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Micro-RNAs (abbreviated miRNA) are naturally occurring ribonucleic acids that regulate gene activity. Blocking miRNA is an antisense method of controlling the activity of disease-related genes.

A major milestone in the miRNA form of antisense therapy was the successful treatment of hepatitis C with miravirsen in a Phase IIa trial published in the New England Journal of Medicine in May 2013. Miravirsen was developed by privately-held Danish Biopharmaceutical Santaris Pharma A/S, a spin-off of Exiqon A/S (OTC:EXQNF). Miravirsen is a modified or locked nucleic acid, or LNA, that antagonizes a micro-RNA called miR-122, abundant in the normal human liver, and which is necessary for the replication of hepatitis C in infected individuals.

This milestone is part of a renaissance in antisense therapies. The number of scientific publications and the number of relevant patent applications related to miRNA have been rapidly increasing, as shown in the following figures.

(data source: Exiqon 2013 Annual Report)

(click to enlarge)

(data source: Circulation Research 2012)

The second figure is from an article in Circulation Research, 2012 entitled "Developing MicroRNA Therapeutics." This paper discusses the research, the patents, and the industry; it also discusses the importance of the chemical nature and formulation of synthetic anti-miRs, which are largely proprietary.

Investment thesis:

The antisense renaissance is an opportunity to invest in innovation.

Investing in antisense therapeutics is high-risk.

Investing upstream in RNA-focused life sciences is low-risk.

Investing in antisense therapeutics is high-risk. The following figure is a list of some of the companies with antisense drugs or their delivery systems that have progressed into Phase II trials or further.

(click to enlarge)Sarepta and Prosensa are not included, since their antisense drugs work by a different mechanism at the RNA-level called skipping.

Market cap and valuations of companies in the table above that are publicly traded are in the next figure.

COMPANY

Market Cap ($M)

Enterprise Value ($M)

Revenue TTM ($M)

P/S

EV/Rev

P/B

Alnylam

$5,120

$4,820

$45

114

108

17

ISIS

$5,740

$5,190

$125

46

42

14

OncoGenex

$178

$121

$31

6

4

3.9

Regado

$127

$82

$0

-

-

2.5

Regulus

$400

$251

$17

23

14

3.8

Silence

$225

$186

$0

579

693

4.3

Tekmira

$282

$243

$12

24

21

6.5

I consider these to be speculative stocks that do not offer opportunity to value investors either because valuations are high or because their pipelines are so limited.

An alternative to investing in antisense therapeutics: RNA-based life sciences. The company that spun off Santaris A/S is Exiqon A/S, and what these two Danish firms still share in common is the proprietary locked nucleic acid technology. As noted above, Santaris has a therapeutic LNA, miravirsen. Antisense oligomers containing locked nucleic acids are also powerful diagnostic tools. LNA™ is the trademark that still belongs to Exiqon for diagnostic uses of LNA after it sold rights to use LNA for therapeutic purposes.

I will parenthetically add a note here that classical antisense therapy with interfering RNA, or RNAi, is against messenger RNA, not miRNA. Therapy with an antagonist to miRNA is therefore different, but still antisense.

Brief History of Exiqon and Locked Nucleic Acids. Exiqon A/S (EXQ) trades on the Copenhagen exchange, and has a market cap of $56 M (DKK 312). In 1999, Cureon A/S was founded as a subsidiary of Exiqon for the purpose of exploiting the therapeutic potential of the LNA™ technology. Santaris A/S was created in May 2003 through the merger of Cureon A/S and Pantheco A/S.

In 2006, Exiqon entered an agreement with Santaris Pharma A/S concerning co-ownership to a number of patents and patent applications for parts of the LNA technology originally acquired from its Japanese inventor, Dr. Takeshi Imanishi, and Dr. Wengel, its Danish inventor. Exiqon issued license to Santaris to exploit those patents in the therapeutic field. In 2007, EXQ granted non-exclusive license to Applied Biosystems to use Exiqon's proprietary LNA in the development of small interfering RNA, or siRNA (source of data: EXQ 2010 Annual Report).

Exiqon has out-licensed its LNA™ technology to Roche to use in its Universal Probe Library and mRNA qPCR assays, to Life Technologies to use in its Silencer and enhanced siRNA, and to Luminex for its molecular diagnostics and miRNA detection systems.

These licenses to larger firms provide tangible support to the impression I get from reading some of the scientific papers in this field that LNA is a platform with desirable features that is commercially viable. Desirable features include resistance to natural enzymes that degrade nucleic acid chains (oligonucleotides, or when they are synthetic, oligomers), and tight binding to their targets. To be honest, however, making a case for one platform over another is difficult, in part due to their proprietary nature: I suspect that experts in one platform tend to favor it over that of a competitor, and I know of no direct comparisons.

Exiqon financial history. In 2008, EXQ acquired biotechnology company, Oncotech, which specialized in the detection of cancer-causing mutations such as KRAS and BRAF. In late 2009, EXQ decided to divest itself of Oncotech, but eventually had to liquidate. Large losses for the company produced large losses for shareholders. Over the past 4 years, however, revenues have grown and losses have progressively lessened, as shown in the following figure.

R&D has averaged 42% of revenue since 2008, 20% for 2013.

The case for capitalizing research and development costs has been made in a paper by Damodaran found here and discussed here. The return on capital adjusted for R&D expenditures using this method is shown for EXQ in the following figure.

EXQ forecasted 21% revenue growth for 2014 in its recent fourth quarter 2013 earnings announcement.

Valuations in the table below are for EXQ and several of its peers.

Company

Market Cap

P/S

EV/Revenue

P/B

EXQ

$56M

2.5

2.6*

4.0

AFFX

$514M

1.6

1.8

1.9

QGEN

$5,280M

4.1

4.4

1.9

TMO$43,730M3.33.62.5

* = Mk Cap + non-current liabilities (no debt or preferred shares)

Conclusions and Recommendations:

RNA-based therapies will change the way diseases are treated. There is opportunity to participate in the innovation and growth in this field.

Valuations in the RNA therapeutics industry are high. Value investors beware stocks of companies developing antisense therapeutics given their limited pipelines or high valuations noted in the above tables.

The successful Phase IIa trial of miravirsen for heptatitis C published in the highly respected New England Journal of Medicine adds legitimacy to the locked nucleic acid platform. I followed a patent trail from this publication to Exiqon, then bought shares after reading some of its annual reports.

EXQ stock has traded between DKK8 and DKK9 for much of the past year, and will continue to do so for a while with no immediate catalyst on the horizon. I expect the stock to appreciate gradually, not explosively. The trading volume of EXQ on the Copenhagen stock exchange is much larger than for the OTC EXQNF version.

Value investors should consider life sciences companies engaged in RNA research and diagnostics like Exiqon (EXQ), Affymetrix (NASDAQ:AFFX), Thermo Fisher (NYSE:TMO), Qiagen (NASDAQ:QGEN); then buy and hold for the long term because it will take a long time for this industry to mature.

Source: Exiqon Is A Safe Way To Play The Renaissance In Antisense

Additional disclosure: I am long EXQ on the Copenhagen exchange.