Orphan Drugs & Venture Capital Backed Companies 
Posted by Carlos on Oct 23, 2010

The October, 2010 issue of Life Science Leader has an interesting article entitled Orphan Drugs: Big Pharma’s Next Act? The premise is that Big Pharma is turning towards orphan drug opportunities because they are faster and less expensive to develop, yet have near-blockbuster potential.Ā Indeed, the article correctly notes that companies such as Genzyme and Cephalon have successfully developed and commercialized drugs for some very rare diseases. BioMarin is another company which has successfully pursued this model.

I think the more interesting point is made when the author says:

Further, the advent of personalized medicine is reinforcing the notion that “no market is too small to develop” and that future corporate profits may depend upon orphan drugs developed for multiple niche indications.

Later, the point is made that drugs developed for orphan diseases may be blockbusters, but that blockbusters may also find high-value opportunities in niche indications.

The blockbuster-to-niche model is a very interesting approach which we suspect some companies may be missing by overly focusing on the blockbuster dollars. This is driven by the desire to reach blockbuster status first, then top off the revenues with incremental revenues from niche indications. On the surface, this is a sensible approach. But is it the most efficient? What if the go-to-market strategy were reversed, that is, develop the drug in a niche indication first, then develop (or even out-license) the blockbuster indication?

On the surface, this sounds crazy, especially from the big pharma perspective. Big pharma needs the blockbusters in order to compensate for the large blockbuster-driven revenue losses about to be incurred. But what about emerging pharma and biotech? They have a similar issue in that both venture capital and licensing deals are predicated on the blockbuster model. Many venture capitalists look for opportunities with blockbuster potential because they hope to exit to big pharma, which in turn will only be interested in blockbusters. And so it goes.

However, if the industry does move towards a niche/orphan model, then the implications are profound for venture-backed companies. Suddenly, they can (should?) pursue orphan indications because they are less costly (remember, VCs are footing the bill) and they can get to proof of concept quicker. In some cases, the VC-backed company may be able to develop the niche/orphan drug through commercialization, marketing the resulting product through non-traditional sales and marketing channels. Meanwhile, any blockbuster indication, because it is essentially a call option, retains and grows in value.

Admittedly, this unconventional strategy takes guts, both on the part of company management and their investors. We concede that this reversed approach is not appropriate in all cases. However, it stands to reason if big pharma is moving towards niches (coupled with more efficient sales and marketing), then some VC-backed companies may have a unique opportunities to develop products in niches themselves while retaining the “blockbuster” potential for out-licensing.

What do you think? If you had a compound with potential indications in both orphan diseases and blockbuster diseases, which would you pursue first, assuming the orphan gets you to market faster, but with lower revenue potential?

Update: GSK and Amicus sign a development and commercialization agreement for a product to treat Fabry’s Disease. Genzyme has a product for Fabry’s as well.

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