By Jake King
Tekmira's (TKMR) story over the last few years has largely been focused on its siRNA delivery technology, lipid nanoparticles (LNPs), and the ability of the platform to be used in broader RNAi applications. But the focus of investors is shifting as Tekmira brings a new therapy into the clinic this year and moves out of early-stage clinical development and into proof-of-concept studies. With that should come greater visibility as investors pick up on the therapeutic development facet of the Tekmira story, and the capital markets should begin to allot more value to the company's in-house pipeline than they currently do.
Tekmira has an enterprise value (EV) of just $20M, markedly low for a company with multiple therapies in human clinical trials, a strong balance sheet, and robust economic agreements in place with larger drug companies. Tekmira simply isn't getting credit for its pipeline, and as the arguable leader in RNAi delivery technology, Tekmira's valuation fails to capture the full potential of its platform and its own LNP products. With soon-to-be six clinical-stage pipeline assets, several catalysts this year for both proprietary and partnered product candidates, and an EV of around $20M, TKMR is remarkably cheap to own. So much to offer and so inexpensive makes TKMR attractive to investors based on the company's long-term prospects, however, drug companies may also be interested in scooping up this "on-sale" platform and pipeline. We believe TKMR will not stay this cheap for long.
Mini version of Alnylam that trades near cash. Alnylam (ALNY) is Tekmira's bigger, well-known cousin in RNAi therapeutics, a drug developer valued at more than $1.4B by the markets, despite that the company's pipeline is still in early- and mid-stage development. Alnylam has done a nice job of focusing the investment community on its "5 x 15" strategy, whereby it expects to have five candidates in late-stage development by 2015, that much closer to a fully validated (FDA approved) RNAi therapeutic. But more importantly, three of Alnylam's leading candidates -- ALN-TTR02, ALN-PSC, and ALN-VSP -- utilize Tekmira's lipid nanoparticle (LNP)-enabling technology, and the smaller company collects royalties and milestones on these treatment opportunities -- by owning TKMR, investors can participate in the ALNY story, while still owning one of the leading, yet undervalued, RNAi delivery developers.
Financially, Tekmira is solid, an important component to owning a development-stage biotech. The company came into a large, non-dilutive source of capital last year when it and Alnylam settled long-standing litigation regarding Tekmira's LNP technology. That settlement netted Tekmira roughly $46.3M, enough capital, the company says, to continue funding operations into 2015. Tekmira ended 2012 with $46.8M in cash & equivalents and guides for a balance of $35M at the end of 2013: a cash burn of just over $11M after factoring in expected revenues and milestone payments from partnerships in 2013. On a per share basis, TKMR is worth almost $3.27 (based on end of 2012 figures) and closed the day on Monday at $4.70; essentially, investors can own Tekmira's entire pipeline for ~$1.50 per share. Even if TKMR remains flat through 2013, which we don't expect, the company expects to end the year with $2.44 in cash per share, still a robust backdrop to its current share price.
Overall, the company's EV of ~$20M (market capitalization of $65M) is remarkably low for five assets that have progressed into human trials, some of which are advancing into mid-stage trials under partner, Alnylam. The two companies are closely tied in terms of success and failure, and positive read-outs at Alnylam should be read as successes for Tekmira, given associated milestone payments, further validation of Tekmira's LNP-technology, and the long-term financial benefits of potential commercialization.
Tekmira has economics on several key assets from Alnylam, some featuring 2013 catalysts and cash milestones. As mentioned above, Tekmira has a financial stake in several of Alnylam's clinical products that utilize Tekmira's LNP delivery technology. Most notably, TKMR has a royalty and milestone agreement with ALNY for TTR02, Alnylam's most advanced clinical product (details below). Alnylam expects Phase II data for TTR02 by mid-2013 and will then advance the therapeutic (assuming positive results) into a Phase III trial, resulting in a $5M milestone payment to Tekmira. Given the strong results seen in Phase I, it's widely expected that the data will be positive and that ALNY will commence a Phase III study in 2H13. Tekmira is entitled to royalties in the single digits on TTR02 sales. Tekmira is also entitled to receive a $5M milestone payment when a Phase II trial for ALN-VSP begins in China; that's expected in the second half of this year, and both the TTR-02 and VSP milestone payments ($5M each) have been factored into Tekmira's 2013 guidance. In addition, Tekmira collects royalties (low single digits) on both VSP and PCS, the latter of which was partnered with The Medicines Company (MDCO) earlier this year, a validation of both the product and the technology behind the product. Seeing a mid-tier drug developer step into siRNA for a large indication like hypercholesterolemia is suggestive of broader industry acceptance of RNAi as a therapeutic pathway.
It's also important to note the unique economics of the TKM-Ebola program. The therapy is being developed cost-free for Tekmira, as the U.S. Department of Defense (DOD) pays for up to $34.7M of development costs through Phase I trials, although the contract could be extended to $140M for TKM-Ebola to achieve FDA approval. Tekmira is preparing for a Phase I trial to begin this year with a newer formulation of the Ebola therapy, and the therapy, if successful, would be approved under the FDA's "Animal Rule" (no requirement to treat humans inflicted with Ebola, only human safety must be proven).
Finally, and important to Tekmira's long-term story, Tekmira has broad access to Alnylam's siRNA payload technology. TKMR can access 13 targets from ALNY and has currently used 8, leaving five targets that TKMR can still tackle, combining ALNY's core technology with its LNP delivery platform. These targets can be developed internally or out-licensed, and Tekmira's ability to access ALNY's payload technology negates any immediate need for an in-house discovery program, allowing for a strong focus on LNPs while still building an internal pipeline. The company will, of course, pay low royalties to Alnylam if any of these assets are commercialized.
More than just RNAi delivery. Tekmira owns the most clinically researched and arguably most advanced delivery technology in RNAi therapeutics -- lipid nanoparticles (formerly called stable nucleic acid-lipid particles, or SNALP). Delivery is key in RNAi. Unlike small molecule drugs, RNA molecules in the bloodstream tend to be unstable and are unable to access cells to carry out their gene-silencing capabilities. Preclinical work has demonstrated that LNP technology, which essentially "encapsulates" short interfering RNA (siRNA) in a deliverable package, is overcoming these limitations. Already in Tekmira's preclinical and early clinical studies, LNP has shown an ability to "knock down" (reduce) target gene expression. Importantly, after a recent litigation settlement with Alnylam, all intellectual property for LNP delivery now resides with Tekmira, strengthening the developer's position as a delivery enabler and creating the sole LNP-enabled partner in the world of RNAi development.
But while technology delivery is certainly a compelling angle to Tekmira's story, we believe that the market has neglected to build in value for Tekmira's in-house pipeline; the company is shifting its positioning from one of delivery technology alone to also more strongly encompass therapeutic development, and should be valued as such. In 2013, Tekmira will identify a third in-house asset to move into the clinic, in addition to the three assets already being developed through its partnership with Alnylam. The Alnylam partnership, while accretive to Tekmira, may be more important as validation of the LNP platform than as key long-term value drivers. Nevertheless, with an EV of just $20M, each pipeline asset has the ability to significantly increase the value of TKMR shares. Below, we describe the first two candidates in the company's pipeline that are being developed in-house, followed by Alnylam's products partnered with Tekmira.
TKM-PLK1 - is Tekmira's proprietary PLK1 (polo-like kinase 1) inhibitor, which is moving into a Phase II trial for the treatment of gastrointestinal carcinoid tumors later this year. TKM-PLK1 created some stir at the American Association for Cancer Research meeting earlier this month with promising results from a Phase I 24-patient dose-finding study in a variety of cancers. The Phase II trial will begin in 2H13.
TKM-Ebola - is an RNAi therapeutic utilizing Tekmira's LNP technology to protect patients from the Ebola virus. Pre-clinical data were published in the Lancet in 2010, and the therapy should be moving into a Phase I safety study in healthy patients yet this year.
ALN-TTR02 - Alnylam's treatment for transthyretin-mediated amyloidosis (ATTR), ALN-TTR02 also uses Tekmira's LNP-delivery technology. A Phase I trial demonstrated that TTR02 is well-tolerated and led to a knockdown of serum TTR protein levels of up to 94% (p<0.00001). Following a single dose of TTR02, the reduction was rapid, dose dependent, and durable; and suppression was sustained almost entirely (80%) at one month after a single dose. Alnylam will have Phase II data by the middle of 2013 and plans to move TTR02 into a pivotal trial after.
ALV-PCS - Alnylam develops ALV-PCS as a treatment for hypercholesterolemia. It targets the PCSK9 gene, resulting in higher LDL receptor levels in the liver and subsequently lower LDL cholesterol in the bloodstream. A Phase I trial wrapped up early in 2012, and we're waiting for details on a development path forward, which we assume will include a Phase II trial beginning in 2013.
ALN-VSP - is a kinesin spindle protein (KSP) and vascular endothelial growth factor (VEGF) inhibitor indicated for advanced solid cancers with liver involvement. Alnylam partnered the product with Ascletis Pharmaceuticals for development in parts of Asia, and a Phase II Chinese trial should begin in 2013.
Business activity is robust and certainly worth more than the current EV. Tekmira is entitled to single-digit royalties on net sales of the recently approved chemotherapeutic Marqibo (vinCRIStine sulfate LIPOSOME injection). The product, owned by Talon Therapeutics (OTC:TLON), was approved in 2H12 for 2nd-line Philadelphia chromosome negative (Ph-) acute lymphoblastic leukemia (ALL). Tekmira receives mid-single digit royalties on Marqibo sales (estimates for that drug are ~$100M at peak), so Marqibo alone could be worth around $5M annually to Tekmira. Also in oncology, Tekmira is moving its TKM-PLK1 into a Phase II trial in gastrointestinal carcinoid tumors, a relatively small indication but one with limited treatment options; the U.S. incidence of GIC tumors is approximately 10-15,000 annually. Considering this advancement, TKM-PLK1 has arguably taken the title of lead RNAi oncology candidate in clinical development.
U.S. DoD development contracts for Ebola treatments were originally given to both Sarepta (SRPT) and Tekmira, but in September 2012, the DoD moved forward with Tekmira's program alone, indicating that Tekmira now has the leading and only RNAi-based Ebola program in the U.S. The agency has demonstrated not only a willingness to test the RNAi possibility, but to back the program in full, an unexpected substantiation of RNAi from the U.S. government. As alluded to earlier, Tekmira and Alnylam settled a lawsuit in November of last year in which Tekmira had sued Alnylam for patent infringement regarding its LNP technology. The original lawsuit was for $1B, and it seemed Tekmira was willing to go down fighting (capital dipped dangerously low before the settlement). The settlement, however, has been largely favorable to Tekmira, which retains a financial stake in Alnylam's clinical products (small milestones and royalties) and has access to 13 of Alnylam's product licenses for in- or out-licensing. While not the billion dollar win that the company hoped for, Tekmira shored up its balance sheet and kept relations in order with its largest partner.
A very attractive valuation; one that either investors or pharma are likely to appreciate. Tekmira has collaborations and/or licenses in place with Alnylam, Merck (MRK), and Bristol-Myers Squibb (BMY). The company hasn't announced a new collaboration in over two years, we believe due to the 20 months spent on litigation with Alnylam. With that litigation out of the way and the patent situation regarding LNP clearly defined, we expect that Tekmira will once again become a sought after partner for companies looking for RNAi delivery.
We see three key reasons to be involved in Tekmira: 1) Cash per share of more than $3.00 and an EV of ~$20M means very limited downside; 2) Upcoming catalysts in Phase II data for ALN-TTR02, and trial initiations for VSP, PCS, Ebola, and PLK1; 3) A new pathway announcement this year that could pique the interests of investors, particularly if TKMR goes after an orphan indication; and 4) Possibility for partnerships with additional major drug companies now that the LNP litigation is out of the way. We expect that TKMR's ~$20M EV will not last as investors focus on the value and potential value that this company has to offer. Alternatively, if the stock remains this cheap, perhaps a strategic investor will go after TKMR. For example, ALNY itself could simply acquire TKMR and never have to pay royalties or milestones to the company again, in addition to keeping its payload technology all to itself. TKMR has put in a strong support base around $4.20 (200D MA at $4.22), and we're looking for a breakout back above $5.00 in the near term as ALNY's Phase II TTR02 top-line readout approaches.
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