Short Alnylam

Biotech shorts and event traders rejoice.  The Tekmira-Alnylam litigation is coming close to a jury trial.  This opens up a few interesting trading opportunities.

As evidenced alone by Alnylam’s delay and cost-intensifying tactics in both the main litigation with Tekmira and the VSP patent interference, Alnylam’s views its strong balance sheet and market capitalization (arguably partly built on the back of Tekmira) key advantages in their alleged attempt to misappropriate SNALP technology from Tekmira.  Why sweat the merits of a case when you think that you can financially outlast your opponent?

At the same time, following a number of positive clinical results, enabled by the contested technology no less, Alnylam the stock has soared over 200% in less than a year.  But as the big showdown with Tekmira approaches (at the end of October in front of a jury) the stock has become a near-perfect short. 

Here is why.

First of all, there seems to be little risk of a catalyst ahead of this key event which could significantly jolt the stock to the upside.  This is because the clinical results with the SNALP-based drug candidates have been reported (ALN-TTR01, ALN-TTR02, ALN-PCS02) and Alnylam will not be able, in light of the Tekmira litigation, close any meaningful product-based partnership, much less close a platform-based deal for any upfront that would move the needle of this billion dollar market cap company.    

The recent run-up in the stock, the early-stage pipeline plus the absence of catalysts make the stock an attractive short based on technicals alone.  A simple analyst downgrade which may come any day could easily knock down the stock by a double digit percentage.  The big short opportunity, however, lies in the increasing likelihood that Alnylam has no choice but to settle the legal matter as the judges in both cases are getting visibly annoyed by Alnylam’s tactical games.  For example in the VSP patent interference, Alnylam got reprimanded for filing motions belatedly and manipulating history by adding claims to an ex parte patent applications; or in the words of the  judge in the main litigation: ‘I conclude that the proposed motions are not only unlikely to eliminate any issues but they would at the same time be extremely costly for the parties to litigate and distract them from preparing for and focusing the issues for trial.'

In fact, I am surprised by how well the judges have picked up on Alnylam’s smugness with all of the important decisions in both cases so far going in Tekmira’s favor.  Note that I did not expect this for the VSP Interference where I had seen the situation more balanced before Alnylam and their lawyers bungled the case.  Unless the bitterness of the dispute has led Alnylam’s management to actually believe in their case, settling the matter ahead of the trial would seem a foregone conclusion.     

Lose, lose big; win, get your money back

A settlement, of course, is likely to be expensive to Alnylam and should pressure the stock as it should consume a good part of their $300M+ cash position.  Tekmira is asking for a billion dollar in compensation, a number that sounds outlandish at first glance, but maybe not so considering that Alnylam has earned over half a billion in non-dilutive partnership funding which would have been impossible without Tekmira’s technology.

Even assuming the best outcome for Alnylam, namely an outright win at the trial, this would be unlikely to have much of a positive effect on the stock at current valuations (~$18.6/share).  In fact, there may be a sell-on-the-news as this legal uncertainty disappears and the biotech analysts/stock market have largely disregarded the Tekmira litigation in their estimates.   

And if it comes to trial and Alnylam loses, well, this could get real ugly for the stock.  But again, I do not believe that Alnylam management and BoD wish to expose themselves to the inevitable shareholder class action lawsuits that would surely follow and therefore settle.

Tekmira Long as an Alternative

With a market cap of merely $30-40M and a potential, if not likely, multimillion dollar windfall, a Tekmira long would be the obvious trading alternative.  If they lose the trial and technology, it would likely destroy the company through endless rounds of dilutions at low share prices.  Consequently, unlike you are me and strongly believe in the merits of the case and have held the stock for close to four years now, I would not hold an outsized Tekmira long position relative to your personal wealth based on the simple mathematical rule that anything multiplied by zero equals zero.  The anemic trading volumes in the stock would also argue against taking a large position, although a slow accumulation strategy and strong trading volumes on the event may allow for that.

Addendum: It would seem that Alnylam management agrees with the above short thesis.  The company's CSO and CFO were quick to act by exercising options and selling the respective shares on the recent ALN-TTR02 data spike.  The CSO made around 350K in profits, the CFO around 100K.

Disclaimer: The above is my personal opinion only.  If you intend to trade stocks based on the account above, it is entirely at your own risk.