NEW YORK (TheStreet) -- Receiving orphan drug designation from the Food and Drug Administration is like manna from heaven for biotech companies, as long as there are enough patients to sustain profitability. Estimating the patient population for a rare disease can get tricky.
Aegerion Pharmaceuticals (AEGR) knows this problem well, which is why its stock price has dropped from $100 per share to $30 per share in seven months. Aegerion's chart looks scary, but I believe the bottom may finally be in. Its shares closed Friday at $34.06, down 52% so far this year.
Investors love companies that develop drugs for rare, or orphan, diseases because the likelihood of getting the drug approved is higher. Since 1983, the FDA lists 3100 orphan drug designations. Out of those, 455 have been approved, amounting to a 14.6% approval rate, with an average period of 4.26 years from orphan designation to approval.
That may not seem like much, until you consider the overall numbers. The approval rate for all drugs from preclinical stages is 8%, and approval takes anywhere from eight to 20 years on average. Bottom line, if a company gets an orphan designation, chances of approval are nearly doubled, and approval time is shortened by as much as 80%.
Interestingly, the orphan drug addiction for biotechs has really heated up in the past five years. Thirty-six percent of all orphan designations have been granted in the last five years, along with 28% of the approvals. For perspective, the Orphan Drug Act is over 30 years old.