Sunday, May 25, 2008

RNAi Therapeutics Portfolio Review: Time for Bottom-Fishing?

A quick look at the table on the right shows that 6 out of the 10 RNAi-related stocks in the RNAi Therapeutics portfolio suffered serious declines of over -15% since January '08. Clearly, the tight credit markets and an overall risk-averse investment climate had an adverse affect on the biotech market in general, and the valuation of early-stage companies in particular.

While the share price decline in companies such as Nastech is to a large degree to be blamed on company-specific issues, the difficulty of raising capital at reasonable terms has only accentuated the downfall of companies in need of near-term funding and has taken on dynamics that make me think twice about whether the time to do some bottom-fishing has come.

When it comes to bottom-fishing in RNAi Therapeutics, the issue is whether the markets have only accelerated the inevitable process of separating the good from the bad, or whether some the of the affected companies could be turned around with good management if they were afforded the necessary funding.

Separation based on scientific and financial track records probably accounts for the difference between Alnylam’s +1.6% increase versus -46.4%, -48.9%, and -67.9% declines, respectively, for Alnylam’s main synthetic RNAi competitors Silence Therapeutics, RXi Pharmaceuticals, and Nastech. Among those three, RXi with its motley patent portfolio (access to Hannon and Tuschl I) and preferential treatment by the State of Massachusetts may be the most interesting, but is hurt by development programs that do not appear to have sufficient maturity.

Nastech may be better off not to compete on the RNAi trigger side (“mdRNAs”) and instead concentrate on peptide-mediated RNAi delivery. As by far the best performer in the portfolio, Tekmira, demonstrates, innovative and clinically credible RNAi delivery capabilities are more likely to be rewarded by the market than companies built on yet another, not-so-innovative RNAi trigger designs.

Next to siRNA delivery companies that have gone down with the overall markets, but of which the science is promising, it is DNA-directed RNAi companies that may offer some of the most attractive investment opportunities right now. Admittedly, gene therapy investments historically have been a huge disappointment with an even much greater failure rate than for normal drug development already and a handful of overly publicized safety incidents. This means that even a phase II rheumatoid arthritis program by Targeted Genetics is valued essentially at zero. However, an increasing number of exciting gene therapy proof-of-concept studies, such as the two recent publications on the vision improvement by AAV gene therapy for Leber’s Congenital Amaurosis, indicates that gene therapy is finally starting to realize its therapeutic potential after years of trial and error.

While (synthetic) siRNA Therapeutics may be preferable for the majority of RNAi Therapeutics applications, DNA-directed RNAi, especially in conjunction with AAV and lentivirus, due to its often more advanced delivery efficiencies, potencies, and long-term expression may have a number of applications for serious and difficult-to-treat conditions such as neurological disorders or together with stem cell therapy (e.g. HIV trials by COH/Benitec). With the right IP, therapeutic portfolio selection and resource allocation strategy, an investment in DNA-directed RNAi at this point may both give the companies' R&D efforts the much needed financial boost as well as reward the investor once the biotech market has returned to more normal valuations. Of course, if the overall market conditions don’t change, there is nothing to stop investors to remain on the sidelines and just wait for even cheaper prices while, unless of course Big Pharma's thirst for innovation causes it to pull the trigger first.

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By Dirk Haussecker. All rights reserved.

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