The Next Great Small Cap Orphan Drug Stock? ZLCS, OMER & VPHM

Small cap orphan drug stocks Zalicus Inc (NASDAQ: ZLCS), Omeros Corporation (NASDAQ: OMER) and Viropharma Inc (NASDAQ: VPHM) have been active lately thanks to good news about their orphan drug treatments. In case you aren't familiar with the term, orphan drug designation by the FDA is granted for drugs targeting conditions affecting 200,000 or fewer US patients annually that are expected to provide significant therapeutic advantage over existing treatments. The designation will also qualify companies for benefits across all stages of drug development, such as accelerated approval processes, seven years of market exclusivity after marketing approval, tax credits on any US clinical trials, grants and waiver of certain administrative fees.

With that in mind, here is a look at the three small cap orphan drug stocks that have just been in the news:

Zalicus Inc. A biopharmaceutical company that discovers and develops novel treatments for patients suffering from pain, Zalicus has a portfolio of proprietary clinical-stage product candidates targeting pain, including Z160, an N-type calcium channel blocker for chronic neuropathic pain and Z944, a T-type calcium channel blocker for acute and inflammatory pain.

On Friday, Zalicus Inc announced that Z160, its first-in-class, oral, state-dependent, selective N-type calcium channel (Cav 2.2) modulator in development for chronic neuropathic pain has received Orphan Drug designation from the FDA for the management of Postherpetic Neuralgia (PHN) - a painful neuropathic condition resulting from an outbreak of the herpes zoster virus, otherwise known as shingles. According to the Wikipedia page for Postherpetic Neuralgia, approximately 1,000,000 Americans develop herpes zoster and of those, approximately 20%, or 200,000 individuals, develop PHN – no small number. Zalicus has also announced it had completed patient enrollment in two Phase 2 clinical studies of Z160 for chronic neuropathic pain indications including Postherpetic Neuralgia and lumbosacral radiculopathy on September 3 with top-line results of both studies expected in the fourth quarter of 2013. Otherwise, it should be noted that for the three months ended June 30, Zalicus Inc reported revenues of $3.9 million verses $2.9 million for the same period last year and a net loss of $10.6 million verses a net loss of $10.3 million as research and development expenses were $9.8 million verses $9.9 million. As of June 30, Zalicus had $20.8 million in cash, cash equivalents, restricted cash and short-term investments compared to $26.1 million as of March 31 – meaning investors should watch the company's cash position. On Monday, small cap Zalicus surged 23.71% to $1.20 (ZLCS has a 52 week trading range of $0.43 to $1.20 a share) for a market cap of $161.86 million plus the stock is up 86% since the start of the year, up 62.1% over the past year and down 63% over the past five years.

Omeros Corporation. A clinical-stage biopharmaceutical company, Omeros Corporation discovers, develops and commercializes products focused on inflammation, coagulopathies and disorders of the central nervous system. Omeros Corporation's most clinically advanced product candidates are derived from its proprietary PharmacoSurgery platform designed to improve clinical outcomes of patients undergoing arthroscopic, ophthalmological, urological and other surgical and medical procedures.

On Monday, Omeros Corporation announced that OMS824, its phosphodiesterase 10 (PDE10) inhibitor, had received orphan drug designation from the FDA for the treatment of Huntington's disease which is estimated to affect approximately 31,000 US patients annually. Right now, the only FDA‑approved treatment for the disease is tetrabenazine and its indicated for Huntington's-related movement disorders while OMS824 has the potential to improve cognitive and psychiatric abnormalities along with the movement disorders associated with the disease. However, shares had done most of their popping in mid September thanks to positive early stage results from OMS824 plus a big price target upgrade from $18 to $28 by Wedbush Securities. Otherwise and back in October, Omeros Corporation reported revenues of $140,000 verses $1.5 million for the same period in 2012 and a net loss of $13.6 million. Cash and short-term investments stood at around $20.06 million at the end of the quarter – something investors should keep an eye on. On Monday, small cap Omeros Corporation fell 1.12% to $9.75 (OMER has a 52 week trading range of $3.65 to $11.85 a share) for a market cap of $291.02 million plus the stock is up 83.3% since the start of the year, up 3.7% over the past year and up 15.2% since October 2009.

Viropharma Inc. An international biopharmaceutical company, Viropharma has a pipeline focused on providing patients and physicians with new therapeutic alternatives for unmet medical needs where there are few treatment options available. In mid-September, Viropharma was soaring thanks to buyout rumors. Specifically, unnamed sources have said that Viropharma was working with the Goldman Sachs Group Inc after attracting interest from suitors that include European drugmakers Sanofi SA (NYSE: SNY), which has been expanding into treatments of rare diseases since its 2010 acquisition of Genzyme Inc, and Shire PLC (NASDAQ: SHPG), which develops treatments for rare illnesses such as Fabry disease. However, it should be noted that Deutsche Bank sees ViroPharma's base case valuation at $38 per share, but the company's full value could be as high as $52 per share if the potential buyer has a Hereditary Angioedema sales force already in place. Bloomberg has since reported that the JMP Group Inc. now says Viropharma could fetch as much as $60 a share while Akiva Felt of Oppenheimer has estimated the company could fetch as much as $50 a share in a competitive bidding situation. On Monday, small cap Viropharma rose 0.26% to $39.26 (VPHM has a 52 week trading range of $22.12 to $40.89 a share) for a market cap of $2.57 billion plus the stock is up 76.5% since the start of the year, up 30% over the past year and up 186.1% over the past five years.

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Finally, here is a quick look at the performance of three small cap orphan drug stocks:

As you can see from the above chart, Viropharma has been the hands down winner for investors over the long term while both Zalicus Inc and Omeros Corporation have underperformed.