Stocks To Watch in Orphan Drugs

Wall Street has become enamored with pharma companies that develop drugs that treat rare diseases. These so-called orphan drugs come with an array of commercial advantages over traditional pharma products, such as an extended period of exclusivity and premium pricing structures that have yet to generate much pushback among payers.

Source: Wikimedia.

Given that the globalmarket for rare diseases is expected to grow to an astounding $120 billion over the next decade, investors might want to consider adding at least one orphan-drug maker to their portfolio. With this in mind, let's look at three small-cap biopharma companies that are uniquely positioned to capture a nice chunk of this high-growth market moving forward.

1.Acceleron Pharma is collaborating with biotech giant Celgene Corp. for its lead product candidate luspatercept as a potential treatment for two different rare blood disorders: beta-thalassemia andmyelodysplastic syndromes. On the back of strong midstage results for both indications, Acceleron plans to meet with the Food and Drug Administration soon to finalize its plans to initiate the late-stage trials required for marketing approval. If all goes according to plan, this rare-disease company could have two pivotal late-stage trials under way before year's end.

Acceleron's ultimate goal is to gain regulatory approval for and subsequently launch luspatercept by 2020. While that's a great plan, the company's current cash runway only extends to about 2017. That means the company will require a capital raise at some point prior to luspatercept's commercial phase of its life cycle.

2.bluebird bio caught the investing world's attention last year when its second-generation gene therapy, LentiGlobin BB305, essentially cured four patients withbeta-thalassemia without any serious side effects. The company thus hopes to gain a conditional approval in Europe and file for accelerated approval in the U.S. after wrapping up a handful of ongoing clinical trials for the drug. Given the high unmet medical need for this rare genetic disorder and the lack of effective treatments, LentiGlobin could be on the market within the next two years, transforming bluebird into a commercial operation in the process.

This promising small-cap biopharma isn't without its risks, however. Gene therapies are notorious for producing stunning results in early trials but then mysteriously failing to show any clinical benefit -- or even worse, generating off-site toxicities -- in larger patient populations.

3.Sarepta Therapeutics is a closely followed rare-disease drugmaker because of its potentially game-changing experimental treatment, eteplirsen, for Duchenne muscular dystrophy, or DMD. This exon-skipping skipping drug is only indicated for about 13% of the DMD population, but it holds the key to an entire platform of similar drugs that could literally be lifesavers for upward of 80% of those afflicted with this devastating muscle wasting disease.

The FDA agreed to review eteplirsen on an accelerated basis last month, meaning it could become commercially available in early 2016. The bad news is that the small midstage trial that will form the backbone of the drug's regulatory review might not be enough to convince the agency to approve eteplirsen. After all, the scientific community has serious doubts about eteplirsen's safety and effectiveness, largely because a rival therapy, drisapersen, flamed out in a late-stage trial.

Key takeawaysClinical-stage biopharmas are, by their very nature, risky investments. Drugs that look like game changers in one clinical trial frequently turn into duds in larger confirmatory studies. And all three of these rare-disease specialists come with that kind of monstrous downside that shouldn't be ignored.

That being said, orphan-drugmakers are often gobbled up by larger pharmas just for their staggering potential. Investors therefore shouldn't be surprised if all three of these companies are acquired within the next 12 months as their lead product candidates barrel toward pivotal clinical studies or regulatory approval. That's why these particular rare-disease companies are definitely worth a deeper look by investors with a strong tolerance for risk and volatility.

The article Stocks To Watch in Orphan Drugs originally appeared on Fool.com.

George Budwell has no position in any stocks mentioned. The Motley Fool recommends bluebird bio and Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.