Breakthrough Therapy Designation - What is it worth?
In summary, it is worth a lot!
This page will summarize an article written by Theodore Zucconi on Seeking Alpha in Dec 2019.
FDA Breakthrough Therapy Designation (BTD) was an offshoot of the Food and Drug Administration Safety and Innovation Act (FDASIA) that was signed on July 9, 2012, that called for a new designation to be created. Since 2012, only 147 drugs have been approved having this designation, which averages out to 21 approvals a year over the past 7 years. BTD is an elite level of review and while the biggest beneficiaries have been big pharma, smaller companies with this designation are ripe for a potential buyout.
Breakthrough Therapy is given to a drug with the following characteristics:
- Intended alone, or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition
- Preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
This chart shows that historically only about 39% of applicants are granted BTD designation. Of that 39% that get the coveted designation, only 147 drugs to date have been granted under the program, out of 771 total applicants.
Reduced Average Approval Times
A study was done in 2015 by PhamaExec, which compared the average development time for all drugs, compared to BTD drugs. The article sought to figure out if a BTD was worth it. The charts show that there was a clear benefit for BTD over standard status or other special programs like accelerated or orphan designations. The benefit averaged 2.5 years earlier approval for a New Molecular Entity (NME), and 3.5 years earlier approval for a drug under an orphan drug or accelerated product approval designations.
Blockbuster Threshold
The key to understanding the effect that a BTD will have on a stock is related to its potential patient population. Valuation is very much tied to the patient population along with the expected revenues. Blockbuster status is defined as drugs that generate over $1.0 billion in annual sales. In general, this threshold, according to the analysis, seems to lead to a value for BTD drugs of $10.0 billion, like Neurocrine Biosciences Inc. (NBIX). In 2018, they had revenues of $451 million. Credit Suisse is projecting $786 million in 2019 and $1.18 billion in 2020. There are exceptions to this rule because Alnylam Pharmaceuticals (ALNY) has a much richer valuation than its revenue supports, but it has a deep pipeline and has been awarded 3 BTDs.
Big Pharma seems to dominate BTD approvals as seen in the chart below.
Here is a list of smaller companies with BTD designation.
The reason the list of pure plays is so small is that a little less than half got swallowed up by big pharma, 12/29. All the companies with 2 or more BTDs were gobbled up by big pharma. This list essentially represents low hanging fruit for a Big Pharma acquisition. Any company with 2 or more BTDs would be in the hot zone for acquisition. Dissecting this list, the companies with the lowest market capitalization were targeting disease indications that represent small patient populations.
Conclusion
It is clear that getting a BTD adds significant value to a company. Based on historical averages, a pure play company with a BTD for a significant population could be worth $8.3 billion. Companies that meet these criteria should be thoroughly evaluated for their blockbuster (over $1.0 billion in peak sales) potential. Other companies should be evaluated for their potential as a platform technology and the ability to put up more than 1 BTD. The other thing that investors need to consider is that not all BTDs are created equal. There is clearly a correlation between the size of the potential patient population and the valuation.