Biotech M&A Heating Up, But Only One Oligo Company In-Play

The M&A activity in biotech has picked up additional steam this week with Celgene buying CAR-T player Juno Therapeutics for $9B and Sanofi buying blood disorder biotech Bioverativ for $11B (the latter shining a positive light on the recent Alnylam-Sanofi deal restructuring). And according to insiders, an unusually high number of additional deals are being finalized following the JP Morgan conference.

RNAi, ASO, genome editing, gene therapy platforms not in-play

Although another CAR-T player, Kite Pharmaceuticals, got acquired late last year by Gilead for $12B and both Juno and Kite had been billed as CAR-T platform plays, these acquisitions are unlikely to read through to gene-targeted platform technologies that are more broadly applicable across disease areas.  These include RNAi, antisense oligo, genome editing, and traditional gene therapy.

This is because the CAR-T acquisitions were driven by the desire of the acquirer to add near-term revenue growth to the topline while strategically positioning themselves in the blood cancer arena.  Of course, the underlying CAR-T platform technology will continue to be further utilized, but it is the near-term revenue streams from their drug sales that justify the multi-billion price tags to the bean-counters inside these companies and like-minded investors.  

These deals therefore do not signal to me a willingness of Big Pharma and Biotech to shell out $3B or so that they would have to acquire companies like Editas, Sangamo, and CRISPR in genome editing or Arrowhead and Dicerna in RNAi in the current marketplace.  This may also be informed by their experience in the RNAi space a decade ago when companies like Merck and Roche made large investments in the platform only to literally die in their hands while it was much smaller, nimbler pure-play companies that have now advanced the technology to commercial maturity.   

Also, more so than a decade ago, Big Pharma/Biotech has adopted a model where they focus on a few disease categories such as oncology, cardiometabolic, or the CNS, in a modality-agnostic fashion.

Target-based technology access 

Accordingly, when technology access for early-stage product development is sought, large companies prefer to partner on a limited number of targets.  This is illustrated by a range of deals over the last year or so such as in the RNAi (Dicerna-Boeheringer for NASH, Arrowhead-Amgen for cardiovascular disease) or genome editing (Sangamo-Pfizer CNS deal) spaces. 

In some cases, such deals may cover multiple targets in the same tissue using the same delivery technology.  These include deals such as the one by Editas Medicine with Allergan in ophthalmology.  

And only in rare cases such as the partnership between CRISPR Therapeutics and Bayer are multiple targets spread across multiple disease types (blood disorders, blindness and congenital heart disease) and may be largely unknown at the signing of the deal.  Such multi-target deals, however, have become less likely as the cost of capital for raising money on the Street has gotten lower and the market caps of these companies commensurately have increased.  At that point, it is advisable for the platform company to forego upfronts and near-term milestone payments that pale relative to their market caps and instead retain maximal low-hanging-fruit target-picking flexibility. 

Only Ionis Pharmaceuticals in-play

According to the above, only Alnylam and Ionis Pharmaceuticals with multiple important drug candidates about to be approved over the next 3-4 years would fulfill the requirement for adding needle-moving near-term revenue growth to a large acquirer.  With a $13B market cap already and a power-hungry management to build the most successful biotech company in history, I do not see large companies ultimately offering the ~$40B it would likely take for a successful bid for the company.

By contrast, Ionis Pharmaceuticals with a market cap of $6B and a likely more robust stream of oligo drugs hitting the market (Spinraza for SMA last year, Inotersen for TTR amyloidosis and an ApoCIII-lowering drug this year alone) appears to me a more realistic target despite its history of engaging in multiple partnerships with a number of large pharmaceutical companies, partly in an effort to make it a less appealing takeover target.

The likely acquirer would be Biogen, of course.  When Ionis and Biogen initially partnered to address in early 2012 on what has become the SPINRAZA blockbuster, Biogen quickly learned how powerful and widely applicable antisense technology could be for addressing CNS disorders.  In less than 2 years, the companies would sign another 3 partnerships ultimately covering numerous targets in the CNS which is where Biogen has gone on to firmly stake its future on.  

As we know today, giving away so fast so much of the upside to the CNS franchise was a mistake on Ionis' part as the CNS has emerged as the area of highest value to the current antisense platform full-stop.  SMA was only the beginning and diseases like Huntington’s, Alzheimer’s, ALS- you name the neurological disorder- suddenly seem within targeting reach.

Still, adding up the royalty payments and milestone payments for such licensed products would add up quite a bit.  In fact, SPINRAZA payments alone would justify Ionis' current market cap as it is growing into a multi-billion annual revenue drug and cornerstone to Biogen's SMA franchise.

Because other Ionis-licensed CNS product candidates would also address the root causes of diseases, they would similarly lend themselves to become cornerstones in new CNS franchises that Biogen is targeting, e.g. ALS.

So when Biogen’s CEO calls M&A valuations being reasonable and not over-stretched as frequently asserted by his colleagues and then goes on to mention recent CNS breakthroughs in SMA (à Spinraza), Huntington’s (watch out for knockdown data from phase I/IIa late Feb/early March), migraine, and multiple sclerosis, I cannot shake the feeling that Ionis will be the target of the big M&A move that everybody is expecting Biogen to make.  $20B and we have a deal. 

it could mean that the company that tried its best in the oligo space not to be an M&A target, Ionis, could be one of the next to be acquired.  

Say 'No' to Rosetta Genomics Take-Under by Genoptix

The first wave of efforts to commercialize microRNAs, the close molecular cousin to RNAi, either for diagnostic or therapeutic purposes is about to fizzle out.  With Regulus Therapeutics getting a last chance to prove its worth with clinical data on its Alport's microRNA therapeutic program pending, today's post symbolizes the end of commercial efforts to establish microRNAs as a broadly applied diagnostic platform.  

Rosetta Genomics Surrenders Despite Promising Products

Last month, the Board of Rosetta Genomics, the main torch-bearer of microRNA diagnostics for close to two decades, announced that it was recommending a take-under by Genoptix.  Genoptix is a larger molecular diagnostics player for which Novartis had paid $470M in 2011 and then was acquired by Ampersand last year.  Under the proposed terms as detailed in this proxy statement, the Board has been recommending shareholders to accept what constituted at the time of the announcement a new all-time low price of between $0.6-0.7 per share, that is  ~1/2000, 1/100, or 1/10 of its value 10, 5, and 1 year ago, respectively. 

Please somebody call the Guiness Books of Records.  

Unsurprisingly, instead of admitting their commercial and financial ineptitude, this surrender is blamed on a financial market that would provide no more support microcap molecular diagnostic companies.

Well, if the company had executed properly, it wouldn’t be a microcap company, would it?  And last time I checked, complex molecular black-box diagnostics was the way the industry was going, although I admit that the Wild West culture of this industry with hardly any market entry barriers has been harmful to the industry and burned many an investor. 

There have been at least two products by Rosetta that I thought had real commercial potential.  The first one was a test to determine the tissue origin of a cancer to better inform treatment (RosettaGX Cancer Origin).  Given the trend towards drug regimen that are increasingly aimed at the molecular changes that have occurred during oncogenesis regardless of tissue origin and immuno-oncology approaches that couldn't care any less, the medical relevance of this test might be waning.  This can happen, but doesn’t subtract from the value of quantifying microRNAs for diagnostic purposes per se.

The other test, RosettaGX Reveal, got me (and apparently Genoptix) excited enough to invest in Rosetta, in my case amounting to a ~3% stake of the company (which curiously I had no problem acquiring in a heart-beat since my bids were hit with volume).  

RosettaGX Reveal is intended to prevent the many unnecessary, and medically harmful thyroid gland surgeries performed today on nodules of uncertain cancer potential based on cytology.  The test appears to be conservatively at least as good as the currently leading test by Veracyte in this ~$350M molecular test market (of which 2/3 remain to be tapped) in terms of making a solid recommendation against performing a surgery without missing the malignant ones.  Importantly, Reveal has the advantage of not requiring fresh tissue and can thus be performed on the same cytology sample that the original indeterminate diagnosis had been made.  This is due to the remarkable stability of microRNAs, in contrast to the longer and thus more fragile mRNAs.

The test has shown solid growth since start of commercialization in early 2016, now running at roughly $1M in quarterly sales with lots more room to grow by increasing reimbursement rates (yes, the test is frequently performed without the company getting paid), tapping the 2/3 untapped market, and converting users of competing tests.

Unacceptable Terms to Holders of Ordinary Shares

The reason why I will not vote my 3% of shares in favor of the merger at the upcoming Meeting of Shareholders (note: the 3% should weigh heavier since related parties in the transaction are apparently barred from voting) is that the proposed $0.6-0.7 per share is at a 25% discount from when merger discussions began, at a time when shares were already tumbling daily to new all-time lows.

While letting shareholders feel the pain, convertible debt holders get $2.5M of the $10M pie, obviously worthless warrants get attributed $1.2M, the two key executives get a combined $0.5M good-bye present (in addition to the windfall from the warrants that they will likely be beneficiaries thereof and insurance benefits), and to add insult to injury the transaction cost of the take-under is estimated at $3.3M, about as much as ordinary shareholders would get!

So unless Genoptix sweetens its offer to at least $13.3M, meaning a decent premium and doubling of the consideration to shareholders, I would rather go down with this ship and let this Lipdub clip by Rosetta on Youtube be their lasting memory:

Going into 2018, OligoRx Has Become Mainstream Drug Modality

When I became interested in drug development almost 2 decades ago, I just didn’t get it: why was it that gene-centric biotech was seen as an esoteric, money-losing endeavor, and why did shot-in-the-dark small molecule drug development represent the pharmaceutical elite?  After all, biology has fully moved into molecular gear and how could medicine not follow that?

After a quarter of a lifetime I now understand that what makes sense often takes a decade or two to manifest.  So if you are dead sure about your view of the world, stick to your conviction and resist the urge to follow the herd.

The gene-centric drug development revolution has occurred, long live Oligonucleotide Therapeutics

In 2018 though, gene-centric drug development has taken the pharmaceutical world by storm.  This just 8 years after gene therapy, RNAi, and oligonucleotides were widely ridiculed for having been hyped and supposedly failed.

Yes, in 2017, antisense drugs Spinraza (for spinal muscular atrophy) and Exondys 51 (for Duchenne muscular dystrophy) made a big commercial splash, RNA knockdown for TTR amyloidosis proved positive in 2 large phase III trials, all the while the first gene therapy products (2 CAR-T cell/gene therapies and 1 ocular gene therapy) got approved.

This momentum will only pick up speed on 2018.  The year is already starting with an onslaught of drug development VC investments prominently featuring mRNA and gene-modulation startups (e.g. $270M investment in personalized/mRNA oncology Co bioNTech, and ~$100M for gene processing plays ExpansionTherapeutics and Stoke Therapeutics).

 

Further down the pipeline, we should see approvals and commercializations for at least 3 important oligonucleotide therapeutics drugs: Patisiran (RNAi/Alnylam) and Inotersen (RNaseH antisense/Ionis) for TTR amyloidosis in addition to Volanesorsen (RNaseH antisense/Ionis-Akcea) for lowering triglycerides.  At the same time, Sarepta will continue to walk the tightrope with their first-generation PMO splice skippers for DMD hoping for approvals of additional exons.

RNAi drug Givosiran should also be speeding towards approval in 2018.  After a sweet and brief phase I/IIa study sponsor Alnylam is pursuing a laser-like direct-into-pivotal study/biomarker-based approval strategy.  Expect this to become quite commonplace rather than the exception, especially under the new FDA.

Adding gravitas to all these activities will be the further commercialization successes of Spinraza and Exondys51 that will break down pretty much all commercialization barriers that may have been put up by payors.  After all, these are all delay tactics intended to save the system a few billion dollars (at the cost of childrens’ lives mind you), get a few bureaucratic underlings promoted, but really won’t stand a chance against the desire of patients and their families to get access to such foundational drugs.

It is my belief that with the commercial successes of Spinraza and Exondys51, all previous reservations with regard to oligonucleotide therapeutics being mere scientific tools rather than real-world drugs have disappeared among pharma and investors.

RNAi Therapeutics Stock Thoughts for 2018

Moving on towards the investment end of the business, Alnylam will be a show-me stock which will have its ups and downs as the market will challenge Patisiran sales numbers against its $12B market cap.  Alnylam knows this and is throwing everything behind the commercialization of Patisiran to the extent that it renegotiated its platform deal with Sanofi to retain full global responsibility for commercializing Patisiran and follow-on ALN-TTRsc02.

The easiest RNAi money in my opinion will be made with Arrowhead Pharmaceuticals (~400M market cap) which has impressed me recently with the vengeance with which it is getting back into the clinic (IND equivalents filed recently for its HBV and AAT drugs) and between it and Amgen it could have brought half a dozen drug candidates to the IND stage within the span of just one year (from having zero in the clinic!).  Just by executing on bringing these drugs to the clinic, Arrowhead’s market cap should exceed those of genome editing high-fliers like Sangamo and Editas (~$1.5B).

The topping on the cake, however, will come from potentially first proof-of-concept biomarker data from their GalNAc programs by the end of the year.  And who knows what will happen to the stock if they can declare HBsAg seroclearance based on the legacy HBV program (ARC-520/1)!  And this is not all as we have yet to learn more about Arrowhead’s lung delivery platform which could be a very big franchise onto its own without much competition.

In terms of striving towards first proof-of-concept and critical biomarker data for its GalNAc RNAi platform, Dicerna is similar to Arrowhead.  The difference is that Dicerna’s goals are not as grandiose as those of Arrowhead (Arrowhead is built to become a $50-100B biotech juggernaut) focusing its resources on a few (ultra-)orphan indications which they are addressing with much care and detail.  At a market cap of $450M after the recent conversion of their convertible debt, the downside could be enormous should the lead program for primary hyperoxaluria stumble.  The upside, however, is also significant as they have their eyes set on 2 orphan drug approvals by 2023.

Critically for Arrowhead, Dicerna, and other companies in the space, given the positive news from Spinraza and Exondys51 sales and TTR trial results, the resistance of more conservative investors to invest in second-tier companies so they can grow into substantial multi-billion companies themselves should also be alleviated.

Finally, investors in Ionis Pharmaceuticals face a critical year.  No, this time it’s not about hitting clinical endpoints and how well their drugs are selling.  Instead, Ionis will have to decide its corporate future.  Run away if it makes the mistake of continuing to try and dominate every area of oligonucleotide therapeutics development.  It is this ambition and resulting lack of focus that is responsible for the company giving away much of the commercial upside of its drugs to its partners.

As the basic oligonucleotide chemical building blocks and designs are coming off patent and more and more disease-focused, nimble companies come online, this train has left the station.  Boy, this company is in dire need of fresh management blood from the outside world. 

The macroeconomic environment also bodes well for a blockbuster oligonucleotides stock year: low inflation and interest rates, good economic growth at low unemployment, lowered corporate taxes in the US and an FDA that seeks to speed up and protect innovation in exchange for ensuring that off-patent drugs are highly affordable.  It is probably this blue sky, however, that scares me most and it is my New Year’s resolution to take it easy on my margin balance for a change.