Sunday, February 17, 2013

RNAi Therapeutics, My Long View

Warning: disorganized thoughts gathered on a long plane ride.  Having followed the development of RNAi Therapeutics since it took off in 2001, I submit that its trajectory continues to strongly suggests that it will become an important new class of drugs.  I am not saying that capital has always been well spent and that the field has been free from scientific and securities 'fraud' (meant in a broader sense).  However, from a 30.000 feet level, a dozen years from the demonstration of RNAi activity in mammalian tissue culture cells to demonstrating potent gene knockdown in Man following systemic administration is more than satisfactory progress. 

If the sound of a dozen years makes you uncomfortably aware of your own mortality already, then consider that nearly two dozen years have passed since the RNAi phenomenon was first described in plants- and it still feels to me like it was yesterday, especially with the lightning speed with which our understanding of the RNAi mechanism unfolded between 1996-2006.

With the momentum fairly intact, certainly somewhat dented by a financially trying spell (2009-12), I expect that RNAi Therapeutics will have real clinical impact over the next dozen years.  In addition to the marketing approval of orphan drugs, RNAi should make deeper inroads into public health by addressing widespread diseases such as metabolic disease and hepatitis B.

There are, of course, also fundamental challenges that could hold up progress in RNAi for knockdown in certain tissues where we don't even have a good idea to start with on how to theoretically overcome the biophysical obstacles in reaching and penetrating them.  Until that becomes rate-limiting, however, there will be plenty of work to be done in exploiting the already existing therapeutic opportunities that come with the ability to silence genes in a few tissues.  

Not just the science

Unfortunately for investors, this optimistic long view for the technology is no assurance of financial success.  We have seen great volatility and an industry shakeout during which a number of companies either went bankrupt or as a result of which existing shareholders were wiped out following a reorganization.  In fact, we are not entirely through this period and it will be interesting whether and how some of the remaining first-generation RNAi Therapeutics companies will come out of the past crisis and re-establish themselves as bona fide pharmaceutical companies.

In addition to the sector sentiment swings and turmoil in the wider economy that can wipe out shareholder value without the direct fault of companies, it has also dawned on me, how scientific illiterate managements can destroy valuable science or fail to seize upon obvious opportunities.  Does the old management of RXi Pharmaceuticals perhaps realize that they were on the right track with their 'self-delivering' chemistries, but for the really stupid decision to stay below 15bp dsRNA lengths for putative, and at that European IP issues, other companies are going to eat the self-delivering cake now?  Scientific illiteracy can be forgiven as it does not suggest willful mismanagement.  Worse are cases where companies have become the personal ATMs of Directors, managements and close friends with retail shareholders helplessly watching how their equity is taken away from them.

In addition to scientific illiteracy and the violation of fiduciary duties, the value of good science may also fail to be exploited because especially science-focussed, early-stage biotech companies do not understand the full value chain of drug development and commercialization.  A related commentary was made about John Maraganore when Fierce Biotech selected him as one of the top 25 influential people in biotech.  Even if I am vigorously opposed to what I considered unethical and monopolistic business practices, I admit that JM's mathematical product of scientific insight times financial market savvy must be one of the highest in the industry. 

Needless to say, such a talented person would look pretty stupid if he found no supporters on Wall Street and if he weren't in touch with the people and institutions driving health policy.  He also needs to exude the type of confidence that Wall Street associates with success.  If you believe you have a great technology and that you 'ought to' become a major pharmaceutical company, better line up your financial and other supporters before starting to invest accordingly.  An important lesson that I've learned on this journey is that if you just call, they won't necessarily come.  

Investment Principles

Considering that in terms of a financial investment the translation of RNAi Therapeutics into marketed drugs is taking a long time which increases the risk of getting wiped out along the way, my current working philosophy for investing in the sector is taking into account the following factors: 

1) pure-play RNAi Therapeutics companies with a hot, clinically mature delivery technology in the industry, hotness also reflected by the buzz the technology is generating in the industry; 

2) one or two flagship products that capitalize on the strengths of RNAi Therapeutics and their specific technologies and which can capture the imagination of healthcare investors (RXi has famously taken years and years to bring their first RNAi Therapeutic candidate into the clinic and failed to live up to expectations of becoming No. 2);

3) a vibrant, yet capital-efficient lab to maintain tech leadership and support potential partnerships (sorry Marina and Benitec shareholders, without a lab keep waiting for that blockbuster partnership deal);

4) a small market cap such that a non-dilutive funding event can generate explosive returns, but not too small to avoid a financing death spiral (a caveat is that from an institutional investor perspective small market caps can be prohibitive);

5) a seasoned, well-connected and yet hungry management that I feel are good stewards of shareholder value and are respectful of retail shareholders (good luck finding that);

and last, but not least 6) avoid exposing a large position to binary events unless you have reeaaal conviction about its outcome.

All of the above, of course, can only be food for thought as different backgrounds necessitate different investment strategies.


Anonymous said...

I assumed you would end that stream with Tekmira a sthe one but going through the points suggests you have Silence as the one;lead potential blockbuster drug,proven most advanced safest drug delievry,new thoguhtful commercial management with a proven ability to raise funds,improve the share price and build real buzz in a controlled stable manner.

Dirk Haussecker said...

No RNAi company checks all the marks, not Tekmira, not Silence. Silence, I agree has done an excellent job on the financial market side, but they've lost a bit of their scientific competitiveness over the last 2 years.

Anonymous said...

What do you think of the recent success Marina Biotech has had with SMARTICLES with data from Mirna Therapeutics and ProNAi? How about Tekmira's interest in UNA chemistry? Seems like they are on their way to raising capital at 25 cents a share. They do have a broad collection of chemistry, delivery, construct and gene target IP. What do you think will happen with Marina?

Anonymous said...

"3) a vibrant, yet capital-efficient lab to maintain tech leadership and support potential partnerships (sorry Marina and Benitec shareholders, without a lab keep waiting for that blockbuster partnership deal);"

Why must "owning" a lab be a success factor? Genable has a lab. Calimmune has a lab. Uniqure has a lab. All of Benitec's in-house programs have outsourced lab work. So, all the partnered programs and in-house programs are run through labs such as the University of New South Wales. Why is "owning" and running better than managing costs through outsourcing? I just don't get it!

Dirk Haussecker said...

Because you build in-house expertise and you can make real deals. Case in point: Marina-Monsanto: $1.5M, Alnylam-Monsanto: $29M.

Marina...we'll see,but as a retail investor at least I'd be a little bit concerned with the default situation.

Dirk Haussecker said...

On having a lab...the benefits translate not just into supporting a deal directly, but there is a general lack of scientific credibility, a lab and its personnel would also be able to better support IP prosecution, generate fresh IP that synergizes with your existing IP position, have people with YOUR interests in mind and a commercial mindset develop products the market wants, I could go on and on. Not having a lab is also a reflection of a weak capital position - how are you going to enforce your IP without capital?

Watch Arrowhead closely. They used to be in the same position as Benitec 2 years ago. Who do you think has the potential for explosive growth in the near to midterm future: maybe Arrowhead as they have made critical improvements to their delivery tech over the last 18 months, matured a HBV candidate for clinical development with a product profile highly attractive to the industry? Versus Benitec: HBV collab with Biomics going nowhere, IP ageing, not any the wiser in terms of RNAi trigger safety, mmh. And the critical difference: having R&D versus no real R&D.

Anonymous said...

Completely agree Dirk and dont forget Benitec has Iain Ross as a non-exec,a beacon of credibility.If Arrowhead is on the turn to better times when are they doing such a bad job of financing themselves?Of course a worry witht hem could be the large annual expenditure in expensive "big pharma style" labs continually drains them of funds.

Anonymous said...

Dirk, I understand your reasons for saying that having a lab makes good sense and I can agree to some extent, however, I question the reasoning that says a company like Benitec needs one right now. The need for a lab, in my opinion, needs to be compatible with the funding available and the pipeline being pursued. In Benitec's case it cannot afford a lab and so has to get by for the time being without one. Later, having a lab may make good financial sense.

Furthermore, it has several programs in the pipeline (not just HBV) and so it does not have all it's eggs in one basket. When even one of these is successful then the company could afford a lab of its own; it is a matter of commercial priorities. Benitec's priority has to be getting one of its programs (partnered or in-house) into a commercial therapeutic.

If the company's treatment for NSCLC is successful do you think that big pharma won't be interested because the lab used to develop the treatment was a the Uni New South Wales?

As far as IP is concerned, in the case of HIV, Benitec partnered with the City of Hope for its first clinical trial. As a result Benitec has exclusive rights to all the IP generated through that partnership. This may not be a good as owning the IP outright, but for any company like Benitec this is certainly a lot more than nothing.

It is also true to say that hundreds of labs around the world are using Benitec's technology for their research into a multitude of diseases. This is not the case for most other biothech's, many of which struggle to get any scientists outside of their own to use their technology.

I understand where you are coming from but I think Benitec is a unique case and needs to be assessed as such. Perhaps Alnylam is the only other comparable company as far as IP ownership and pipeline is concerned but they were fortunate enough not to suffer the same early setbacks which befell Benitec and their market cap reflects this.

Anonymous said...

Kepp a watch for a downramp of investor expectations then a fire sale of an RNAi drug therapy programme into a private entity.

tufulipo said...

One of the apparent advantages of not having a lab is that the CEO's of such companies have the time to hang around on sites like this and tout their companies, and explain their logic of not having the bricks and mortar most folks associate with good science.
Makes me think maybe I can still keep up my farming after I sell my land and my tractors.

Anonymous said...

I guess if your technology works in the first place, and you have plenty of options regarding delivery, you may not need to run a lab likely to send you bankrupt before you get a drug on the shelves. Benitec are happy for the experts in their respective fields to manage their trials for them, e.g. HIV at the City of Hope, and chronic pain at Stanford. It is a lot cheaper initially to do this than run your own lab. Benitec just needs to show efficiency (not just safety) in a Phase I trial to get the ball and finance rolling. Setting up a lab before they are sufficiently cashed up would be a mistake. They can add to their IP portfolio by dealing with the many research institutions that have already done extensive work using ddRNAi. HCV is ready to go mid-year, the lung cancer program too is almost ready to roll. Shouldn't cost too much for phase I studies. Calimmune and Gradalis are in the clinic with shRNA, UC Davis have advanced programs using shRNA for HIV, and Huntingtons. City of Hope are optimising their HIV candidate and have one in the works for gliomas. Merck has ongoing primate studies for cholesterol. J&J are also using shRNA multi-cassettes targeting HIV and other diseases. The list goes on. I can see much more upside investing in a company like Benitec over Alnylam that is already overpriced for a company still years away from possible commercialisation and just as likely to fail. In addition, gene therapy companies are beginning to realise that adding a gene without silencing the mutated one is only doing half the job. Watch for more licencing agreements in this regard, a la uniQure and Genable. The constant patent challenges should result in at least 5 additional years securing their core patents till 2023. They need capital soon though, so holding off till the money is secured would be wise.

Anonymous said...

Peter French lives in Sydney. It's 12:40am. He may have spare time in not having a lab, and Dirk does run a great blog, but really, that last one was shot from the hip, inverted.

Anonymous said...

I better let Pfizer, GSK and Eli Lilly know that their strategic partnerships with contract research organisations in difficult economic times was a terrible idea that, not only might damage their 'scientific credibility', but their scaling back on the 'bricks and mortar' might make most folks think they are no longer interested in 'good science'.

tufulipo said...

Perhaps some contributors here might better outsource their comments to writers who understand the difference between Large Pharma and biotechs.

Anonymous said...

I wonder if Benitec executives figured out the numbers game yet. What is their cash position, will they need to be laid off at some point before product royalty income is a reality, maintain a lab or putting up the costs for clinical trials may be the least of their worries.

Giles said...

How boring is it to have Kangaroo spinners drivel on and on.Come back when its not all gas.

Anonymous said...

In what way/ area would tkmr need to improve on to hit on all 6 of your investment principles. Also what are your thoughts on a big pharma partnering with tkmr

Anonymous said...

Mr.Dirk if you were to place all or most your chips in one RNAi company which one would you , public or private companies. Also since I'm currently not invested in an RNAi company should I wait for the data to be released sometime midyear
Kyle smith

Anonymous said...

Whats your take on the relative weakness vs the broad market in TKMR- i mean arent they trading at or below cash/share right now.. not that management helped by throwing the 50 mln shelf offering out there, which i believe is kinda disingenuous to shareholders b/c they said they have cash until 2015

Dirk Haussecker said...

Tekmira's weakness is probably the pipeline which looks relatively dry after Ebola and PLK1. The advantage of that, however, is that new programs can be started with the most advanced delivery technologies- plus they are in a good financial position. Had they entered more candidates into clinic 1-2 years ago, they may have similar decision problems as Ebola (re-formulation).

Anonymous said...

Dirk, tufulipo, your argument for a lab being necessary for commercial success for Benitec or any early stage start up for that matter fails to recognize the precedent established by Genentech.

Everything done R&D-wise was on a contract basis until they had what was necessary to go to market with a product and revenue.

However, one does need to be cognisant of the "snap" point inherent in such a strategy. This could be the failure to develop product, to licence, expiry of patent(s) or to partner with not only pharma co's but those investment houses such as J.P.Morgan who hold sway in places that matter.

So it is a bit of a surprise to see Benitec getting dissed on by the guy they sponsored to Australia to talk up their book when they had very little cash save for the La Jolla funds.

What's with that?

Because to diss on BLT is to diss on Cappello. To diss on Cappello is to diss on RXi, one of his babies.

My guess is Benitec will sold by Bremner & Co. As will RXi. To find such comments biting the hand that once fed would suggest as much.

Anonymous said...

RNAi technology and development will mimic monoclonal antibody development, in my opinion. I remember in the mid-1980s when everyone in industry was saying "humanizing monoclonal antibodies? It'll never work"

tufulipo said...

Re:Benitec and Genentech
I'm reminded of Lloyd Bentsen's response to Dan Quayle.

Sir, I knew Genentech. You're no Genentech.

By Dirk Haussecker. All rights reserved.

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