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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.
To Mr. Ernie Tremblay
One Stock you should put on your watch list for sure.
( INO ) Closed at $ 2.54 Look for break out end of feburary
Could go as high as 1000%
I am very interested in acquiring a half-interest in Sanafi pharmaceutics
Mr Tremblay, is there a biotct subscription service you lead. How do I join. What is the web site?
Frank, thanks for asking! Please keep an eye on your email in February, when we’ll open my service up to new members.
I was wondering if Ernie has a way to profit from a Drug reaching a mile stone via Royalties. I know Biocompanies get large bonuses when they reach various production or profit milestones, and was curious if we can cet a piece of the royaltys some how.
Thanks in advance,
Randy R.
Great question, Randy! A milestone royalty announcement can send a stock soaring, but there's really no way to know when a company will reach the markers they're aiming for. There are, however, some ways to time your investments, based on expected sales, that should put you in a good position to catch the milestones as they come. First, presuming you're following sales on a new drug or device, are docs and patients desperate to have it? If it's the only remedy for a terrible disease, it will pick up sales strength very rapidly. On the other hand, if it is competing with other therapies, even if it offers a significant improvement over them, sales may take time to develop. In the first case, make sure you have a position in the stock within the first few months after FDA approval. In the second, it doesn't hurt to wait six months or even a year.
Dear Mr. Trembley,
I thus far am a small investor in the small biotech company Xoma, the orphan drug company . with a treatment for Bechet's uveitus. One of the premier attractions to my investing in this stock was the fact that on member of their Board was a former Chief Legal Council for the FDA among other incentives when I first invested well over one year ago. My question is as follows: What is your outlook short and/or long term? Is this stock ever going to be approved by the FDA, and for that matter, does it have any chance whatsoever. I assumed (and you know what "they" say about assume) having a former Chief Legal Council for the FDA would perhaps in at least some small way give Xoma some small influence at the very least. I may have very well been way off on that belief. Had Xoma been Pfizer, Glaxo-Smith Kline, Merck, Bayer or one of the other very large Big Pharma, we would not even be having this discussion right now for this pending drug possibility would have come to fruition long ago. Money accomplishes what all the meetings, information gathering, data, conferences, definitive/conclusive research, etc in the entire world could never achieve.
Dear Mr. Tremblay,
I've been tracking your articles for some time and now I've subscribed to your site to present some of my thoughts and share them with you. I invest in several biotech and pharmaceutical companies such as SKLN, CXRX, APRI, ARGS and recently DCTH – Delcath, which develop very promising liver cancer treatment at Phase 2 and Phase 3 Preparation.
But first, I would like to make my point about the pharmacology and wealthy companies that make billions. Your explanation of how big pharmaceutical companies are tackling the big investment challenge, leaving small smart start-ups to do most of the job and then taking it all in a vicious way is very accurate. To be honest I hate these pharmaceutical companies and the way they do business. In my close family I lost my father – stomach cancer, my mother – diabetes, and recently my best friend's mother – stomach cancer. I can not describe what this sadness, sorrow, and the feeling of being unable to look helplessly as near as they go. Therefore, I hope the FDA-AdCa will very soon approve of Delcath's treatment of liver cancer. In Europe, this treatment is already being carried out in a number of hospitals and feedback is very good and positive, where information comes from patients themselves. And more than that, existing treatments and medicines owned by large companies did not yield good results, for example Bayer. I hope there will not be an unnecessary time for all those sick of this nasty disease and that Delcath will soon receive a positive light for the use of this revolutionary treatment.
And in the end, I would ask you for your good opinion about this company and the treatment they are doing, whether their future is good and whether they will survive on this unmerciful market.
Thank you
With regards
Valter