Introduction

FDA Approves New Drug for Market Launch, Stock Price Soars by 70%

The Logic Behind the Commercial Value of "Orphan Drugs"

Market Potential: Earnings Before Interest and Taxes Reach 100%

One Drug Treats Four Diseases, New Drug Has Entered Phase II Clinical Trials

Everyone desires health, and even when ill, they hope for a timely recovery. Unfortunately, among the nearly 8 billion people worldwide, some suffer from extremely rare diseases for which there are no treatment options, leaving them to endure long-term pain and even loss of life. This is the harsh reality of "orphan diseases."

Therefore, on March 13th, when the Australian pharmaceutical company Neuren Pharmaceuticals announced that it had obtained market approval for a drug developed for an orphan disease, the market immediately gave the strongest recognition—Neuren's (ASX: NEU) stock price soared by 70% in a single day, with a market value reaching 1.7 billion Australian dollars! Due to the significant increase in market value, the Australian Securities Exchange has considered including Neuren in the ASX200 index.

The "orphan drug" approved by the U.S. Food and Drug Administration (FDA) is called Daybue (chemical name: trofinetide), which is used to treat a rare early childhood neurological disorder—Rett syndrome.

Advertisement

Rett syndrome causes children as young as six months old to gradually lose motor skills and speech abilities, with an incidence rate of one in 10,000 to 15,000 in newborn female infants. The clinical manifestations lack specificity, making diagnosis very difficult. The approval and market launch of Daybue have brought a glimmer of hope to the parents of affected children.

How do pharmaceutical companies make money with "orphan drugs"? What is the market potential of Neuren's new drug? As one of the few companies developed in Australia and approved by the FDA, can Neuren achieve higher-level development in the future? This article will conduct an in-depth analysis.How do "orphan drugs" achieve commercial value?

Before understanding the expected pricing and revenue data of Daybue, let's first clarify the business logic of pharmaceutical companies developing orphan drugs.

Compared to drugs for common diseases, orphan drugs have a smaller user group and limited expected sales, with almost zero commercial value. If pharmaceutical companies invest time and money in research and development, they will inevitably end up with losses. However, in reality, many pharmaceutical companies are still willing to invest heavily in research and development, and the capital market also recognizes this to a certain extent.

Is it that the pharmaceutical company's compassion for the world has overwhelmed the instinct to make a profit? Definitely not.

This seemingly incompatible behavior with the market economy is actually related to the "Orphan Drug Act of 1983" enacted by the United States in 1983. In this act, orphan drugs are defined as drugs for treating diseases affecting fewer than 200,000 U.S. citizens, and a series of very key incentive policies are given, including the following three points:

● Orphan drugs can enjoy a market monopoly period, during which other companies are not allowed to develop or produce generic drugs. The monopoly period in the United States is 7 years, in the European Union it is 12 years, and in Japan, South Korea, and Taiwan it is 10 years. China plans to introduce a 7-year monopoly period;

● As long as the drug developed by the company is recognized as an orphan drug, the regulatory agency can grant priority review rights (for example, the U.S. FDA review is 6 months, and ordinary drugs are 10 months), and there is a higher probability of approval;

● Orphan drugs have a very favorable pricing environment. In 2017, the average price of orphan drugs in the United States reached $186,758 per patient per year.

Without such help, Neuren, a pharmaceutical company located in Camberwell, a suburb of Melbourne, might not have survived to this day. In fact, the company has been in a loss-making state since it shifted its research focus to the development of "orphan drugs" for the treatment of neurodevelopmental diseases in 2012. It was not until the successful development and FDA approval of Daybue that the company achieved a revenue of 14.6 million Australian dollars in 2022. However, after deducting 12.71 million Australian dollars in research and development investment, the company's net profit after tax for that year was only 184,000 Australian dollars.How much market potential does Daybue have?

After Daybue successfully obtained FDA approval, Neuren appointed Acadia as its distribution partner in the United States and will continue to receive a double-digit percentage of royalties from Acadia.

Daybue is about to start commercial sales in the United States this month, from which Neuren can first obtain a cash advance of $40 million. It is worth noting that patients with this rare disease may need to take medication for life, and Acadia's pricing for Daybue is an astonishing $375,000 per year!

Acadia's official website introduces the Daybue page

At present, there are about 5,000 cases discovered in the United States, with potential patients being 10,000 people. Brokerage firm Wilsons said that 60% to 67% of patients are currently covered by the U.S. Medicaid program, and another 30% of patients are covered by private insurance.

Neuren's revenue from Acadia is divided into two parts, one is to obtain tiered patent fees based on net sales, and the other is to achieve phased milestone payments based on annual sales.

Assuming Daybue's annual sales are $250 million, Neuren can obtain 10% of all sales, which is $25 million in annual patent fees, and $50 million in milestone incentives.

According to Wilsons' forecast, Acadia's net sales of Daybue in 2023 are about $35 million. Assuming that the distributor can occupy 45% of the potential market for treating Rett syndrome in the United States, the peak sales are expected to be about $350 million.

It is also worth noting that Neuren does not need to pay patent fees to third parties, which means that Neuren's revenue from Acadia will directly flow into pre-tax profits, and its pre-tax profit margin is 100%!

In addition, according to the terms of the agreement with Acadia, Neuren retains the sales rights of its drugs outside of North America (the United States, Canada, and Mexico). Neuren plans to use a method similar to the Acadia distribution agreement to seek registration and commercialization of Daybue in other countries.According to the company's financial report, there are currently 4,000 confirmed cases in Europe and 2,000 in China, with the potential for the number of cases to reach 41,000. Additionally, the market size in other regions globally is five times larger than that in North America.

The diagnosis rate for Rett syndrome is currently low, but as awareness increases and treatments like Daybue become available, the rate of diagnosis is expected to rise.

Neuren's Next "Blockbuster" Drug

Beyond the Trofinetide drug, Neuren is also developing orphan drugs to treat rare diseases caused by other related genetic mutations. Currently in the pipeline is a second compound, NNZ-2591, which can be used to treat four types of rare diseases: Phelan-McDermid, Angelman, Pitt Hopkins, and Prader-Willi syndromes, with the first three already in phase II clinical trials.

Neuren has previously completed phase I animal trials for NNZ-2591, which showed clear and consistent efficacy in animal models for each syndrome, along with good safety and tolerability. The company has initiated phase II clinical trials in the United States involving up to 60 patients, with trial results expected to be released starting with Phelan-McDermid syndrome before July of this year.

Neuren's CEO stated that since NNZ-2591 can be used to treat four syndromes simultaneously, it not only reduces the risk of pursuing a single drug but is also expected to ultimately be more valuable than the Trofinetide drug.

Neuren estimates that there are potential patients numbering 56,000 in the United States, approximately 71,000 in Europe, and about 205,000 in Asia, making the potential market about five times larger than that for Rett syndrome. Unlike the Trofinetide drug, Neuren retains global rights to NNZ-2591.

Furthermore, with the upcoming market launch of Daybue and the existing AUD 40 million in cash on hand, Neuren has ample funds to invest in the development of NNZ-2591.

Australian Financial Investment Research Perspective

A medical industry analyst from Petra Capital stated that FDA approval is typically a watershed moment for a pharmaceutical company, as it can transform a company's situation from both a risk and financial perspective.However, as a company that has just achieved commercialization, although FDA approval can lead to a surge in the company's stock price and market value in the short term, whether the company can achieve sustainable development, the performance of Daybue in the U.S. market is crucial, and it will directly affect Neuren's ability to expand the Daybue therapy to other countries.

In addition, due to the limited market size of a single orphan drug, Neuren is also actively developing other related orphan drugs, with the aim of covering a broader market.

Overall, if Daybue can achieve the expected sales, and the Phase II clinical trial of NNZ-2591 can obtain positive results, Neuren's commercial prospects will be very good. Coupled with international capital's particular attention to the research and development results of Australian pharmaceutical companies, many Australian companies have been quickly acquired and achieved significant capital appreciation after their products have been approved by the U.S. FDA. Therefore, investors can continue to pay attention to Neuren's dynamics to seize future investment and exit opportunities.