How Are Orphan Drugmakers Faring in the Great Biotech Downturn?

Orphan drugmakers led the biotech rally upward. Is it now leading it downward?

Apr 17, 2014 at 6:30PM

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:IONS), 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.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

George Budwell has no position in any stocks mentioned. The Motley Fool recommends BioMarin Pharmaceutical and Isis Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers