Friday, September 18, 2009

The Difficulty of Valuing the RNAi Therapeutics Platform from the Perspective of Monoclonal Antibody Company Morphosys

Sometimes I am asked why it is that I think that RNAi Therapeutics has this special potential to have a big impact on health care. Is it because I only came to know RNAi and simply got excited by it, or was it because I studied every drug technology under the sky and came to the conclusion that RNAi it is?

I have to admit that it is clearly the former: Since the fateful day in late 2000 that I first seriously considered RNAi when my undergraduate plant biology lecturer asked me whether I wanted to design plant RNAi vectors in his lab, I have followed a strong instinct to stay with RNAi, especially its monetary potential (now I prefer to call it ‘therapeutic’ instead of ‘monetary’). Long story short, I realize that I had been somewhat lucky that my initial fervor leading me to discount most other technologies as inferior simply because they weren’t RNAi did not ruin me financially. Some would argue that there is so much equally exciting biology, yet most of it is not suitable as a biotechnology. After having re-evaluated the potential of RNAi Therapeutics in comparing it to other drug technologies and coming to the conclusion that, yes, RNAi Therapeutics has unique characteristics and should have broad applicability for future medicine, the question from an investment perspective still remains: how will the market value this (still unproven) platform technology over time?

I think that in this regard there are a number of lessons to be learned from the monoclonal antibody arena of which Germany’s Morphosys is one of, if not the last remaining independent pure-play platform company. What is striking is that even for a platform company with strong IP in an already proven technology like monoclonals, it is the actual proprietary clinical pipeline that is driving valuation. While 60-100 partnered therapeutic programs (mostly in early-stage development) and non-core monetization efforts of its antibody know-how through a diagnostics division, has helped to keep Morphosys cash-flow positive and with a strong balance sheet position of over EUR140M (~210M USD), it is valued at what I consider a modest $570M. Considering the stronger balance sheet of Alnylam, this is probably comparable to if not somewhat less than that of the leading pure-play RNAi Therapeutics company. This strong balance sheet position, however, allows Morphosys to now ramp up its proprietary clinical pipeline without having to worry about the next fund-raising round, again similar to Alnylam.

While overly close relationships with Big Pharma are often seen as constraining the freedom of the platform company to choose its own targets (one of the criticism faced by Alnylam after its Novartis deal), when done properly, the benefit of being able to learn about the technology from the co-development programs on Big Pharma’s budget is not always fairly considered by the market. Tekmira for example is sometimes criticized for not having obtained juicy upfront payments in their deals with Alnylam and Big Pharma. On the other hand, Tekmira’s deals are built around long-term relationships in which they can learn about liposomal delivery from their partners’ programs and make a small profit on each program. Morphosys once more is a good example here with a relationship with Novartis that is very close and, no surprise here, therefore also sometimes condemned for this reason, but that results in dozens of monoclonal drug candidates passing through the early stages of development in their own laboratories, and moreover fosters familiarity between employees of the two companies and the exchange of know-how.

As a result of these personal ties perhaps, Morphosys announced two days ago the appointment of a new head of Clinical Development coming from Novartis and with a strong background in hematology, an area where monoclonal antibodies have had a big impact and Morphosys is focusing on their early proprietary pipeline. Since disease-specific knowledge is something that platform companies tend to be lacking, I would argue that as the liver, oncology, and to some degree the eye, are shaping up as the first fertile fields for RNAi Therapeutics, RNAi Therapeutics companies should begin to build strong expertise in these areas and combine it with their unique insights into the RNAi mechanism of action and specific delivery. This may even mean that as the companies become intimately familiar with the organs and diseases and new targets emerge, RNAi Therapeutics may be complemented with other drug technologies. It is by focusing on a limited number of disease-associated molecular signaling pathways that Genentech e.g. has become interested in small molecules that can address proteins not accessible to monoclonals. TTR is an example where due to the size of the patient population and relatively small research community, it may make sense for Alnylam and Cambridge neighbor FoldRx, which is developing a promising protein-folding compound for TTR amyloidosis, to learn from each others’ experiences.

I’d like to think that the unique challenges faced by platform companies in obtaining a fair valuation from the financial markets, especially after the first honeymoon period is over and in the wake of a severe financial crisis, should provide an opportunity for investors with a long-term horizon to invest in companies that are well capitalized and should therefore make it through this period of skepticism. The best time may be when, as is the case for Morphosys now, the number of clinical pipeline candidates are starting to grow exponentially which in turn will attract the attention of a wider audience of investors. In the RNAi space, Alnylam with its many partners is an obvious case where similar dynamics are in the works, or Tekmira with its SNALP technology which counted one IND last year with two and three more expected this and next year, respectively, by Alnylam, Roche, and Tekmira itself. One factor that may help RNAi Therapeutics to catch up with Morphosys’ monoclonals and compensate for the fact that RNAi Therapeutics are less well validated is the ability to obtain early proof-of-concept in programs such as ApoB and the fact that Big Pharma does not want to miss the boat in RNAi Therapeutics as it did with recombinant DNA and monoclonal antibodies.

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By Dirk Haussecker. All rights reserved.

Disclaimer: This blog is not intended for distribution to or use by any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the author or any of his collaborators and contributors to any registration or licensing requirement within such jurisdiction. This blog expresses only my opinions, they may be flawed and are for entertainment purposes only. Opinions expressed are a direct result of information which may or may not be accurate, and I do not assume any responsibility for material errors or to provide updates should circumstances change. Opinions expressed in this blog may have been disseminated before to others. This blog should not be taken as investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investments particularly in the field of RNAi Therapeutics and biotechnology carry a high risk of total loss. You, the reader must make your own investment decisions in consultation with your professional advisors in light of your specific circumstances. I reserve the right to buy, sell, or short any security including those that may or may not be discussed on my blog.