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.
