Tuesday, January 22, 2008

Will Market Turmoil Accelerate Consolidation of Core RNAi Therapeutics Companies?

I know that I am vulnerable to accusations that I take a very pro-Alnylam view. But you have to admit that history thus far has supported this view and that I have been pointing out some of the dangers Alnylam faces as well. With that out of the way, another shameless pro-Alnylam posting:

One striking observation from the recent volatile trading is that while the bellwether of RNAi Therapeutics, Alnylam, almost seemed oblivious to the economic troubles around it, smaller second-tier players such as Silence Therapeutics, CytRx, and Nastech were being severely punished by the markets. Part of this may be explained by the solid financial position of Alnylam which may not have to return to the capital markets for years, while the likelihood increases that Nastech and CytRx have no choice but to exercise their shelves and dilute shareholder equity at a time when share prices are sinking ever more.

Shareholders of Nastech and CytRx may have both hoped that a successful spin-out of their RNAi units MDRNA and RXi, respectively, would avoid a secondary offering at the most inopportune times. But as the spin-outs take time to materialize and bad partnering and clinical news keep coming in, this appears less likely by the day. The latest developments (today):

- Nastech “announced” in an SEC filing that Novo Nordisk would be joining Merck and P&G in walking away from a co-development program relating to Nastech’s nasal delivery program. This was followed by a $50M shelf registration, quite sizeable for a company with a $72M market cap.

- CytRx suffered a clinical halt by the FDA for their lead small molecule phase II ALS program.

In both cases, the problem for RNAi Therapeutics investors has been their exposure to the non-RNAi parts of the parent companies which, unlike Sirna Therapeutics’ financially successful total makeover before, chose to nurture RNAi divisions within a non pure-play environment. Additionally, both developments were preceded by re-shuffling of their financial management structures and significant share price declines.

The situation at Silence Therapeutics, where share prices have fallen by more than half in a matter of two month, is slightly different, but also emphasizes that second-tier companies have a hard time attracting interest as their IP position is under scrutiny. In this case, progress in the US patent application for their AtuRNAi design or a validating Big Pharma partnership is needed.

I would not be surprised that Alnylam’s strong IP position plays a critical role in all these delays as it should make any potential partner or investor think twice about investing. It will now be interesting whether current market conditions accelerate the consolidation of the core RNAi Therapeutics space. My real concern, however, is how will a recession affect funding of scientific research, particularly for RNAi delivery and safety.

Alnylam should also be careful that their cash pile is not melted away by hyperinflation, as policy makers have come to the conclusion that the best way to save the economy is to print more money and please the Big Banks on Wall Street by slashing interest rates. Never mind that it was overspending encouraged by low interest rates that got us into the mess in the first place.

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By Dirk Haussecker. All rights reserved.

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