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.
...Spotted an Obvious Winner
So for lomitapide, I looked over the clinical trial data on the drug and was certain it would have no problem weathering the regulatory gauntlet. A couple of years earlier, I'd also had the privilege of meeting the scientist who developed the drug for clinical use, Daniel Rader, MD, at the University of Pennsylvania. He's the kind of guy you instantly believe in. He's serious, smart, and above all, passionate about helping sick kids. And there was something else: In his medical practice, he had more HoFH patients than any other physician in America - so he already had a significant portion of the market at his fingertips.
As far as I was concerned, Aegerion was a no brainer. Lomitapide had huge potential, not only for patients, but for investors. I recommended we add it to our Lifetime Subscribers' portfolio.
We entered the stock on Oct. 12, 2012, at $17.46.
As expected, the AdCom gave Aegerion a strong recommendation (voting 13 yea to 2 nay) and the price jumped. A month later, the FDA gave Juxtapid, as it was now called, its seal of approval, and AEGR went to $25. A year later, on Oct. 4, 2013, the stock reached an all-time high of $97.24, more than 5.5 times our original investment.
So I wasn't kidding. If you want to hit home runs in the bioscience sector, start by looking for small, unknown biotechs with single drug pipelines - because they can be goldmines.
Isolating Bioscience's Next Big Winners
When I'm setting out in search of a lucrative bioscience stock, here are some qualities I find really attractive:
- Market cap. $250M-$2.5B. This is the sweet spot for growth. Less than $250M can mean low volume trading, which can be a problem if you need to sell. More than $2.5B makes a company less responsive to catalysts.
- Single product pipeline. These companies can yield high returns because they carry high risk. If their drug succeeds, their investors can get rich rapidly. A failure, however, can mean doom, so you need to know what you're doing in evaluating the drug's potential to be effective, safe, convincing to the FDA, and marketable. Some of my recommendations, of course, are for companies that have richer pipelines. They yield less return, but they're safer bets for a balanced portfolio.
- An upcoming catalyst. A catalyst, such as an AdCom, FDA approval date (called a PDUFA), or even results from a clinical trial, can make you a whole lot richer overnight. Last year, Sarepta Therapeutics (Nasdaq: SRPT) tripled its stock price overnight when the company announced positive results for a study of its Duchenne muscular dystrophy drug.
- Orphan drug status. As I explained above, these drug candidates have real advantages over traditional "blockbuster" entries.
- An extreme need. Everyone born with HoFH would eventually die from it, and before Aegerion's Juxtapid (lomitapide), no effective treatment existed. Patients were longing for it.
- Little or no competition. ISIS Pharmaceuticals Inc. (Nasdaq: ISIS), in partnership with Genzyme Pharmaceuticals, was developing a drug, mimoperson, to compete with Juxtapid, but it was inferior in several ways (injectable rather than oral, more severe side effects). It also passed its AdCom, but barely, garnering a vote of 9 to 6. Juxtapid had a nearly clear field to play in.
The Profits Ahead
Next, of course, comes the tricky part. You've got to be able to read studies on experimental drugs, evaluate the often subtle nuances in the results, and develop a sense of what the FDA will or won't like. What are a new drug's benefits? Are those benefits real, or has the developer skewed the data? Are they superior to the current standard of care? What are the risks? How hard are patients and the medical establishment pushing for the passage of new therapy? Once the drug or device reaches the market, will insurance companies foot the bill? And will doctors use it?
Important questions all, and ones I consider carefully in evaluating every stock I recommend to my subscribers.
With over 30 years' experience writing about the latest developments in health, medicine, and related technologies, Ernie Tremblay has gained "insider" access to the world's top doctors, professors, and researchers. He's worked with Nobel-caliber doctors such as Yale's Karel Liem, Columbia's George Gaylord Simpson, and Harvard's William S. Beck, to name a few.
Ernie's edited hundreds of books on science, microbiology, and groundbreaking medical therapies for top publishers like Harper Collins, Penguin Putnam, and Prentice Hall. He's also co-authored and ghostwritten numerous books on everything from Alzheimer's to rheumatology.
Best of all, he's developed knowledge of the inner workings of the FDA drug approval process and knows precisely when a drug or technology is about to "pop" and its company's stock rocket upward in price. So stay tuned, you'll be hearing from Ernie a lot more now...
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.