Back in July 2011, I wrote about a type of “virtual” biotech company that is formed to focus on a single product and use minimal financing to generate sufficient data to validate the drug and attract an acquirer and whether this model could be used to commercialize products for the neglected, global diseases (“Backyard Biotech” 7/7/11). For one company I mentioned in that post, FerroKin Biosciences, virtuality became reality. To recap, until recently FerroKin was a San Francisco-based company with six employees, 60 contractors, and $27 million in private equity capital developing an iron-chelating drug to be used against the iron overload that anemic patients can suffer after repeated blood transfusions (FerroKin and FierceBiotech article). And, thanks to positive mid-stage Phase II data, it was acquired two weeks ago by Shire PLC for an upfront payment of $100 million and potential milestone payments of up to $225 million (FierceBiotech article). I mention FerroKin’s success (at least from the viewpoint of its investors), because, as a company with a single product with a well-defined market, I think the company’s acquisition provides useful guidance for the investment decisions investors and companies may make in considering funding a start-up biotech that may have a product with a global health application.
So how did Shire arrive at a value for FerroKin of $213 million ($100 million cash and $225 million in milestone payments which I am converting to $113 in cash by assuming the likelihood of Shire paying out all the milestones is 50%)? One way is to base a potential product’s value, in this case, the FerroKin’s value since it is a single-product company, on the expected maximum annual revenue from sales of the product. Shire stated in its press releases that the annual worldwide market for iron chelation drugs is $900 million (Burrill report). I found that the leading drug of the three sold in this category is Novartis’s Exjade and it has sales around $652 million per year, so the Shire number seems right, if not an underestimate. Using the (very) rough heuristic of valuing a product opportunity at one year of peak sales, it underpaid since at a conservative a 30% market share (could be more if the drug has a superior clinical profile to Exjade) the gross peak sales value is $270 million per year. Another addition to the value of FerroKin is that its product had received an “orphan” condition designation, i.e., treating fewer than 200,000 patients, in the US and the EU (FBS0701 status), so Shire will have seven years during which the FDA/EMA will not approve a competing drug. Of course, Shire will bear the considerable cost and some risk of completing the trials and product registration.
Next, what is a comparable global health market opportunity for investors seeking to turn a $27 million dollar investment into $213 million (about an 8X ROI)? Sickle cell disease (SCD) would be a good choice. SCD is a genetic disease with its primary bad results being anemia and fatigue and an occasional blockage of blood flow by the inelastic red blood cells, resulting in pain and organ damage (especially in the spleen leading to decreased resistance to infection) and stroke (NHLBI). It is an orphan disease in the US (70,000 to 100,000 prevalence) but a major problem in Africa where the gene persists since the trait confers some resistance to malaria during childhood. As I noted in my posting, “A Really Neglected Disease” (7/29/10), recent studies show that SCD is a major factor in childhood mortality and may be a cofactor the 500,000 annual deaths in African children under 5 years old, more than HIV/AIDS at 370,000. So the potential US market is good (my guessimate is $300 million since a low-ball price for an orphan drug is $10,000 per year and a modest number of patients at 30,000); what about in Africa?
The WHO gives the prevalence of SCD in sub Saharan Africa as 2% (WHO sickle cell disease), so if I assume the continental prevalence is 1% in Africa’s 1 billion people, a 30% rate of market penetration, and an “affordable” price of $.30 per day or about $100 per year, I get a market of $300 million/year. (By comparison, Novartis gets about $70 per daily dose of Exjade [AVHLaw article].) Of course, the skeptic will say the average per capita health care spending is less than $30 per person in countries with the most SCD so there seems to be no money for an SCD drug, and I, the optimist, will point out that African governments have been able to provide HIV/AIDS treatments at about $900 per patient (but with lots of outside aid and treating fewer than half of those who need treatment), but who/how pays for an SCD drug is worthy of another post. So with some squinting, the African market for an SCD drug is about the same size as the US, if albeit, with much lower-priced drug.
Finally, my point in this meander is that my calculations support the idea that investors and companies should be looking seriously at creating single-product virtual biotechs in which the candidate compound (plus its backups) may work against an US orphan indication and a neglected/global health disease. The route is for an established, or struggling, biotech, pharma company, or university to find a successful serial entrepreneur who believes in doing well by doing good, back her/his virtual start-up with a bit of capital (like $5 million) to develop a single product for a dual orphan/global indication, and hope to cash out at an 8X ROI. The additional $10-20 million needed could come from far-sighted VCs (not likely), foundations (a bit more likely), or research grants (lots needed).
I agree that this route is speculative and risky but that’s what venturing is about. Just for the heck of it, here’s a table of SCD drugs in development:
|AesRx||Aes-103, small molecule||Starting Phase I||AesRx product|
|Celgene||Pomalidomide, small molecule||Starting Phase I||ClinicalTrials.gov|
|Georgia Health Sciences University||Pomalidomide, small molecule||Starting Phase I||GHSU PR|
|GlycoMimetics||GMI-1070||In Phase II||PR on license to Pfizer|
|Government of Nigeria||Niprisan, plant extract||Premarket||Nigerian Ministry of Information PR|
|HemaQuest||HQK-1001, short chain fatty acid||Phase I completed||HQ product|
|Selexys||SelG1, antibody||Phase I completed||Selexys PR|