Tuesday, November 6, 2012

Cautionary Statements in Alnylam's SEC Filing

Today, I would like to post excerpts from Alnylam's most recent quarterly filing with the SEC (10-Q, here), comments that are related to the trade secret litigation between Alnylam and Tekmira.  Since the use of cautionary language is strongly encouraged for public companies to protect themselves from shareholder lawsuits, such filings are a great way to glean some insights into how they think about legal proceedings.

Although Alnylam claims that a loss, including resulting from a settlement, is 'less than probable', they certainly acknowledge the significant potential liability.  For the first time, Alnylam discloses what it considers an appropriate damage estimate- a meager (less than) $4.4M, but which makes me wonder whether the manufacturing accusations have been more or less admitted to (highlights are mine):

        'The Company has not recorded an estimate of the possible loss associated with this legal proceeding. Although the plaintiffs have not specified in their complaint the amount of monetary damages they are seeking, they have served an expert report estimating their damages under a variety of theories, which was subsequently updated. These theories include the purported lost value of the plaintiffs’ trade secrets, calculated using two approaches, as well as the Company’s alleged unjust enrichment resulting from the purported misappropriation of the plaintiffs’ trade secrets, again using multiple approaches. The Company believes that under the applicable law the plaintiffs are not entitled to aggregate multiple theories, but the plaintiffs have argued to the Court that they are entitled to do so. The various theories of plaintiffs’ damages under the plaintiffs’ most recent expert report range from approximately $61 million to $234 million. If the theories of monetary recovery included in the plaintiffs’ most recent expert report were aggregated, it would result in damages within a range of approximately $310 million to $484 million. In addition, under one of the plaintiffs’ claims, any compensatory damage award sum could be subject to doubling or trebling, which could increase the potential damages up to approximately $1.5 billion, and the plaintiffs would also be entitled to recover their reasonable attorneys’ fees. As of June 30, 2012, Tekmira reported a contingent liability to their lead counsel in the amount of $12.5 million, which is likely significantly higher as of the date of this filing. The plaintiffs are also seeking prejudgment interest.
The Company denies any wrongdoing and believes that the plaintiffs’ estimate of their purported compensatory damages is grossly overstated and based on faulty reasoning. The Company has served expert reports supporting the Company’s position that it is not liable on the plaintiffs’ claims, as well as an expert report on damages, which opines that the plaintiffs’ damages estimates are unreliable and, if their expert conducted an appropriate analysis under one of his approaches, damages in the event of an adverse finding on the liability issues would be less than $4.4 million. This amount could be subject to doubling or trebling, and the plaintiffs would also be entitled to recover their reasonable attorneys’ fees and potentially prejudgment interest. However, notwithstanding the Company’s expert report, damages would be much greater if the case is tried to a verdict, and the jury finds the Company liable and also accepts the plaintiffs’ theories of monetary damages discussed above.
As the trial date approaches, the Company is pursuing all reasonable approaches available to it to reach resolution of this matter, including both settlement negotiations and full trial preparation. The Company does not currently believe that a settlement of this legal proceeding is probable, in accordance with ASC 450, Accounting for Contingencies, due to a number of factors; however, the Company intends to continue to evaluate all possibilities for resolution of this matter, including a potential settlement.
Significant judgment is required to determine both the likelihood of a loss and the estimated amount of any such loss. The Company currently believes that the likelihood of a loss is more than remote but less than probable, in accordance with ASC 450, Accounting for Contingencies, and is unable to estimate a reasonable range of loss for this legal proceeding due to many factors.'

It is also of interest that there was a statement on the recent Genzyme deal which strongly indicated that it got done without Tekmira's consent.  Note that Tekmira would stand to receive part of the financials of that deal just as ISIS got a cut, plus Tekmira would have to be involved as regards ALN-TTR02 manufacturing:
'The Company has agreed to indemnify Genzyme for legal costs and other losses or amounts required to be paid by Genzyme, if any, in connection with or related to certain of the Company’s ongoing litigation matters.' 

Finally, Alnylam discusses that it is important to be able to manufacture RNAi Therapeutics candidates themselves, including LNP delivery.  It would not be surprising if building such capabilities had already been a major effort at the company.  Such a move would also support that the two companies rather than merging will go their separate ways after all is said and done:
'Given the limited number of suppliers for our delivery technology and other materials, in the future, we expect to develop our own capabilities to manufacture drug substance, including siRNAs and siRNA conjugates, and/or finished drug product, including LNP formulations, as permitted under our manufacturing agreement with Tekmira, for human clinical use.'

The jury trial is slated to start next week.  Alnylam won't have to face analysts on a conference call for another 3 months, and tonight all the attention will be with the outcome of the US elections.  If there were a settlement, tonight would be the night to announce it.


Anonymous said...

Great post... thank you.

Anonymous said...

re: "the liability issues would be less than $4.4 million... subject to doubling or trebling,... entitled to recover their reasonable attorneys’ fees"

So added up, ALNY is figuring up to $13m liability + attorneys' fees, which is probably another $10M or so, or $26m total. That amount is already baked into TKM share price (it's up 80% since Feb '12). I can't imagine that TKM would be satisfied with such a small settlement, but there's some smart lawyer's in Boston, so ALNY might be on track. For TKM, this outcome would be a diaster, and hardly worth the almost 2 year effort, IMO.

Anonymous said...

The final pre-trial conference will be on November 7, 2012.
Jury empanelment will begin on November 13, 2012.
The trial will commence, in front of a jury, on November 14, 2012.

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.