Alnylam Pharmaceuticals, one of the bright lights on the Boston biotech scene, has suddenly found itself getting almost zero value for its technology on Wall Street.
It’s a shocking thing to say about the Cambridge, MA-based company (NASDAQ: ALNY), considered to be a leader in RNA interference technology. This, after all, is a hot field of science which has potential to silence disease-related genes that were previously inaccessible to conventional small molecule drugs and genetically engineered proteins. No drug that works this way has made it through the FDA approval process, but Alnylam has three programs in clinical trials, a massive roster of partnerships, a long list of scientific publications, and an enviable cash horde estimated to be worth $325 million heading into 2011.
Yet it’s clear that the early enthusiasm for RNAi and Alnylam has faded, and evidence can be seen each day in Alnylam’s plummeting stock. The company’s shares closed at $9.24 on Friday, giving it a market valuation of about $390 million. That might sound like a lot, but Alnylam expects to finish this year with $325 million in cash and investments. That means that all of Alnylam’s technology, patents, people, drug candidates, and future prospects are only being assigned a valuation of about $65 million. It’s a stunning fall for a company that not long ago had a market valuation of more than $1 billion, and that was worth more than $35 a share in July 2008.
Two things made shareholders scramble this fall. Back in September, a partnership between Novartis and Alnylam ended, and as a result, Alnylam cut about 25 to 30 percent of its workforce. Then, on November 17, Roche stunned the pharmaceutical industry when it said it was pulling out of RNAi altogether as part of a global restructuring effort. That meant it no longer had any use for its partnership with Alnylam. Roche essentially spent $500 million on the effort, and pulled the plug after three years.
Alnylam still has three RNAi drugs of its own moving through clinical trials for respiratory syncytial virus, liver cancer, and a rare condition called TTR amyloidosis. It still has alliances with companies like Takeda Pharmaceuticals, GlaxoSmithKline, Cubist Pharmaceuticals, and Medtronic. Simos Simeonidis, an analyst with Rodman & Renshaw, said the sell-off was an over-reaction and called Alnylam “a table-pounding buying opportunity in both the short and long term.”
I chatted with Alnylam CEO John Maraganore last week to get his view of what’s going on, both in terms of perception and reality. Here’s an edited transcript of the chat.
Xconomy: John, as I was getting ready for this call, I must say I was completely shocked. I don’t look at your stock every day, but it looks to me like your enterprise value is down to $60 million or $70 million. What’s going on?
John Maraganore: Yes. Obviously, there’s been a frenzy and a visceral reaction to the Roche news, which we don’t think reflects on RNA interference at all. Really, it’s all about Roche dealing with their near-term business needs. Roche’s decision was a restructuring of 5,000 people and $2.6 billion in future costs. They made a lot of cuts, not just RNAi. But all of a sudden, the whole restructuring of Roche became an RNAi story, which is insane. We feel better about the science and technology than ever. The change in the stock price brings a new opportunity for investors who hopefully will do very well in the future. We don’t have to raise capital now, so we’re just focused on what we have to do. It’s a clear over-reaction to the Roche news.
X: But John, was it a surprise when you got the word from Roche that they were pulling out of RNAi?
JM: It was a big surprise. We got the word the night before the release went out, at close of business. What was explained to us was that they had to make big cuts. We knew that, it had been known for some time. They needed to preserve their investment in their clinical pipeline, and they have near-term issues with revenues. They also, for social/cultural reasons, chose not to do very much [cutting] in San Francisco. So what really got hit were the discovery elements in traditional Roche pharma, and among those cuts there were two locations—-one in Kulmback, Germany, and the other in Madison, WI—that happened to be the centers of excellence for their RNAi research. That’s what happened here.
It’s disappointing that this type of thing happens within large companies. It does make you wonder how best companies can ensure they can support innovation going forward. I’m increasingly of the view that strategies of externalizing innovation is the only path forward. Roche has been one of the leaders in internalizing their innovation. That’s what they did with Alnylam back in 2007. That’s what they did with Genentech in 2009. I don’t know if their experiment is working out very well so far.
X: My sense of the investor sentiment around your company the past couple years has essentially been, ‘Gee, you must have something pretty valuable there in RNAi because you have all these big name Big Pharma companies lining up and shelling out a lot of money to partner with you.’ So then this fall, Novartis says it will terminate their deal, and then so does Roche. And Roche is the biggest one you’ve done. Why should people not be alarmed?
JM: Let me first correct you. Novartis didn’t terminate our deal. Novartis and Alnylam were partners going back to 2005. In 2008, Novartis, on their own volition, extended the partnership an additional year. Then in 2009, they extended it for a fifth year. The agreement was capped at five years. That deal ended in a natural process. And, remember, they chose to move ahead with 31 programs on their own using Alnylam RNAi technology and IP. That’s 31. Not one, not two, not three, but 31. What they chose not to do was they had an option for a broader license for a one-time $100 million payment. They chose not to do that, because they rationalized—completely legitimately—that they will be really busy working on 31 programs. That’s the decision they made.
X: OK, and I understand that your 2010 financial forecast was never set up to count on receiving the $100 million payment from Novartis. But what about Roche? That one really surprised people.
JM: Roche made a decision to be focused on near-termism. They are walking away from an incredibly important field that we think in the future they will regret. But it’s something they’re choosing to do now because they have to make cuts, and they have to make cuts, and they have to make cuts. And in our business, innovation is often what gets cut. That’s what happened here.
X: What kind of impact does this have on Alnylam operationally? What did you have to say to the employees?
JM: I told them it was unfortunate [Roche] chose to do this, but there’s no economic impact on Alnylam whatsoever. We received no money from Roche after the rather large upfront payment [$330 million] we received in 2007, and some small additional costs. There’s no impact whatsoever. I’d argue that it creates opportunities for us.
X: So you now have to think about how to rebuild value at Alnylam. How do you do that?
JM: Clinical data. It’s the only way that matters. It’s frankly the thing that’s most important to the company for the past 12-18 months. We’ve been saying it, and saying it, and saying it. But I think it’s going to become more evident to our investors and the outside world when they see the steady drumbeat of clinical data. We believe people will see it in the months and years to come, and it will be the absolute critical determinant of value creation for this company and the whole field. We couldn’t be more confident about our prospects for generating that kind of data.
Now, not everything is going to work, as you know. But a lot of it is. As a lot of the clinical data starts to emerge, it will be like Groundhog Day all over again, back in the 1990s, when you started to see monoclonal antibodies take off. That’s what we’re going to create if we’re successful.
X: What about business development? Has Big Pharma lost its appetite? Or can you get out there and find some new partners?
JM: Takeda is still very involved in this field. Novartis is still very involved in this field. Merck is still very involved. We know Pfizer has an effort. We think there will still be opportunities for future partnerships. Whether it’s a platform, or pipeline, or deals like the one we did with Regulus Therapeutics or the biotherapeutics things we are pioneering now, there will be lots of deals. We’re not worried about deals getting done in the future. We are more focused on advancing the clinical pipeline.
X: So what is the deal with Wall Street? What are these guys telling you? Have they gotten bored waiting around for your clinical data?
JM: We have great investors who are really committed to where we are going with this company. Obviously, you look at the market reaction and some investors—-not any of our major investors, but some—have become skittish about this news, or misinterpreted the news. We wish them well, and we’ll welcome them back when they are ready to come back. Obviously, we need to work on our fundamental technology to advance our pipeline.
It’s an amazing opportunity for new investors to come in, given the space we’re in, and the position we’re in as a company, having made major delivery breakthroughs that now enable us to take programs into the clinic. This couldn’t be a better time.
X: Do you need to make any further cuts?
JM: No, absolutely not. The cuts we made following the Novartis deal are different. Novartis had about 25 to 30 people in Alnylam who were doing research for Novartis. In the case of Roche, we had zero people within the company doing any work for Roche. The cuts we made following the Novartis deal reflected the transition in the business from having a service-based resource allocation to one that would now be exclusively focused on higher value activities.
X: I suppose you are putting together your budgets and cash guidance for next year. Can we get a preview of how that looks for you guys?
JM: We will end the year with at least $325 million in cash, and probably will end well north of that. We’re in a really good cash position, we still have one of the best balance sheets in the U.S. biotech industry. It’s pretty unique for a company that doesn’t have a marketed product. We haven’t given guidance yet on what the end of 2011 financial numbers will be, but we’ll be in a good position at the end of 2011. And we’re going to be in a good position at the end of 2012 and beyond. We’re feeling really good about our ability to make the right investments as a company, in terms of value creation for our shareholders. It’s largely driven by our clinical pipeline, and clinical investments. We haven’t raised money as a company since 2006, and we’re one of the very few if not the only company that can say that.
X: What about these clinical trial catalysts? What does the calendar look like, in terms of when we’ll see data on RSV or liver cancer or TTR amyloidosis? I suppose those are the three value drivers you are counting on, right?
JM: Yes. Obviously this year has been a big one for our liver cancer program. We reported on it at ASCO (American Society of Clinical Oncology) and more recently at a symposium in New York. We’ll probably next report at ASCO in 2011, although we may choose to report data before that. We started the TTR program in June of this year, and will probably generate data people will hear about next year. We’ll be starting our PCSK9 program in the first half of next year. There will be data coming out of that program. And our RSV program is actively accruing, and it’s a double-blind study. We haven’t given guidance on when we’ll report data on that. We are entering RSV season in the northern hemisphere. So there’s a lot going on. There will a second generation TTR program, and through Regulus there’s the mir-122 program for hepatitis C infection. Those are two possible candidates for (clinical trials) next year. So it’s a sizable and growing pipeline. A lot of data will be reported in increasingly high frequency, and we think it will open up some eyes.
X: Has there been something I missed in the field of RNAi, like a disappointment or a fundamental blowup in a clinical trial somewhere else that might affect you guys?
JM: Remarkably, no. That itself is great news. That’s not to say there won’t be clinical studies like that. Hopefully there aren’t any, but you have to be realistic. But there are 14 programs now in clinical studies that are RNAi based programs. We obviously have our three programs. We have licensed IP to a good number of other programs that are out there, so in some ways Alnylam has a footprint across the entire RNAi pipeline. There probably are well north of 500 patients, maybe close to 1,000 patients, who have been enrolled in clinical trials of RNAi therapeutics. From a safety standpoint, we’re not aware of any major issue out there. When we start getting into Phase 2 studies, we’re going to start to see more clinically relevant types of data. I’m confident there’s going to be some good stuff.
X: I looked back at our conversation from almost a year ago, in which you talked about how this is going to be the RNA decade. I think that’s the right way to think about a technology like this, it’s just not realistic for people to think this is some breakthrough that wins the Nobel in 2006 and then new therapies will just start growing on trees two or three years later. But yet, that’s how the stock market works.
JM: Thank God we can shelter ourselves with the cash we have to build this technology up. We’re really grateful for that. It’s a strategic asset for the company. But it’s like Groundhog Day as I said before, we saw this with antibodies in the late ’80s and early ’90s. People were in despair, proclaiming antibodies dead. Then [Eli Lilly’s abciximab (Reopro)] gets approved in ’94-95, and now 15 years later we’re looking at a major drug category generating $40 billion in sales and growing fast. This is going to turn around, and it will in an exciting way, and it will happen because of clinical data. Our job is to generate the data, and we’re up to it.
X: It looks to me like 60-70 percent of your value has gone away in the last two years, and what actually happened was that one partnership ended on schedule and another was terminated. But it’s not like your drugs are killing people, right?
JM: One was terminated because the company had an acute case of near-termism.
X: But when I look at a biotech company that loses 60 to 70 percent of its value, usually that’s because your drug caused a major side effect, or you had to terminate your lead clinical program, or you just got rejected by the FDA. Not something like what happened here.
JM: That’s why it’s a great opportunity for new investors.
X: What else is going on there at Alnylam behind the scenes that the external world doesn’t see, that does give you confidence?
JM: An enormous passion among our employees. I’ve never seen our employees more excited, more passionate about what they are doing. Nobody sees that in the outside world. I see it every day.
X: So you didn’t have to encourage people to buck up after the Roche news?
JM: Not at all. We had a restructuring process we had to go through after the Novartis deal, and everybody agreed we had to do it. Ever since that decision, which was hard on a personal level, this company has been remarkably charged with passion. There are people who high-five each other every single day around the office here. It’s a high-five culture.
X: OK, that’s most of what I wanted to ask. Is there anything else you want to add, John?
JM: We love what we’re doing here. I think it’s important that people don’t misinterpret what they heard about the Roche news as some kind of indictment of the technology. At the end of the day, they only invested in the technology three years. Three years is nothing. It’s absolutely nothing. It’s like kicking your three-year-old out of the house and telling him to get a job. You can’t discover a single small molecule for a single disease target to go to the clinic in three years, let alone develop a whole new class of drugs. It’s important that people put it in perspective.
X: If I was a Roche shareholder, I’d be asking those guys, what exactly did you do with that $500 million you spent on RNAi?
JM: (laughs). Exactly.
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