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 2^nd 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.