NPS Pharmaceuticals (Nasdaq: NPSP) moved forward with its drug teduglutide on both sides of the Atlantic in recent weeks. The drug received European market authorization last week for treating adult patients with short bowel syndrome. The U.S. Food and Drug Administration is slated to discuss the drug at its advisory committee meeting in October. NPS, following in the footsteps of companies like Alexion Pharmaceuticals (Nasdaq: ALXN), is attempting to carve a profitable niche in the orphan drug market, targeting rare disorders as opposed to more widespread diseases with larger addressable markets. While market sizes are indeed smaller, pricing power can be enormous, as evidenced by Alexion's Soliris, which sells for around $400,000 for a year's worth of treatment. Orphan drug designations also come with the added advantage of various tax incentives, stronger patent protection, and other government subsidies.

Birds and bushes
 The two developments around teduglutide impact NPS in different ways. The old saying "a bird in the hand is worth two in the bush" comes to mind. The European authorization is like the proverbial "bird in the hand" while the FDA review compares to the "two in the bush."

While the European authorization is a done deal, NPS shares the prospective financial benefits with Takeda Pharmaceutical. Through June 30, NPS received $40 million in license fees and milestone payments for teduglutide. NPS stands to gain $5 million more from the launch of the drug in Europe.

Takeda must pay royalties to NPS for sales of the drug outside of North America. These royalties will be a percentage in the teens of Takeda's net sales of the drug during the first 10 years, dropping to single-digits afterwards.

On the other hand, NPS retains all rights to sale of teduglutide in the U.S., Canada, and Mexico. An estimated 10,000 to 15,000 Americans per year receive nutrition through IV or tube-feeding because of the disease. There are no other approved products for long-term treatment. Assuming the FDA ultimately approves the drug, NPS seems poised for significant gains close to home.

Taking flight
 The company has a strong track record in partnering with other larger organizations to market products that it develops. It teamed with Amgen (Nasdaq: AMGN) on Sensipar, a drug for treating hyperparathyroidism.

NPS licensed Nucynta, used in the treatment of moderate and severe pain, to Janssen, a unit of Johnson & Johnson (NYSE: JNJ). It is also working with GlaxoSmithKline (NYSE: GSK) on a bone disorder drug, Ronacaleret, which is in phase 2 trials.

With solid partnerships and good news for teduglutide on both sides of the ocean, NPS Pharmaceuticals should probably be on the short list for investors looking at smaller biopharmaceutical companies that could take flight. The stock is up 26% in the past year, and in my view, appears likely to go up more. However, make sure to do your own homework before investing in the sector.

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