3 Orphan Trades in Biotech That Could Soar: XBI SRPT AMLX OSTX

Orphan drug companies represent an increasing share of the biotech industry’s leading index, the XBI (NYSE: XBI).  The index is hovering around the 100 psychological resistance level. The index put in a 4 year triple bottom at the $65 level and has worked its way constructively higher.  A breakout to all-time highs ($159) is imminent given the fundamentally supportive backdrop of lower interest rates.  Orphan drug companies like Sarepta Therapeutics (NASDAQ: SRPT), Amylyx Pharmaceuticals (NASDAQ: AMLX), and OS Therapies (NYSE: OSTX) have the power to propel it higher.  

RBC Capital’s recent upgrade of Sarepta Therapeutics (NASDAQ: SRPT) price target to $182 following the FDA authorizing the expanded use of Elevidys in the treatment of Duchenne muscular dystrophy underscored the value of developing drugs for the treatment of rare conditions. In the case of Sarepta, it also underscores how a single company can change the course of the lives of patients who suffer from rare disease. The controversy surrounding the initial approval of Sarepta’s first drug Exondys 51 (eteplirsen) in 2016 was related to the crucial role patient advocacy groups played in getting the drug approved.   While the safety and efficacy of the drug would not have met traditional metrics for approval, the patient advocacy groups convinced the agency of the importance of getting new therapies into the market, and the decision ultimately allowed Sarepta to develop several additional therapies and spurred other companies to develop therapies for the disease. Exondys 51 was originally approved based upon an open label trial of only 12 patients for Duchenne muscular dystrophy, a condition affecting approximately 500 patients annually in the US.  Now SRPT is a company with a $13.6 billion market cap.  Patient advocacy is sometimes a huge key, and that will be expanded upon later on in this article.

‍Amylyx Pharmaceuticals (NASDAQ: AMLX) was strongly supported by Amyotrophic Lateral Sclerosis (ALS) patient advocacy groups as the Company sought accelerated approval for its drug candidate Relyvrio. Ultimately the FDA decided to grant Relyvrio accelerated approval in September 2022 based upon Phase 2 data, conditioned upon the Company agreeing to conduct an additional clinical trial to prove the drug’s efficacy. The stock had an epic run almost quadrupling off its lows that year.  Results from its phase 3 showed no efficacy and Relyvrio was pulled from the market earlier this year and the stock cratered.  It is currently trading at a $137 million market cap well below its cash value.  AMLX was unfortunately a one trick pony with nothing else in the pipeline so when its drug was put out to pasture it had to reinvent itself.  With a healthy balance sheet that contains $375 million in cash, it is rebuilding its pipeline with a GLP-1 inhibitor and another orphan drug disease for Wolfram syndrome.  This case study proved the value of the ALS market for investors and led other drug companies to pursue development of other therapies for the disease.  It also proved the power that patient advocacy groups can have in the orphan drug approval process.   

There has been a dearth of IPO’s this year but cancer immunotherapy developer OS Therapies (NYSE: OSTX) just completed an successful initial public offering on August 1, 2024. The company issued 1.6 million shares at $4.00 raising $6.4 million.  With this low float, the stock has tremendous upside potential and the recent catalyst of the formation of a patient advocacy board demonstrates their commitment to a proven approval formula in orphan drug diseases. These patient advocacy groups would ultimately help make the case to the FDA for an accelerated approval after announcing promising interim results from the human clinical study in June from the ongoing Phase 2b clinical study that reads out in Q4. There are 21 million shares outstanding on a fully diluted basis which means their offering was for about 8% of the total tradable float which means the supply is extremely constrained and has a good chance to move to a much more reasonable valuation of a $1.0 billion as shareholders discount their first approval in the coming year.   

OSTX is developing an immunotherapeutic cancer vaccine OST-HER2 that the company says is able to generate a T cell response against all HER2 expressing cancers. While OS Therapies says its technology will ultimately be used in combination with Genentech’s (OTCQX: RHHBY) Herceptin® for the treatment of breast cancer, OST-HER2 was conditionally approved by the USDA for the treatment of osteosarcoma in dogs following stellar data showing a 5-fold increase in survival at 2 years post-diagnosis.  This means investors could see a canine approval very soon and it's reasonable to speculate that their global partner might likely be Zoetis Inc. (NYSE: ZTS) the most prominent global veterinary drug developer.  They have also fully-enrolled a potentially pivotal Phase 2b clinical trial in humans, having already received Orphan Drug Designation, Fast Track Designation and Rare Pediatric Disease Designation for the treatment of osteosarcoma. 

The Company says it is currently in discussions with the FDA regarding Breakthrough Therapy for the disease. Investors should keep in mind that Breakthrough therapy drugs are worth billions versus the $80 million market cap of OSTX.. There have been no new treatments for osteosarcoma in over 40 years. OSTX’s open Phase 2b trial has enrolled 41 patients for a condition that affects approximately 1,000 patients annually in the US.

Given the increasing risk-reward profile for targeting orphan diseases due to the smaller trial sizes, lower standards required for approval and the potential for a priority review voucher valued at over $100 million in the case of orphan drugs developed for diseases that primarily target kids, we believe there will continue to be an increasing focus on rare diseases in the biotech industry from small companies and that this approach is good for investors, companies and patients. Based upon the late stage of clinical development and the near-term potential following its IPO, OS Therapies appears best positioned to potentially deliver outsized returns by the end of 2024 based upon its pending Phase 2b trial readout in osteosarcoma and potential for full approval in canine osteosarcoma. Given recent data the Company announced in breast cancer, the value of a potential approval in osteosarcoma could be very significant given that it is easier to expand the label into breast cancer for an already authorized molecular-targeted cancer drug such as OST-HER2 than to get a new label for the product.

Investment Summary

SRTX has 4 approved drugs and a number of other gene therapy based drugs in clinical trial development. The stock is an embodiment of a proven model that leverages patient advocacy in their development which translates into less expensive trials and quicker drug development. Their stock should continue to move higher as they keep adding approvals to their pipeline.  OSTX appears to be using the same clinical trial approval template as SRTX which is very cost efficient for investors (minimizes dilution) and accelerates the process.  AMLX understands the orphan drug development model and has shown it can successfully execute and drive shareholder value once before. The same management team is taking another bite at the apple and the stock is trading at a discount to cash and investors should consider such a low priced play given the track record of management and the new asset they just brought in to develop that has very promising statistically significant efficacy data. 

OSTXs’ IPO priced 1.6 million shares at $4 per share and was immediately shorted down to $2.51 on its first day of trading on only 416,000 shares.  While it was one of the worst days for the overall market in 2024, it was followed by a massive short squeeze that saw over $6.00 in premarket and traded a total of 5.13 million shares the following day (over 3 times the float). The shorts had no idea that the offering was in such strong hands and must have not gotten the memo that there was no debt outstanding following conversion of all of its debt into equity at the IPO or that there were no warrants in this deal either. This is a super clean deal which means the stock can march much higher with liquidity fueled by the short player that got caught on the wrong side of the tape.       

Given the proximity to the Phase 2b data, we believe there is minimal dilution risk heading into the year-end event. There is also the potential of a veterinary deal that could fund future clinical development on the rest of their pipeline.  OS Therapies represents a compelling risk-reward profile, and its fairly low profile IPO on one of the worst days for the stock market in 2024 leaves potential new investors with a golden opportunity to take advantage of a clean NASDAQ low float play with a number of positive catalysts.

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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. A guest contributor wrote this article and solely reflects his opinions.