Saturday, August 23, 2008
Leerink Swann Report on Alnylam- A Review
Honestly, I’m not sure where to begin writing about the Leerink Swann (LS) report by Alsenas and Yoo. One does not need to look hard to find plenty of acceptable areas to take issue within this less-than-glowing assessment of RNAi. Is their report accurate? I will examine their assessment point by point. LS discusses some areas of RNAi technology that are, and will be, areas that will continue to progress, but overall the report is intellectually dishonest at best. Let’s face it, we’ve all seen examples in politics (on many sides in many issues) that are “true” but intellectually dishonest. For example, I could say that “history has taught us that airplanes don’t fly.” That is technically a true statement if one looks prior to December 17th, 1903 when the Wright brothers took the first flight; however, it’s clearly a misleading statement. There are a number of examples that read similarly to the fact that “history has taught us that airplanes don’t fly” in the LS article on Alnylam Pharmaceuticals, and I cannot understand how or why such instances would be presented as honest reporting by a reputable firm.
The meat of the report:
Leerink Swann initiated a sell rating on Alnylam, expecting a valuation of $14-16 in 2009 based on cash (currently over $13 per share) and a valuation of $200 million for their IP and technology. LS claims that Alnylam is “narrowly” focused on RNAi and that RNAi is better suited for research than as a drug platform. Additionally LS investigates the respiratory syncytial virus drug ALN-RSV01 as “underwhelming” and evidence of a lack of systemic delivery capabilities for RNAi. LS states that RNAi delivery is impossible at the moment, and will probably be a hurdle never surmounted. Furthermore, LS believes that the number of collaborators working with Alnylam (and paying for the privilege) is a liability and not an asset. Moreover, LS states that Alnylam “will use its significant cash position of $538 million...to “diversify” or “forward integrate” by acquiring another technology or clinical product.
I will look at a small portion of the statements made by this report simply because documenting a group of clear errors is enough to toss out the report in its entirety.
LS values Alnylam’s IP and technology at $200 million. That’s all well and good, but how did they arrive at that number? They don’t say. However, we can ascribe a more realistic valuation than the professionals at LS by comparing actual dollars rendered for RNAi and similar technologies. First of all, when someone (Roche) is willing to pay $273 million dollars for non-exclusive access to 4 of 20 disease areas using Alnylam’s IP and technology, not counting the future milestones and royalties but an upfront $273 million, it’s difficult to realistically value Alnylam’s entire IP at $200 million. So far, Alnylam has over $500 million in the bank mostly derived from licensing (non-exclusively) their technology to a few Pharmas, namely Novartis, Roche, and Takeda. The authors disingenuously attribute these payments to “The pharmaceutical industry is often swept by new technology fads.” Well, even if that’s all Alnylam has to offer, wouldn’t those dollar amounts suggest that it’s a fad many of the other pharmas are going to try? Science has shown us that this is not the latest fad, but rather a monumental discovery that has the ability to revolutionize medicine.
Let’s look at a few other players that own IP space on platform technologies. First and foremost is Isis Pharmaceuticals that owns the IP on many RNA chemistries and more importantly the use of single-stranded oligonucleotides designed to repress messenger RNA, collectively grouped under the term “antisense.” The early days of antisense were plagued by disappointments and one can see the vestiges of the early adopters (Genta etc.), but Isis has overcome the initial troubles and developed a working and robust platform based on antisense. Reading the LS report, one comes to the conclusion that there are no oligo-based drugs that demonstrate efficacy. Isis’ pipeline is full of effective drugs. Recently one such drug was partnered for hundreds of millions upfront with potentially a more than a billion dollars in milestones and royalties of 30-50% of sales. Does that sound like nothing is working with oligo-based drugs? Perhaps the authors simply read only the investing reports on Isis and not the scientific literature. It is interesting to note that LS also downgraded Isis stock to hold at $14 from $17, it has since moved back up and closed yesterday at $18...
Another company that owns IP around a platform of potential drugs is Sangamo Biosciences. This company produces specific proteins (zinc-finger proteins ZFP) that bind to DNA and perform several possible functions mainly to either inhibit or increase the expression of messenger RNA and consequently increase or decrease the amount of that gene’s expressed protein. The design and production of these molecules requires human hands and many ZFPs are then tested to determine which has the ideal properties for the specific disease state being investigated. Subsequently, the molecules need to be delivered to the interior of the cell and then into the nucleus. (The production of one molecule is much more time consuming than the production of RNAi where a computer chemically assembles the individual bases into the drug.) Is this starting to sound like antisense and RNAi? Yep, there’s a reason for that: all three require delivery in the form of either chemical modifications, a chemical delivery vehicle (e.g., liposome/SNALP), or possibly through an engineered viral genome. Antisense is the smallest and therefore easiest to deliver naked, or without a carrier. RNAi is about twice the size of antisense (similar size, but 2 strands instead of one) while ZFPs are up to 20 times the size of antisense molecules. Does this sound like ZFPs are easier to deliver than antisense or RNAi? For the sake of the valuation of RNAi IP and technology, let’s assume that RNAi is equally valuable as ZFPs.
LS has a price target of $18 for Sangamo (SGMO) stock or about $650 million for the IP and technology. Why such a high valuation for SGMO IP compared to Alnylam? They must have a list of multi $100 million dollar collaborations right? Nope. But they do have about $76 million in the bank at the moment... Remember, LS thinks Alnylam’s IP is worth $200 million. Does that make sense? Not really, but as LS says, “Alnylam is narrowly focused on the development of a Nobel Prize winning technology called RNAi.” I am not saying Sangamo is not worth that much for fundamental IP, but clearly there is a rational disconnect between the valuations of these two companies by LS.
Which brings us to the next point: Alnylam is ‘narrowly’ focused on a technology that could be applicable to every gene in the genome (read this as potentially 10’s of thousands). Huh? Yep, you read that correctly. Alnylam owns the bulk of IP for RNAi, half of the company Regulus that controls the majority of IP for a closely related technology to regulate genetic pathways via microRNAs, and recently acquired the fundamental IP for RNAi’s cousin RNAa that can be used to increase production of gene products. Can anyone honestly say that this is narrow? Too broad would be a more believable tale to weave, but then they might have to back that up with data that would cast shadows on the remainder of their story.
Perhaps I should be generous and alter their statement to read that Alnylam is narrowly focused on respiratory syncytial virus. This is currently the only drug Alnylam has in Phase II clinical trials; however, I’ll be quick to point out that they have a number of other programs that will soon be entering clinical trials including liver cancer, hypercholesterolemia, Huntington’disease, Progressive Multifocal Leukoencephalopathy (PML), hepatitis C virus (HCV), and biodefense projects including Ebola virus. The authors state the results for the RSV trials as “difficult to interpret and undewhelming.” They are especially difficult to interpret when one leaves out a major portion of the positive data. Compared to the control group, approximately 1/3 displayed similar symptoms to non-treated individuals, 1/3 had reduced symptoms (by about 38%), and 1/3 had no symptoms (based on the controls, one would expect 12 subjects to not show symptoms but 24 were symptom free). The authors kindly neglected the group that displayed no symptoms but were shown to have a very low viral infection. Is this a fair approach to science? Additionally, Alnylam conclusively demonstrated that the viral reduction was due to specific RNAi mechanisms and not due to non-specific activation of the immune system. Read the actual data here, it is not difficult to interpret.
Was the study underwhelming? I guess if one has expectations of complete obliteration of all RSV virus, then yes it was underwhelming. But then again, every other drug trial would be underwhelming as well. To be fair, it was a difficult trial. Alnylam had to develop a model system for a virus that had never been done before. Because they were administering the virus to healthy volunteers, they used a mild strain of the virus that would be least likely to harm the test subjects. Would they have had stronger data if they used a strain that was much more likely to be lethal in elderly/infant populations? Maybe, but how are you going to sell that study to volunteers and the ethics board? LS also objected to an additional study in lung transplant patients where RSV is a serious disease that can lead to tissue rejection (to be sure, it is serious if one’s lungs are rejected...). This study provides an additional look at the ALN-RSV01 safety profile and a more optimized administration route of nebulized drug PRIOR to testing in infants. There can be no doubt that Alnylam has chosen to move into the pediatric tests in a cautious manner, but that is to be expected.
One additional point to make about the authors contention with ALN-RSV01: they claim that it will not be worth much money and that they will have competition with Synagis, a monoclonal antibody for the PREVENTION of RSV infections. First of all, the market is large enough that Synagis is a billion dollar drug and secondly ALN-RSV01 is a TREATMENT for RSV infections. Synagis does not enter the cells where the virus replicates - thus it is used as a prophylactic in premature infants where RSV infections are quite dangerous. (I like analogies, so how about “antibiotics are worthless because condoms exist?”) ALN-RSV01 does enter the cells and shut off the viral replication capacity of those cells. It is tempting to speculate on the potential synergism between the two drugs.
ALN-RSV01 is as simple as an RNA-based drug can be. It is a non-modified RNA oligo pair dissolved in saline water. It is literally misted into the lungs and absorbed by the cells it contacts. There is no delivery vehicle and it is not a systemic drug. Why not? It works without either chemical modifications or a delivery vehicle. Simple enough.
This seems to be the Authors’ main objection to the RNAi platform. They claim that systemic delivery is not currently possible with RNAi (but remember, delivery of a much larger molecule with Sangamo should be no problem and thus Sangamo should be valued much more highly than Alnylam...). There is no doubt that delivery is the rate-limiting step for achieving the potential that lies within RNAi. In fact, John Maraganore (the CEO of Alnylam) has stated as much when he said that Alnylam would be working on delivery for many different tissue types for years. Does that mean that they can not effectively deliver RNAi? They can, they have demonstrated so with Tekmira using technology developed by Alnylam, Protiva (now part of Tekmira), Tekmira, and Robert Langer’s lab at MIT. Yes, Alnylam delayed their IND filing for VSP and PCSK9 last year, but in hindsight it appears to have been a wise move. They had liposome (stable nucleic acid lipid particles - SNALPs) formulations that were effective, but near the date of filing the aforementioned technology came together to achieve a 10 fold increase in RNAi activity. I’d wait a few months and file for an IND using those formulations as well. The beauty of the SNALP system is that it is easily tunable to different sized particles and each can have different properties determined by different lipid or lipidoid formulations. This is where the MIT lab has aided in the production of tissue-specific and/or property optimization of Tekmira’s SNALPs. SNALPs can be engineered to be stable in serum for long periods and be slowly delivered or be rapidly absorbed by the liver depending on the desired pharmacokinetics. Each drug may have differing desirable characteristics and with SNALPs it is easier than ever to design such properties into delivery.
The process of producing a delivery vehicle is not easy, but the assessment of such technology is simple. The only two questions that matter are: does enough of the drug get in the cell to be effective? and is the formulation toxic? Tekmira/Protiva developed delivery vehicles that were effective and not toxic, the newer formulations are better. End of story, I won’t even bother with their quotes here. If you want to see data and read about the advances made at Tekmira, please read the Prospectus (type in 'Tekmira' under company name, then select 'management information circular dated 6 May, 2008).
This system is currently being used to actively and specifically target RNAi to the liver. Read that again, EFFECTIVE DELIVERY TO THE LIVER. Oh, fine, you say. That’s only one organ...with dozens of known targets. Many of them would be major blockbusters - cholesterol reduction, hepatitis C, cancer etc. Personally, I don’t think Alnylam needs to be able to deliver to any tissue besides the liver to become a major player in pharmaville; however, Alnylam and its collaborators are actively targeting many other tissue types (CNS, eye, lung, tumors, heart, smooth muscle) with both SNALPs and many other technologies. Delivery will not be a one-size-fits-all endeavor, and it doesn’t matter. Each cell type has specific differences and these will call for different delivery vehicles. Each cell type will probably have multiple targets so delivery optimization will result in many additional drugs for these tissues. To convince yourself of the value of RNAi with delivery to only one area, read the list of major drugs that each big pharma has currently. They are not long lists of major drugs.
Leerink Swann states that “Alnylam has approximately 25 drug delivery collaborations...which we see as signs of desperation rather than strength.” Technically this statement is true, but it’s true in the sense that historically airplanes don’t fly. It is a sign of desperation. Now before you get your shotgun, hear me out. Big pharma and small biotech companies alike are so desperate for innovation they are clamoring for RNAi and have partnered with Alnylam. The authors did not mean it this way, but instead meant it as an act of desperation for Alnylam. Perhaps they didn’t bother to read which direction the money was flowing. Investing is simple. Follow the money. If Alnylam had paid Roche to help, it would be Alnylam that was desperate; it was, in fact, Roche, Takeda, Novartis, etc. who paid Alnylam, implying that they were desperate enough to pay for the privilege of using Alnylam’s IP on a non-exclusive basis. Again, I feel compelled to point out that we are talking over a half a billion dollars in cash, not including milestones and royalties. Additionally, the list of collaborators has been altered recently to include a number of 50/50 splits with Alnylam. Alnylam renegotiated the contract with Medtronic from a small royalty with milestones to a 50/50 split. Alnylam is allowed to pick at least one of the drugs Tekmira is developing for 50/50 splits. Alnylam has the right to a 50/50 split on 4 drugs of their choice with Takeda. Does this sound like Alnylam is desperate? Domineering maybe, but they are not desperate.
From the tone of the article, it has not escaped our attention that there may be desperation from investors on the short side of the trade rather than those who have researched and paid for the right to use RNAi.
LS ends their “investment thesis” section with “When Alnylam uses its significant cash position and high share price to “diversify” or “forward integrate” by acquiring another technology or a clinical product, we will take it as a sign that the management team has acknowledged the difficulties with its current approach as well.” I know you’re wondering if a reputable financial analyst would say this in their research report, or if I made it up. The answer is no, a reputable analyst would not say this, and no, I didn’t make it up. See other articles on this blog for additional information on the pipeline.
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