Happy Gene Therapy Talk Presaged Market Correction

In January, many biotech stocks went parabolic shattering all-time-highs.  Now they have started crashing back down to earth.

The run-up was partly driven by real fundamentals.  These include corporate tax reform in the US, a new FDA commissioner (Scott Gottlieb) who makes all the right decisions (speeding access to innovative medicines, fostering generic competition, amenable to rational discussion etc), and a voracious appetite for innovative pipelines in the pharmaceutical industry which has manifested itself in a number of chunky, multibillion dollar acquisitions. 

At the same time, ever-increasing valuations in a deceptively low-volatility stock market environment has emboldened analysts, investors, and managements alike to proclaim that the golden era of curative medicines is upon us.  Gene therapy and genome editing in particular got hyped beyond reason as if all of a sudden critical bottlenecks in tech development had been solved.  CRISPR companies Editas Medicines and CRISPR Therapeutics, without a single drug candidate in the clinic, were bid up to $2B valuations although access to genome editing tools have become a commodity and cannot be considered gate-keeping tech any more.

Not much changed technology-wise

I understand that gene therapies have made tremendous inroads into the pharmaceutical marketplace with the first 3 gene therapy approvals in the US over the last year, one for an eye disease by Spark Therapeutics and two CAR-T cell cancer therapies going after the same target.

While I acknowledge these successes, what is really surprising here is that it took that long to get there given that the related delivery and genetic technologies (AAV, gene insertion, immune cell transfer) have been in existence for a decade or two already.  In that light, the recent Happy Talk around gene therapy seemed overdone.

The CEO of one genome editing company, Sangamo Therapeutics, is a great example of this divergence between scientific progress and clinical reality.  

Having come on board only a year ago, the good Dr. Macrae looks as if he is having a steep learning curve ahead of himself.  The reason I got the impression is that he likes to grandiosely talk about how the company's AAV capsid shuffling will enable them to cure all these CNS disorders while making great progress with LNPs to address the rest of humanity's afflictions.

Well, LNPs have gotten 10x more potent every year for the last 15 years so we must have reached homeopathic doses by now; and looking at the literature, AAV shuffling hasn't changed all that much since I completed my post-doc in an AAV lab in Stanford.  Or maybe Jim Wilson has grown exceedingly gun-shy when he resigns from his well-paying function at AAV company Solid Biosciences over concerns of toxicity from high systemic AAV doses and possibly also his finding that delivery to a certain tissue in the mouse does not predict same delivery in humans.

Certainly, there are also tailwinds supporting gene therapy that had not been around a decade ago.  As alluded to above, society and regulators have finally warmed up to a very sensible approach to medicines in the genomic era.  Moreover, there are established paths now to effectively develop such therapies and the challenge of producing large quantities of viral vectors is gradually being addressed.

Still, amid the hype and stock market giddiness, valuations in many of these companies have run ahead of themselves and were ripe for a pull-back.

Next time you hear so much Happy Talk around a biotech subsector leader as has been the case for gene therapy, watch out for a correction.   

What about RNAi stocks?

RNAi stocks have also benefited from the overall bullishness in the biotech sector with ARWR and DRNA having run up by 300% or so in a matter of months.  While I still hold shares in these companies, I have written calls (largely in-the-money) on essentially all of them meaning that I am fairly insulated should they fall another 10% or so.   

Since I still like ARWR and DRNA ahead of their first clinical GalNAc knockdown data, and in the case of Dicerna the potential removal of the overhang from the Alnylam litigation, I am eyeing (and have been) selling out-of-the money puts on these for 10+% premiums or so.

If the market turns back up, you pocket the premium. 10% or so in a matter of 2 months is not bad in my mind.  If, however, the stocks decline and the puts are in-the-money at expiration, you get handed a stock that you like anyway.  Say Arrowhead for a price of $4.5 instead of $5.45 yesterday.  

But before you place any such options bets, consult with your investment advisor first to familiarize you with the risks of writing options!

On the simple, naked long side, I like Ionis Pharmaceuticals which, as a biotech stock that has essentially missed out on the post-Trump rally and with the upcoming Huntington’s data catalyst, has the potential to become a new biotech bellwether following subsector rotations that usually occur following corrections (remember the 2015 correction following which oligonucleotide stocks turned from sector leaders to laggards?).  Alnylam, meanwhile, looks tired here with a lot of the upside priced in, at least regarding the TTR story.

Happy trading and be mindful.

GILD by Association

Biotech stocks have suffered massive losses with the IBB biotech index down 20% over the last 1 ½ months.  This followed a sustained bull market with a 300% increase since the US Housing Bubble bottom.  RNAi Therapeutics stocks could not duck this trend and suffered similar, if not exaggerated losses: bellwether Alnylam down almost 50% since their $700M Genzyme deal, Arrowhead Resesarch down 40% since their all-time high, and even the most undervalued of them all, Tekmira, down a solid 30% off the pricing of their secondary barely a month ago.  Should investors worry?

The causes of the pullback in the biotech market can be attributed to at least three factors: 1) a general downturn in secular growth stocks that have done quite well recently; 2) worries that interest rates are on the upswing and could divert capital flow away from stocks with little or no current earnings; and finally 3) a sense that society will stop paying for expensive drugs. 

Although the era of ‘resource-constrained’ healthcare has long arrived in Europe, the fact that US lawmakers made an example out of HCV wonderdrug Sovaldi (sofosbuvir) as a wildly overpriced drug, sent shudders through the biotech investment community.  If a $84,000 price tag for a cure of HCV is deemed too much despite the fact that it will extend life by years for the average patient and save the healthcare system much more over the long-term in terms of reduced costs related to liver-related complications…then what about say orphan drug pricing for which $300-500k per patient every year has not become that uncommon?  To wit, orphan diseases represent a fertile ground for RNAi Therapeutics as illustrated by Alnylam’s phase III candidate for TTR amyloidosis, ALN-TTR02. 

‘Resource-constraint healthcare systems’ is certainly something that I occasionally hear here at the European Liver Meeting (EASL) which celebrates the very Sovaldi and general progress made in treating HCV, yet tries to deal with the problem of how to get it patients due to cost issues in light of the millions infected and that would be treated today if cost were not an issue.

Interestingly, nobody here criticizes the drug makers for overcharging.  I don’t think this is because they are paying for our lunches, but because the medical and long-term pharmacoeconomic and quality-of-life benefits of curing HCV are so obvious.  In general, I believe the Sovaldi issue will be short-lived and accelerate a transition to a value-based reimbursement system with the benefit of curtailing some of the drug pricing mis-behavior we have seen (you all know them).  However, beyond that, I expect that we will still be willing to spend much on our health and drug costs accounting for just ~10% of overall healthcare costs, the pharmaceutical industry should be able to make the case that innovative drugs that make a solid difference in patients' lives out to be rewarded financially.  Remember this when small, innovative biotechnology companies are undercapitalized to the point of becoming financially non-viable yet patients clamoring for new treatments.  RNAi Therapeutics was in that precarious position just 2 1/2 years ago and RNAi investors deserve every cent they raked in on the stock market when the sector recovered. Every cent.

If you look at the RNAi Therapeutics pipeline addressing the roots of and seeking cures for diseases ranging from the severe and orphan like TTR amyloidosis and solid cancers, to the chronic and debilitating like HBV and alcohol dependence, it will be RNAi companies that will stand first in line to benefit from the value-based cost model of healthcare.   The continued flow of clinical trial data (watch ARC520, TKM-PLK1, ALN-TTR02, and ALN-AT3 this year) should make that obvious and allow RNAi Therapeutics to break out from the biotech crowd and bounce back.  And even if the monetary policy makers increased interest rates, I don’t think it would be much in this deflationary environment, and a 1% short-term interest rate should not divert capital flow all that much.    

If You Like Dicerna, You Will Love This Company

Yesterday, RNAi Therapeutics platform company Dicerna went public and following a wildly oversubscribed offering, popped 200% from the issue price.

It was a day to celebrate for the RNAi Therapeutics sector.  Following years of starvation and neglect, the going public of a private RNAi company marks another milestone in the technology’s recovery and vindicates activities in the early VC rounds seen last year (e.g. Solstice and Arcturus; correction: as rightly noted by Arcturus, the source of Arcturus' early-stage funding was not classical VC funding).  This is because venture investing in biotech really only pays off when the exit is on the public market- and very rarely by means of Big Pharma takeovers.

Sorry Bruce, but planning your company’s on the assumption that they will be Big Pharma takeover targets is flawed as you are dealing with miser companies failing to see the Big picture for their discounted cash flow obsession.  And how can you trust a counterpart which for years have refused to pay small biotechs based on the value of their discoveries and instead preyed on their need of capital, only to cry foul now that the public markets provide a more attractive alternative source of capital to them.

The bullish view: potential

The $700M market cap for a preclinical-stage company, however, does raise some legitimate questions.  Supporting such a valuation is the realization that this is a platform company and that once it has clinically relevant delivery figured out, it can roll out an Alnylam-type broad pipeline in a short period of time.  Or think of a pipeline with not just one Alexion-type drug (one-rare-orphan-drug wonder with a >$30B market cap), but a handful of those. Thus, valuing the company merely based on the number of development products and their development stages would be woefully short-sighted. 

It is obviously a mistake to apply the same risk discount based on the stage of development regardless of technology and drug target.  Hence, once delivery is validated (e.g. through extensive non-human primate experience), you should significantly increase your valuation of an RNAi Therapeutics company that wisely seeks to minimize target risk by taking advantage of RNAi to choose from a plethora of targets.  And under such circumstances when capital and not technology becomes limiting, a capital raise should even increase shareholder value and not be viewed as shareholder dilution.

So if you speculate that Dicerna will have a TTR amyloidosis-type program and will have generated impressive proof-of-concept knockdown in a clinical study by the end of 2015, a $700M market cap would seem acceptable if not on the low end.  

The bearish view: limited de-risking and relative valuation

On the other hand, it seems easy to challenge the view that Dicerna has fulfilled a key criteria for the $700M valuation: clinical de-risking.  

By clinical de-risking, I do not even mean SNALP-type gene knockdown results in humans (e.g. >90% with ALN-TTR02).  By that criterion, an Arrowhead Research, with a market cap similar to Dicerna, would fail the test, too.  However, ARWR's valuation is supported by solid non-human primate efficacy data and human safety data, plus Arrowhead is leading the way in the important area of ligand-targeted polyconjugates (for more on my view on Arrowhead Research and much more, please consult the RNAi Therapeutics Investment Guide 2014).

By contrast, the degree of validation of Dicerna’s delivery system is essentially limited to rodents, although I expect them to have collected at least some non-human primate safety data as they are about to enter clinical development in the first half of 2014.  Non-human primate data is required in RNAi Therapeutics as it has been shown again and again that rodent data often do not translate into humans. 

Accordingly, it can be argued that Dicerna’s lipid-based (Encore) delivery system will be at a similar stage to that of Tekmira’s lipid-based (SNALP) delivery technology 5 years ago.  As Tekmira’s (TKM-ApoB) experience with SNALP illustrates, there can be time-consuming lessons to be learned before a suitable formulation and administration solution are found.  On top of that, Tekmira controls some fundamental patents covering Encore delivery technology (Semple/Wheeler), although their expiration date is certainly approaching fast.

In terms of pipeline strategy, Dicerna and Tekmira are also not all that different either, both of them pursuing indications targeting gene expression in the liver and cancer, with an increasing focus on orphan diseases.  In all respects, Tekmira can be considered more advanced although RNAi companies do not like to talk about their specific orphan indications for competitive reasons.

The analysis thus far has shown that the overall strategies of Dicerna and Tekmira are quite similar, but Tekmira is (much) more advanced in practical terms.

One obvious difference between the companies is the nature of the RNAi triggers employed.  As the name Dice-RNA implies, the company was built on the Dicer-substrate technology that was once pushed by some to be superior in terms of knockdown potency to other RNAi triggers.  I believe I can safely say that most would agree that this is not the case and that the main advantage of Dicer-substrates may be in conjunction with certain conjugation strategies. 

The argument that Dicer-substrate RNAi triggers are commercially so valuable because they are the only alternative to Alnylam’s RNAi trigger IP, is also outdated.  This is because Alnylam has lost its standing in RNAi trigger IP and there have been other developments, such as the issuance of the Baulcombe patents that showed that Dicerna does not have the automatic freedom-to-operate when it comes to its RNAi triggers. 

In an intriguing twist of events, the IPO document (S1) filed by Dicerna with the SEC describes how the fact that Alnylam has acquired the RNAi assets of Merck unexpectedly could have a chilling effect over business development efforts involving Europe.  This is because the opposition has relied on Merck to do the heavy lifting in revoking Kreutzer-Limmer once and forever.  It teaches me to never count Alnylam out as they seem to have always one more Machiavellian move up their sleeves.  And it should hardly surprise you that (according to the S1), yes, Dicerna in 2010 also received a not-so-friendly reminder from Alnylam’s lawyers that it does not have freedom-to-operate.

In addition, as I had observed before, the S1 also describes that Dicerna is not the only one with access to the fundamental Dicer-substrate RNAi trigger IP licensed from the City of Hope, but that Arrowhead Research enjoys similar access.  If Arrowhead Research wanted to hurt Dicerna as a competitor, it could frivolously sub-license the Dicer-substrate IP and thus destroy its scarcity value.  By contrast, Tekmira can play it safe by utilizing the Alnylam-type RNAi triggers to which it has access in addition to usiRNAi triggers which appear to be a simple and cheap way to get around all of the otherwise fundamental RNAi trigger IP.

So what is left to justify the $250M vs $700M market cap difference between Tekmira and Dicerna?  Not much since Tekmira’s relationships with regard to Ebola, ALN-TTR02, Monsanto, and Alnylam (and quite likely more to come...mRNA), easily outweigh the Kyowa Hakko relationship of Dicerna.  

So yes, to come to the point of this blog entry, if you like DRNA, you should love TKMR (which, of course, I own and selfishly choose to promote).