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As we documented in our first article about Alnylam (ALNY), the company's pipeline is significantly weaker than many people, in particular the institutional analysts, seem to think. We doubt that we are alone in that assessment, since both the actions of the company's management and insider shareholders would seem to indicate a significant lack of confidence in the company's direction.

First, why just a year after announcing a concrete plan to bring five drugs into advanced clinical development, did ALNY fire a large number of researchers, laying off 30% of its workforce? Keep in mind that Alnylam will have more than $200 million in cash at the end of this year, so, unlike many other biotech companies, Alnylam does not face the prospect of a cash crunch at any point in the near future.

What possible motivation would the company have for so greatly decreasing the pace of its R&D and slowing its pipeline development if it believes its RNAi therapies have a good probability of succeeding? It doesn't add up that the company talks about the great promise its pipeline holds while at the same time it lets go swaths of employees and continues to advance its drugs at such a languid pace. One seemingly failed program, RSV, and one, TTR, that has only been tested in a couple of small Phase I trials is not a lot of progress to show for the last five years of Alnylam's existence.

TTR: Analysts' Optimism Greatly Misplaced

Oddly enough, if you read through JP Morgan's (JPM) bullish initiation report on Alnylam, you find that its analyst ascribes a 65% chance of Alnylam's TTR drug getting approved based on the Phase I data. The analyst further concludes that Alnylam could be projecting revenue generation from the TTR drug in 2016. This 65% chance of approval figure is patently absurd. We'd point out that BioMedTracker has noted that historical data indicates that final approval for drugs graduating from Phase I ends up at less than 10%. We'd also remind JP Morgan's analyst that Alnylam showed very solid and encouraging Phase I results in healthy patients for its RSV program, but that program now appears unlikely to even enter a Phase III trial, let alone garner FDA approval.

We also were genuinely surprised to find JP Morgan's analyst assigning a mere 15% discount rate to the TTR compound. This is a questionably low figure for a Phase I (or even Phase II) compound, and this figure should be much closer to 25%. Given that much can go wrong between now and potential FDA approval years down the road, the errant 15% figure accounts for much less risk than is appropriate.

To add to that, we'd also note that JP Morgan seems to have missed a key issue that would normally cause analysts to have greater concerns and apply larger discount rates to early stage drugs. With respect to Alnylam, a competitor has a more advanced drug in development for TTR. In this case, Isis (ISIS), in combination with its partner GlaxoSmithKline (GSK), has a drug for TTR that is also entering Phase II. Isis is initiating its Phase II/III study this year, after it successfully cleared Phase I.

In stark contrast to Alnylam's extremely small Phase II study with only a handful of research sites and less than two dozen patients, Isis is conducting a large and robust study that is specifically seeking to evaluate the effects of Isis' drug "on neurological dysfunction and on quality-of-life in patients with amyloid polyneuropathy." In other words, Isis is actively searching for meaningful clinical data and is seemingly on the fast track to try to get their TTR drug toward FDA approval.

While it is unclear whether or not the FDA will approve KYNAMRO, Isis's most advanced drug prospect, (the FDA will decide next year), Isis has been able to demonstrate that its delivery platform is capable of producing clinically effective drugs in patients, a step that Alnylam is still struggling with. At this point, it seems that Isis has to be the favorite in the race to produce a successful TTR drug that will get to market first.

As we've demonstrated previously, Alnylam's pipeline is very dependent on TTR working out effectively. Alnylam has slashed its efforts in focusing on other drug candidates to, as it put it in a press release earlier this year, align "its resources to focus on what it believes to be the company's highest value opportunities with accelerated clinical development plans." There is a very real chance that Alnylam will be beaten by Isis in the race to market for its TTR drug; even if Alnylam's drug candidate turns out to be effective and earns FDA approval, that doesn't ensure the company will ever generate significant revenues from the TTR drug.

Partnerships

We have doubts about the company's recent partnerships. While any sort of partnership is probably better than none at all, the recent partnership with Genzyme for TTR seems less than promising. Alnylam received $22.5M from Genzyme for the Asian rights to the TTR product, plus future potential payments and royalties should the drug reach the market. The cash is nice, but this is quite a small deal should the drug actually work out. Again, for a company with so much cash in the bank, what is the rush to limit upside on the company's pipeline? Or is the cashing out via a partnership a sign that the pipeline holds much less promise than management has been leading investors to believe?

For investors unfamiliar with Alnylam's history, the $22.5M partnership with Genzyme and/or the development deal with Monsanto might seem like significant corporate milestones. However, one must remember that back in 2007, Roche (RHHBY.OB) paid Alnylam $331 million up front, and potentially more than a billion in future milestone payments to participate in Alnylam's development pipeline. Three years later, Roche gave up, and dumped RNAi technology, taking a complete loss on its $331 million investment. Roche wasn't the only company to get burned with a large Alynylam partnership. Novartis (NVS) also spent an exorbitant sum of money to partner with Alnylam in 2005. This partnership would be terminated years later without providing much value to Novartis.

Not surprisingly, since then Alnylam's partnerships have shrunk in both scope and in monetary value. While the Genzyme partnership is beneficial to the company, it is far less encouraging than the previous Roche and Novartis agreements. With Alnylam's seeming failure in RSV, potential partners are likely to be much more wary about giving Alnylam large upfront payments until the company can demonstrate statistically significant results in the clinic.

Turning our attention back to Isis' competing TTR drug, it is important to note that Isis has received a far more meaty partnership for that TTR drug from its partner, GlaxoSmithKline. According to a recent Isis press release, Isis has already received $10 million in milestone payments for its TTR drug. Furthermore, Isis will receive a $2.5 million upfront payment and is eligible to receive another $7.5 million for the initiation of the Phase II/III study. Isis will also be eligible to earn another $50 million in pre-licensing milestone payments to support the Phase II/III study.

In sum, Isis will likely have earned more than $70 million in payments from its partner by the time its more ambitious study is completed. Meanwhile Alnylam only received $22.5 million from Genzyme, and its study will produce far less statistically significant data than Isis's. All signs point to Isis being the favorite in the race to produce a successful TTR drug.

Valuation: $840 Million in Market Cap Seems Awfully Generous

At $16/share, Alnylam has an $840 million market cap. As we've demonstrated, Alnylam's pipeline is narrow and is in an extremely early stage of clinical development. Its leading candidate, the TTR drug, faces a strong competitor. Even if the company's RNAi approach pans out in the long run - by no means a sure bet - that would still seem like a fairly aggressive valuation for a company that is unlikely to have much of a shot of getting FDA approval for any of its drugs until 2016 at the very earliest.

The management team's strategy doesn't seem to make much sense, and recent headcount reductions significantly threaten the company's ability to execute its touted 5x15 initiative. With meaningful clinical results from actual sick patients at the earliest more than a year away, it's hard to envision a scenario where Alnylam can maintain such a large valuation over the coming quarters.

The last potentially bullish catalyst for Alnylam, the spin-off of its micro RNAi subsidiary Regulus (RGLS), turned out to be "an outright disaster". Alnylam attempted to spin off Regulus at a price of $11/share. The IPO failed to generate any market interest, and ended up pricing at a mere $4/share, a 61% discount from the intended IPO price. The Regulus spinoff was supposed to help Alnylam "derisk" to some degree by giving the company more financial flexibility and also serve as another demonstration of the market's faith in Alnylam's RNAi drug development technology. Instead, the IPO failed to raise anything close to the expected proceeds and served as a stark reminder of the market's continuing doubts over the long-term viability of the RNAi field, and Alnylam's research in particular.

Finally, Alnylam's sum-of-the-parts valuation has been significantly reduced by the loss of $65 million in cash (and another $10 million in likely milestone payments) in the patent settlement with Tekmira (TKMR). Now Alnylam faces a future where its best drug candidate, its TTR program, appears to be rapidly falling behind in development in comparison with Isis' competitor program, and it has to compete while having lost a significant amount of its cash and intellectual property base. Alnylam has performed a lot of interesting science, and its IP is certainly of interest. But its market capitalization of $840 million paints far too rosy a picture of ALNY's actual prospects of developing a revenue-producing drug.

All together, we see substantial downside in ALNY shares.

Source: Alnylam: Further Evidence That The Stock Is Overvalued