Wednesday, June 16, 2010

RNAi Therapeutics Portfolio Review (June 2010)

It has been awhile since I last updated the RNAi Therapeutics Portfolio. The Portfolio was originally conceived to reflect the value the market places on RNAi Therapeutics. Following some criticism, however, that this is at the risk of being too much of an academic exercise, I have started earlier this year to make it more performance oriented, albeit at the cost of dropping some pure-play RNAi Therapeutics companies that are an important part of the ecosystem.

Since the last portfolio review there have been two notable movers in the portfolio: Tekmira which has more than doubled as the story of the company having become a key enabler of RNAi Therapeutics is finally seeping out into the broader market, catalyzed not insignificantly by the widely reported Ebola monkey treatment success, and on the other end of the spectrum Silence Therapeutics which has since halved in share price as it is struggling to build a new shareholder base with historical shareholders apparently leaving the company in droves following its merger with Intradigm at the beginning of this year.

The way Tekmira has created shareholder value is through intense focus on its core area of expertise: liposomal delivery of siRNAs. This is in contrast to companies like Alnylam, mdRNA, RXi, and Silence Therapeutics that have tried in the past to be the one-stop shop for RNAi Therapeutics by offering a variety of delivery modalities and therapeutic areas. Of course, some of the differences of business development strategies are to be expected as the various companies build from different patent positions and know-how. The point, however, that has become apparent is that, unless you are dealing with a patent portfolio of the caliber of Alnylam (and there are some qualifications to that), IP alone is not enough to attract meaningful partnership funding. Instead, for the majority of companies in the space it is at least as important to be able to convince potential partners, and increasingly also the investing public, that you have a reasonable strategy to actually develop commercially viable drugs.

Although it has taken one or two years longer than I had expected, Tekmira has arrived at this point. With Big Pharma starting to think about building their own RNAi Therapeutics pipeline and Novartis coming to a critical $100M Alnylam adoption license go/no-go decision later this year with no obvious access to advanced delivery technology, I would think that there is a good chance that the future of Tekmira Pharmaceuticals will be decided over the next year or so. With its highly efficient financial structure (part of the focus theme) and increased visibility/upcoming Nasdaq listing, both an acquisition or stand-alone structure should position the company well to continue and build shareholder value.

Judging by the share price performance following the Intradigm merger, Silence Therapeutics on the other hand seems to be wandering in no-man’s land. There is some evidence though that Silence could emulate Tekmira’s model in being a desirable enabler of RNAi Therapeutics. This view is based on the apparent utility of the Atuplex delivery system for knocking down genes in the vascular and possibly also lymphatic endothelia, including in monkeys, with implications for important therapeutic areas such as cancer and vascular disease. In addition, Silence has credibility in siRNA chemistry (some decent early science that has held up over the years) plus in target discovery and validation, its focus pre-RNAi.

While I have hopes that with the apparent strength of its scientific team, Silence could re-emerge as a leading RNAi Therapeutics enabler, especially should Tekmira have been spoken for, a few things would need to occur to earn my full confidence. First, the lipoplex-endothelial data ought to be replicated by a thrid party, ideally in a peer-reviewed format. Second, Silence’s claim to have solid delivery options besides Atuplex, for example peptide-based and lung delivery, needs to be substantiated with data. Otherwise, the stock market cannot place any real value on those technology that presumably consume precious resources. This is another way of saying that it is possible that Silence’s research spending is not as efficient as it could be. Its recent re-organization may well address some of that and extend the cash-runway beyond a year from now. Third, Silence needs to communicate a coherent RNAi trigger strategy. Silence in my opinion has become the victim of its own early success in developing the Atu-siRNA chemistry that has led them to vigorously hold on to it and may have prevented further innovation in siRNA chemistry and related fresh IP, but ended up with IP that has only a narrow scope and is at the risk of becoming out-dated in the foreseeable future. And lastly, Silence needs to build a new investor base. Many of the historical investors seem to have left the company with the old management, and while one of the selling-points of the merger was in increasing its exposure to the US, without a US listing it does not appear that this outflow can be compensated with investments from the US. With a market cap of less than US$30M and about a year of cash, nevertheless an interesting value.

As the company with the dominant RNAi trigger IP, Alnylam’s business model is necessarily different from that of Tekmira. It is in Alnylam’s interest to stimulate the wide adoption of RNAi as a therapeutic modality which is the reason why the company has this relatively high burn rate which needs to be supported by equally lush licensing and collaboration revenues. While 2 years ago, $100M for Alnylam would have almost been yawned at, my expectation is that should Novartis pay that amount to Alnylam for the adoption license for which the decision is coming up soon, it would provide Alnylam with some nice cash worth at least another year and reawaken investor interest in the space…$100M is nothing to be laughed at. Equally important potential catalysts for both Alnylam and Tekmira will be the first clinical results for the ApoB and TTR candidates using 2nd generation SNALP technology (likely early and late 2011 events, respectively). While there is every reason to believe that we should see decent knockdown with these formulations, nothing beats actual clinical data. With Novartis, data from the ApoB and TTR programs, first RNAi Therapeutics pipeline activities by Big Pharma, and clarity on the IP front (‘Tuschl Tussle’) all coming up, the 2-year-long and painful wait for Alnylam investors may finally be coming to an end.

In the DNA-directed RNAi space of the sector, Benitec still remains the only significant effort. Following a period of reorganization, including cleaning up its IP relationship with CSIRO and getting the fundamental Graham patent re-instated in a number of important constituencies (except, of course, in the US), the company has started to expand its pipeline efforts with recently forged relationships for lung cancer (University of New South Wales) and Hepatitis B viral infection (China-based Biomics). On top of that, additional data from its triple RNA therapeutic HIV candidate that has already entered the clinic can be expected. Underlining the transformational period for the company, Peter French, a trained scientist with significant experience in technology management, has yesterday been appointed as the new CEO. A probably important upcoming milestone will be an oral hearing at the USPTO in the re-exam of the fundamental Graham patent at the beginning of August. While IP is critical, it would also be nice to see the company conduct more of its own research in-house. In my opinion, a lot of ddRNAi Therapeutics value is just waiting to be uncovered, especially with gene therapy showing more and more promise in the clinic.

One of the companies in the small RNA biotech arena that has impressed scientifically, but failed to sustain investor interest is Rosetta Genomics. This is somewhat surprising since diagnostics is currently valued as a low-cost, low-risk, relatively large reward area in biotech, quite attractive for many in this economy, and Rosetta Genomics is a, if not the company in what should eventually be one of the molecular pillars in diagnostic: small RNAs. Rosetta Genomics may still suffer from the perception that its business strategy has never lived up to its scientific potential, and personally some of that distrust is deserved stemming from the atrocious recent financing. There is evidence, however, that this is changing such as expressed interest in finally developing companion and response diagnostics. Revenue from its first three microRNA diagnostic products may also mean less frequent financings and new types of investors.

[Important update: Rosetta released 1st quarter financial results in late May which I had missed as I was traveling then. Having now listened to the conference call and read the report and recent filings with the SEC, I was shocked to find out that Rosetta is in a serious legal dispute with its US partner for its first microRNA diagnostics products, Prometheus laboratories- possibly explaining the extremely anemic 1st quarter sales numbers. Potentially most damaging could be the following claim: '. In response, Prometheus has issued notices to Rosetta denying the allegations of breach and alleging that Rosetta made material misrepresentations in the Stock Purchase Agreement, dated April 10, 2009, between Rosetta and Prometheus and demanding rescission of the securities purchased by Prometheus under the Stock Purchase Agreement'. This is strong stuff, indeed, and I felt insulted by the CEO's casual remark that this issue had long been public knowledge. The company should know that not every retail investor is subscribing to SEC filing alerts and given the importance of this particular event, a timely press release would have been warranted.]

I am currently neutral on the last component in the Portfolio, ISIS Pharmaceuticals. This company has understood to sustain investor interest now for decades by staying on the cutting-edge of RNA Therapeutics research as it is still waiting for its first commercially significant drug approval. While over the years this has not made investors rich, there are much worse examples, and maybe one of these days they will hit the jackpot (the question, of course, is whether their proof-of-concept, then out-licensing strategy allows them to enjoy a jackpot at all...). The reason, however, why I am neutral at the moment, is that I have been slightly negatively surprised by some of the tolerability aspects of mipomersen that have surfaced without much fanfare in the literature, and I would rather wait for the two upcoming phase III study results announcements before considering adding to the position. It is always possible that the volatility triggered by these events could create interesting price points. On the other hand, the broad interest of ISIS in RNA Therapeutics combined with its very strong balance sheet gives the company considerable flexibility to capitalize on the genomics revolution.

Now to some of the companies not in the Portfolio. In the case of mdRNA, I'd still like to wait before the dust settles. The recent announcement that it has gained exclusive access to the use of UNAs (unlocked nucleic acids) for the use in diagnostics got me somewhat confused and raises concerns that mdRNA feels the need to be seen to be doing something instead of focusing on building clinical capabilities. On the other hand, unlike Silence Therapeutics which has been held back by its history, mdRNA is not shy to explore all opportunities that may exist in RNA-related therapeutics and diagnostics and then to opportunistically jump on a band-waggon as it passes by. This reminds me somewhat of Ribozyme Pharmaceuticals when it abruptly decided about 8 years ago to abandon ribozymes and leverage their oligo therapeutics expertise for the development of RNAi Therapeutics which eventually resulted in that company, subsequently known as Sirna Therapeutics, being sold to Merck for $1.1B. Of note, some of the key people from Sirna Therapeutics are now with mdRNA adding some credibility to that strategy.

One company that I feel has just made a good strategic decision is RXi Pharmaceuticals when it announced last week that it had chosen dermatology and ocular disease as their 2 therapeutic focus areas using their self-delivering rxRNA technology (sd-rxRNA) which represents a convergence between RNAi trigger and delivery. It is the right decision because I share their view that sd-rxRNAs should be most promising for these direct RNAi approaches (see recent blog entry on sd-rxRNAs) and that commitment might hopefully catalyze their efforts in coming anywhere close to the clinic. To me, this lack of drive towards the clinic has long been a major deterrent. It is now up to the company to actually follow up on its promise and earn back the confidence of the market, even more so after a Rosetta Genomics-style recent financing.

I have decided not to make any changes to the Portfolio at this time as I feel that the real pay-day for at least one of the larger positions in the portfolio may come within the next 12 months or so.

PS: Please read and understand the financial disclaimer at the bottom of this page.

13 comments:

tettrazini said...

I am a big fan of your blog. I am not a scientist, but as an investor you help keep me abreast of the progress and tribulations of the RNAI industry. Thank you.

Determining what constitutes a worthy investment requires a different set of metrics than simply judging the merits of a company’s science. Given your background, you understandably have a special affinity and understanding of companies with exciting “potential” break through technology. Unfortunately most of these companies have an unproven track record, are cash poor, have technology that is still developmental, and face stiff alternative competition within the field. With the exception of one company, ISIS, it will be many years before the FDA will be weighing in on an NDA based on RNAI technology.

ISIS is a bit of a different animal compared to the rest of the RNAI industry. It has the most robust, broadest pipeline with more drugs in clinical trials than the rest of the industry combined. Many of these drugs have reported positive trial results. It is expanding that pipeline by three to five drugs a year, a pace unmatched by the industry. It is the only company with an RNAI drug that has achieved regulatory approval. It is the only company close to filing an NDA. Its drugs are not encumbered with delivery problems. It has hundreds of millions of dollars more cash than any other RNAI company. It has the broadest intellectual property estate in the industry and that IP is not under legal assault. Later this year it will be introducing an improvement to its technology that the company suggests will increase the potency of its drugs up to tenfold and reset the patent clock. Even with all these industry leading positives the company’s market cap is less than billion dollars.

But the objective progress the company has made over the last several years is remarkable. I wish I was could better reconcile your neutral opinion with my rosy optimistic outlook. I realize the company has been unresponsive to your emails, I have experienced similar problems. I realize the company has over promised and under delivered in the past, I criticize them for that. Perhaps these actions have left you with a sour taste. Perhaps you are focusing more on mipomersen while I am looking more broadly at the company.

Anonymous said...

Do you see Tekmira eventually selling itself to a Big Pharma or trying to grow itself over time into a much larger company than it is now?

Dirk Haussecker said...

Tet- Many of your points are valid, and I believe ISIS' market cap relative to companies in the RNAi space already reflects the many strong points of ISIS that you describe: the longer history of antisense vs RNAi, being a constant innovator, the depth of its clinical pipeline, and, of course, an enviable cash cushion.

On the other hand, the impact of mipomersen on the near-term valuation of the company cannot be ignored, and as you may remember, I am not as confident as ISIS' management (at least in public) about its safety and tolerability profile and how to deal with it. And having followed the market basically ever since I've been able to read the newspapers and started to invest the day I turned 18, I believe I have enough investing grey hairs, but still enough near-term memory to tell you that I would not be surprised if there could be some turbulence in ISIS with the upcoming announcements of the two mipomersen phase III studies.

Also, there are some questions with ISIS' business model. The reason why most biotech companies outlicense by phase III is not because it is what they would do in an ideal world, but because they do not have the financial means to conduct large-scale studies and then commercialize the drug. ISIS is an exception and I'm struggling to understand why they are giving away all these apparently blockbuster drugs so soon.

Your current assets can be considerable compared to that of others, but if your business model is not as capital efficient, the advantage will eventually be eaten up by more nimble competitors. This is why I like Tekmira so much at the moment. Very focussed on a key unmet need in the field and capital intelligent with more hidden earnings power than meets the superficial eye.

And finally, RNAi is inherently much more powerful than simple antisense for mRNA downregulation, and we could long argue about the pharmacologic advantages/disadvantages of the 2 platforms (RNAi/antisense). I like potent gene knockdown at low dosages in a tissue-limited manner.

Maybe to summarize, while ISIS may well be an excellent investment opportunity in the wider drug development context, there may be even better opportunities when it comes to RNA Therapeutics.


Anonymous...I believe that Tekmira has still both options, which is good as it puts them in a position of strength should Big Pharma approach them for the purpose of an acquisition. It would be a strategic coup for Novartis, Pfizer, or Merck, to control Tekmira, and a risk for others, esp Roche should that happen. Barring a major clinical trial setback, I can't see how Tekmira will be independent at the end of 2011.

Anonymous said...

I agree with your view that Rosetta Genomics should eventually be "the" company in microRNA diagnostics. They seem to have optimized internal processes for developing microRNA diagnostic tests. These processes would probably carry over to companion diagnostics development. They are also keeping their hand in microRNA therapeutics, which looks more promising every month. The big homerun would be if they could ever perfect their miRscreen product for colon cancer or other cancers. Potential microRNA diagnostics competitors such as Asuragen and Exiqon seem distracted with other types of products. Rosetta's marketing and sales expertise needs to catch up to their scientific expertise.

tettrazini said...

<< I'm struggling to understand why they (ISIS) are giving away all these apparently blockbuster drugs so soon.>>

Don’t struggle, that hasn’t been true for years. Look at the two most recent licensing deals as templates for future deals.

The first, for mipomersen, was consummated two years ago. How good was that deal? Simply put, it is among the largest licensing deals in biotech history for a single drug. The paradigm here is to auction the rights only after a major value inflection point.

The recently consummated GSK “preferred partner” arrangement is representative of the second model. This is most remarkable and lucrative deal for ISIS. Under the terms of the agreement, which covers up to six preclinical programs for rare diseases, Isis received an upfront $35 million payment and will receive on average ~$20 million in milestones per program through Phase 2 proof-of-concept. GSK will then have the option to license each drug candidates at terms already agreed upon that equal or exceed the typical terms for a drug at PII proof of concept. The total milestone and licensing payments to ISIS, in a best case scenario, is ~$1.5 billion, plus royalties starting in the double digits

There are a number of unusual features that make the GSK deal noteworthy.

1) ISIS retains full unimpeded control of these drugs through PII.

2) ISIS owns the drugs should GSK not exercise its licensing option(s). This includes the proprietary targets GSK brought to the table. These are targets that were undrugable with conventional technology.

3) ISIS will earn millions in profits for each of the drugs, even if every one them is a bust. The cost of developing each is considerably less than the GSK payments to develop them.

4) The licensing terms are already agreed upon.

Theses deals fits nicely into ISIS business model of doing what it does best, discovering and developing drugs through PII. ISIS leaves the risk and heavy costs of PIII registrational trials and commercialization to others whom have more expertise in this area. Look at ISIS’ pipeline; it has many unpartnered potential blockbuster drugs moving through the clinic.

Dirk Haussecker said...

Don't want to argue with you about the mipo deal. Outstanding. Still, an n=1 and in that light the GSK deal seemed like a step back.

Taking out the financials, the GSK deal structure reminds me of an early-stage venture biotech options deal with Big Pharma. Probably much better financials that ISIS did command here, but still ultimately their upside is capped.

The problem is that while everybody talks about the importance of innovation in drug discovery, Big Pharma still is not willing to pay fair prices for this and is even slashing this part of their R&D efforts at the moment. In that context, ISIS is working in the high-risk, low-margin part of the business when it does not have to. My hope, however, is that as Big Pharma loses its capacity to innovate entirely, there will be a tipping point when the price for innovation will sky rocket as it loses its negotiating power. ISIS may be on to something, but it is not the reality yet.

Anonymous said...

At risk of appearing a bit simple, my focus too with this blog entry is ISIS and their gen. 2.5 claims versus their current market cap.

Recently, they increased their stake in a company in Australia called Antisense Therapeutics Ltd (ANP). This company trades for a penny...literally...and recently presented at ISIS' AGM. Market cap. is a fraction of ISIS.

I am of the opinion that given the exclusivity of their licences with ISIS which should include gen. 2.5 the most upside to be had from ISIS is through ANP and other CRO's like ANP. More so than the likes of OGXI which has been a stella performer. Mipo. data notwithstanding.

Since this is not mentioned in your analysis I am left wondering if you are aware of this fact and whether or not you consider such a vicarious strategy in to ISIS to be worthwhile viz-a-vis a direct entry or your Benitec position.

claybuster said...

Tekmira was knocked down pretty hard yesterday. Best I can find is the announcement by Alnylam that was taken by some to mean that they have a delivery vehicle that is their own. I am not knowlegeable enough to discern the real facts about this. If there are any experts reading this, why not make a comment.

Dirk Haussecker said...

The lipid formulations used for biotherapeutics manufacturing have nothing to do with Tekmira's SNALP technology which is pharmacologically optimized to work in human bodies. Still, the trading in Tekmira was very curious. I will assume a human error, otherwise I'd have to suspect price manipulation. In any case, avoiding a repeat of such trading on light volume is one of the reasons for listing on the Nasdaq.

Anonymous said...

The recent Bilski case ruling should ultimately help Rosetta Genomics protect their microRNA diagnostic tests with defensible patents.

Dirk Haussecker said...

Since the original Bilski ruling was against the patentability of merely 'abstract ideas', and the present Supreme Court ruling apparently upheld it, I'm not really sure whether I can follow you. Would it maybe depend on the type of microRNA Dx test? If you can, please elaborate on your comment.

Anonymous said...

As part of their ruling this past Mon., the Supreme Court basically said that patent law has to be open, flexible and inclusive of new technologies.

The Supreme Court also declared the machine-or-transformation test too limited for blanket use in patent cases, and explicitly expressed concern that the test might create uncertainty about whether "advanced diagnostic medicine techniques" could be patented.

Therefore, they leave the door open for potentially patenting advanced diagnostic tests such as microRNA diagnostics, which undoubtedly would be considered "advanced medical diagnostics".

The Biotechnology Industry Organization was pleased with the clarification offered with the Supreme Court's ruling.

Dirk Haussecker said...

Thanks. That's really helpful. Here is the link to the BIO letter:

http://www.bio.org/news/pressreleases/newsitem.asp?id=2010_0628_01

I guess though that since Bilski has been upheld after all, that it would be good to get confirmation that BIO's optimism is justified in some of the upcoming rulings, one of them apparently concerning Rosetta's US partner Prometheus:

http://www.patentlyo.com/patent/2010/06/mayo-v-prometheus-labs-bilski-and-medical-methods.html?cid=6a00d8341c588553ef013485181235970c

By Dirk Haussecker. All rights reserved.

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