Before talking about stocks I want to know his formula for success. While he admits that his scientific background is important, it's just one piece of the puzzle. How do you pick biotech companies? "The most important thing about assessing development-stage companies in the biotech universe is the quality of management," he says. Unlike quantitative comparables among companies developing similar therapies, management, "Is not something you can measure on a standard scale. It's a sliding scale at best," he says. "What I look at in the context of management is track record. If a team has been successful before you can bet on them doing it again." It works the other way around too. "If we see a management team that has failed multiple times before," he says. "We're not going to give it a lot of credence."
The first companies on Selvaraju's list are served up with care like pearls on satin. He loves Amarin Corporation (AMRN:NASDAQ), Medivation Inc. (MDVN:NASDAQ) and Ironwood Pharmaceuticals Inc. (IRWD:NASDAQ). "The common thing that all three of these companies share is that they are all development-stage companies," he says. "They do not currently have revenues, and they are all heavily dependent on the future of a single drug."
Amarin's AMR101 (icosapent ethyl), an ultra-pure fish oil for hypertriglyceridemia, has already been filed with the FDA. The product has an extraordinary safety profile which is important for drugs competing with statins, which may elevate liver enzymes for which patients have to be monitored constantly. Amarin's PDUFA (Prescription Drug User Fee Act) date for AMR101 is July 26, and "I fully expect that we will see drug approval on that date," he says.
Medivation is in a similar situation with its Enzalutamide (formerly MDV3100), which was filed with the FDA on May 21. The product is partnered with Japanese big pharma Astellas Pharma Inc. (ALPMF:OTCPK). Enzalutamide has shown strong outcomes in hormone-refractory, chemotherapy-experienced prostate cancer patients, "which is the hardest possible patient population in prostate cancer to treat," he says. "And, most importantly, the drug showed virtually no side effects." Selvaraju believes the whole package is nothing short of excellent. "I would expect that the drug could potentially be approved before the end of this year," he says.
Ironwood Pharmaceuticals is developing linaclotide for chronic constipation and irritable bowel syndrome. The product acts locally in the GI tract and is not absorbed systemically which contributes to its strong safety profile. Competing products have cumbersome and uncomfortable side effects and tend not be effective. Linaclotide produces symptomatic relief at an 18–30% rate on a placebo-adjusted basis, "which turns out to be two to three times as effective as its closest competitor," says Selvaraju.
I ask about peak sales for these three products. "In my view, I think Amarin, Ironwood and Medivation all have legitimate blockbuster opportunities with their drugs," he says. "Amarin's drug AMR101 could be the biggest. I think sales could be somewhere in the $6–10 billion ($6–10B) range at peak." Selvaraju throws out some familiar biotech names that have become popular with media, bloggers and day traders, but "These (Amarin, Ironwood and Medivation) are the real next-generation biotech companies in my opinion," he says. "I feel that these three companies, which have been financed with far less capital (than other companies) and their drugs are in my opinion going to be much more widely used and much more popular."
Selvaraju also has a hepatitis C (HCV) theme. "The HCV sector is very important in the world of the sellside analyst today," he says. "Some disease areas are always going to be hotter than others, and others come into and go out of fashion from year to year-- a bit like clothing lines from your favorite designers. So, HCV is what I would classify as the flavor of the year," he says. Salvaraju loves to analyze comparisons among companies in the same therapeutic space. "Achillion Pharmaceuticals Inc. (ACHN:NASDAQ) has in my view been neglected somewhat," he says. "There has been some acquisition speculation over it but not anywhere near as much as I think there should be. If you look at one comparable to Achillion, a company called Idenix Pharmaceuticals Inc. (IDIX:NASDAQ), you will see that it trades at roughly double the valuation of Achillion. Yet, Idenix has only one clinical-stage asset that is truly meaningful in the HCV arena, whereas Achillion has four. So, in my opinion, the discrepancy between Idenix and Achillion doesn't make a lot of sense," he says. "I would strongly advise the investor to consider Achillion over Idenix."
He knows Acorda Therapeutics Inc. (ACOR:NASDAQ) quite well. The company is focused on multiple sclerosis (MS), which is where Selvaraju has been focused over his entire career on both Wall Street and when he was in industry. Going with his good management theme, "CEO Ron Cohen is a canonical example of the kind of CEO that I look for," he says. "He's extremely thoughtful and is very upfront with investors. I believe that Acorda in the long-term should be an excellent investment." Selvaraju says Acorda's Ampyra (dalfampridine) is a highly differentiated MS drug. "It's orally bioavailable, and it is the only symptomatic therapy that specifically addresses walking impairment. Furthermore, it is the only drug approved for use in all types of MS, and there are several different kinds."
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