David Amsellem is a Principal and Senior Research Analyst at Piper Jaffray who covers specialty pharmaceuticals. Prior to joining Piper Jaffray in 2008, Mr. Amsellem spent five years at Friedman Billings Ramsey, where he was a Senior Research Analyst covering small- and mid-cap pharmaceuticals from 2006 to 2008, and a Senior Associate on the biotechnology equity research team from 2003 to 2006. Mr. Amsellem was recognized as the number one-ranked analyst in North America for accuracy of earnings estimates in the pharmaceuticals sector in the 2008 Financial Times/StarMine “Best Brokerage Analyst” survey. He graduated from Cornell University with a bachelor’s degree in industrial relations.

TWST: Where are you focusing your attention in the smaller-cap pharma space these days?

Mr. Amsellem: In terms of the smaller caps – companies under 10 billion or under 5 billion in market cap – typically we focus on specialty pharma companies with significant brand businesses. Our focus is mainly outside of generics for now. We typically like companies that have managed their product life cycles well. In other words, they have the ability, either through development or acquisition, to sustain cash flow growth even after key top-line drivers have seen their patents expire. So companies that have been active on the acquisition front, companies that have been active in terms of deepening their R&D pipeline to where they can really sustain their business models over the long term, those are companies that we tend to be more favorably disposed towards. The reality in the specialty pharma business is that assets have finite lives. In the biotech space, biologics have much greater patent protection, much greater market exclusivity, especially when compared to small molecules. I’m thinking about where biosimilars will be, and it’s going to be much tougher for generic competitors to really make a major dent into biologics the way they have in small molecules. So for specialty pharma, the goal for companies is to continually find ways to reinvent themselves. That is the challenge, and it’s a big challenge, and it’s one of the reasons that the multiples for spec pharma companies typically trade closer to, say, big pharmas than they do to big biotech.

TWST: What do you mean?

Mr. Amsellem: The challenge with specialty pharma is terminal value, right? You have a product that’s generating cash flow, but it goes off patent and in three years, five years, seven years – whatever it is – it’s a finite life, whereas biologics don’t have that kind of issue yet. That is being legislated now though. Now for a spec pharma company, five years down the road – maybe earlier, maybe later – you can see a significant decline in revenue and a significant decline in earnings power. That dramatically impacts terminal value. So on one hand you have businesses that generate very significant cash flows. In terms of value and cash flows, these are stocks that are pretty cheap by and large. But there is the challenge of terminal value. So that’s why you’ve seen this kind of multiple compression. You’ve seen that with Big Pharma as well. In terms of this idea of finite patent life and generic competition on the horizon, that’s probably the single biggest reason for multiple compression in the space. And this is just something you just don’t see – or haven’t seen historically – with biotech.

TWST: What types of deals are you seeing?

Mr. Amsellem: I think there are deals that kind of fall all over the spectrum – ex-U.S. companies looking to gain a commercial footprint in the United States. A recent example of that is the Japanese pharma company Sumitomo, which recently announced that it’s purchasing Sepracor for more than $2.6 billion. And that’s an easy way for a deep-pocketed Japanese company to access a sales force so they can readily establish a commercial infrastructure here. That’s one such example. Certainly, we’re seeing consolidation in Big Pharma. In terms of the mid- and small-cap companies, you are seeing more in-licensing and product acquisitions. Certainly, companies in my space, such as Forest (FRX) and Cephalon (CEPH) continue to be active in acquiring specific products, acquiring small companies to add to their pipeline. So I think that in the case of pharma M&A, activity is varied and it continues to be brisk.

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