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Raptor's FDA Approval Is New Test for Orphan Drug Pricing

Stocks in this article: RPTP ALXN

NOVATO, Calif. ( TheStreet) -- On Tuesday, Raptor Pharmaceuticals (RPTP - Get Report) joined the coveted ranks of orphan disease companies with an FDA-approved therapy. Regulators approved Raptor's Procysbi to treat nephropathic cystinosis, a rare genetic condition that affects about 500 kids and adults in the U.S. and 3,000 worldwide.

Investors love orphan disease companies because they can charge sky-high prices -- Alexion Pharmaceuticals (ALXN - Get Report), for example, charges about $500,000 per year for Soliris -- and insurance companies reimburse without much protest. But as the number of orphan disease companies with approved products grow, so too are concerns about a backlash. As the cost of orphan drugs rise, will insurance companies erect more roadblocks in the way of reimbursement?

Raptor is an interesting test case because Procysbi isn't a new drug, just a long-acting version of Cystagon, approved in 1994 to treat nephropathic cystinosis. Cystagon must be taken on a strict, every six-hour schedule. Procysbi is administered twice a day.

Cystagon costs about $10,000 a year. By orphan disease standards, that's almost giving a drug away for free. Raptor intends to charge $250,000 per year for Procysbi. We'll soon find out if insurance companies agree to a 2,400% price hike for a more convenient, but not necessarily more effective, orphan disease therapy.

Raptor believes insurance companies will pay for Procysbi because less frequent dosing reduces gastrointestinal side effects and helps cystinosis patients stay on therapy longer. Better convenience and improved compliance translates into better outcomes for patients.

On a conference call Tuesday, Raptor said 400 patients have been identified in the U.S. already but it will take two to three months before reimbursement can be obtained and patients are switched from Cystagon to Procysbi. Raptor expects to have 125 patients on Procysbi at the end of 2013, with a majority of revenue recorded in the back half of the year.

Raptor's commercial market potential in the U.S. is approximately $100 million. Obviously, not all cystinosis patients will switch to Procysbi so a more realistic peak sales estimate for the U.S. is in the $75-80 million -- if insurers pay for the drug.

After Procysbi's approval was announced Tuesday, Raptor shares closed up 5% to $6.90. The relatively muted response to the company's first drug approval is likely due to a $370 million market valuation that obviously bakes in a good amount, if not all, of Procysbi sales already.

Raptor is also seeking Procysbi approval in Europe, where a decision may come in the middle of the year. The company is also studying the drug in other diseases, including Huntington's.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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