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By David Shook Boston-based Genzyme (GENZ
) has become one of the most highly valued stocks in the U.S. biotechnology sector thanks to an enzyme-replacement therapy it developed to treat Gaucher disease, a potentially deadly genetic disorder that can cause enlargement of the liver and spleen, osteoporosis, and anemia. The rare ailment affects only about 10,000 people worldwide. But around half of Genzyme's $1.2 billion in annual sales and much of its $7.5 billion market capitalization are due to its Cerezyme, which is taken by less than 4,000 Gaucher sufferers worldwide.
Genzyme may be blazing a path for other big drug producers. Thanks to so-called orphan-drug laws, it may turn out that the rarest diseases could prove to be the most profitable.
LUCRATIVE LIFELINE. Passed in 1983 in the U.S. and 1999 in Europe, the laws encourage biotech companies to develop treatments for diseases that the industry previously ignored because they affect only small numbers of people and promised only limited profitability. The laws permit companies to apply for special licenses that guarantee exclusive rights -- and the liberty to charge high prices -- as an inducement to develop treatments for rare diseases.
For years, Big Pharma ignored orphan-drug licenses, seeing such niche markets as too small to be worth the trouble. But as Genzyme is proving with Cerezyme, there may be gold in niche drugs. Genzyme won exclusive rights to the Gaucher-disease market with the introduction of Cerezyme in the early 1990s. That gave Genzyme the freedom to charge perhaps the highest markup on any prescription drug.
Patients -- or, in the vast majority of cases, their insurers -- pay an average of $170,000 annually for their medication, according to the company. With about 3,500 people receiving the drug for life, Cerezyme generates more than $600 million in annual revenue.
REWARDS AND RISKS. Now, not only has Genzyme made the pursuit of more orphan-drug licenses a key part of its growth strategy so have a new wave of competitors. Genzyme has already identified and developed drugs to treat several rare diseases caused by genetic flaws, including a new therapy for Fabry disease, another enzyme-deficiency disorder marked by excessive buildup of waste cells. About 5,000 people worldwide are thought to have Fabry disease, which is chronic and often fatal.
The good news for sufferers and the medical community is that Genzyme and rivals such as Transkaryotic Therapies (TKTX
), Oxford GlycoSciences (OGSI
), and Orphan Medical (ORPH
) have recently begun to deliver from clinical trials medications for previously untreated diseases. And for investors, the hope is substantial profits. "The Orphan Drug Act has been one of the most successful pieces of Food & Drug Administration legislation ever passed," says Dayton Reardan, Orphan Medical's president of regulatory affairs.
Still, investors should take note that as competition grows more intense, Genzyme's plan to develop additional orphan drugs becomes riskier. Its main stock -- Genzyme has two smaller tracking stocks as well -- has climbed more than 50% since last July, from $15.64 a share to $33.70 on Dec. 12. The stock has a forward price-to-earnings ratio of 24, which is lofty for a biotech company with inconsistent profits -- although the shares remain far from the one-year high of $61.64 they achieved late in 2001.
BEST OF THREE. Genzyme is structured as a holding company with each of the three tracking stocks associated with its own division. Of the trio, Genzyme General, the division that produces all drugs associated with rare genetic diseases, is both the largest and the only profitable one. Next year, Genzyme General is expected to record $292.7 million in earnings, or $1.38 a share. That compares with a projected $229 million, or $1.08 a share, in 2002, and the $44.5 million, or 21 cents a share, reported last year.
January, 2003, will be a critical month for those growth projections. That's when the FDA will review clinical trial results on Fabrazyme, Genzyme's treatment for Fabry Disease, as well as Aldurazyme, a third enzyme-replacement therapy for an entirely different disease known as MPS 1. Aldurazyme was developed by Genzyme's partner, BioMarin (BMRN
If U.S. marketing approval and the new orphan-drug licenses are granted, Genzyme would be likely to join the small club of biotech companies that boast consistent profits and steady earnings growth. The two drugs could raise the company's earnings estimates as much as 25%, analysts say, which would go a long way toward making the on-again, off-again profitability of Genzyme's parent more consistent. If approved, analysts expect both drugs to generate between $150 million and $250 million a year.
REGULATORY ROADBLOCK? While analysts believe the data on Aldurazyme appear strong, Fabrazyme is competing with Transkaryotic's Replagal for the one orphan-drug designation U.S. authorities are likely to award. Both drugs are already being used to treat Fabry disease in Europe, where regulators made what Biotech Opportunities Fund co-manager Libbe Englander describes as the "unusual and unprecedented" decision to allow both on the market.
This was done because the medications are nearly identical in composition and function and were submitted for regulatory review in Europe at roughly the same time. The FDA isn't likely to approve both drugs, most observers believe, because U.S. orphan-drug laws and regulatory attitudes are far less flexible.
"That's the essence of the orphan-drug legislation," says Jan van Heek, Genzyme's executive vice-president. "Until the approval process before the FDA, anybody can develop a drug for an orphan disease. But at a certain point, only one company will be awarded the exclusive license."
THE FINAL ROUND. So far, Genzyme has the upper hand. Transkaryotic's drug has failed to meet two key clinical-trial objectives that were considered important, but not essential, to obtaining FDA approval. In light of Transkaryotic's setbacks, the FDA may decide to grant the orphan-drug license to Genzyme.
Nonetheless, Transkaryotic isn't giving up. In a last-minute maneuver, it has stepped up efforts to focus on different aspects of its clinical-trial data that may make Replagal more compelling to FDA reviewers. Says Transkaryotic's spokeswoman Justine Koenigsberg: "We continue to believe the FDA will approve Replagal."
So far, Wall Street is betting that Genzyme will prevail. Following Transkaryotic's latest setback in late November, its stock plummeted from $33 to close at $9.85 on Dec. 12. During that same period, Genzyme has risen about 10%. On Dec. 2, Credit Suisse First Boston analyst Mark Augustine raised his rating on Genzyme to outperform from neutral, with a 12-month price target of $40.
With a double dose of good news from the FDA in January, Genzyme would broaden its lead in the increasingly competitive orphan-drug market. Just because its drugs treat diseases that afflict a small number of patients doesn't mean the stakes aren't high. Biotech investors should get ready for a cliff-hanger. Shook covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online