Insights
By: Alastair Dean
Thematic investing viewpoint: Rare and Orphan Diseases
Healthcare subsector offers substantial potential growth
A Rare Disease, can be defined by a condition that affects less than 200,000 Americans, like Cystic Fibrosis, Sickle Cell disease or Amyotrophic Lateral Sclerosis (or ‘ALS’). Orphan diseases are a subset of that group, so-called because they are seen as neglected conditions whose treatments are often not considered profitable due to the high cost of development relative to the limited patient population.
However, despite being a small segment of the global pharmaceutical market, Rare and Orphan Diseases looks to be a very promising Healthcare investment theme with the capacity to grow substantially over the long-term. While each disease is rare, collectively they impact a large population worldwide, with some estimates suggesting that 400m people are affected (Source: Global Genes Project, Sept 24).
Scientific advancements
Around 80% of rare diseases are genetic or have a genetic component (Source: Rare Genomics Institute, Sept 24). Recent advances in genomics, gene therapy, and precision medicine are opening new avenues for treating previously untreatable conditions. As of 2022, the market was estimated at $154bn, with projections suggesting it could reach $485 billion by 2032, growing at a compound annual growth rate of 12.2% (Source: Precedence Research, 2022).
Robust demand
High levels of unmet medical needs combined with fewer treatment options lead to robust demand and the ability to command higher prices. Smaller patient populations can make drug development more streamlined, involving targeted clinical trials which are both cost effective and quicker to complete. Furthermore, regulators often offer these treatments expedited approval processes, shortening the time to market and enabling faster returns on investment.
Regulation
Entering its forty-first year, the 1983 US Orphan Drug Act has been overwhelmingly successful in facilitating the production of treatments for rare diseases. It offers financial incentives to investment towards these areas, tax credits and extended market exclusivity for new therapies, all of which can reduce financial risk and enhance potential returns.
Optionality
The technology used to design treatments for one disease can open the door for the development of novel treatments for others. Indeed, it is relatively common for drugs developed for rare indications to be expanded into larger patient populations. Cancer treatment, Keytruda, for instance – which generates $25bn in annual revenue – started out as a rare/orphan approval (Source: Statista, 2023).
Potential challenges
While there are substantial opportunities in this market, it is not without its challenges. Risks such as clinical trial failures, regulatory or political obstacles, and market competition are all part of the landscape.
Furthermore, addressing the Rare and Orphan Diseases sector is not without ethical dilemmas, particularly when it comes to drug pricing and access. Development and manufacturing costs for small patient populations can result in prohibitively expensive medications. There is also the potential for companies to exploit patients for profit.
Despite these issues, investment is essential because it drives the development of novel therapies for conditions that otherwise receive little attention. Collaborating with specialist investors can help navigate these ethical challenges. By ensuring that drug pricing is conducted responsibly it is possible to mitigate the risks of reputational damage or regulatory action.
Rare and Orphan Diseases is set to continue to take advantage of a set of conducive factors including pharmaceutical innovation, a favorable regulatory environment and strong demand. As a result, the potential for future growth looks good.
Alastair Dean is a Director focusing on equity research and manager selection. He is responsible for due diligence and research on global and regional equity mandates, and is also a member of both the Sustainable and Thematic Investment Committees.
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Disclaimer:This information does not constitute legal, tax, or investment advice. It is neither an offer to sell, nor a solicitation to buy, any investments or services. Our expectations and beliefs are based on reasonable assumptions within the bounds of what we currently know. Opinions expressed here are as of the date of publication and subject to change without notice.
Issued by Stonehage Fleming Investment Management Ltd. Authorised and regulated by the Financial Conduct Authority (FRN.194382).