What Does Equity Look Like for Rare Diseases

Venture capital and angel investors are the lifeline of biotech companies. But what happens when obtaining an orphan drug designation no longer causes your stock price to double or triple in a matter of day, or allow you to do an IPO? Are VCs still interested? CheckOrphan rolled up its sleeves to talk to investors at Biotech Showcase.

The Rise of the Rare Disease Focus

Early in the 2000s, a young group of physicians led by a very successful Korean entrepreneur saw a niche space and arrived before the rest. Palo Alto Investors – back when it used to be a venture capital firm – used to focus a large portion of their investments in companies working with rare diseases.

Actelion was one of the first investments. As Actelion matured, so did Palo Alto Investors, which transitioned from venture capital to currently only investing in publicly traded companies. When Actelion sold for $30 billion dollars, Palo Alto investors was still one of the largest minority shareholders. Great investments in smaller companies like Enobia and Hyperion also led to great exits.

A little north of Palo Alto in San Francisco is where Bay City Capital calls home. It also moved in the same direction as Palo Alto Investors, however, a little later. They also benefited from investing in Hyperion, Raptor and other companies focused on rare diseases.

“Investing in orphan drug-based companies meant everyone was coming to us,” explained Rob Hopfner, formerly with Bay City Capital. “And it was and still is the area where the most cutting edge techniques were being used first. Gene therapy. Enzyme replacement. It happened with rare diseases first.”

Third Rock, SR One (at the time backed by investments by GSK to focus a fund on rare diseases.), Orbimed and more all had their seasonal focus on rare diseases, their investments and their exits – financial exits from the rare disease-focused companies, and eventual exits from investing solely or primarily in rare disease-focused companies.

“For us it was a matter of being in niche areas,” remarked John Doux from Palo Alto Investors. “When everybody else was entering, we went and found another underserved, niche investment area.”

When talking with angel investors the lure was the ability to do an IPO after an orphan drug designation. This designation is granted by the US, EU, Japan and Korea for rare diseases where orphan is defined as about 1 in 2000 or less persons living with a given rare disease except for the US, where the criteria is 200,000 persons or less from a prevalence standpoint.

A Window Closed – A Void

“As angel investors, we could see our companies ready to do an IPO – even though small – after obtaining and orphan drug designation. These companies were not even running clinical trials,” remarked an angel investors, who preferred to not be named. “But as that IPO window closed, so did some of the interest.”

And confirming that change, Biotech Showcase did not have one investor or institutional investor, whose investment was solely focused on rare diseases.

In fact many were apprehensive to be associated with rare diseases. But the question remains – is there a more niche market than investing in rare diseases?

There are now over 7,000 confirmed rare diseases and almost a new one being added weekly due to the height of genome sequencing and collaborative efforts by governments and genome sequencing companies to share de-identified genomic data in order to move towards more targeted medicines – true precision medicine.

And yet, despite the consistent increase in more approved products for rare diseases, thus demonstrating there is a market for investment, focused investment solely on rare diseases in the private and public equity space has not grown accordingly.

But if you are looking for a niche market for investment, rare diseases are arguably the place. FDA has been clamping down on “me too” products for over 4 years now, and not approving them if they do not show a significant improvement in efficacy or equivalent efficacy and improved safety.

This was really felt in the diabetes arena, where several products finished successful phase III trials only to not be approved.

The argument could be made that if you are looking to find a niche, the rare disease space is where to play. Over 95 percent of rare diseases are without some form of treatment, and of that almost 5 percent that do have a marketed treatment, most only extend life a few months to a couple of years or minder symptoms – rarely are they disease modifying.

The Rise of the Advocate

Even more alluring than being able to focus on a niche rare disease with no competitors is the draw of working with passionate and driven patient advocates in the rare disease space.

Their ambition, fueled by love, is what movies and books are based on – literally. Take for example Lorenzo’s Oil, an academy award winning movie about the quest of Augusto and Michaela Odone, who were two economists turned researchers as they slaved day and night to find a treatment for their son who had adrenoleukodystrophy. The parent tandem found a compound that allowed their son to be the first to outlive a parent. And the parents were economists, not neurologists.

Or you could turn to the riveting storyline of John Crowley (played by Brendan Fraser) and Dr. Robert Stonehill (played by Harrison Ford) in Extraordinary Measures. Even more inspiring is not only did John Crowley find a treatment for two of his three children in time to save their lives from the grip of Pompe disease, but he is still leading the torch as the CEO of Amicus Pharmaceuticals that focuses solely on rare diseases.

Some advocates form companies to produce solutions.

Others advocate to drive change at the government level.

And a very large number form patient organizations to support people living with a rare disease.

All moving mountains, paving roads no one ever thought would be paved and tackling one rare disease a time.

The interesting conundrum is Amicus is not alone. It is accompanied by Biomarin, Ultragenyx, and many smaller companies that focus solely on developing products for rare diseases.

“And that is where everything is headed. Everything is probably going to be a rare disease in the future as we find more subtypes of even larger diseases at the genetic level,” said Chris Marai a bank analysis, who has covered the rare disease space for much of his career.

“With everything trending in that direction, why wouldn’t you want to focus investing in rare diseases?”

Filling the Void – Philanthropic Venture

Restrained by years of history, Paris’ Boulevard Periferique can only allow so many cars to enter or leave Paris years of history. Or even more restraining are the number of toll booths on the Bay Bridge from San Francisco to Oakland in California

Similarly, without more equity focused on solutions for rare diseases, the number of treatments are limited as well.

But as companies in the rare disease space usher in the most game-changing and promising types of treatments, – cell therapy, CRISPR, RNA technologies, enzymes, gene therapy and more – while lead with passion to drive change within the halls of government, and build foundations of empathy through patient organizations…

…they are also transforming the investment field.

Although a search of traditional investors that focus solely on rare diseases came up empty, a non-traditional, but game-changing – as game changing as the technologies that are needed to solve rare diseases – approach is evolving, and has been evolving for quite some time.

And the change is coming from rare disease patient foundation, which only invest in one or more rare diseases.

This type of investment is not new. Rather, it is becoming more popular in the rare disease space.

Many foundations have been providing grant money to companies of over 75 years to help them de-risk the preclinical stages of product development or even earlier.

What is changing is the paradigm that the Cystic Fibrosis Foundation made popular.

At more advanced stage, especially funds for clinical trials, the money is no longer a full grant. For example, the Cystic Fibrosis Foundation invested in Vertex Pharmaceuticals, when VCs and other investors were hesitant and requested royalties from revenues that would come due if Vertex was bring its product to the market.

And Vertex did. And it was a game changer for the patients.

The payoff is large and transformative. The foundation was able to sell their royalty deal they had with Vertex for over a billion dollars. That money allows the foundation to provide better services to patients, it gives them the ability to provide early stage grant money, and continue with larger royalty based investments for more clinical stage assets.

At Biotech Showcase, CheckOrphan ran into the CMT Research Foundation, which is focused on Charcot Marie Tooth disorders. CMT has many different subtypes that all have different genetic problems, which have different molecular pathologies, but related symptoms.

“We have a patient focus, first. And with that comes a very long and dedicated perspective with our funding,” highlighted Keith Ross, Chief Scientific Officer of the CMT Research Foundation.

“We like to think our approach is a journey that we can walk together with companies for the patient, where we make finding a solution more feasible, and hopefully at the same time, more patient focused.”