Cashing in on 'orphans'

NEW YORK (CNNMoney.com) -- Some of the most successful blockbuster drugs in the world treat diseases that most people have never heard of.

They're called orphan drugs, and the government doles out big tax breaks to companies that deliver them. Even without the tax incentives, plenty of biotechs have found ways to profit big off drugs for rare diseases.

How do they do it? By charging gobs of money.

Consider Genzyme (Charts), one of the more prolific producers of orphan drugs, also known as "orphans." The Cambridge, Mass.-based biotech has three on the market, including a $1 billion-a-year treatment for a debilitating, hereditary disease called Gaucher. Gaucher disease results from a specific enzyme deficiency in the body.

Cerezyme, Genzyme's Gaucher drug, is one of the world's most expensive drugs. An annual supply can cost $200,000. About 5,000 patients take Cerezyme, according to company spokesman Dan Quinn, who said that's at least half the world population for Gaucher patients.

"Genzyme charges a higher price per patient because patients need the drug and there's no other enzyme replacement therapy out there [that's] approved," said Biren Amin, analyst for Stanford Financial Group.

Genzyme isn't the only company to strike it rich off orphans.

Novartis and Amgen have also excelled at this business. Novartis (up $1.09 to $57.45, Charts) sells Gleevec, a treatment for chronic myeloid leukemia that (along with the drug Glivec) totaled $2.5 billion in 2006 sales. Amgen (down $0.07 to $59.94, Charts) has Epogen, which started out as an orphan but is now used to treat anemia. With $2.5 billion in sales last year, Epogen is now one of the world's top-selling drugs.

At first glance, a blockbuster drug that treats a rare disease seems to defy logic. Some of the best-selling medications, after all, have been treatments for the most common diseases where demand and public awareness are highest.

For instance, the top-selling drug of all time is Lipitor, a cholesterol-lowering statin from Pfizer (up $0.08 to $25.07, Charts) with nearly $13 billion in 2006 sales. Merck's (up $0.42 to $43.61, Charts) fast-growing Zetia/Vytorin cholesterol franchise, meanwhile, had nearly $4 billion in 2006 sales, a 60 percent leap from the year before.

Why, then, invest years and untold millions in betting on treatments that, if successful, relatively few patients will ever need? It isn't just because the IRS allows orphan drugmakers to write off up to 50 percent of the cost of clinical trials. It's also because approved treatments command premium prices which quickly add up even if only a small portion of an orphan disease's victims buy them.

In addition to Cerezyme, Genzyme sells two more orphan treatments. One is Fabrazyme, a medication for a disease similar to Gaucher that's known as Fabry. The other is Myozyme, a drug for Pompe disease, a debilitating and often fatal neuromuscular disorder. Like with Cerezyme, costs for these medications can run to $200,000 a year.

But the high cost of orphan drugs have angered pharmaceutical industry critics, who accuse companies like Genzyme of profiteering.

Shiv Kapoor, analyst for Montgomery & Co., said any criticisms of Genzyme are misplaced. But for Genzyme and its three orphan drugs, patients suffering from Gaucher, Fabry, and Pompe would have "nowhere to go," he said.

What's more, Kapoor estimates that Genzyme spent nearly $4 billion on research and development over the last nine years on orphan drugs. The company's 30 percent profit margin, he added, is "similar to other biotechs."

Genzyme hasn't raised the price of Cerezyme since it was approved more than a decade ago, said Kapoor. "If Genzyme was unscrupulous and really wanted to milk these drugs, they would be taking a 15 to 20 percent price increase."

Genzyme spokesman Dan Quinn says that anyone who needs Cerezyme gets the drug, even if he or she is uninsured.

"We work to try to find [insurance] coverage for patients," said Quinn. "But for patients who are not able to get insurance coverage, we do provide treatment free of charge."

Quinn said that policy applies to all three of the orphan drugs.

Aaron Reames, analyst for A.G. Edwards, said that Genzyme's practice of providing the drug for everyone in need is one reason why its orphans cost so much.

Only competition from generic drug makers is likely to drive down the price of orphan drugs, analysts say. But in the case of Cerezyme, that won't happen until the drug's patent expires in 2013. And since there isn't a FDA regulatory system in place for generic version of biogenerics, it might take longer than that for a viable rival to come to market.

The lack of competition is one reason why medications like Cerezyme are called orphan drugs in the first place. It also means that orphans will continue to be cash cows for their developers, at least in the short term.

"There will be competitors [to orphan drugs], but most of the competition will probably come from biological generics," said Kapoor of Montgomery. "That's a ways off so I don't expect anything to change in the near term."

The analysts interviewed for this story do not own shares of company stocks mentioned here, but Stanford makes a market in Genzyme.