Thursday, August 26, 2010

RNAi Therapeutics Portfolio Review: Preparing for Novartis

As I am about to do some traveling over the next couple of weeks and won’t be able to monitor the markets closely, part of my preparations included a review and slight adjustment of my portfolio so as to position it well for what are likely to be turbulent weeks in RNAi Therapeutics. With the $100M Novartis decision coming up, a lot of the dust in the RNAi Trigger landscape about to settle, and share prices of a number of RNAi Therapeutics companies tumbling to mind-numbing levels, the number of companies was further reduced to more fully capture the upside from impending deal activity.

Rosetta Genomics and Benitec were sold as these two companies in the portfolio are probably the least exposed to the Novartis decision. The money was used to buy shares of RXi Pharmaceuticals that I had previously sold during the suspicious run-up to a financing round earlier this year which was followed by a steep 80% drop in RXII. The drop was exacerbated by the relentless selling of RXi shares by CytRx, the company from which RXi had been spun out. It is difficult for me to rationalize how the former parent of RXi could sell down their remaining shares in RXi without apparently any regard for the effect this would have on RXII. The sale of $5.1M worth of shares alone was directly responsible for a ~30% drop in RXII. The primary responsibility for the amateurish disposition of shares, of course, goes to CytRx. On the other hand, a company that cares about shareholder value would want to help and ensure that major stakes are disposed of in an orderly manner. Shareholders will find little consolation in the CEO’s comment on the CytRx issue during the recent quarterly conference call which described these stock sales as potentially beneficial for shareholders in the long run!

At the same time, the current share price of $1.75, which gives the company a market cap of slightly above $30M provides an opportunity to speculate on the company’s new focus on the highly modified and sufficiently differentiated ‘self-delivering rxRNAs’ which I believe to be quite compatible with the dermal and ocular disease areas that the company said it would concentrate proprietary pipeline efforts on.

After a string of technology development agreements with small and large companies alike, near-term upside in RXII will have to come from the company’s ability to execute on the long promised Big Pharma deal that would provide validation for the company’s position in self-delivering siRNAs and add non-dilutive capital. In terms of knockdown potency, the sd-rxRNAs appear to be at least on par with Alnylam’s (5-year-old) cholesterol conjugates and based on their structure should also work around most, if not all of Alnylam’s IP. It is here where the exposure to Novartis should come from, especially now that it has become a powerhouse in the ocular disease area with the Alcon acquisition.

Such a deal would need to be accompanied by the nomination of a serious development candidate to support the notion that the company is finally getting close to the clinic. It is my opinion that there are viable business strategies centered around early-stage RNAi technology development, but that such strategies are not appropriate for companies with RXi’s expense structure.

In addition to seeing validation that RXi has real clinical drive now and the Big Pharma deal, further investments in RXi critically depend management being on the side of the investors rather than pleasing a number of other constituencies as appears to have been the case. The times that public biotech companies were able to treat (retail) shareholders simply as a source of cash to keep management and employees in good stead are over now. If the pain is not truly felt and shares and options continue to be awarded regardless of performance and all the while share prices are tumbling, then such companies have no place to exist. Sadly, I can only say of Tekmira where I have seen an example of a company believing in its technology and managing it in a way to maximize shareholder value. Truly priceless as one can also see from its share price performance over the last 2-3 years.

With that we have arrived at Tekmira and Silence Therapeutics as the two other companies that are most likely to react with large percentage moves from Novartis-related deal activity. I have written a lot about why Tekmira is my favorite RNAi Therapeutics company, so I will only reiterate here my belief here that due to its its critical position in delivery, Tekmira should be The ‘in play’ company over the next couple of months. At the same time, it has now built a nicely diversified proprietary development pipeline consisting of TKM-ApoB for the treatment of hypercholesterolemia, TKM-PLK1 for non-liver solid cancers, and TKM-Ebola in the infectious disease area. The development candidates should make it easier for the market to assign a value to Tekmira, particularly once it lists on the Nasdaq. Importantly, although 3 development candidates may seem like quite a bit for a company the size of Tekmira, the related clinical expenses should be manageable and not overwhelm the pre-clinical research efforts that are aimed at expanding the utility of LNP-siRNA delivery, an area where it is positioned to create significant further shareholder value.

Silence Therapeutics should be the company second best positioned after Tekmira to benefit from the Novartis decision. Through its partner Quark Pharmaceuticals, companies like Pfizer and Novartis have now partnered products based on Silence Therapeutics’ RNAi trigger technology. In addition to the development milestones that Silence stands to collect and thereby extend the cash runway possibly into 2012, I would be surprised if Pfizer and Novartis had not considered Silence Therapeutics a less expensive alternative to Alnylam. Patent issuances for the Atu-siRNA structure and the Zamore RNAi trigger design rules should help Silence make its case.

The impact of a Novartis option exercise on Alnylam’s share price is probably less certain. Because the market expects Novartis to exercise, this could limit the immediate upside, although I would certainly expect some increase in ALNY as it would remove lingering uncertainties and should be seen as a validation that Alnylam’s RNAi trigger position is not just slightly ahead of the competition. The exact extent of the upside, however, would likely depend on how much extra Alnylam can extract from providing Novartis with access to delivery. The Tuschl litigation in the US, and the Tuschl II and Kreutzer-Limmer patent exams in Europe also have to be closely watched as it will determine the extent to which Alnylam can control access to RNAi triggers. Fortunately, scientific progress reported at recent meetings suggests that despite the various legal battles Alnylam is fighting, there is actually some R&D happening, too. Long-term, this, and not trying to marginalize competitors at the cost of management attention, is really what will drive the value of ALNY.

In the short run, however, Alnylam needs one or two more significant platform deals. This is because a relatively early-stage pipeline would make it difficult to get the market cap back above $1B. Alnylam should be well positioned to get them done eventually given that many in Big Pharma do not have the luxury to delay RNAi Therapeutics forever. Sanofi-Aventis, GSK, and Pfizer are potential candidates. Intriguingly, Sanofi-Aventis will apparently occupy the first floor of the building where Alnylam is headquartered in Cambridge, MA, which is even more so curious given that Sanofi-Aventis will likely become Alnylam’s immediate neighbor anyway given their attempt to take over Cambridge-based Genzyme.

But as time progresses even the Tuschls and Kreutzer-Limmers will show their age and will decrease in value. Similar to monoclonal antibodies, what will count is the scientific quality of such triggers which will be more narrowly defined than just by the length or the blunt-endedness of an RNAi trigger. Alnylam is naturally best positioned to continue and lead the field here, but there is no reason to be complacent, especially as delivery, more than triggers is increasingly driving value in synthetic siRNA Therapeutics.

ISIS Pharmaceuticals, the remaining portfolio component, is currently recovering from the sell-off that followed the release of the last set of phase III results of lead candidate mipomersen. I believe the market almost assumes that an increase in liver fat equals liver toxicity. My view is that while liver fat increases can cause toxicity, by far most people with such increases do not go on to develop fibrosis and other complications and the clinical relevance of such cases is debatable. Supporting this view, cases of Hy’s Law, indicating actual liver toxicity, have yet to emerge (admittedly patient numbers are still somewhat limited). So if no further negative surprises emerge from upcoming data presentations of mipomersen, the stock should be attractive in the short run. In the medium-term, it will be important that the initial filing in 2011 will not be limited to the homozygous FH population. If so, it may be difficult for ISIS to sustain any upward momentum.

In conclusion, the second half of 2010 should be a good time to be invested in RNAi Therapeutics. Similar to the dogs in this picture, what may look like a languishing field based on share price performance, it actually has regained quite a bit of its scientific bite now and could come alive again faster than you’d think.


Anonymous said...

I would be very careful with these smaller RNAi companies, even Tekmira. Additional dilution is just around the corner for virtually all of them.

Larry Norder said...

Hi Dirk,
I found your blog and I really find it informative and useful. I am in the industry and I may have a proposition for you. Please email me to arrange a time to chat...

Anonymous said...


I read on the IV board today that NVS owned about 13% of ALNY..ALNY has about $380MM in cash. In the upcoming event category NVS has the option to put another $100MM into ALNY...

WHy doesn't NVS do a Genetech deal and bid for 35% of the stock? They have a ton invested already. I am not sure they will put the addition $100MM in this October, but it seems pretty cheap to buy part or the whole company before the year is out.

Hell, the Swiss Franc is almost at parity with the dollar, so it looks a lot more reasonable, do you agree??

Anonymous said...

ALNY currently has ~$9.50/share in cash.

Anonymous said...

RXi (RXII)is a bad investment. Kriegsman will sell another 3 mil. shares as he did on Jun 30 (selling 2 mil.) and RXi will tank again as it did from almost $9/share in March-2010 to current price - $1.90

Anonymous said...

Tekmira is a good company. US Military is supporting them with $140 mil.
They will be listed on Nasdaq as well by year end I think.

Dirk Haussecker said...

On the issue of why Novartis wouldn't just buy all or a significant part of Alnylam instead of investing $100M in Alnylam's IP: Alnylam has rules in place that make such a Novartis acqusition unlikely. One of them is the 'poison pill' which makes a hostile bid unpalatably costly, the other a limitation on further biddings once Novartis' shareholding in ALNY crosses a certain threshold. In my opinion, these rules represent a conflict between management and shareholders.

Anonymous said...

The examiners board has reissued all claims on the seminal 099 graham patent, do you think Pfizer will now bid for Benitec as the company owns all the rnai IP that works?

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