Can This Orphan Program Create Even Larger Gains?

In most circles of the market, Celldex Therapeutics is known as a biotechnology company developing novel therapeutics to treat cancer. However, Celldex is also developing products to treat ultra-rare orphan diseases, and if successful, this fact could transform the company and add long-term gains to your portfolio.

The orphan leaders
On Wall Street, companies that treat the rarest of diseases (orphan) are often rewarded with large valuation premiums. The reason is because these diseases lead to longer years of product exclusivity, removing fears of generic pressure, and because many can be developed to treat multiple rare diseases. But also, since these drugs are targeted at patient populations below 200,000, premium pricing is also awarded, which ultimately drives margins higher.

Perhaps the two best examples of successful orphan companies are Alexion Pharmaceuticals and BioMarin . The two are similar yet different in operational approach: Alexion develops one product that treats multiple indications, while BioMarin develops several products to treat a particular indication.

In the case of BioMarin, it has four marketed products with revenue of $524 million over the last 12 months. However, the company also has a product called GALNS that is expected to earn an FDA approval in the coming year for Morquio-A syndrome, an enzyme deficiency disease that causes systemic skeletal dysplasia, short stature, and joint abnormalities.

It is estimated that this disease effects 300,000 people in the U.S., yet despite this small patient population, analysts project that GALNS could produce peak sales of $500 million annually. Therefore, BioMarin trades with a market cap of $9.5 billion, or 18 times current sales, due to the prospects of both GALNS and its four other products in development.

Alexion develops Soliris, a drug that treats genetic and blood disorders with an annual price tag of $400,000. Currently, Soliris is approved by the Food and Drug Administration to treat two diseases, but is being tested to treat five additional indications. If successful, peak sales of this drug are expected to top $4 billion.

Where is the connection to Celldex?
As a result of Soliris' potential, Alexion trades with a market cap over $20 billion, yet has revenue of only $1.3 billion in the last 12 months. This fact is why Celldex is attractive in its orphan efforts, as its clinical product CD-1135 and Soliris are rather similar.

Soliris is what's known as a complement modulator, which binds to a component called C5. This binding prevents the destruction or removal of invading particles by the immune system. The C5 binding addresses uncontrolled complement activation on the surface of cells, which play a role in life-threatening and chronic diseases. Alexion has been able to expand the use of Soliris because other diseases have responded to the binding of this particular component.

In the case of Celldex's CD-1135, it is also a component modulator, binding to C5 but also C3. Already, CDX-1135 has shown a good safety profile in various clinical studies and demonstrated control of C3 in mice with damaged kidneys. This is important because no other drug has had such an effect.

Currently, Celldex is testing its product in a study on dense deposit disease, or DDD. If successful, it is logical to believe that Celldex will then begin testing the product to treat other indications, those that are rare, many of which might even challenge the programs of Soliris.

Where is the upside?
Celldex's clinical data on CDX-1135 is expected to be released within the next few months. At that point, we will know whether CDX-1135 is another Soliris or if Celldex should stick to its oncology roots.

With that said, it's important to understand that none of Celldex's one-year 365% gains over the last year have been in connection to CDX-1135. The company's breast cancer drug increased survival and delayed progression in the most difficult to treat of patients. Celldex investors are also preparing for data from the company's brain cancer study, a trial that was expanded earlier this year after early signs of anti-tumor activity .

Hence, this is a company that's moving in the right direction regardless of CDX-1135. However, from a biological standpoint, CX-1135 makes sense, as it's very similar to Soliris. Also, with the success of this product, Celldex would likely be transformed from an oncology-focused company to a diversified all-around biotechnology company that treats both rare and common diseases. Given the large premiums awarded to the likes of BioMarin and Alexion, it's likely that CDX-1135 becomes closely watched in the months ahead, and if positive, Celldex might even see continued momentum as investors brace for a new look company.

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The article Can This Orphan Program Create Even Larger Gains? originally appeared on Fool.com.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends BioMarin Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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