Look for orphan drugs to keep fueling M&A, Moody's says

Orphan drugs are attractive to make thanks to premium pricing prospects, limited competition and regulatory perks. But those factors also make them attractive to buy, and they'll continue to spur M&A activity in the biopharma field, Moody's predicts.

As Moody's SVP Michael Levesque pointed out in a recent research report, nearly half the pickups in pharma's recent deal spree have involved orphan drugs, or meds that treat serious conditions that affect fewer than 200,000 patients. And with the wheeling and dealing showing no signs of slowing down, he expects they'll continue to take center stage.

"Favorable credit characteristics of pharmaceutical companies that produce orphan drugs include high barriers to entry and the life-threatening nature of orphan diseases that require patients to stay on therapy for life," he said in a statement. And orphan drugs often come with patent bonuses, too, offering extra protection beyond normal IP shield expiration dates.

So who's next on the list of buyers and sellers? Levesque highlighted Sanofi's ($SNY) Genzyme, Baxter's ($BAX) soon-to-be-spun-off biopharma unit Baxalta, and Horizon Pharma ($HZMP). Rare-disease specialist BioMarin ($BMRN) has also drawn its fair share of buyout speculation over the past couple years, and recently, Bernstein analyst Geoffrey Porges suggested Gilead Sciences ($GILD) should snap up cystic fibrosis drugmaker Vertex Pharmaceuticals ($VRTX).

But as some pharma skippers have warned lately, companies shouldn't be too quick to the draw--even if lucrative orphan drugs are involved. As GlaxoSmithKline ($GSK) CEO Andrew Witty told the Financial Times last month, ultralow interest rates--a.k.a. cheap money--were spurring companies to make "poor choices" when it came to dealmaking, and Valeant ($VRX) helmsman J. Michael Pearson recently told Bloomberg that some of the industry's most recent acquisitions were "not going to work."

There's a "bit of a bubble" going on in the industry, he told the news service. "In terms of prices being paid for acquisitions, some of them make sense and some of them don't."

- access the report from Moody's

Special Reports: Top 20 orphan drugs by 2018 | Pharma's top 10 M&A deals of 2014