Horizon’s Guidance Shows Valuation Discrepancy In Selecta

Selecta sold off to 52 week lows after the JP Morgan Conference. We believe this was an overreaction by the market on news that did not warrant such a move.

To recap: In November 2017, Selecta announced SEL-212 0.1mg/kg data, which showed that their drug was equally as effective as commercial competitor KRYSTEXXA (read analysis here). SELB price fell over 55%. However, SEL-212 showed a cleaner safety profile and greater convenience (monthly vs biweekly dosing) when compared to KRYSTEXXA. In addition, Selecta is also testing higher doses, which could improve the response rate. Although SEL-212 November data was not in line with what was expected, it created a discrepancy in Selecta’s valuation. We believe this created a buying opportunity.

SEL-212 Higher Cohort Data Pushed From Q1 2018 to First Half April 2018
The initial timeline for data of cohorts receiving 0.125 and 0.15 mg/kg doses of SVP-Rapamycin was expected in Q1 2018. During JP Morgan Conference, this was pushed back slightly to the first half of April 2018. We think there is a good chance that this data will show increased clinical activity and make SEL-212 a superior alternative to KRYSTEXXA once again.

Selecta also announced that its lead gene therapy product candidate, SEL-302, is expected to file IND in 2019. This methylmalonic academia (MMA) candidate was initially expected to be in clinical trials by year end 2018. The delay should be a slight negative, but as a preclinical staged candidate, it should have a small bearing on Selecta’s overall valuation.

Overall, the minor delay in SEL-212 cohort readout and IND delay in SEL-302 were negatives, but not enough to push SELB to 52 week lows.

Market Overlooks Increased KRYSTEXXA Guidance
Horizon (HZNP) upped their guidance for KRYSTEXXA peak sales to more than $750M from a previous estimate of $400M. The company also said that they expect KRYSTEXXA sales to grow 50% YoY in 2018, which should yield about $225M in revenues for the year.

Remember, Horizon acquired KRYSTEXXA for $510M and projected peak sales of more than $250M at the time of acquisition. Assuming a constant 2x peak sales multiple, this new projection would value KRYSTEXXA at $1.5B.

Selecta is sporting a $130M enterprise value (1/10th KRYSTEXXA), even though the company could have a potentially superior drug. We think data in April will bring light to this valuation discrepancy.

  • SELB sold off after JP Morgan, but we believe market overreacted to minor and early stage delays
  • With data in April, we think Selecta will run into the catalyst. BUY SELB under $10
  • If you already hold SELB, remain LONG

One or more of PropThink's contributors are Long SELB

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