September 15, 2008 (Vol. 28, No. 16)

Sustaining an Upward Trend Depends on One Major Obstacle: Delivery

Biopharmaceutical development efforts have been filled with many so-called promising technology platforms. Besides protein therapeutics, however, the challenges surrounding peptide- and oligonucleotide-based therapeutics have stifled their success.

RNAi technology is one of the latest in a long slew of biologic drug development techniques. It is touted as being superior to other oligonucleotides in terms of specificity, potency, and flexibility. There are several companies vying to market the first RNAi drug, among them Sirna (acquired by Merck & Co.), Silence Therapeutics, and RXi Pharmaceuticals.

Alnylam Pharmaceuticals has the distinction of being the only company to take an RNAi candidate into clinical investigation. It also stands out as having a strong intellectual property position, so much so that it has lured many R&D partners and enjoys a high stock value.

The biggest obstacle in this field, even after two decades of research, is that of delivery. While Alnylam reports some potential solutions, these are not yet a reality. Also, with only one compound in clinical development, some say that Alnylam’s approximately $30 share price is inflated.

“Currently, I think the valuation is high and is being driven by collaborations not clinical programs,” asserts Grant Zeng, senior biotech analyst at Zacks Investment Research.

Alnylam was founded in 2002 and has since been focusing on RNAi technology. It has one Phase II candidate for RSV infections, called ALN-RSV01, and two known preclinical molecules.

In February, Alnylam reported that its mid-stage study with ALN-RSV01 reduced infection rates by 38%. Healthy subjects were given ALN-RSV01 intranasally for two days before and three days after inoculation.

Jonas V. Alsenas, managing director and senior biotech analyst at Leerink Swann, is not impressed. He points out that, because it is the first clinical test of an RNAi drug in general, as well as the first to evaluate this candidate in the RSV setting, the study design is unusual. “Since Alnylam is trailblazing, it’s a little tough to be excited about the data.”

During the trial, volunteers were infected with a laboratory-passaged virus. Disease progression in these participants was not similar to the natural course of RSV infection, according to Alsenas. Subjects only experienced upper respiratory infections, he explains. Clinically significant RSV infection is a lower respiratory disease.

“The odds of success in therapeutic applications are highly stacked against Alnylam,” notes Alsenas. The biggest issue is delivery. Possible solutions like liposome encapsulation and altered oligonucleotide chemistry have been associated with toxicity and reduced efficacy.

“It’s a fundamental physio-chemical problem,” Alsenas explains. Oligonucleotides are usually highly charged, making it difficult for them to enter the neutrally charged layer of a cell membrane. As a result, oligonucleotides have short half-lives. Additionally, these molecules are large and unstable. Alsenas also points out that RNAi’s are quickly degraded by endo- and exonucleases once in the body.

Because of these seemingly inherent hurdles to RNAi drug development, Alsenas goes so far as to say that it is a technology better suited for research purposes. While acknowledging the vast potential of the platform, he feels pessimistic about breakthroughs to the existing challenges.

“Another concern,” according to Zeng, “is that the company is moving its clinical program very slowly. RSV01 has taken more than three years to reach Phase II trials.” He seems amazed that with $538 million in cash reserves as of June 30 the company isn’t progressing its clinical program and preclinical research quicker.

Additionally, with all that money, both Zeng and Alsenas agree that Alnylam should consider diversifying its portfolio. The firm could feel, though, that doing so would be an indication of weakness to investors and Wall Street, according to Alsenas.

Alnylam has padded its financials with a smart deal-making strategy. “The company is doing a significant amount of research but is also getting a lot of research support,” points out Alsenas.

Alnylam has six alliances, and two of those brought in three-digit upfront payments. Its collaboration with Roche, inked in July 2007, earned Alnylam $331 million upfront. More recently in May, Alnylam received an initial fee of $100 million from Takeda Pharmaceuticals. Each of these agreements has an overall potential value of $1 billion.

Alsenas believes that Alnylam is entering alliances out of desperation, and with Alnylam saying that it is seeking out more alliances, Alsenas points out that, “if the next deal is with a small company, like its last agreement with Kyowa Hakko, that could also be seen negatively.” In June, Kyowa Hakko obtained Asian rights to ALN-RSV01 for $15 million. Milestone fees could reach $78 million, a far cry from the Roche and Takeda agreements.

Zeng, on the other hand, thinks that current and future deals will continue to make Alnylam a financial success story among early-stage biotech companies. “If there is no major failure in the technology, which I do not expect will happen in the near-term, Alnylam will continue to monetize its technology.” This, in turn, will keep driving the company’s value up.

Because of his trepidations regarding clinical development, the firm’s small pipeline, and technology hurdles, Zeng has a Hold rating. His target price is $38.5 for the next 10 to 12 months.

Alsenas’ prediction for the next year is quite the opposite. He is slashing the company’s value by about half, and his 2009 valuation is $14-16 per share.

“When we initiated coverage on Alnylam, the company had about $1 billion in technology value. This is not a normal value for a company with just one, not very impressive, mid-stage compound. In fact it’s rare to even be public at this stage.”

As long as Alnylam can show some success and continue with its deal making, investors and Wall Street will continue to believe that the potentials outweigh the challenges.

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