Is This Orphan Drugmaker in Trouble?

Protalix BioTherapeutics (PLX 0.83%), an Israeli company focused on the treatment of Gaucher disease and other rare diseases, recently reported its third-quarter earnings. But its core business -- a joint venture with Pfizer (PFE -0.19%) to sell its Gaucher disease drug Elelyso (also known as Uplyso), showed major signs of weakness.

What is Gaucher disease?
Gaucher disease is a rare genetic disease that affects one in every 50,000 to 100,000 people. The disease is caused by the lack of a certain enzyme, which causes fatty acids to accumulate in the cells and organs.

There are three kinds of Gaucher disease. Type 1 is the most common form of the disease, and causes bone disease, anemia, an enlarged spleen, and an abnormally low count of blood platelets. Type 2 usually starts at infancy and causes severe neurological problems and is frequently fatal. Type 3 causes liver, spleen, and brain problems.

Protalix and Pfizer's Elelyso, as well as most other approved Gaucher disease drugs, treat type 1.

Protalix's weak third quarter
Under the terms of the Elelyso joint venture, Protalix retains marketing rights for the drug within Israel, while Pfizer holds the rights to market it abroad. However, Protalix retains a profit-sharing agreement that entitles it to 40% of Pfizer's profits.

Elelyso is currently only approved in Israel, the U.S., Brazil, Chile, Mexico, and Uruguay. The drug was notably rejected in Europe in November 2012, not due to lack of efficacy, but due to a 10-year exclusivity previously granted to Shire's (NASDAQ: SHPG) Vpriv, a similar Gaucher's treatment.

During its third quarter, Protalix reported that its revenue had declined 38% year over year to $2.3 million. $1.4 million of that $2.3 million was generated by Israeli sales of Elelyso, with the remainder coming from deferred revenue from Pfizer's original payment of $65 million at the joint venture's inception. Revenue from its joint venture with Pfizer also declined 35% to $1.1 million -- indicating that the treatment is having a lot of trouble gaining traction.

Protalix also reported a wider loss of $0.06 per share, or $5.7 million -- down from a loss of $5.5 million in the prior-year quarter. However, the company's cash position jumped 75% to $91 million -- primarily due to a $69 million debt offering back in September.

Sanofi and Shire's Gaucher treatments are dominating the market
Protalix and Pfizer's treatment hasn't made much of an impact in the market for Gaucher disease due to increased competition from Shire and Sanofi's (SNY -2.27%) rare disease subsidiary, Genzyme. Sales of Elelyso pale in comparison to both treatments, which are also enzyme replacement therapies. Both Vpriv and Elelyso are biosimilar (generic) versions of Cerezyme.

Source: Company quarterly earnings reports.

Vpriv is rising fast in emerging markets, where it reported 37% year-over-year growth in sales last quarter, compared to a 6.7% gain in the United States. Both Vpriv and Cerezyme are approved in Europe, while Elelyso is not.

The one major advantage that Protalix and Pfizer have with Elelyso is with pricing -- Elelyso costs $150,000 per patient per year, compared to the $170,000 and $200,000 it costs per year of Vpriv and Cerezyme, respectively. However, Protalix and Pfizer will have to expand the drug's reach into more markets to capitalize on that strength -- which looks tough considering that sales are falling by the double digits before the drug has even gotten off the ground.

Looking into the future
Slumping sales of Elelyso obviously represent a much bigger problem for Protalix than it does for Pfizer, which can easily absorb the losses from the failing joint venture and move on. However, that doesn't mean that Protalix is a lost cause yet.

Protalix's second best hope is the Fabry disease treatment PRX-102, which is currently in phase 1 and 2 proof-of-concept trials. Protalix believes that if the trials are successful, the FDA could allow it to proceed to phase 3 trials, which could be completed by early 2017. Fabry disease is another rare genetic disease, which affects one in every 40,000 to 60,000 males. The disease causes a buildup of fat in cells -- causing pain in the extremities, vision problems, gastrointestinal problems, hearing loss, and potentially life-threatening complications.

However, if approved, PRX-102 will be arriving extremely late to a market already dominated by two familiar rivals, Shire and Sanofi. Sanofi's treatment, Fabrazyme, posted much stronger growth than Shire's competing treatment, Replagal, in the most recent quarter.

Source: Company quarterly earnings reports.

Sanofi's strong sales growth of Fabrazyme was fueled by a 50% year-over-year jump in sales in Western Europe, as well as 20.5% growth in the United States.

Although Protalix's Fabry disease treatment could become the company's second lifeline, it will face some steep challenges entering the market split between Shire and Sanofi. In addition, if Protalix successfully completes its phase 3 trials of PRX-102, there's still the question of a marketing partner -- will Pfizer partner up with Protalix after Elelyso's weak start?

The Foolish bottom line
Therefore, most investors don't see a compelling reason to invest in Protalix -- which explains the stock's 14% year-to-date decline.

However, the tale of these Gaucher and Fabry treatments should highlight the importance of orphan drugs. All of the aforementioned treatments were once classified as orphans -- which granted them seven-year exclusivity and 10-year exclusivity in the U.S. and Europe, respectively, without the need for additional patents.

On their own, revenue generated by these treatments is not significant, but when combined with a portfolio of other treatments for rare diseases -- as Sanofi and Shire have done -- it can be an extremely profitable way to corner a niche market.