Traditional pharmaceutical blockbusters like Pfizer's Lipitor treat millions of patients at relatively low cost. It's a high-volume business model that has kept the pharmaceutical industry afloat for a long, long time. But over the past decade, out of necessity, a new model has taken the industry by storm.
As big moneymakers, like Lipitor, reach the "patent cliff," their intellectual rights protection are evaporating, and generic drug makers are taking over their markets.
Big Pharma needs fresh drugs to take the place of those they're losing. But replacing these products with new ones is expensive. Most experts agree that it takes about $800M in capitalized costs to develop a single new drug. And frankly, the "easier" medical riddles, like treating high LDL cholesterol, have mostly been solved. The remaining tough ones, like cancer and Alzheimer's, will drive costs even higher.
So how do the major pharmaceutical companies meet the challenge? By letting small, smart start-up biotechs do the R&D legwork on new drugs, then either making distribution deals with them or buying the small companies out.
Here's what makes this new approach so lucrative for investors…
Taking the "Lamborghini" Approach…
Back in August 2012, I noticed that a tiny biotech called Aegerion Pharmaceuticals (Nasdaq: AEGR) was about to present lomitapide, the one and only drug in its pipeline, to an FDA AdCom (Advisory Committee). AdComs are catalysts, key points in the drug development regulatory process that can make a company's stock soar – or nosedive.
Lomitapide treats a genetic disease called homozygous familial hypercholesterolemia (HoFH), which affects mostly children. HoFH can rocket blood cholesterol levels up by 1,000% or more, and most people who have it die from heart disease by age 11. All do by age 30. It's a horrible affliction.
The AdCom for lomitapide would vote on whether to recommend that the FDA approve the drug for marketing in the U.S. The FDA is under no obligation to take an AdCom's recommendation, although it usually does.
The thing is, HoFH affects only one in a million people. That's maybe 2,000 people in the U.S. – almost no market at all.
So how could Aegerion possibly make money treating it? The answer, when you think about it, is obvious. Think Lamborghini, not Volkswagen.
The biotechs, for their part, have learned that it often makes more sense to develop products for "orphan" indications than for major diseases.
"Orphan" is a special designation the FDA gives to illnesses that affect fewer than 200,000 people. If you manufacture a drug that treats these diseases, you get special tax breaks and seven years of market exclusivity (instead of the usual five). And you have a much smaller market to penetrate.
Still, how can you make money treating conditions that afflict only a handful of people? Aegerion, like many similar firms, had the answer: they would charge $250,000 to $300,000 per patient per year for their drug. As I said, think Lamborghini.
Obviously, insurance companies would say no to those prices, right?
Not so. First, the cost savings they were realizing from major drugs going generic left them with extra cash to burn, so they could afford to pay for rare, orphan indications. And the great PR they could get from funding treatments that saved kids or other helpless victims was priceless.
About the Author
Ernie Tremblay has more than 25 years of experience in following and analyzing the latest developments in health, medicine, and related technologies. He understands the FDA approval process, as well as the "hard science" behind new, experimental drugs and the market demand for them - and has a comprehensive grasp of the complex dynamics that determine whether a new drug will be a breakthrough winner, or just another casualty of the FDA approval process.