, gives some comfort to venture investors hoping for a timely exit.

Indeed, it was Genzyme that first demonstrated that investment in seeking treatments for rare diseases, despite their small patient populations, could prove a sustainable business model and it is deals such as the 2011 acquisition of Genzyme by Sanofi that gives venture capitalists hope for those much anticipated trade sales of the future.

There are, however, many reasons for this seemingly incongruous shift by venture capitalists, corporate venture investors and pharma companies away from the hunt for the blockbuster drug to the smaller targeted the rare disease approach:

1. The development of a drug to treat a rare condition may be the gateway to understanding mechanisms that are shared by other more common diseases. Hence the orphan drug may actually be the gateway to the next blockbuster.

“The development of a drug to treat a rare condition may be the gateway to understanding mechanisms that are shared by other more common diseases.”

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2. It’s personal – the specific, patient centric approach is attractive to investors as it requires smaller clinical trials (therefore less funding) and faces less competition.

3. The orphan drug legislation in Europe and America combines to give real commercial advantage to developers of drugs targeted at real unmet clinical need.

There is no doubt that a renewed focus on orphan drugs, the Genzyme legacy, if you will, may revolutionise the way forward for biotech and pharma companies. In addition, as the environment for financing and, particularly for biotech financing in Europe, remains difficult, the perception of orphan drug discovery as a less capital intensive method of financing the drugs of the future has an attractive quality for biotech investors.

Does this mean that we are witnessing the end of the blockbuster model?

Well some investors would argue that is the case, that big pharma will seek to replace the revenues from a single blockbuster drug with revenues from multiple drugs with smaller patient populations, but with the potential perhaps to be applicable to a range of rare diseases.

Could there be a downside to the orphan drug story?

Orphan and rare disease patient populations are small, sometimes very small. There have indeed been orphan drugs that have generated a very high price tag. In areas of completely unmet clinical need, with a very small patient population, the authorities may not have baulked at the high price tag for a drug. But once a drug becomes relevant to a larger patient population, who is to say whether the relevant authority will have the means or the appetite to continue to fund a particularly expensive drug on a much larger scale?

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“However, where an orphan drug is capable of treating several rare diseases, then there is huge potential within the marketplace.”

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However, where an orphan drug is capable of treating several rare diseases, then there is huge potential within the marketplace. For example, Glivec, an orphan drug originally launched by Novartis for the treatment of orphan designated chronic myeloid leukaemia, has grown into best seller for Novartis. The ability of Glivec to be applied to several additional orphan indications propelled it to the status of blockbuster with the potential of revenues in the billions.

So, where do we go from here?

Out of the financing documents for biotech investments that I will review this year, I would expect a significant proportion to be for companies working on the development of drugs in orphan indications and I predict that we will not have seen the end of the acquisition by big pharma of biotech companies focused on rare diseases. As for the future, to a relative layman, it seems to me that we are entering a new phase for drug discovery, targeted, patient centric and, as always, highly innovative.

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About the author:

Catherine McLoughlin is a corporate finance partner in the London office of leading UK regional law firm Pannone LLP. Catherine focuses on M&amp,A, private equity and corporate finance with a particular focus on companies in the life sciences sector.

Catherine can be contacted on 020 7 998 8560 or by email on catherine.mcloughlin@pannone.co.uk.

Are rare diseases the way forward for pharma?