A recent report by EvaluatePharma claims that sales of orphan drugs — ones that target rare diseases — will grow at twice the rate of the overall prescription market. Pharmaceutical giant Novartis AG (ADR) (NYSE:NVS) was the largest seller of orphan drugs in 2012, and will likely be the number one in 2018 with expected sales of $11.8 billion, but that’s not where I would put my money.
Over the last four quarters, Novartis AG (ADR) (NYSE:NVS) reported revenue of $57.85 billion. The drug major’s Q1 2013 revenue of $14.21 billion is second only to Johnson & Johnson (NYSE:JNJ)‘s $17.5 billion. Since late 2011, the company’s revenue has stagnated as losses due to patent expiration offset gains from sales of orphan drugs. Novartis AG (ADR) (NYSE:NVS) is hardly the only drug major with this problem.
If you want to hitch a ride on the orphan drug rocket, obviously you want to own companies that specialize in highly specialized medicine. Here are four smaller drug makers that are set to soar on the backs of their orphan drugs.
Ultra-rare and ultra-profitable
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is focused on creating medications for ultra-rare and untreated diseases. Its groundbreaking drug, Soliris (eculizumab), is the only approved therapy available for treatment of patients with paroxysmal nocturnal hemoglobinura (PNH), and atypical hemolytic uremic syndrome (aHUS). Solaris is also undergoing clinical trials for three additional diseases and two types of kidney transplant complications.
According to the EvaluatePharma report, Solaris is expected to generate sales of about $3.4 billion in 2018. Excluding potential sales from other drugs currently in Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)’s pipeline, EvaluatePharma is predicting an overall revenue gain of $1.9 billion over 2013 analyst estimates of $1.51 billion.
Not as overvalued as it seems
Celgene Corporation (NASDAQ:CELG) is an integrated pharmaceutical company involved in the discovery, development, and commercialization of innovative therapies designed to treat cancer and immune-inflammatory related diseases.
Celgene Corporation (NASDAQ:CELG) reported total sales of $5.5 billion in 2012. Its number one seller, Revlimid, contributed about $3.77 billion in sales. The drug is intended to treat patients with multiple myeloma (MM) and some forms of transfusion dependent anemia. In February 2013, Celgene Corporation (NASDAQ:CELG) won FDA approval of Pomalyst for treatment of MM. EvaluatePharma is predicting Pomalyst sales of $922 million in 2018.
Combined, Revlimid and Pomalyst sales are expected to climb to about $7.52 billion in 2018. That’s more than $2 billion over the company’s total sales for 2012 of $5.5 billion.
These two orphan drugs are hardly Celgene Corporation (NASDAQ:CELG)’s only source of revenue. According to the company’s Q1 2013 10-Q filing, the company has six commercial stage products, including Revlimid and Pomalyst, and receives royalties on the entire Ritalin family of drugs. It’s easy to understand how the company has recently been trading at about 21 times its 2013 earnings estimates.
Small product base, huge potential
San Francisco-based Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) develops and markets cancer treatments. It currently has just two approved products, Kyprolis and Nexavar, that are both in EvaluatePharma’s list of the 30 highest selling orphan drugs in 2018.
Proteasome inhibitor, Kyprolis, comprised just $64 million of the company’s 2012 revenue of $362.2 million. In 2018, the MM treatment is expected to add $1.52 billion to the company’s top line.
Sales of Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX)’s liver and kidney cancer treatment, Nexavar, are shared with Bayer. The two companies split Nexavar sales of $1.02 billion in 2012. Expected sales of Nexavar in 2018 are about $1.46 billion.
Financially, Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) is one of the shakier companies mentioned, but the explosive top line growth from Kyprolis alone makes it very tempting.
Tomorrow’s cystic fibrosis blockbuster
The last two years have been very exciting for Boston-based Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). In May 2011, the company won its first FDA approval for hepatitis C treatment, Incivek. The company’s cystic fibrosis treatment, Kalydeco, was approved less than a year later.
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) recorded total sales of $1.5 billion in 2012. Just $172 million of 2012’s revenue was from Kalydeco. In 2018, EvaluatePharma expects Kalydeco sales alone to reach $1.7 billion.
Like Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has also allowed its bottom line to hover between profits and losses over the past several years. Both are sporting reasonably strong balance sheets for emerging pharma companies. Rather than take on debt to fund their expansions, both companies have relied on share dilution.
Rookie of the year or last season’s MVP
Personally, I prefer the slower, steadier growth from companies like Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), and Celgene Corporation (NASDAQ:CELG). Both companies have already proven that they are capable of maintaining profitability while continuing to advance their pipelines. As usual, riskier companies, like Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), offer much larger potential.
While the overall outlook for the pharmaceutical industry going forward is flat to negative, specialized treatments are going to be the bright patches of sun between the clouds. I hope you’ve found at least one or two companies here that you feel are worthy of further investigation.
The article 4 Companies Riding the Orphan Drug Rocket originally appeared on Fool.com.
Cory Renauer has no position in any stocks mentioned. The Motley Fool recommends Celgene and Vertex Pharmaceuticals. Cory is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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