How Are Orphan Drugmakers Faring in the Great Biotech Downturn?

There is little debate that we are now in the throes of a general market correction. And because health-care and biotech stocks were the best performers over the past few years, they are being hit particularly hard in this downturn. That said, we have to be careful lumping all pharma and biotech stocks together. Some large pharma companies, for instance, have continued to climb higher, whereas a couple of the biggest biotechs have led the way downward.

Previously, I wrote an article discussing how orphan drugmakers were the cream of the biotech crop in many ways during the industry's bull run, and had some of the highest valuations as a result. In fact, many orphan drug specialists appeared to have a major valuation gap, with the market paying heavy premiums for earnings from this sub-group. The investing thesis at the time was that newly launched or approved drugs would help to bridge this gap going forward, and increasing earnings would drive even more growth. With this in mind, let's check up on how five of the top orphan drugmakers are performing in the face of this downturn, namely Alexion Pharmaceuticals (NASDAQ: ALXN  ) , BioMarin Pharmaceutical  (NASDAQ: BMRN  ) , Isis Pharmaceuticals (NASDAQ: ISIS  ) , Jazz Pharmaceuticals (NASDAQ: JAZZ  ) , and Shire plc (NASDAQ: SHPG  ) . 

Are orphan drugmakers escaping the biotech implosion unharmed?
Don't tell Alexion Pharmaceuticals there is an ongoing market correction. Shares of the ultra-rare disease drugmaker are still up 12% this year and 57% year over year. This continued strength in Alexion shares is partly due to the company increasing its guidance for 2014 last March, after coming to an agreement with the French government over reimbursement for its rare blood disorder drug Soliris. Looking ahead, the company is due to report first-quarter earnings next week on April 24. So, you might want to mark that date because first-quarter earnings could determine if Alexion will continue to defy the overriding market sentiment. 

BioMarin is a different story altogether. This orphan drug specialist is down over 12% year to date despite the recent approval of its enzyme-replacement therapy for Morquio A syndrome called Vimizim. What's key to understand is that management believes Vimizim can nearly double the company's revenues moving forward. Even so, BioMarin is still a ways from becoming cash flow positive and was previously trading at over 20 times annual revenue. If Vimizim performs up to expectations this year, BioMarin shares could be trading closer to 10 to 12 times annual revenue at present. To keep tabs on this story, you should listen in on the company's first-quarter earnings call on May 1.  

Isis Pharmaceuticals has been bearing the brunt of the biotech correction, falling over 13% year to date. I'm not particularly surprised by Isis' drop because it was one of the most expensive orphan drugmakers based on annual revenue relative to market cap prior to this correction. In my view, its $4 billion market cap is tied mainly to its clinical pipeline that boasts of over 30 ongoing clinical trials, especially in light of the fact that Isis only has a single approved product Kynamro and 70% of the drug's sales go to its marketing partner Sanofi. As the correction deepens, I suspect that less value will be placed on potential and more on actual revenue. In that case, Isis could be in for a long year.

Jazz Pharmaceuticals has been able to shrug off the correction and gain over 7% this year. Again, this isn't a surprising finding because Jazz was one of the few orphan drugmakers trading at a reasonable price before the correction. Specifically, my last checkup on Jazz had shares trading at 10 times annual revenue, making it one of the lowest in the group.

Looking ahead, it is projected to grow earnings by over 20% for the next five years based mostly on increasing sales for its lead products Xyrem and Erwinaze. As a result, Jazz is presently trading at a forward price-to-earnings ratio of 13.4.  In short, I think Jazz will continue to march upward, so you may want to keep track of this specialist biotech going forward. 

Shares of the Irish biopharma Shire have also performed reasonably well of late, gaining 5.46% year to date. What you need to know is that analysts are pegging Shire's compounded annual earnings to grow by double digits for the next few years, with much of this growth coming from the company's recent acquisition of orphan drug specialist ViroPharma. Combine this growth with the natural tax advantages of an Irish company and it's hard to see how Shire doesn't come out a winner. 

Foolish wrap-up
This brief overview of orphan drugmakers shows that this sub-group has performed fairly well under a difficult market environment. What I find particularly noteworthy is that orphan drugmakers were also some of the top-performing biotechs in general, but they are not falling as a whole now. Instead, it appears that some investors were wise to believe that increasing earnings from newly launched orphan drugs would fuel further growth. As far as BioMarin's and Isis' turbulent year is concerned, we need to view this in light of the fact that both of these stocks have a valuation gap problem. BioMarin looks to correct this issue with sales of Vimizim, but it's hard to see how Isis will improve its fundamentals in the near term.

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