By Ben Hirschler

LONDON (Reuters) - The science of gene therapy is finally delivering on its potential, and drugmakers are now hoping to produce commercially viable medicines after tiny sales for the first two such treatments in Europe.

Thanks to advances in delivering genes to targeted cells, more treatments based on fixing faulty DNA in patients are coming soon, including the first ones in the United States.

Yet the lack of sales for the two drugs already launched to treat ultra-rare diseases in Europe highlights the hurdles ahead for drugmakers in marketing new, extremely expensive products for genetic diseases.

After decades of frustrations, firms believe there are now major opportunities for gene therapy in treating inherited conditions such as haemophilia. They argue that therapies offering one-off cures for intractable diseases will save health providers large sums in the long term over conventional treatments which each patient may need for years.

In the past five years, European regulators have approved two gene therapies - the first of their kind in the world, outside China - but only three patients have so far been treated commercially.

UniQure's Glybera, for a very rare blood disorder, is now being taken off the market given lack of demand.

The future of GlaxoSmithKline's Strimvelis for ADA-SCID - or "bubble boy" disease, where sufferers are highly vulnerable to infections - is uncertain after the company decided to review and possibly sell its rare diseases unit.

Glybera, costing around $1 million per patient, has been used just once since approval in 2012. Strimvelis, at about $700,000, has seen two sales since its approval in May 2016, with two more patients due to be treated later this year.

"It's disappointing that so few patients have received gene therapy in Europe," said KPMG chief medical adviser Hilary Thomas. "It shows the business challenges and the problems faced by publicly-funded healthcare systems in dealing with a very expensive one-off treatment."

These first two therapies are for exceptionally rare conditions - GSK estimates there are only 15 new cases of ADA-SCID in Europe each year - but both drugs are expected to pave the way for bigger products.

The idea of using engineered viruses to deliver healthy genes has fuelled experiments since the 1990s. Progress was derailed by a patient death and cancer cases, but now scientists have learnt how to make viral delivery safer and more efficient.

Spark Therapeutics hopes to win U.S. approval in January 2018 for a gene therapy to cure a rare inherited form of blindness, while Novartis could get a U.S. go-ahead as early as next month for its gene-modified cell therapy against leukaemia - a variation on standard gene therapy.

At the same time, academic research is advancing by leaps and bounds, with last week's successful use of CRISPR-Cas9 gene editing to correct a defect in a human embryo pointing to more innovative therapies down the line.

PAY-FOR-PERFORMANCE

Spark Chief Executive Jeffrey Marrazzo thinks there are specific reasons why Europe's first gene therapies have sold poorly, reflecting complex reimbursement systems, Glybera's patchy clinical trials record and the fact Strimvelis is given at only one clinic in Italy.

He expects Spark will do better. It plans to have treatment centers in each country to address a type of blindness affecting about 6,000 people around the world.

Marrazzo admits, however, there are many questions about how his firm should be rewarded for the $400 million it has spent developing the drug, given that healthcare systems are geared to paying for drugs monthly rather than facing a huge upfront bill.

A one-time cure, even at $1 million, could still save money over the long term by reducing the need for expensive care, in much the same way that a kidney transplant can save hundreds of thousands of dollars in dialysis costs.

But gene therapy companies - which also include Bluebird Bio, BioMarin, Sangamo and GenSight - may need new business models.

One option would be a pay-for-performance system, where governments or insurers would make payments to companies that could be halted if the drug stopped working.

"In an area like haemophilia I think that approach is going to make a ton of sense, since the budget impact there starts to get more significant," Marrazzo said.

Haemophilia, a hereditary condition affecting more than 100,000 people in markets where specialty drugmakers typically operate, promises to be the first really big commercial opportunity. It offers to free patients from regular infusions of blood-clotting factors that can cost up to $400,000 a year.

Significantly, despite its move away from ultra-rare diseases, GSK is still looking to use its gene therapy platform to develop treatments for more common diseases, including cancer and beta-thalassaemia, another inherited blood disorder.

Rivals such as Pfizer and Sanofi are also investing, and overall financing for gene and gene-modified cell therapies reached $1 billion in the first quarter of 2017, according to the Alliance of Regenerative Medicine.

Shire CEO Flemming Ornskov - who has a large conventional haemophilia business and is also chasing Biomarin and Spark in hunting a cure for the bleeding disorder - sees both the opportunities and the difficulties of gene therapy.

"Is it something that I think will take market share mid- to long-term if the data continues to be encouraging? Yes. But I think everybody will have to figure out a business model."