KNSA - Sector Spotlight: Orphan Drug Developers With Significant Upside
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The biotech sectoris finally beginning to recover following a two year stretch ofunderperformance that was largely driven by rising interest rates andother macro factors. Biotech has a track record of strong recoveries,with the sector typically seeing double-digit gains after a downturn.This is something investors shouldn’t ignore.
This recent turnaroundcan be credited to a robust increase in fundraising efforts and anuptick in IPOs, reaching levels not seen since the peak of themid-pandemic market boom.
According to the Financial Times, drug developersraised $6 billion in equity capital markets in January, the largesttotal since February 2021 – a period when biotech stocks hit theirall-time high. Moreover, the SPDR S&P Biotech ETF (XBI) returned28.7% over the past six months alone, clearly illustratinginvestors' rising confidence in the biotech rebound.
Identifying biotechstocks with the potential to deliver superior returns is no easy feat.There are specific milestones that companies can achieve to signalpositive momentum to investors. For example, smaller biotech companiesmay have received the nod from regulatory authorities such as the FDA,or new breakthroughs from clinical trials, to offer a compellinginvestment opportunity.
With that in mind, two stocks that investors should considerlooking at are Cardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) and Kiniksa Pharmaceuticals (NASDAQ:KNSA) .
Cardiol Therapeutics lead product is CardiolRx™, a small molecule therapy thatappears on track to bring major disruption to the pericarditismarket.
CardiolRx™ received a vote of confidence as it was grantedOrphan Drug Designation (ODD) by the FDA for the treatment ofpericarditis back in February, illustrating the potential of the drug.Apart from providing a seven-year term of market exclusivity uponfinal FDA approval, the ODD also positions Cardiol Therapeutics(NASDAQ:CRDL) (TSX:CRDL) to be able to leverage a wide range offinancial and regulatory benefits, including government grants forconducting clinical trials, waiver of expensive FDA user fees, andcertain tax credits.
The U.S. Orphan Drug Act is intended to assist and encouragecompanies to develop safe and effective therapies for the treatment ofrare diseases and disorders, defined as one that affects fewer than200,000 people in the U.S. There are approximately 160,000 cases ofrecurrent pericarditis in the U.S. annually, which includes 38,000cases with a recurrence. Having secured FDA approval, CardiolTherapeutics is an exemplary company likely to attract biotechinvestors seeking assurance in smaller firms.
While the stock had asignificant rally on the backdrop of this news and continues to showstrength, we believe that there is still potential for furtherupside.
Cardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) isexpected to release topline data in June for its Phase 2 MAvERIC-Pilotclinical trial, which if positive, could unlock significantshareholder value. Several analysts have already indicated that theyare highly optimistic that the data could be a catalyst, with oneanalyst noting that “CardiolRx’s potential to be a safe, newapproach to RP (recurrent pericarditis) treatment isunderappreciated.”
CardiolRx™ stands out when compared to the only FDA-approvedtherapy because it is administered orally and expected to be offeredas a first-line therapy for pericarditis, opening it up to an evenbigger opportunity as it could be prescribed at the firstoccurrence.
Orphan drugs have become lucrative business opportunitiesbecause these drugs command premium drug pricing, with the averageprice for an orphan drug at $32,000 per year per patient according toa 2021 study published in the journal Rare Diseases & Journal ofOrphan Drugs.
That could explain why analysts who have been tracking CRDL areso bullish on the stock. For instance, JoeGantoss of Chimera Research Group says he won’t be surprisedto see Cardiol’s price break past the 3-year high at $4.96, whileanalyst Vernon Bernardino of H.C. Wainwright & Co. reiteratedtheir Buy rating and issued a $9.00 price target.
That would imply thatCardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) has a potential upsideof about 300% from its current share price.
KiniksaPharmaceuticals (NASDAQ:KNSA) offers some insight into the revenuepotential of an orphan drug that treats recurrent pericarditis.
So far, KNSA has had agreat run, gaining about 36% over the past year and trading at about$18.00 per share despite challenges in the sector. It is currentlyvalued at $1.3 billion. Kiniksa’s portfolio of assets includesARCALYST®, the first and only FDA-approved therapy for recurrentpericarditis.
For some context, the FDA granted Breakthrough Therapydesignation to ARCALYST® for recurrent pericarditis in 2019; the FDAgranted Orphan Drug exclusivity to ARCALYST® in March 2021 for thetreatment of recurrent pericarditis and a reduction in the risk ofrecurrence in adults and pediatric patients 12 years of age and older.The European Commission granted Orphan Drug Designation to ARCALYSTfor the treatment of idiopathic pericarditis in 2021.
Sales of ARCALYST®were $38.5 million in 2021; $122.5 million in 2022; $233.2 million in2023 further reaffirming the massive revenue potential for treatingrecurrent pericarditis. For the first quarter of 2024, ARCALYST®sales were $78.9 million representing 85% year-over-year growth.
Furthermore, since itslaunch in April 2021, approximately 2,000 prescribers have writtenARCALYST® prescriptions for recurrent pericarditis, illustrating themassive demand for effective recurrent pericarditis therapies.
Going forward, Kiniksaanticipates that it will bring in between $370 million and $390million in 2024, up from the earlier guidance of $360 million to $380million. The revised outlook represents roughly 63% year-over-yeargrowth at the midpoint.
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