Sector Analysis February 4, 2016

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1 Sector Analysis Analysis of Orphan Drug Market There is significant interest among drug makers and investors alike to focus on the development of products for orphan indications. The reason is these drugs can be brought to market quickly and often yield impressive sales in small, targeted patient populations. In order to better understand the market for orphan drugs, we analyzed 65 drugs approved for orphan indications and examined pricing, competitive dynamics within indications, and orphan drug launches for first-to-market products. We found that diseases with a prevalence of 10,000 or less in the US generally support premium pricing of greater than $200,000 per year, especially for biologics. There is a first mover advantage in orphan indications, and certain indications support multiple drugs at high prices. Finally, orphan drug launches for first-to-market therapies have been robust, with double-digit sales growth for 6 or more years after launch. These findings can be applied to companies currently developing therapies for orphan indications to understand the market opportunities for their clinical assets. Analysts Jerry Isaacson, Ph.D. (AC) (646) jisaacson@lifescicapital.com Many Reasons to be Bullish on Orphan Drug Makers. The FDA considers orphan indications to be diseases affecting less than 200,000 patients in the US. More than 400 drugs for orphan indications have been approved, with a rising trend in annual approvals since the 1980s. The growing interest in these indications is due to regulatory advantages from orphan drug designation and the potential for premium pricing. We analyzed the orphan drug market to better understand the commercial advantages for orphan drugs. Our main conclusions, which are discussed in detail below, are: Diseases with 10,000 or fewer patients in the US support annual pricing of $200,000 or greater. Orphan diseases, despite a small target population, can support multiple drugs at high prices. Most first-to-market orphan treatments have strong market penetration and corresponding sales. Premium Pricing for Drugs Targeting Orphan Indications with 10,000 or Fewer Patients in the US. We selected 65 orphan drugs from 47 indications, calculated the disease prevalence for each indication based upon published sources, and determined the current annual drug price in the US using the wholesale acquisition cost (WAC) and recommended dose. For prevalence rates with a range, a midpoint was chosen for our analysis. Drugs approved for more than two indications were excluded, as were drugs that are used as acute therapies with no label for chronic use. We analyzed the relationship between disease prevalence and drug price, which is shown in Figure 1. The green data points represent drugs targeting 10,000 or fewer patients in the US, and the pink data points represent drugs with prevalence of 10,000 or more in the US. Most drugs we analyzed for diseases with 10,000 or more patients are priced between $25,000 and $150,000 per year, whereas the majority of drugs for indications with less than 10,000 patients in the US are priced at or above $200,000 per year. The data indicate that manufacturers have more easily obtained premium pricing for drugs addressing indications with 10,000 or fewer individuals in the US. Page 1 For analyst certification and disclosures please see page 9

2 Figure 1. Orphan Drug Pricing Versus Disease Prevalence Biologics Command Nearly Double the Price of Small Molecules. We separated and analyzed prices for biologics, such as antibodies and protein based therapies, and compared them to small molecules. The median and mean prices for biologics were $289,509 and $320,218, respectively. In contrast, the median and mean prices for small molecules were $119,844 and $160,907. The data indicate that biologics have on average a 2 fold higher price than small molecules, and the difference was not dependent on disease prevalence. Orphan Disease Markets can Support Multiple Players at Premium Prices. We analyzed the markets for Gaucher s disease, a lysosomal storage disorder, and Pulmonary Arterial Hypertension (PAH), a high blood pressure condition, to understand the dynamics within orphan indications where multiple drugs are approved. There are 5 FDA-approved drugs for type I Gaucher s disease, as shown in Figure 2. For each drug, we calculated the current annual price per patient and yearly revenues beginning from Page 2

3 Figure 2. Pricing and Revenues (in Millions) for Drugs Approved to Treat Gaucher s Disease Three main conclusions drawn from the Gaucher s disease data are applicable to other orphan indications. There is a clear first to market advantage, the indication can support multiple drugs, and pricing remains strong as new drugs are approved. These points are discussed in more detail below: Page 3

4 There is a Tangible Advantage for the First Market Entrant. Genzyme/Sanofi s (NYSE: SNY) Cerezyme (imiglucerase) was FDA approved in 1994, and replaced a prior placental-derived version of the β-glucocerebrosidase enzyme called Ceredase (alglucerase). Ceredase was approved in 1991 and faced unique manufacturing challenges, including the requirement for an estimated 50,000 donor placentas to provide a year s supply of enzyme for each patient. Sales were $160 million in It was gradually phased out as Genzyme s next-generation version of β-glucocerebrosidase, Cerezyme, was approved. For this reason we still consider Cerezyme to be first-to-market for Gaucher s. Cerezyme was alone on the market until 2003 when Actelion s Zavesca (miglustat) was launched. In 2014 Cerezyme generated $949 million in sales, which translates into approximately 65% of the Gaucher s disease market, 20 years after first approval. Cerezyme s control of the market is impressive considering that 4 competing drugs are now approved and its sales were hit by viral contamination at a manufacturing plant in The contamination forced Genzyme to halt manufacturing of Cerezyme between June and December of 2009, which resulted in a 36% decrease in sales that year and lingering revenue declines for the next 2 years. The impact on sales from the contamination and can be seen in Figure 2. Orphan Indications can Support Multiple Therapies. With a prevalence of about 1 in 40,000, we estimate that there are approximately 8,000 Gaucher s patients in the US. Given the small patient population it is surprising that there are 5 approved therapies. On the other hand, with premium pricing the market opportunity is substantial, and at of the end of 2014 three of the drugs exceeded $100 million in sales. Three of the treatments are enzyme replacement therapies (ERT), and two are small molecule substrate replacement therapies. Cerezyme is entrenched in the market due to its longstanding history. To reach full market potential, newer ERTs such as Pfizer s Elelyso (taliglucerase alfa) and Shire s VPRIV (velaglucerase alfa) must be able to capture newly diagnosed patients as well as those rare individuals crossing-over from Cerezyme. Despite this hurdle, each approved drug has had sales increase year to year. Premium Pricing is Preserved. All of the Gaucher s disease drugs are priced at approximately $300,000 per year or higher, whether they are biologics or small molecules. The two most recent agents approved in 2012 and 2014 have an annual price of $405,312 and $310,250, respectively. There appears to be little attempt to gain market share by undercutting competitors in terms of price. With premium pricing preserved, even treatments that are sold at a discount relative to Cerezyme could achieve blockbuster sales at 33% market penetration. There are 12 products approved for PAH across 4 drug classes, as shown in Figure 3. Similar to the Gaucher s drugs, we calculated the current annual price per patient and yearly revenues beginning from Page 4

5 Figure 3. Pricing and Revenues (in Millions) for Drugs Approved to Treat Pulmonary Arterial Hypertension *sales for Q are estimated Page 5

6 The PAH market confirms some of the conclusions we made from the Gaucher s data and also provides insight into the sales dynamics within orphan indications. We conclude that first-in-class agents have a distinct market advantage, strong pricing is preserved as subsequent drugs are approved in the same drug class, and PAH supports multiple therapies across the drug classes. First-in-Class Agents Have a Tangible Market Advantage. GlaxoSmithKline s (NYSE: GSK) Flolan was the first approved therapy for PAH and received marketing authorization in Accurate sales values for Flolan prior to 2011 are unavailable, so we were unable to make a definitive conclusion regarding its initial market penetration. However, we did observe a market advantage for a first-in-class agent. Actelion Pharma s (XETRA: ACT) Tracleer was the first approved endothelin receptor agonist (ERA) for PAH. It generated sales of $1.6 billion in 2014, accounting for about 40% of the PAH market. This is partially due to the tendency for PAH patients to remain on their initially prescribed therapy and not switch to new agents. Newly diagnosed patients typically begin therapy with an agent from the PDE5 or ERA class. As their disease worsens, they add a second treatment from another class. Tracleer s market share is only beginning to erode as existing patients succumb to their disease and newly diagnosed patients choose best-in-class agents such as Actelion s Opsumit (macitentan). Actelion owns both agents and is contributing to the shift by focusing commercialization efforts on Opsumit, the more recently approved agent with the most patent life. This dynamic does not detract from the significant revenues Tracleer has and continues to generate. Strong Pricing is Preserved in Each Drug Class. Half of the drugs approved in PAH are priced at $90,000 per year or greater. They are all small molecules, and the $90,000 per year value falls in line with the mean price we derived for the small molecules analyzed in Figure 1. We also found that drugs that are second or even third to market for any of the four drug classes sustain strong pricing. Subsequent drugs launched in a given class may compete for overall sales, although companies are clearly not trying to compete with one another on price. It is worth noting that Revatio and Adcirca, both PDE5 inhibitors, are priced lower than the 10 other PAH products. Both of these drugs have been previously approved for erectile dysfunction and are therefore priced similar to that indication. Orphan Indications can Support Multiple Therapies. There are 12 products approved for PAH, an indication with approximately 10,400 patients in the US. Five of these therapies are expected to have generated sales of $400 million or greater in The success of multiple drugs in PAH can be attributed to the way the disease is managed, which we discussed above. The tendency for combination therapy equals more revenue per patient. There have also been routine price increases for PAH drugs and greater diagnosis of the disease. All these factors have led to an overall expansion of the PAH market. Figure 4 shows the growth in the overall PAH market. Figure 4. Growth of PAH Market in Terms of Sales *sales for 2015 are estimated Page 6

7 Most First-To-Market Disease Modifying Therapies Achieve Strong Market Penetration and Sales. In order to answer the question of how a typical orphan drug launch behaves, we analyzed the sales ramp of 7 first-to-market biologics approved for orphan indications. We tracked the sales of each drug starting from the first year of launch, which is shown in Figure 5. The annual price is also listed next to each drug. Similar to non-orphan indications, the sales ramps vary and are driven by patient number, price, accessibility of prescribing physicians, safety and efficacy profile of the agent, and competitive dynamics. Figure 5. Orphan Drug Launches for First-to-Market Agents Alexion Pharmaceutical s (NasdaqGS: ALXN) Soliris (eculizumab) is most successful of the 7 we analyzed, and has achieved double-digit revenue growth every year since launch. It reached over $2.2 billion in sales in Alexion estimates that the combined prevalence of the approved indications in the US and Europe is 9,000 to 11,000, suggesting over 40% market penetration as of Soliris is a unique situation where a combination of high pricing (~$600,000 per year), a relatively large market size, and strong penetration has led to blockbuster sales. Other agents such as Genzyme/Sanofi s Myozyme (alglucosidase alfa) and Shire s Elaprase (idursulfase) and Cinryze (C1 esterase inhibitor) have also achieved strong sales. These agents have premium pricing, worldwide prevalence above 10,000, and have achieved strong penetration in their respective indications. It is worth noting that 3 treatments, Naglazyme, Kuvan, and Aldurazyme, had slower sales ramps than the rest of the 7 therapies we analyzed. We believe that Naglazyme could be limited by a target indication of approximately 6,600 patients in approved markets. Kuvan s slow sales ramp is likely due to a relatively low price of $59,000 per year since it targets a disease with more than 10,000 individuals in the US. Ultimately our opinion is that orphan drugs targeting indications with 10,000 or fewer patients per year in the US and priced at $300,000 or above can achieve impressive sales. Analysis of Sales per Patient per Year. We also calculated sales per eligible patient per year by dividing annual sales by the prevalence of the target population, shown in Figure 6. Factors such as disease diagnosis and treatment rates were incorporated into the prevalence numbers when possible. For example, Shire has indicated that there are 42,000 HAE patients worldwide. 40% of these patients are Page 7

8 diagnosed and 90% of diagnosed patients are treated. Using these estimates we determined there to be 15,120 eligible patients for Cinryze, which is approved for HAE. Figure 6 demonstrates the relative change in market penetration of each drug since launch. In the figure, each drug nears 100% penetration of its eligible patient population as the sales per eligible patient shifts towards the drugs WAC. Figure 6. Sales per Patient per Year for First-to-Market Agents Ultra-Orphan Indications Can Achieve High Value Per Patient. Based upon an eligible patient population of 1,100, Naglazyme appears to be approaching 100% market penetration after 10 years on the market. The sales per eligible patient is approaching the drug s WAC price, affirming this conclusion. Soliris and Naglazyme have Penetrated the Market with a Quick Ramp. Soliris has penetrated the market faster than any firstto-market drug with an eligible patient population of 10,000 or greater. The penetration ramp accelerated after year 4 of launch, when its label was expanded to a second indication. Naglazyme has also penetrated a relatively small market at a quick pace compared to the other 5 first to market drugs we have analyzed. Risk to an Investment Investors should consider the risk of any investment. These stocks can have high risk and high volatility. Clinical stage biopharmaceutical companies assets may not be successful in clinical trials or may fail to gain regulatory approval. If products are launched, it is possible that revenues will not meet investor expectations, or that the products will face unexpected competition. The revenues of approved products may also not meet investors expectations, and approval in one disease does not always correlate with success and approval in another disease. Overall market conditions may also affect the value of the underlying securities. Page 8

9 Analyst Certification The research analyst denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies), with respect to each security or subject company that the research analyst covers in this research, that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or subject companies, and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. DISCLOSURES This research contains the views, opinions and recommendations of LifeSci Capital, LLC ( LSC ) research analysts. LSC has not provided investment banking and other broker-dealer services to any of the companies that are the subject of this report within the past twelve months. LSC does not expect to receive or intend to seek compensation for investment banking services from any of the companies that are the subject of this report in the next three months. LSC does not make a market in the securities of any of the companies that are the subject of this report. Neither the research analyst(s), a member of the research analyst s household, nor any individual directly involved in the preparation of this report, has a financial interest in the securities of the any of the companies that are the subject of this report. Neither LSC nor any of its affiliates beneficially own 1% or more of any class of common equity securities of any of the companies that are the subject of this report. LSC is a member of FINRA and SIPC. Information has been obtained from sources believed to be reliable but LSC does not warrant its completeness or accuracy except with respect to any disclosures relative to LSC and/or its affiliates and the analyst's involvement with each issuer that is the subject of the research. Any pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute LSC s judgment as of the date of this report and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, companies, financial instruments or strategies to particular clients. The recipient of this report must make his/her/its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Additional information is available upon request. No part of this report may be reproduced in any form without the express written permission of LSC. Copyright Page 9