What convinces investors that a drug discovery company is likely to bring products to the market, and rewards to shareholders? It comes down to just a few things: Proprietary biology. Confident management. Experience driving products into clinical trials and onto the market. Enough of a story to be able to raise money. And the likelihood, based on animal or early human data, that the drugs might actually work. These days, the final charm is to focus on orphan drug markets, where reimbursements are still robust.
Role models that have built on proprietary biology in the orphan space include the granddaddy of them all, Genzyme, acquired by Sanofi in 2011 for $20.1 billion; BioMarin (NASDAQ:BMRN), a disciple of Genzyme, and the current market darling, Sarepta (NASDAQ:SRPT), currently in Phase 2 trials in Duchenne Muscular Dystrophy.
I argue here that the latest company to join this glowing group is Alnylam Pharmaceuticals (NASDAQ: ALNY), a clinical-stage biotech in Cambridge, Massachusetts. In my view, Alnylam has turned a corner in becoming a legitimate orphan drug developer with a strong proprietary pipeline and a good bargaining position with pharma. As much as wishful stock-pickers are speculating on BioMarin being the next juicy big pharma acquisition in the orphan-disease space, Alnylam just might beat them to the punch.
The smart money seems to agree with me. After settling a lawsuit with Tekmira (NASDAQ:TKMR) in November for an initial $65 million, Alnylam announced in January that it was raising $125 million. It actually raised $174 million—a good sign—at $20.13 a share, and the stock price continued to go up. Lately the stock has been trading in the $24 range, putting the company’s market capitalization at $1.2 billion, plenty large to attract investment from institutional investors.
Disclosure: I have been a consultant to Alnylam, most recently in 2007. At the time of this writing, I am long Alnylam.
Along the way, Alnylam has overcome huge doubt although there are still skeptics (and more skeptics). Talk about climbing a wall of worry! Skeptics have complained, in some cases accurately, that Alnylam faces big, scary challenges:
The last statement is definitely true. I’ll come back to it. First, let’s take the others one by one.
RNA is not a drug
When Alnylam was founded, it was truly heretical to invest in a platform developing nucleic acid drugs. I was a venture capitalist at the time and other investors told me that I was “throwing away my career” by pursuing investments in the field. Well, I’m not a venture capitalist any more but my career change was not due to any failed bets on RNA as a therapy. In fact, the investment that VCs, including my fund, made in Sirna Therapeutics in 2003 and some follow-ons paid off in a $1.1 billion acquisition by Merck in 2006. That early wave of interest in RNAi—a good five years too early, in retrospect—helped sustain Alnylam via partnerships with Novartis and Roche.
In the meantime, RNA therapies and their ilk are certainly not mainstream but they are no longer considered impossible long shots. An RNA-targeting product, mipomersen (Kynamro), developed by Alnylam’s business partner and competitor Isis Pharmaceuticals, received a high-profile approval from the FDA in late January, albeit with an attached warning. Other nucleic acid medications have made it to market (e.g. pegaptanib, an antibody-like aptamer sold as Macugen for age-related macular degeneration) only to be eclipsed by other products. A slew of new nucleic acid drugs—gene therapies, microRNA therapeutics—are making their way towards the market, some with validating pharma partnerships.
An astute industry insider I know, a senior executive at a pharmaceutical company with no stake in the success of RNAi drugs, told me that it’s not just Alnylam that has turned a corner—“it’s the whole field of oligonucleotide drugs.” But, he added, this shift is “less about advancing the technology than it is about finally coming to terms with and accepting its limitations. It’s not a panacea; rather it’s a modality that is useful in very particular settings (e.g., genetic disorders) and very particular tissues (e.g., liver).”
Other insiders agree the tide is turning and the fundamental opposition to the whole class of RNA-based drugs is melting away.
Delivery is an insurmountable problem.
Ten years ago, the biggest hurdle RNAi faced—both in public perception and in the laboratory—was delivery of RNA-interference-based medications across the cell membrane. In some ways, delivery still is a big challenge. But Alnylam has managed in several ways to go under, over, or around and get their molecules to their (intracellular) targets. For the company’s lead program in TTR (transthyretin) amyloidosis, an orphan disease that nonetheless affects 50,000 patients worldwide, some of them severely, the molecules are definitely getting there, resulting in impressive Phase 1 data.
Modern RNAi delivery has moved well beyond the cationic lipid technology that was the subject of the Tekmira lawsuit. Alnylam and its fellow RNAi companies are applying no fewer than three promising delivery approaches, each of which is likely to find its niche. Alnylam is working on a proprietary, subcutaneous form of previously known delivery molecules known as GalNAcs (more here) that deliver siRNAs via receptors found on liver cells; Arrowhead Research (NASDAQ: ARWR) has developed DPC (Dynamic PolyConjugate) technology; and privately held Dicerna Pharmaceuticals has created a proprietary cationic lipid delivery system of particular use in oncology indications.
The same industry observer said: “Has the delivery issue been solved? Not really. Instead they’ve adapted their therapeutic focus to where they CAN deliver,” e.g. to the liver.
No way to build a pipeline.
Aware that it’s not a platform unless it has multiple applications, Alnylam’s management has been diligent in expanding the list of preclinical and early clinical programs. One advantage of the company’s cash hoard has been its ability to seek out indications likely to be amenable to the RNAi approach. Genetic disorders that manifest in the liver are an ideal category.
Alnylam has been just about pitch-perfect in the story it started to tell investors in January, 2011. It’s not just about one program headed for the clinic, they said. It’s about five programs, each able to deliver meaningful efficacy data by 2015. Alnylam called this approach “5 X 15.” Alnylam has successfully transitioned from an IP story (2003: we have all the key IP we need) to a partnering story (2008: “RNAi 2010″ projecting four programs in clinical development and four additional partnerships) to a bona fide product development story (5 X 15) funded by financial investors.
The value of a platform increases exponentially once it has been shown to work in the first indication. That points to an important value inflection point if the Phase 2 data in TTR, due by mid-2013, are good.
Pharma has abandoned RNA interference.
RNAi-based drug developers were hit with a wave of bad news in 2010 when Alnylam’s partners, first Novartis and then Roche reduced their commitment to RNA interference or eliminated it entirely. This indeed caused a bump in the road for Alnylam. The stock price fell, staff members were let go. At that time, things looked bleak indeed for RNA interference.*
But one could argue that the loss of partners such as Roche who apparently no longer believed in the platform was a blessing in disguise. Unencumbered, Alnylam’s products are worth more to its shareholders. The whole company is more valuable based on its ownership of most of its pipeline.
Furthermore, there is no evidence that pharma is the right partner for an early-clinical-stage orphan-disease-focused drug developer, which is largely what Alnylam has become. Indeed, in any potential acquisition scenario except Sanofi or BioMarin, Alnylam would likely be the orphan-drug teacher and the pharma acquirer the pupil.
Biotech is already moving in to fill the vacuum left by pharma. On Feb. 4, Alnylam announced that it had struck a partnership, complete with $25 million upfront, with its former Cambridge neighbor The Medicines Company (MDCO) for its cholesterol-fighting program targeting PCSK-9, a gene expressed (where else?) in the liver.
Meantime, in October, 2012, Alnylam added credibility when it signed up a new pharma partner in Genzyme, now a unit of Sanofi, for Asian rights to its TTR programs, with Alnylam holding onto both U.S. and European rights. This leaves the company maximally flexible in terms of potential acquisition (no encumbrance) or further growth.
Money is great but money alone does not buy clinical data.
This one is true but I contend it is irrelevant, even indicative of jealousy. John Maraganore and the Alnylam team have formed partnerships with pharma without giving away their technology. In lucrative deals with Roche ($331 million in cash to Alnylam) and Takeda ($175 million), they mastered the type of non-exclusive technology partnerships that trace their roots back to Maraganore’s previous company, Millennium Pharmaceuticals. More recently, in early 2013, they went back to investors with their first stock offering since their 2004 IPO and sold them on the likely success of RNA interference and the desirability of investing in the market leader.
Alnylam is not the only RNAi company trading on the NASDAQ. Arrowhead, Tekmira and others do, and Silence Therapeutics is traded on the London Stock Exchange (LSE: SLN). But Alnylam’s funding has dwarfed that of all the other companies put together and the company continues to raise money with ease. That cash has fueled the path into Phase 2. That is not something to criticize. It is something to admire.
Alnylam has shed its baggage and moved beyond being a technology story into a clinically focused stage in which the risk profile is clearer. Extraneous factors no longer cloud investors’ judgment. Now, finally, it is all about the upcoming clinical data. RNAi-based medicines will work or they won’t. Judging by the recent rise in both the stock price and the company’s cash position, the market is betting that at least some of them will.
*Contrary to popular belief, Novartis did not pull out of RNA interference R&D. In fact, they continued to pursue targets of their own as well as targets that Alnylam had identified in their collaboration. What they declined to do was to extend for a third time an agreement that they had already extended twice. Not exactly abandonment.
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