Specialty drug company Pharmion (NASDAQ:PHRM) is soaring today after the Food and Drug Administration approved its groundbreaking drug, Vidaza, for the treatment of Myelodysplastic Syndrome (MDS). Patients with the rare condition, in which bone marrow stops making healthy blood cells, can suffer from anemia, infection, and bleeding. Some even require frequent blood transfusions.
The FDA approved the drug to treat all five subtypes of MDS. Because the FDA previously granted the drug orphan status, Pharmion will enjoy seven years of exclusivity in the U.S market. However, with Vidaza's overall response rate (including both complete and partial responses) at 15.7%, competitors like Celgene (NASDAQ:CELG) still have a near-term shot at the MDS market, assuming they deliver a more effective treatment. Celgene's Revlimid, a potent formulation of thalidomide, is reported to be highly effective in MDS patients who have a specific genetic defect.
Investors may also find Pharmion's business model of interest. The company does no internal research or manufacturing. Instead, it licenses, develops, and commercializes promising therapeutic products developed by others.
Worldwide rights for Vidaza, for example, were licensed from Pharmacia, which has since merged with Pfizer (NYSE:PFE). The deal makes sense. With the number of U.S. cases estimated at 10,000 a year, MDS is a modest market for a giant like Pfizer. Rather than shoulder the cost of clinical trials, Pfizer cashed in on its research and let smaller Pharmion work toward FDA approval.
Clearly, those who participated in Pharmion's IPO last November at $14 a share are very happy today. In addition to nice paper gains, they have a company with $77 million in cash and virtually no debt. Roughly $130 million in accumulated losses, meanwhile, will delay tax payments for a long time.
Still, analysts do not see the company earning money this year or next. This lack of earnings, coupled with the fact that the company reached a $1 billion market capitalization today, should be a warning to conservative investors. A solid balance sheet is nice, but over the long term, earnings drive stock prices.
Care to discuss the implications of thalidomide on Pharmion and Celgene with other investors? Come to Fool.com and join the discussion.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
