London, England – There are ~7,000 rare diseases that together affect 300 million people. For the vast majority of these patients there are no approved treatments, representing a huge unmet medical need.
Advances in the understanding of the molecular basis of rare diseases, the continued development of therapeutic platforms such as viral vectors for gene therapy, and regulatory and economic incentives such as those provided through orphan drug designation by the FDA, have encouraged investment to respond to this need. In the past 12 years, the proportion of FDA new drug approvals for rare diseases has increased from 29% in 2010 to 54% in 2022. Furthermore, as large biopharma companies have sought to boost their pipelines in the past decade, the value of partnership deals for rare disease biotechnology companies has increased by an order of magnitude, from US$3.7 billion in 2011 to more than $23.4 billion in 2021. The total paid value of merger and acquisition (M&A) deals has also increased recently, from $18.9 billion in 2019 to $50.6 billion in 2022.
However, despite the perceived advantages of rare disease drug development programmes, late-stage development success rates for rare disease drugs have historically not been substantially better than those for drugs for non-rare diseases. Furthermore, regulatory approval for a drug does not guarantee patient access, most commonly owing to cost. Consequently, M&A deals in the rare disease space may frequently fail to lead to a marketed therapy.
To help understand factors contributing to such failures, acquisitions of companies developing treatments for rare diseases were analysed over the past 17 years using public domain M&A information. The dataset was limited to public M&A deals involving biotechnology and/or pharmaceutical companies. An international consultation was also convened in 2023 between representatives from rare disease biotech companies, the pharmaceutical industry, academia, accelerators, funders, venture capital, venture philanthropy, intergovernmental agencies, governments and rare disease organizations.
First, the scientific validation of therapeutic targets for rare diseases may be far less robust than those for common diseases. Also, because each rare disease may only have a handful of experts, independent due diligence is difficult to come by. Unverifiable scientific assumptions haunt the rationale underpinning many potential rare disease therapies. For the ~7,000 rare diseases where a molecular cause has been identified, only about 500 have approved treatments. Scientifically validated targets have not delivered widespread cures.
A second area fraught with assumptions is the way in which valid rare disease targets translate into clinically relevant outcomes. Most rare diseases have never previously been treated, and so clinical end points are poorly defined. In some cases, this means that substantial — and risky — work is needed to establish that end points for use in pivotal trials are clinically meaningful and acceptable to regulatory agencies as the basis for approval. In other cases, the target may be scientifically valid, but it may not be feasible to intervene sufficiently early in the course of disease. For example, for a rare monogenic neurological disorder in which brain damage occurs in utero, a medicine that modulates the target may be ineffective because of the extent of irrevocable neurological damage that has occurred before birth.
Third, regulatory approvals in rare diseases follow a different trajectory to medicines for common illnesses. This is theoretically advantageous; for example, the FDA may accept the use of natural history data as a comparator for a new drug in the regulatory application for a rare disease drug, instead of data from randomized controlled trials. However, expert methodologies for gathering, reporting and analysing these data is required. If the necessary skill sets are unavailable, the advantageous regulatory environment is for naught.
The fourth factor contributing to failures of rare disease acquisitions may be the ineffective integration of a small biotechnology company into a large corporation. Rare diseases are the antithesis of the standard big pharma model of mass production, distribution and marketing of medicines. Building a bespoke global therapeutic pipeline for 1,000 patients is fundamentally different and must be anticipated. Corporate culture frequently clashes with entrepreneurial small company culture. Furthermore, large companies often split up founder teams for operational efficiency. Cultural mismatch can cause disbandment, stagnation and failure.
Fifth, valuation discrepancies are common in rare disease acquisitions. Gaps exist between the number of patients known to have a rare disease and the number who will receive paid-for therapy once it is available. Similarly, assumptions about pricing are rarely accurate because rare disease medicines, often with $100,000–$1,000,000 annual price tags, may not achieve the full theoretical level of reimbursement by payers. Also, rare disease therapies can wrongly be assumed to achieve market dominance, as competition exists even in restricted small therapeutic markets. ‘Herding’ occurs around certain rare diseases such as cystic fibrosis, Duchenne muscular dystrophy and haemophilia that each have multiple potential competing therapies on the market and/or in clinical development. Segmenting already small markets limits profitability. Multiple valuation assumptions need to be de-risked before acquisition.
Lastly, intellectual property (IP) for new medicines used in common diseases is aggressively defended because predicted revenues are high. In rare diseases, there are fewer companies in smaller marketplaces, so threats to IP can be under-valued at acquisition. This is a mistake, because IP challenges in a rare disease treatment can cause greater proportionate damage; a single infringement claim can derail a therapy through costs and delays. IP and legal threats in rare disease acquisitions need to be fully de-risked, just as for medicines for common diseases.
Noting that rare disease acquisitions often ‘fail’, another area for consideration is the definition of ‘success’. Although most financiers evaluate the potential for success of their investments in rare disease drugs on aspects such as the time to market, we argue in favour of alternative definitions to success as a de-risking strategy.
The development of treatments for rare diseases can enhance a company’s brand and reputation, demonstrating a commitment to addressing unmet medical needs and improving the lives of patients. Acquiring rare disease companies can lead to new partnerships with patient advocacy groups, research organizations and other health-care stakeholders. Good and visible relationships between rare disease patient associations and treatment innovators are valuable. The EU’s Corporate Sustainability Reporting Directive and Corporate Social Responsibility commitments have become mandatory, and rare disease ventures may be regarded as quantifiable social outcomes.
Commercially, rare disease acquisitions can expand market access into niche markets with high unmet medical needs, leading to significant market share, premium pricing and diversification of revenue streams. For example, familial Mediterranean fever affects people of Mediterranean descent in Turkey, Armenia and Iran. These markets are accessible through an acquisition in this space.
Acquisition of a rare disease company with an innovative pipeline can also accelerate a large company’s access to new therapeutic modalities. Rare disease biotech acquisitions with technology-to-bedside know-how can bring matured innovative platforms to large companies. Such acquisitions can also bring in talented personnel in new drug discovery areas.
Expanded IP portfolios can have therapeutic implications beyond the rare disease in question. For example, both Prader–Willi syndrome and Alström syndrome are rare diseases associated with obesity and type 2 diabetes; IP in these small markets may have broader reach. Furthermore, rare disease treatments often have longer patent life cycles because of regulatory incentives.
Several large pharmaceutical companies have identified rare disease acquisitions as a key business target. Strategic themed clusters of rare disease acquisitions can form a conglomerate of greater net value than the component parts through economies of scale. Rare diseases can be clustered by organ systems, therapeutic platforms or even the degree of rarity. In this model, all acquisitions are de-risked to a degree.
In conclusion, there is thirst for rare disease acquisitions in the presence of an excess of targets; it is still a buyer’s market. If biotechnology companies, investors and pharmaceutical companies were to more effectively de-risk rare disease acquisitions, greater capital will be available to help more patients. Non-traditional measures of success could become indicators of effective rare disease acquisitions, but these key performance indicators are not yet fully valued by boards and stock analysts. Rare disease investments are growing; greater success would be a triple-win for patients, biotech and investors. More efficient investments in rare diseases will save lives.
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James Levine