In honor of Rare Disease Day on February 28, 2025, we will publish a series of posts throughout the month on As Prescribed and Health Law Scan, focusing on issues impacting the rare disease community.
The value of merger and acquisition (M&A) deals of rare disease companies has increased significantly over the past few years (from $18.9 billion in 2019 to $50.6 billion in 2022 according to a 2024 article in Nature Reviews Drug Discovery). This combined with recent billion-dollar acquisitions in the rare disease space have piqued the interest of large pharmaceutical companies, as well as investors, and may be indicative of further growth of this life sciences sector in the years ahead. This article analyses some of the key challenges faced by parties to an M&A transaction in the rare disease space and outlines strategies that can be deployed to ensure a successful closing.
An Unmet Need Driving Research, Development, and Investment
According to the US Food and Drug Administration (FDA), it is estimated that there are more than 7,000 types of rare diseases that affect around 30 million in the United States, and a 2024 Nature Reviews article reports that there are approximately 300 million patients with rare disease globally. Of these rare diseases, approximately 95% are without any treatment options.[1] This large unmet need combined with scientific advances on the molecular underpinnings of rare diseases and various incentives that governments provide for the development of orphan drugs (such as market exclusivity, accelerated pathways, and tax credits) have contributed to a significant rise in investments in this area.
Small Patient Populations Require Early Identification and Transparent Communication
By their nature, rare diseases affect a very limited number of patients. Identifying the relevant population affected by a rare disease is often difficult and may require genetic testing. As we outlined in one of our previous posts for Health Law Scan, 2024 saw the US Department of Health and Human Services Office of Inspector General (HHS OIG) provide more concrete regulatory guidance for programs sponsored by pharmaceutical manufacturers that provide financial assistance and free genetic testing and counseling services to patients suffering from rare diseases.
Patient advocacy groups (PAGs) can connect companies with affected patients. Developing meaningful relationships with PAGs can facilitate trial recruitment, improve reputational standing, and guide research and development priorities. Therefore, companies developing rare disease drugs should consider engaging with PAGs at appropriate times. Providing clear information on the benefits and side effects of the proposed treatment will build patient trust and support. Companies interacting with patient advocacy groups, however, must be mindful of FDA’s rules and guidance around pre-approval communications and product promotion, as well as legal requirements and industry guidelines around interactions with healthcare providers.
The early identification of patients is critical to meeting enrollment targets for clinical trials and managing clinical development costs. The availability of patients, as well as the estimated development costs to the company, will be heavily scrutinized as part of the due diligence process and feed into the ultimate valuation assigned to the business.
Predicting Sales and Revenue
Small patient populations make it difficult to determine the sales and revenue for orphan drugs, which in turn will affect a buyer’s valuation of the business. To further complicate matters, the Inflation Reduction Act only exempts orphan drugs with a single approved indication from mandatory price negotiations, which could potentially have significant financial impacts on long-term revenue. The traditional pharma commercial models do not easily translate to small patient populations. Buyers examining a potential rare disease company target for M&A, will be focused on understanding the reimbursement landscape, that can vary significantly across geographies, seeking expert reporting as necessary, to ensure that the right valuation is assigned to the target.
In addition, a great portion of the transaction value in many private M&A transactions involving rare disease drugs rests in development and commercial sales milestones and royalties. Potential pricing concerns can be addressed in the transaction documentation through tying development milestones to full enrollment (as opposed to first patent dosed) in clinical trials and royalty payment adjustments.
Tackling Regulatory Complexities
The development of products for rare disease may present challenges not encountered when developing products for other diseases and conditions. For instance, companies developing products for rare diseases may face enrollment challenges and will need to carefully consider the design of clinical trials to optimize data collection and management.
In addition, since many rare diseases have no existing FDA approved treatments, clinical endpoints may be difficult to define, especially in disease with slow or variable progression. As a result, it is critical for a target company to ensure that it has well-thought-out clinical trial protocols with endpoints that are acceptable to regulatory agencies and clinically meaningful for patients.
Compliance with regulatory requirements and having a clear regulatory strategy are key to bringing a drug to market. Companies looking to be acquired should therefore develop and implement a well-thought-out regulatory strategy and interact with applicable regulatory agencies early and thoughtfully in the drug development process. In this respect, it can be beneficial to employ experienced regulatory counsel.
Ensuring a Smooth Business Transition
The research, development, and manufacturing of rare disease drugs relies on highly skilled professionals with specialist knowledge. Beyond a company’s internal know-how, relationships with critical third-party service providers will need to be considered and, in some cases, renegotiated.
In the case of a share acquisition, the parties should work together during the negotiations to establish a suitable incentive structure to ensure the retention of employees post-closing.
If the transaction is structured as an asset sale, a transitional services agreement (TSA) will likely be required, to ensure that the seller continues to provide certain services to the buyer for a period of time after closing of the transaction. The nature of those services will depend on the buyer’s ability to take the business forward. The practicalities of ensuring a successful transition will become apparent as the operational teams on both sides engage with each other and determine the transitional plan.
Conclusion
According to Precedence Research, the worldwide treatment market for rare diseases was valued at $205.7 billion in 2023, and various research agencies have projected that the worldwide rare disease market is expected to grow at a compounded annual growth rate of approximately 9% from 2024 to 2033. In addition, a 2024 IQVIA report noted at 44% of the global clinical trial activity is focused on rare diseases.
While acquiring a rare disease company does not differ substantially from any other acquisition within the life sciences sector, certain aspects of developing a rare disease drug will have a significant impact on the way that buyers evaluate the target. Companies active in the sector that are looking to be acquired should prepare for a thorough due diligence and consider engaging proactively with regulators and PAGs. Through careful planning, the parties can ensure a successful business integration and fulfil the vital mission of improving health outcomes for underserved rare disease communities.