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.