RNA Therapeutics Has Gone Mainstream

When Mad Money host Jim Cramer on CNBC singles out RNATherapeutics as a sector to invest in and notable Big Pharma RNA Therapeutics deals materialize on a regular basis, you know that the industry has become accepted as mainstream.  This acceptance and confidence are critical for the financial viability of the industry and shareholder profitability, as it determines the terms at which the cash-burning companies can raise capital to mature and launch their first drugs.  Alnylam’s recent fund raising is the best example of that, and while almost all of the investor attention has been on bellwether companies and cult stocks such as Alnylam, ISIS Pharmaceuticals, Sarepta, and Regulus, the increased scrutiny should also benefit some of the smaller technology leaders such as (my own holdings in the space) Tekmira and Arrowhead Research.

Market Doing Homework

Drug development is attractive to me also from an investment point of view because it is one of the few opportunities where scientific insights should provide you with an investment edge.  Financial market gurus such as Jim Cramer feel quite comfortable talking about automobiles, electronics, restaurant chains and most other sectors of the economy, but you can sense that they are more uncomfortable when it comes to explaining why a certain biotechnology is worth investing in.  The fact that Jim Cramer had done some homework for the show and did his best to explain the basic promise of RNA Therapeutics is not only laudable, it speaks to the fact that mainstream market participants can ill afford to ignore this geeky sector any more, especially if your performance is measured in terms of peer performance.  This is because RNA Therapeutics hit the sweet spot of drug development today, which is personalized medicine and orphan diseases.  There are very few sectors like it where a number of companies can be expected to experience rapid growth almost regardless of what the wider economy does (well, at least until the next big correction/disruption).   

Big is Beautiful

A downside of it being a technologically driven sector dealing with complex biology and where strong recurrent revenues in the form of drug sales are lacking, is that most market participants prefer to invest with companies having the largest market caps.  This, of course, is based on the wisdom that since I do not even pretend to understand the gory details of the technology, the fact that companies have leading market caps must mean that I am probably investing along with more expert and diligent investors.  Moreover, the vast majority of investors looking for potential opportunities in RNAi Therapeutics or RNaseH antisense e.g. will come across Alnylam and ISIS Pharmaceuticals first and essentially stop there.  In Germany, you would refer to such behavior as the devil always shi**ing on the biggest pile.

Another problem for the smaller companies in the sector is that even $0.5-1.8 billion market caps are still small for the larger funds.  The technologically potentially more interesting ‘second-tier’ RNAi Therapeutics companies with 20-40 times smaller market caps are usually not an option.  Working on increasing awareness with the next larger investor group is therefore an important market-facing activity for these companies ahead of potential scientific and clinical trial catalysts.  As illustrated by the recent analyst event, Arrowhead Research is doing that ahead of its chronic HepB program entering the clinic, and I would not be surprised if Tekmira had done the same ahead of the important TKM-PLK1 phase I data presentation at the imminently upcoming AACR meeting.

Is This Time Different?

Having lived through the ups and downs of the financial fortunes of RNAi Therapeutics, watching the increased interest in the sector evokes old memories.  In particular, are we in the middle of another 2006-8 type bubble?  In 2006-8, most of the value was ascribed to RNAi trigger IP while neglecting the importance of delivery and the poor quality of the product candidates at the time.  With the value of RNAi trigger IP and leading product candidates evaporating, there was no place to hide during one of the worst financial crises of modern times and the bubble had to burst.

This time, however, a clinical pipeline of much higher quality and sales visibilities, not just in RNAi Therapeutics, but RNA Therapeutics at large, provide better support to some of the increased valuations.  Today, unlike back then, there is no question that RNAi Therapeutics and RNaseH antisense for example can knock down genes in humans profoundly.  The pipeline includes numerous opportunities for validating events in the form of biomarkers ensuring a constant newsflow to keep up interest, confidence, and valuations.  In fact, it is not just the more mature pipeline, with mipomersen, the first RNA Therapeutic with commercial potential to speak of (I expect the ‘symptomatic’ homozygous FH population to grow miraculously), has recently been approved. 

This, of course, does not shield from significant downside to investors of companies like Sarepta or Alnylam if their lead candidates suffer setbacks.  If major platform or delivery-related toxicities emerge, the fallout ought to spread and Jim Cramer will tell his audience to sell, sell, sell.

Register for the GTC RNAi Research and Therapeutics meeting in San Francisco today (June 20-21).  Get a free RNAi Therapeutics blog T-shirt and 20% discount on registration by entering discount code 'RNABLG13'.