The Life Sciences Report: Ram, you joined Aegis in March 2012. When you move to a new firm, do you have to perform the diligence process on companies all over again?
Raghuram Selvaraju: It depends. With companies that I have had a significant and long-standing relationship with, relatively little due diligence needs to be done. If significant time elapses between when I join a firm and when I roll out coverage, I have to familiarize myself with whatever new developments have taken place at the company.
TLSR: You are a top-rated analyst, but you began your pharma/biotech industry career as a researcher. How did you transition into sellside research?
RS: It is very difficult to be a sellside analyst when your background is exclusively scientific. My financial acumen came about by attending business school and then taking the sellside analyst licensing exams. It is the melding of the financial acumen with the scientific that makes you successful as a sellside analyst. The most successful members of my peer community on the sellside have very similar backgrounds to my own.
It is important to have the ability to take a quantitative approach to the analysis of companies vis-à-vis their comparables in industry. But the most important thing about assessing development-stage companies in the biotech universe is the quality of management, which is not something you can measure on a standard scale. It's a sliding scale at best. What I look for in the context of management is track record. If a team has been successful before you can bet on success again.
TLSR: Can you share a management example?
RS: Alan Auerbach developed Cougar Biotechnology and sold it to Johnson & Johnson (JNJ:NYSE) for just under $1 billion (B). He got a lot of institutional buy-in for his next company, which not coincidentally is called Puma Biotechnology (PBYI:OTCBB). Puma is developing a drug that was, for all intents and purposes, discarded by Pfizer Inc. (PFE:NYSE); however, the institutional community is familiar with Auerbach's success and believes he can pull it off again. That's the bottom line. On the other hand, if we see a management team that has failed multiple times, we're not going to give it a lot of credence.
TLSR: Ram, you've had some recent exciting mergers and acquisitions (M&A) in your coverage. Inhibitex Inc. was taken out by Bristol-Myers Squibb Co. (BMY:NYSE). Pharmasset Inc. was acquired by Gilead Sciences Inc. (GILD:NASDAQ) for $11B. Earlier, Genzyme Corp. was acquired by Sanofi (SNY:NYSE) and Cephalon Inc. by Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ). Should investors play stocks as takeovers or should they stick with the green-eyeshade fundamentals of value and growth potential?
RS: Both. I believe firmly in what CEO and cofounder Pat Mahaffy of Pharmion Corp. said. Pharmion was acquired by Celgene Corp. (CELG:NASDAQ) for $2.9B in 2007, and Pat always said that you should build a company to be a self-sustaining enterprise. If it is truly self-sustaining there will be acquisition interest. I look for companies with a viable commercial strategy. They should have such compelling value propositions that there's no question they would interest big pharma or midcap specialty pharma.
TLSR: Can you talk about some companies you are recommending to investors?
RS: I've been bullish on these companies for a long time, and investors know my work on them intimately. They are Amarin Corporation (AMRN:NASDAQ), Medivation Inc. (MDVN:NASDAQ) and Ironwood Pharmaceuticals Inc. (IRWD:NASDAQ). They are all development-stage companies; they do not currently have revenue and they are heavily dependent on the future of a single drug.
TLSR: First thing that struck me about Amarin was the safety profile of its AMR101 (icosapent ethyl), an ultrapure fish oil for hypertriglyceridemia. How can you get efficacy added to that safety profile?
RS: The company has done two placebo-controlled phase 3 trials that robustly demonstrate efficacy. The P value is P<0.0001, where P<0.05 is considered statistically significant. [Editor's note: P value is a statistical measure used to evaluate the validity of a hypothesis.] AMR101 is significantly better than the existing marketed agent Lovaza (omega-3-acid ethyl esters; a product of GlaxoSmithKline [GSK:NYSE]). Not only is AMR101 significantly more potent, it is also synergistic with statins and it lowers LDL cholesterol, which Lovaza cannot do. It blows the competition away. I don't see any reason why the U.S. Food and Drug Administration wouldn't approve it.
TLSR: Amarin is seeking a label for very high levels of triglycerides, greater than 500 milligrams per deciliter (mg/dL). If you can show efficacy in this group, you can get it approved, right?
RS: The context is that the company wants the drug on the market as soon as possible. I have talked to a lot of cardiologists who have indicated their full intent to prescribe the drug off-label (for high triglyceride levels that are lower than 500 mg/dL). If they prescribe the drug off-label it's not going to be reimbursed, but this is not a drug that costs $50,000 per year ($50K). It will cost $3K/year maximum.
Off-label prescriptions normally carry a lot of risk because physicians don't want to be sued for malpractice. But in a case like this, where the drug has such a good safety profile, cardiologists are willing to prescribe it because there is no downside risk. They are not afraid someone will be poisoned by the therapy. Amarin has a PDUFA (Prescription Drug User Fee Act) date for AMR101 on July 26, 2012. I fully expect that we will see drug approval on that date.
TLSR: The second company you mentioned was Medivation.
RS: Medivation's situation is very similar to Amarin's. Medivation and its partner Astellas Pharma Inc. (ALPMF:OTCPK) filed for approval of enzalutamide (formerly MDV3100) on May 21. In the drug's phase 3 AFFIRM trial, which reported positive interim data in late 2011, there was very, very strong efficacy data in hormone-refractory, chemotherapy-experienced prostate cancer patients, which is the hardest patient population in prostate cancer to treat. Most importantly, the drug showed virtually no side effects. That may seem like a strong statement, but we were expecting to see fatigue and maybe even an incidence of seizures because seizures had been seen in patients in earlier clinical trials. However, it was never conclusively demonstrated that seizures were related to the drug. In fact, patients reported less fatigue on this drug than for the placebo in the phase 3 trial. The data set was nothing short of staggeringly good. Medivation has applied for priority review and I would expect the drug could be approved before the end of this year.
"The most important thing about assessing development-stage companies in the biotech universe is the quality of management, which is not something you can measure on a standard scale. It's a sliding scale at best. What I look for in the context of management is track record. If a team has been successful before you can bet on success again."TLSR: Astellas has a major presence in pharma, correct?
RS: Yes. The fact that Medivation has enlisted Astellas, a big Japanese company, is a big advantage. Astellas has a significant presence in urology, which will help Medivation promote this drug. The drug will be targeted toward oncologists as well as urologists. They have a very compelling efficacy and safety argument to make. Because of the good safety profile, the drug can be moved rapidly down the pipe. Medivation and Astellas can start with approval for chemotherapy-experienced, hormone-refractory patients, then move on to chemotherapy-naïve, hormone-refractory patients, and then into the hormone-sensitive population in prostate cancer.
The total market size is enormous. Enzalutamide looks like the 800-pound gorilla in the prostate cancer space, and I firmly believe this will make Medivation a very appetizing acquisition target for Astellas, which only owns half of the rights to the drug right now. Why would Astellas pay a 50% royalty to Medivation when it can just buy the company?
TLSR: Ironwood Pharmaceuticals was the third company you mentioned.
RS: Ironwood is a very similar scenario. It focuses on gastrointestinal disorders, particularly chronic constipation and irritable bowel syndrome. The drug in development is linaclotide, which is not absorbed into the system and has a very safe profile. The indications are for massive untapped markets. Existing drugs not only have undesirable side effects, such as nausea and headache, but they are also ineffective. One of the competitive drugs, Amitiza (lubiprostone; Sucampo Pharmaceuticals Inc. [SCMP:NASDAQ]), only achieves 8–9% relief of symptoms on a placebo-adjusted basis. With Ironwood's linaclotide, 18–30% of patients report relief of symptoms on a placebo-adjusted basis. This drug could be considered two to three times more effective than its closest competitor. And it is a peptide, which will make it more difficult for other companies to make a generic equivalent as time goes on.
TLSR: This question goes to recurring revenues: Is this a chronic therapy?
RS: That's a good question. Linaclotide will be targeted to a patient population—and more importantly to a physician population—that historically has prescribed only for relief of acute constipation symptoms. Because this drug is so safe and affords such significant relief of symptoms, I believe it will migrate into a chronic therapy. Ironwood is in a very good position, and it has a PDUFA date for linaclotide in September. Forest Laboratories Inc. (FRX:NYSE) is Ironwood's partner in the United States. As with Medivation, it could be a very appetizing takeover candidate for Forest, which may not want to give up half of the revenue stream to Ironwood when it could just buy that company.
TLSR: What kind of peak sales are we talking about with these companies?
RS: In my view, Amarin, Ironwood and Medivation all have legitimate blockbuster opportunities. Amarin's AMR101 could be the biggest. I think sales could be somewhere in the $6–10B range at peak. If you look at statins, they provide a very useful comparison. Lipitor (atorvastatin calcium) was a $12B drug at peak. Medivation's enzalutamide could be a $4–6B drug if the company can penetrate the hormone-sensitive patient population successfully. And Ironwood's linaclotide could generate $2–2.5B in peak sales. They are all legitimate investment opportunities.
These are the real next-generation biotech companies, in my opinion. We've all heard talk about companies like Regeneron Pharmaceuticals Inc. (REGN:NASDAQ), Human Genome Sciences Inc. (HGSI:NASDAQ), Dendreon Corporation (DNDN:NASDAQ) and Alexion Pharmaceuticals (ALXN:NASDAQ). But these three companies have been financed with far less capital than any of those I just cited, and these drugs are going to be much more widely used and much more popular.
TLSR: There has been a lot of activity around hepatitis C (HCV). Can you comment on that?
RS: The HCV sector is very important in the world of the sellside analyst today. Some disease areas are always going to be hotter than others, and some go in and out of fashion from year to year, a bit like designer clothing lines or popular ice cream flavors. HCV is what I would classify as the flavor of the year. It may well turn out to be the flavor of this decade because I have never before seen so many high-profile acquisitions for such significant premiums. We saw Vertex Pharmaceuticals Inc. (VRTX:NASDAQ) consummate a licensing agreement with privately held Alios Biopharma for a significant amount. The price involved an upfront payment of $60 million (M), research and development milestone payments (precommercial) of up to $715M if both drug candidates involved in the partnership are approved, and $750M in total sales-related milestones based on achievement of predefined sales targets. In addition, Alios is slated to receive tiered royalties on product sales. While this deal was heavily backend-loaded, Vertex paid a pretty hefty sum to get access to the Alios compounds, which only had preclinical data at the time. You mentioned Gilead, which bought Pharmasset for $11B late last year. The most staggering of all was Bristol-Myers, taking out Inhibitex for $2.5B all cash and acquiring what was essentially a compound with phase 1 clinical data. It is the highest price ever paid for a phase 1 compound. This shows you that HCV is a very, very interesting area for big pharma. The market has been untapped for a long time and there is a significant unmet medical need because existing therapies are old school and have a lot of safety issues.
TLSR: You have some coverage in HCV. Could you discuss this?
RS: Achillion Pharmaceuticals Inc. (ACHN:NASDAQ) is interesting because, in all the furor about other HCV companies that have been taken over recently, it has been neglected. There has been some acquisition speculation, but not as much as there should be. If you look at one comparable company, Idenix Pharmaceuticals Inc., 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. The discrepancy between Idenix and Achillion doesn't make a lot of sense. If I were to talk to investors about the bets they should make in HCV, I would strongly advise them to consider Achillion over Idenix.
TLSR: Achillion's ACH-3102 candidate is currently in phase 1. It is a pan-genotypic agent and proposed as an interferon-free once-daily dose. If you can avoid interferon, with all of its side effects, this could be a blockbuster. But it is only in phase 1 and is long way from approval.
RS: Yes, it's a long way off, but not as far off as people might think. Remember that Pharmasset, with its 7977 drug, which was the main reason Gilead acquired the company, was in phase 1 less than three years ago. Companies can go from zero to hero in the blink of an eye.
ACH-3102 from Achillion is not going to work all by itself. It will be part of a combination therapy. But I would definitely agree that the name of the game is the obtainment of an all-oral regimen for HCV, with direct-acting antivirals so interferon won't be necessary anymore. If Achillion's drugs form part of an all-oral regimen, as I believe they will, then the market is massive.
Achillion has four drug candidates, each of which could potentially generate $100–150M in annual peak sales if approved. Do the math. It basically gets you to the company's current market cap, and that is based on a single year of sales for those four drugs. I consider Achillion to be significantly undervalued at this point in time.
TLSR: We've talked about Gilead. Did you want to comment on that company?
RS: Sure. I have never formally covered Gilead, but I can comment.
TLSR: The moment Gilead acquired Pharmasset it got bad news on the 7977 product, realizing it was not going to be a monotherapy. How bad was that news for Gilead?
RS: I don't think it was as bad as people made it out to be. Obviously, paying $11B for a company and subsequently having your market cap increase by $11B didn't make a lot of sense. When you pay that much your stock price should either go down or stay the same. A pullback in Gilead was warranted. But having concerns about the commercial future of 7977 simply because it is not going to be an all-oral regimen and a monotherapy is incorrect. We should take 7977 for exactly what it is—a very potent drug against which resistance does develop. The way around that is to combine it with existing therapies. Combine it with ribavirin. Combine it with Incivek (telaprevir; from Vertex). Combine it with later-generation protease inhibitors like Achillion's ACH-1625, and you can get around the resistance problem very effectively. There remains no question that 7977 could be a $3–4B product opportunity at peak. It is by far the most potent HCV drug currently in late-stage clinical development.
TLSR: You follow Acorda Therapeutics Inc. (ACOR:NASDAQ). What do you see there?
RS: I have known Acorda management for a long time. CEO Ron Cohen is a canonical example of the kind of CEO I look for. He is extremely thoughtful and very upfront with investors. I believe that Acorda, in the long-term, is an excellent investment. I have focused on multiple sclerosis (MS) for virtually all my time on the Street, and when I was in industry I worked for a company that was heavily focused on MS. Acorda's lead drug focus, Ampyra (dalfampridine), treats symptoms of MS and is differentiated from other agents currently available. It is orally bioavailable and 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.
TLSR: Is Ampyra a growth product?
RS: Absolutely. For some people the sales trajectory has been disappointing, but I believe it is right on track. Acorda successfully partnered this drug with Biogen Idec Inc. (BIBB:NASDAQ), which is beginning to see real traction with the drug in Europe. In the middle of last year the company received an additional patent that will give the drug another seven to eight years of protection. The new patent is scheduled to expire in 2027, whereas originally it would have lost patent protection in 2017. Acorda is going to do very well with this agent.
TLSR: I've enjoyed meeting you very much, Ram.
RS: Sure. Thanks.
Raghuram Selvaraju started in the securities industry with Rodman & Renshaw LLC as a biotechnology equity research analyst. Dr. Selvaraju was the top-ranked (#1) biotech analyst in The Wall Street Journal's "Best on the Street" survey (2006). He went on to become head of healthcare equity research at Hapoalim Securities, the New York-based broker/dealer subsidiary of Bank Hapoalim B. M., Israel's largest financial services group. While at Hapoalim, Dr. Selvaraju was regularly featured in The Wall Street Journal, Barron's, BioWorld Today, and Reuters/AP. He was also a regular guest on the Bloomberg TV program "Taking Stock," hosted by Pimm Fox, and appeared live with Bloomberg TV's on-air correspondents Betty Liu and Gigi Stone. Recently, Dr. Selvaraju has also been a guest on CNBC's "Street Signs with Herb Greenberg."
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DISCLOSURE:
1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Johnson & Johnson is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Raghuram Selvaraju: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
