In the pharmaceutical industry, a "blockbuster" is any drug that brings in $1 billion or more in revenue per year.
It's the prize that every biotech hopes to win - and every biotech investor hopes to cash in on.
So how do you spot one in the making? If the market suspects a drug candidate has blockbuster potential, catalysts (events like positive clinical study results and regulatory milestones) will give its manufacturer's share price a big, big boost.
There is no crystal ball that's 100% accurate when experimental drugs are concerned, but here are some telling questions that can narrow your search.
Questions to Answer Before You Buy In
Does the drug fulfill an unmet need?
Alexion Pharmaceuticals Inc.'s (Nasdaq: ALXN) Soliris (eculizumab) is the only drug approved to treat paroxysmal nocturnal hemoglobinuria (PNH), an extremely rare, lethal blood disorder. It is also the only therapy approved to treat atypical hemolytic uremic syndrome (aHUS), a genetic condition that can result in sudden and progressive damage to vital organs, leading to stroke, heart attack, and kidney failure. Five years ago, ALXN shares were selling for about $18.50. They recently hit a high of $180.51 - thanks to Soliris, and Soliris alone.
Is it a "breakthrough" drug?
A "Breakthrough Therapy" (BT) is actually a designation awarded by the FDA for a drug that "...is intended alone or in combination with one or more other drugs to treat a serious or life-threatening disease or condition and [has] preliminary clinical evidence [that] indicates the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development." In 2012, the FDA granted Roche/Genetech's Gasyva a BT designation and then approved it for marketing in 2013. It treats chronic lymphocytic leukemia (CLL) and is expected to be a big blockbuster - as are the other three breakthrough therapies that were approved last year.
Can its market produce blockbuster income?
This can mean a huge market, such as patients with high cholesterol - think Pfizer Inc.'s (NYSE: PFE) Lipitor (atorvastatin calcium), the bestselling drug of all time - or a small market that will pay for highly priced orphan drugs for rare diseases. BioMarin Pharmaceutical Inc. (Nasdaq: BMRN), a company that specializes in the development of drugs for rare diseases, for example, has increased its share price 460% over the past five years by following this strategy.
Where to Find These Big Winners
One great place to look for potential blockbuster drugs is in the pediatric market. Drugs for children with serious medical problems seem to have a special attraction for investors. For example:
Aegerion PharmaceuticalsInc. (Nasdaq: AEGR) developed a drug, Juxtapid, for a rare genetic condition called homozygous familial hypercholesterolemia, or HoFH, that can raise a person's cholesterol levels to more than 1,000 mg/dL. A healthful level is considered to be less than 200 mg/dL. The disease largely affects kids, who can die of heart attack by age 2. Most are dead by age 11. When Juxtapid hit the market, it was the only therapy available. ISIS Pharmaceuticals Inc. (Nasdaq: ISIS) would soon join in the competition with its less expensive injectable drug, Kynamro, but Juxtapid had fewer side effects and could be administered orally.
There are only about 2,000 cases of HoFH in the United States, but Aegerion charged $250,000 per year for its medication.
Within about a year of the time I first discovered this stock, AEGR shares shot up from $13 per share to a high of $101 per share. (Due to other market variables, including some unfortunate statements made by the company's CEO that ended in a warning letter from the FDA, the share price has since fallen back quite a bit.)
Sarepta Therapeutics Inc. (Nasdaq: SRPT)is developing a drug for Duchenne muscular dystrophy (remember all those Jerry Lewis Telethons?). The CDC estimates the disease affects about one out of every 5,600 to 7,700 males age 5 to 24 in the United States. By age 24, about 9 out of 10 of the 58% still alive at age 24 are wheelchair-bound. Not a pretty picture.
The potential for this drug to potentially become a blockbuster so whetted the appetite of investors that between the end of July 2012 and the beginning of October 2012, the stock price jumped nearly 1,200% - with a substantial part of that pop taking place in a single day, when the price tripled after a positive data release from a phase 2 clinical study. The stock has had its ups and downs since then, but if you had invested two years ago, you would still be up by 286%.
Take Advantage of the Huge Potential
I particularly like the pediatric space because it's so wide open - there is so much room for new drugs in every category of disease. In cancer, for example, only a handful of drugs have been approved for pediatric use over the past 30 years. I do expect that trend to change, as the FDA is now offering incentives for companies to pursue this type of research.
There are also conditions that affect a large number of children but have no current treatment whatsoever. Autism spectrum disorders fall into this category. About one in 68 children have some form of autism. There are currently no drugs to treat it.
One biotech hard at work developing drugs for this indication is Alcobra Ltd. (Nasdaq: ADHD), a biotech specializing in treatments for cognitive disorders. In particular, they're working on a drug to treat fragile X syndrome, the most common single-gene cause of autism and inherited cause of intellectual disability among boys.
They're still a long way from marketing their drug, metadoxine extended release, for this indication. In fact, they completed animal studies last year and are just beginning clinical studies in 2014. But in the meantime, they're further along in studies of the same drug for other indications.
For example, a phase 3 clinical trial on metadoxine extended release as a treatment for adult attention deficit hyperactivity disorder (ADHD) will be finishing up at the end of this year. Positive data could give the stock a huge boost.
So what I see is a company with huge potential, a strong drug candidate with several possible indications - including autism, and lots of catalysts down the road to give the share value boosts along the way.
I'd look into this one.
Editor's Note: Ernie has developed a secret "calendar" that lets him know the specific dates that certain stocks are likely to go higher - much higher. We've put together a special presentation about it, and we're offering a few of his readers a special sneak preview on Monday, April 7. Click here to RSVP