Novogen : Orphan Status for Dummies

My contempt for Novogen (ASX : NRT) is known, but today my contempt for Novogen shareholders is even greater than that of the company.

Today, Novogen (ASX : NRT) received orphan designation for Anisina from the US Food and Drug Administration (FDA), with a resulting 20-odd% surge in share price. Whilst FDA orphan designation is nothing to be sneezed at from a strategic development vantage, neither is it worth a 20% increase in market capitalisation of the company. Since investors in NRT are evidently less sophisticated than the average, here is a repeat summary of the most common misconceptions (and for those of you who enjoy reading FDA guidance, but haven’t yet worked out how to use Google, here is the link) :

  1. The orphan designation is part of the approval process. Submitting an orphan designation request is unrelated to the drug approval process. In fact, the orphan application can be filed anytime in the drug development process before NDA/BLA submission, even prior to IND filing.
  2. There can be only one orphan designation per indication. Not only can there be multiple orphan designations per indication; more than one sponsor can receive an orphan designation for the same drug/indication. However, only the first drug to be approved for a given indication will enjoy the benefits of orphan approval. A product with a different active moiety can also receive orphan approval for an already approved orphan indication.
  3. A drug must be proven safe and effective in order to get orphan designation. The safety and efficacy bar is fairly low for an orphan designation. The applicant is asked to provide a “scientific rationale” for the use of the drug (i.e. a hypothesis). The applicant may provide clinical data, animal studies or in vitro data to make the case. If sufficient information exists in published literature, that may suffice. (In otherwords, even Novogen’s shitty experiments meet the bar).
  4. The orphan application process is arduous. Actually, the orphan application process is quite simple. In the US, the argument hinges on disease prevalence of under 200,000. If the number can be established and there is a “scientific rationale” for the use of the drug, it will most likely achieve orphan status. If FDA rejects the submission, FDA will explain why and the submission may be reworked and refiled as many times as necessary. Additionally, there is no FDA fee for the orphan designation request. (So what is there to lose?).
  5. Seven-year exclusivity is the sole benefit of the orphan approval. Although post-approval benefits are significant, many early-stage companies apply for orphan designation when approvals are in the distant future. The successful application becomes public when the designation occurs, thereby broadcasting the young company’s intention and opening the category to anyone. Therefore, there must be another reason for these early filings. There is. Orphan designations are newsworthy and small companies often use the designation to put themselves on the map and to gain the interest of the investment community. Other benefits of orphan designation include:
    • Protocol assistance offered by FDA (good for Novogen)
    • Tax credits of 50% of the clinical drug testing cost awarded upon approval (if run in the US)
    • Research grants—FDA awarded approximately 75 grants in 2013 (not guaranteed if the science is crappy)
    • Waiver of NDA/BLA application fee—this is a $2.2 million value (on an NPV basis, given that Anisina would take 6-7 years to NDA, this is worth about 300,000, without probability adjustment)

Here is the bottom-line. In the best-case scenario, Anisina for neuroblastoma (in the US) will treat 150 patients a year (full market capture). The cost of development out to NDA will be – in the best case scenario (i.e. when the company starts doing proper clinical development instead of buying time until its options are cashed in) – $70-100m. Absolute best case. This means with a USD $100,000 price tag (generous), pediatric neuroblastoma will bring in about $15m a year in revenue (to repeat, in the full market ownership scenario). Even if the good ol’ US government gave half of the development costs back to Novogen and there was ZERO competition, the company still will never recover this investment. Ever.


I love Pink Floyd, though I didn’t much like The Endless RiverIf Anisina really is “in memory of“, it is in memory of the days when orphan drug status was worthy of a 20% share price hike.

Those days have gone. Buy low, sell high.

 

Photo cred:  The brilliant 1948 Oliver Twist. The pivotal moment – “please Sir, may I have some more…”

5 thoughts on “Novogen : Orphan Status for Dummies

  1. Chris – What discount rate are you usinvg to wind $2.2M back to $300k over 6-7 years? You seem to be assuming that ASX biotechs invest at or above their cost of capital! That’s ridiculous! I’d almost go so far as to argue that the non-probability adjusted PV of the fee is higher than the $2M FV. As a bunch, these co’s are generally value destructive.

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    • I assumed a 25% DCF and a zero investment in the “cost” of the BLA filing fee for seven years. I chose this DCF precisely to capture your concern. Normally I would be comfortable with 20%. When I say probability adjusted, I mean adjustment at each stage in clinical development, which means that a pre-clinical company for a small molecule has a <10% chance of success (ignoring anything related to orphans).

      If you are dedicated and you stick to a DCF 20% (which I think is very reasonable for an early-stage biotech company with no clinical data), the PV of that fee waiver is worth $500k in today's money. If you apply the probability of success, this FDA designation is worth about $50,000 to the market cap of the company as a pre-clinical company.

      That’s how irrelevant this is, in terms of valuation impact.

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  2. I agree that orphan status is irrelevant to Novogen. No argument at all. But, I don’t think it makes sense to argue the point by discounting. The corollory of your $300k orphan value is that the current share capital of Novogen has an FV of $3 billion at the time of realising the $2.2m FV benefit. If you don’t believe that this would be the case, then your discount rate is wrong.

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    • Hi Bmccaw,

      I get your point and I agree. I suppose my sarcasm didn’t have the right impact. I attribute ZERO value to this event. The only financial value I could attribute was the waiver of the NDA fee and I chose to simply discount it to the present day. I was being “flippant”.

      Apologies for dragging you into a pointless modeling exercise 🙂

      Thanks for reading –

      Like

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