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The Orphanization of Drug Development


Investors should be looking toward orphan drugs, which are specialized drugs created for smaller populations and likely the future of the industry.


I started writing for Minyanville in 2004. At the very first Minyanville in the Mountains event that summer, I presented a roadmap and signposts for how I believed the pharmaceutical and biotech business would change going forward. I called this roadmap "The Death of the Blockbuster Drug." In the more than six years since, I've seen this theme echoed in presentations by academics and pharma business executives.

Briefly, the Death of the Blockbuster Drug thesis is how the advent of personalized medicine and genetic screening would mean targeted drugs would begin to replace untargeted drugs in the marketplace due to superior therapeutic profiles. Because, by definition, targeted populations are smaller subsets than the one-size-fits-all nature of most blockbuster drugs (those that sell more than $1 billion annually), blockbuster drugs would be increasingly rare.

My trip to the American Association of Cancer Research (AACR) meeting this past April was eye-opening. Back in 2004, I predicted development-stage biotech companies would lead the way toward smaller, genetically screened target populations. On the contrary, at AACR the bulk of protocols screening patients for a specific genetic profile came from big pharma. Close behind were private biotechs. Dead last were the publicly traded dev-stage companies.

This surprised me greatly, but the consequence of this is my belief the Death of the Blockbuster Drug is accelerating. If the AACR meeting is a good indication big pharma is already on board, this will move much faster than I originally thought.

This story isn't about the Death of the Blockbuster Drug, but a corollary phenomenon I didn't anticipate at the time. This is something I call the "Orphanization of Drug Development." As science unlocks the secrets of the genome and (especially) the proteome, drugs will become increasingly specialized. The industry will go from having drugs screened on a single genetic marker to drugs screened for multiple genetic markers. The result of this is the overall size of the patient population covered by the drug will drop below 200,000.

Why is that number important? In the US, any drug for a patient population that small is theoretically eligible for Orphan Drug Status. Before I get into all the ins and outs of the Orphanization of Drug Development, therefore, I need a detour about the 1983 Orphan Drug Act.

The Orphan Drug Act

In 1983, the United States Congress passed the Orphan Drug Act (ODA) to provide financial incentives for developing drugs for small populations. The ODA has lots of moving parts, but the salient pieces are as follows:

  • Drugs for US populations smaller than 200,000 are eligible

  • The first drug to market for a population gets seven years market exclusivity

  • No FDA application fees

  • 50% tax write-off on R&D expenses

  • Quality of safety and efficacy data must be identical to non-orphan drugs

Companies announce a drug under development has been "granted orphan status" so often the market rarely blinks at these announcements. Most investors focus on the seven-year exclusivity bit, so let's talk about that first.

If you are the first drug to treat a specific orphan indication, you get the seven-year exclusivity. This is like patent exclusivity, not complete market exclusivity. What you get is the right to market your drug for seven years in the approved indication regardless of the drug's patent life. It doesn't mean you can block another, completely different treatment for the indication for seven years.

That said, it's clear from our firm's conversations with some orphan drug developers that the FDA treats orphan-class drugs differently. If you want to do a trial in an orphan disease, even with a drug with a different mechanism of action, the FDA is likely going to be pretty strict about requiring a head-to-head trial.

The Orphanization of Drug Development

The "therapeutic index" is a mostly mental equation I've written about previously. On the numerator is a drug's efficacy. On the denominator are the drug's side effects. A drug with good efficacy and low side effects has a higher therapeutic index than a drug with the same efficacy but higher side effects. Drugs with high therapeutic indexes are more valuable. Despite the obviousness of this, developing drugs with high therapeutic indexes is a relatively recent phenomenon and too few R&D teams explicitly chase this goal.

For a given clinical trial population, a portion of people will respond to a drug and a portion will not. However, all patients have side effects. The worst case for a patient is getting side effects with no efficacy. The more patients like this, the lower your therapeutic index goes, and the less valuable your drug becomes.

So what if you had a strategy to weed out patients who see no benefit from a drug -- so-called non-responders? Eliminating people who will not respond to your drug will increase your therapeutic index because non-responders aren't dragging down your cumulative efficacy numbers. This is the hope and promise of genetic screening. If you can find a genetic profile that screens out non-responders, you increase your therapeutic index and the value of your drug.

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