In 1980, Abbey Meyers was beginning to feel hopeful. She had enrolled her son, who had Tourette’s syndrome, into a clinical trial for the drug pimozide, and he was responding favorably. Then came the awful news… the trial was being halted and pimozide would no longer be available. “Why?” Meyers wondered. Because the drug was proving ineffective against schizophrenia, its primary target, she was told; and Tourette’s—the drug’s secondary target—is an “orphan disease,” meaning it wasn’t enough to merit further research on the drug. “I was devastated,” recalls Meyers.

After the sadness subsided, Abbey Meyers decided to take action. After all, the problem wasn’t as daunting as discovering a treatment… that had already been done. The problem was to find a way to get the treatment to market. She thought she might be able to help find a solution. She began by developing an understanding of orphan diseases.

A Rare Breed

An orphan disease is one that the pharmaceutical industry chooses to ignore because of its rarity. If a patient population isn’t large enough to justify the costs to develop, manufacture, and market a treatment, then it won’t happen. In the US the FDA has somewhat arbitrarily defined a rare disease as one that affects fewer than 200,000 people. By that definition, scientists have determined that there are about 7,000 rare diseases affecting 25-30 million Americans.

With this information, Meyers—previously a Tourette’s Syndrome Association volunteer—began to take a broader view of her advocacy. By addressing the larger issue of orphan diseases rather than just Tourette’s, she felt she could cast a wider net and marshal the necessary support and political clout needed for some kind of legislative action.

And that’s exactly what happened. Thanks to Meyers’ tireless work, a community of support groups representing families affected by rare diseases began to coalesce, culminating in the founding in 1982 of the National Organization of Rare Disorders (NORD). Then, in 1983, Congress passed the Orphan Drug Act (ODA), due largely to the efforts of NORD.

Incentives Work

From the beginning, Meyers saw the lack of treatment for rare diseases as “an economic problem” that needed an economic solution. As such, ODA was passed to give drug companies financial incentives to develop and manufacturer orphan drugs to treat people with rare diseases.

Some of the key elements of the Act include:

• A 50% research and development tax credit to help cover the costs of clinical trials;

• Waiver of FDA fees;

• Funding grants for clinical trials; and

• Seven years of marketing exclusivity for the first sponsor of an orphan drug to receive FDA approval for a particular indication.

Has the Act produced the desired result of getting rare disease treatments to market? You bet it has. According to the FDA, 10 rare disease drugs and biologic products were FDA-approved in the decade leading up to the passage of ODA. Since then, over 400 such products have been FDA approved. Currently, fully one-third of all FDA-approved drugs are orphan drugs. Furthermore, the orphan drug category has grown to be a $50 billion market worldwide, and has been expanding at an annual rate of over 20% for the last several years.

The Six-Figure Drug

While tax credits, waived fees, and grants encourage investment by reducing front-end costs, the greatest financial incentive for orphan drug companies comes after FDA approval. The exclusivity clause of the ODA not only gives these companies time to recoup their investments, it also allows them to aggressively price their products. That’s because users, who often face debilitating and/or potentially lethal conditions, are highly motivated buyers who have few, if any, options.

To the casual observer, even the cheaper orphan drugs seem exorbitantly priced. For example, the annual per-patient cost for Sutent, a treatment for gastrointestinal tumors, is $48,000; for Tarceva, a pancreatic cancer drug, it’s $56,000.

But that’s paltry compared to the “ultra” orphan drugs…

For the most part, insurance companies pay these astronomical bills; for the uninsured, many orphan drug companies provide products free of charge.

How can the insurance companies afford these prices? Well, let’s remember that each of these diseases and disorders is rare. So, there are relatively few patients to begin with. Then consider that those few patients will probably be spread over scores of insurance companies. So, though each patient’s claims may be inordinately high, the totality of the claims for the individual insurance companies is at least tolerable, and perhaps insignificant.

But while monopolistic prices may be infrequent and thinly spread from the insurance company perspective, they can mean big profits for the drug companies, which are in the unique position of being able to raise prices virtually at will.

Jazzed Up

In 2005, Jazz Pharmaceuticals obtained the right to develop the drug Xyrem, a treatment for the rare disease narcolepsy. Evidently, it didn’t recognize the drug’s pricing potential right away, as the company lost money in each of the next four years. By 2009, Jazz was in serious trouble, with negative equity, $91 million in long-term debt, and only $15 million in cash. In April of 2009, the company’s stock price bottomed at $0.55 per share.

Then the company began raising the price of Xyrem; since 2009, the annual increase has averaged about 40%. Financially, the impact has been dramatic: from 2009 to 2013, revenues grew from $128 to $872 million and net income improved from a negative $7 million to a positive $216 million. In addition, the balance sheet had been shored up, showing cash of $636 million, a current ratio of 4.2, and a long-term debt to equity ratio of .41. And oh, by the way… the stock price is now $137 per share…

Where’s the next Jazz? Maybe in the Casey Extraordinary Technology portfolio. We recently recommended a company that’s been granted the coveted orphan drug designation for head and neck cancer. Now it’s just a matter of getting FDA approval… which is much easier said than done. But if the company gets the nod, it’s off to the races—shaky stock market be damned.

And we don’t stop there. The Casey Extraordinary Technology team is constantly on the lookout for orphan drug companies and anything else that offers massive upside potential… the kind of stocks in which a mere $1,000 investment could yield a multi-thousand-dollar return. If that kind of thing interests you (and I suspect it does), then take advantage of our risk-free trial. If you’re not pleased, get your money back… no questions asked.