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).