Many people have probably never heard of some of the diseases that venture capitalists and drug company executives are swooning over lately. But regardless of how obscure a rare illness like X-linked hypohidrotic ectodermal dysplasia is, investments in developing drugs for such diseases are growing in popularity.

In Boston, both venture firms and pharma executives are getting in on the act. Third Rock Ventures has funded or formed three biotech startups in Cambridge, MA over the past two years that are developing drugs for rare genetic disorders (which are in some cases called orphan diseases). One of those companies, Alnara Pharmaceuticals, counts among its founders Christoph Westphal, a Cambridge-based executive who scouts for external business opportunities for London-based drug giant GlaxoSmithKline (NYSE:GSK).

These companies are ripping a page or two from the battletested playbook at Cambridge-based Genzyme (NASDAQ:GENZ). The company’s three best-selling treatments are for rare genetic diseases that affect fewer than 10,000 patients each. Still, Genzyme has been profitable because it can command hundreds of thousands of dollars per year for each patient treated with some of its drugs, and for years it has faced very little or no competition in these niche markets.

But the party’s getting more crowded nowadays. New York-based Pfizer (NYSE:PFE), the world’s biggest drug company, inked a deal announced in December to partner with Israel-based Protalix Biotherapeutics to develop and market Protalix’s rival drug to Genzyme’s top seller, imiglucerase (Cerezyme), an enzyme-replacement therapy for patients with Gaucher’s disease. Genzyme’s Gaucher drug brought sales last year of $793 million, way less than Pfizer makes from its top sellers like the heart pill atorvastatin (Lipitor). Despite the smaller markets for rare disease treatments, major pharma companies are investing in them as many of their multi-billion dollar drug franchises face greater competition from generic knockoffs.

“Pharma and bigger biotech players need to fill their pipelines to continue to evolve,” says Nick Leschly, a partner at Third Rock Ventures, “and nobody’s scoffing at $150 million, $250 million, or $500 million markets anymore.” Third Rock has hired experts on rare genetic diseases as part of its strategy to find investment opportunities in this field over the past couple of years, Leschly says. He credited Philip Reilly, one such expert who joined the firm in 2009, for finding a promising experimental therapy for X-linked hypohidrotic ectodermal dysplasia in Switzerland. The rare genetic disease, which affects 1 in 17,000 people, robs them of their ability to sweat, and stunts the normal development of teeth and hair, according to the National Institutes of Health. Third Rock gained rights to the Swiss therapy and formed Cambridge-based Edimer Pharmaceuticals last year to advance it into clinical trials. Edimer quietly raised more than $20 million in a round of funding from Third Rock and the Swiss venture firm VI Partners last year, according to Leschly, a member of the firm’s board of directors. Last month he also led his firm’s investment in the $35 million second-round funding for Genetix Pharmaceuticals, a Cambridge-based developer of a gene therapy for a rare brain disorder called adrenoleukodystrophy. Genzyme Ventures, the investment arm of Genzyme, is another new investor in Genetix.

Rare disease deals aren’t limited to the Boston area. Last month Carlsbad, CA-based Isis Pharmaceuticals pocketed $35 million in upfront cash from Glaxo in a deal that is worth up to $1.5 billion to discover new gene-silencing drugs for rare diseases and other serious illnesses.

“There’s a shift away from the blockbusters like anti-cholesterol and anti-diabetes drugs towards some of the orphan disorders,” says Michelle Dipp, a vice president in charge of Glaxo’s U.S. Center for Excellence in External Drug Discovery in Cambridge, MA. “So people are trying to build a mini-Genzyme inside of a pharma company.” There are also economic advantages to the rare or orphan drug business, despite the relatively small markets for the treatments. For one, the number of patients that need to be treated with an orphan drug during clinical trials can be way fewer than a trial for, say, a heart drug. The FDA may grant orphan drug developers an expedited approval process for their products, shortening the time it takes to bring their drugs to market. (The agency grants “orphan” status to drugs that treat patients with diseases that affect fewer than 200,000 patients in the U.S.) These and other perks can reduce development costs by millions of dollars. In many cases, rare disease drugs can provide life-changing benefits for patients. This makes the treatments valuable both to the patients and their health insurers who have a vested interest in keeping them healthy. The ability to show such benefits helps pharmaceutical companies convince healthcare payers to provide reimbursements for their drugs. That’s not expected to be the case in large markets where there are a number of “me-too” drugs that work in similar ways, or in markets with generic competitors. “It’s almost unanimous that all the big pharmas are paying much more attention to rare diseases than they have in the past,” says Mark Miller, a vice president of corporate development at the Indianapolis-based drug powerhouse Eli Lilly (NYSE:LLY). He is expected to travel to Cambridge this week for the Boston Biotech Business Development Conference 2010, where he plans to connect with local developers of drugs for rare disorders and other diseases of interest to his company.

“Clearly there’s a growing opportunity for biotech companies that might be focused in” the rare disease field, Miller says. “I think people look at the Genzyme model and think that that is a reasonable model to try to emulate.”

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