Tekmira: RNAi Company With Long-Term Potential, Short-Term Catalysts

| About: Arbutus Biopharma (ABUS)

In my observation, most biotech bloggers on Seeking Alpha write about stocks they own in a favorable light in order to boost public perception or to give their stock a little attention. I'm afraid to confess that this also rings true with this blog but can nevertheless serve as a starting point for your own due diligence.

Tekmira Pharmaceuticals (TKMR) holds a special place in my portfolio. It was my first investment in early stage biotech which opened up a strong interest in RNAi therapeutics and biotech in general. It was my gateway drug so to speak - no pun intended. I hope this article provides something more than just a rehash of what appears on the company website and gives a variety of commentary. I will try and provide as many useful links as I can throughout the article. Maybe, by the end, you will be more comfortable investing alongside me in a small early stage biotechnology company.

When I literally stumbled upon Tekmira surfing around Google Finance, its technology had a great story. It played a part in how I envisioned the future of medicine. It was the first company where I grew to know the ins-and-outs of every aspect of the company. I'm sure we all have a stock or two in our portfolio for which we have a soft spot.

Tekmira is involved in a class of medicines called RNA interference (RNAi). RNAi therapeutics is based on a 2006 Nobel prize winning technology that allows specific genes to be turned off. Here is a video that breaks down how exactly RNAi works. I highly recommend watching it. It is informative, fun and interesting. It reminds me of watching the old Bill Nye show in 7th grade science class.

The idea of silencing disease-causing genes is very elegant and it seems very simple in theory. It's easy to understand and it makes sense. Not only can identified therapeutic targets be treated with RNAi, but RNAi itself can be used to screen for such candidates to begin with. In a nutshell, turn off a gene and see what it does. Rinse and repeat for all genes of interest.

The ability to screen for therapeutic candidates is something which is just as important as the RNAi therapies itself. It allows the identification of gene targets and increases our ability to treat with RNAi and non RNAI methods. If you are brave, you can read this article on the National Center for Biotechnology Information's page to see an example of how RNAi is being used to screen for genes that can be targeted for therapeutic applications. This specific article zeros in on PLK1 - a program now in Tekmira's pipeline. I will overview this later.

Shortly after the Nobel prize, expectations were enormous and its technology was the frequent feature in major media outlets such as the Nova video linked above. Investors became carried away with themselves and seemed to forget what a long process bringing a new class of therapeutics to the market can be.

The only problem is, it wasn't as easy as it seems in the video. The main challenge was delivering the payload where it needed to go. This proved to be a very difficult hurdle to overcome. With all the signs pointing to a bumpy road ahead, the market took a dive for the worse and everybody began to sell off. Collaborations with Novartis (NYSE:NVS) fell apart in cost saving moves. The nail in the coffin occurred when Roche (OTCQX:RHHBY) seemingly terminated its RNAi efforts after making a substantial investment in the technology. This, combined with distracting litigation, proof of concept not yet be shown in man, and a Euro debt crisis, sent PPS of all RNAi companies to astounding lows through 2011.

In spite of these issues, the science continued. Delivery technology made huge evolutionary leaps, human proof of concept was shown and clinical validation of target genes came with little fanfare.

When looking at a start up biotech company for the first time, usually the first place a potential investor evaluates is the pipeline candidates. However, with Tekmira the secret sauce is their expertise with delivery technology. In an entirely new class of medications, having a strong IP portfolio is critical. Having IP relating to the main challenge surrounding RNAI is especially critical. Tekmira has developed a technology based on the use of lipid nanoparticals (also known as LNP or SNALP) to protect the RNAi payload until it gets to where it needs to go for indications involving the liver. With 6 drugs in current clinical development using this technology, they have become the solid leader in delivery. ALN-VSP02, ALN-TTR01, ALN-TTR02, TKM-PLK1, TKM-EBOLA, and ALN-PCS02 all are using Tekmira's technology and they are entitled to royalties on the products they are not developing themselves. The safety and delivery of its payload have been confirmed in the trials that have been completed thus far. Tekmira's delivery technology has substantial performance advantages over polycation-based RONDEL delivery technology used by Arrowhead (NASDAQ:ARWR) and is more mature than AtuPLEX offered by Silence Therapeutics (SLN). Very recently, Tekmira was granted an important patient that covered all LNP formulations. This protected the technology and served as a nice catalyst in their share price. In addition, they were granted another patent that covered the mitigation of immune stimulation. It is important to suppress immune response so the medication is not destroyed before it arrives at its intended target. More clinical additions using their technology are almost certain.

Tekmira's ever evolving delivery technology just entered the 3rd generation and gave an update at 7th Annual Meeting of the Oligonucleotide Therapeutics Society. This generation of "reLNPs" has a ~10-fold improvement over their 2nd generation technology. It is well tolerated at dosages as high as 10mg/kg. It outperforms all other LNP delivery technology, including MC3 - a major sticking point in the litigation between Alnylam (NASDAQ:ALNY) and Tekmira.

Now on to the evaluation of their pipeline starting with TKM-EBOLA. The most important aspect of this program is that it is being funded to the tune of $140,000,000 by a branch of the DOD called the Joint Project Manager Transformational Medical Technologies. It has a nice ring to it, don't you think? They selected two companies, AVI-biopharma and Tekmira, to develop medical countermeasures for Ebola to be used by war-fighters. JPM-TMT went out of their way to select only platform based technologies. This pipeline candidate is important because it allows them to further improve platform-wide technology while having the government foot the bill.

Since Tekmira and AVI are essentially competing, it is important that the drug not only work, but that it works better than AVI's offering. Preclinical animal testing on non human primates showed a 100% survival rate. AVI has demonstrated an 80% survival rate but AVI has a slight head start on their program. At the conclusion of Phase I trials, Ebola programs will then be evaluated in an Earned Value Management model. These drugs are being developed under the animal rule. Phase I will be measuring the safety of the drug against healthy volunteers. One would expect Tekmira's trial to be safe and well tolerated as SNLAP enabled products have already undergone safety evaluations in other Phase I drug candidates.

Do you get nervous about government funding in an era of austerity? I do too, but all indications are that the funding for this program will continue as planned into 2013. Hypothetically, even if the program was terminated tomorrow, they have already used it to contribute to the advancement of their platform. One can expect this trial to go much more quickly than typical and may even be stockpiled prior to FDA approval. JPM-TMT is also funding research on how to actually best carry out the trials as clinical testing for Ebola is uncharted waters. For more information, I suggest viewing and subscribing to JPM-TMT's newsletter and subscribing on Twitter.

Tekmira's most advanced offering in its pipeline is TKM-PLK1 for indications involving liver tumors for a variety of cancers. PLK1 is found to be over expressed in a variety of tumors and its silencing results in death of the tumor. The targeting of PLK1 has proven to be a very wise choice as it keeps being indicated in a number of different cancers. This month, PLK1 was found to be a potential theraputic target for Breast cancer.. In addition, PLK1 has been fingered in Colon and Lung cancers. Experience gained in silencing PLK1 can potentially be translated into other areas. Tekmira even claims that TKM-PLK1 was adjusted so that it can reach tissues outside the liver.

This specific program is very similar to Alnylam's ALN-VSPII which showed a good safety profile and human proof of concept. Though it is not targeting PLK1, ALN-VSPII used Tekmira's delivery technology. VSPII is a good window into part of PKL1's performance in that regard. It can also serve as a benchmark for which to measure against.

Tekmira has two ongoing phase I trials of TKM-PLK. The most recently started of the two studies was done in collaboration with The United States National Cancer Institute which will deliver TKM-PLK1 directly into the liver via Hepatic Artery Infusion. I am personally very much looking forward to the results of the NCI study. I can't wait to see what silencing PLK1 will do when administering it directly to the liver. It cuts right to the chase. It's a little easier to justify doing that when patients are dying and not suffering from something like high cholesterol.

The results of the first Phase I study are coming any week now. They are expected in Q1 2012 and will serve as a near term catalyst. Since this is expected so soon, you will need to know how to quickly interpret the results of the study to know how to react. Good safety profiles are somewhat hard to navigate in early Phase 1 with patients in pretty bad shape to begin with. Most patients are already heavily treated and I'm sad to say that some will not make it through the trial due to their respective condition. It's difficult to say if the drug was a contributing factor in their death or if it was just their time.

Upon the release of results, I will be looking for three things. I will be using ALN-VSPII as a point of comparison and have VSPII's results bookmarked for quick reference. The first is I want to see is safety as compared to ALN-VSPII as it is considered a drug that is considered well tolerated and results were well received by investors. I will have both safety results side by side.

Second, I want to see how tumor suppression levels compare to Alnylam's 40% reduction. If we see above 40%, we will probably see a significant bump in share price that would extend well over $3.00 in my opinion. If we saw good safety but not so great tumor suppression, it's possible that the drug didn't actually make it to the tumors to do its work. There could be a number of reasons for this, most of which don't mean that the sky is falling. If this is the case I will be looking at my third item very closely - tumor biopsies. They will tell us how much of the drug actually made it in to the tumor. If low levels of the drug made it into the tumor and we saw low levels in the tumor, we have our reason. At some point the drug didn't end up where it needed to go. In which case, I would expect the NCI study to pick up where this one fell short.

From a strategic standpoint, Tekmira chose to do the Hepatic Artery Infusion administration second because they wanted to further refine their platform wide LNP technology. In the event of its failure in this case, they have the follow up study coming in behind it.

TKM-ALDH2 for the treatment of Alcohol Dependence is Tekmira's very recent addition to its pipeline. Much of the information contained about this program is contained in their latest press release. It employs their newest LNP formulation and I would infer that it may use their 3rd generation "reLNP's" mentioned above. I could be wrong in that regard. In any case, they say its their most potent LNP product to date and surpasses all other LNPs to date and that's the most important aspect. Improved potency translates to an improved safety profile.

ALDH2 is an interesting choice. I don't think it creates as much excitement as a cure for cancer but it is a very lucrative opportunity with an interesting story nevertheless.

Caucasians have 2 major ALDH2 copies while 50% of Asians have one normal copy of ALDH2 and one mutant copy. Those with the reduced ALDH2 reaction suffer a "flush reaction" which includes dysphoria, tachycardia, nausea, and hypotension owing to acetaldehyde accumulation when they drink. People with this mutation have alcohol intolerance and generally find it uncomfortable to drink. Only a little over 2.3 of Japanese alcoholics had the ALDH2 mutation. While there are other factors at play other than genetics, these findings are very interesting that alcoholics rarely have this mutation. It demonstrates a clear genetic component in how the body deals with alcohol.

I understand the reaction to TKM-ALDH2 might be similar to that for medications designed to treat obesity. We have a tenancy to blame the patients in areas such as this. TKM-ALDH2 sidesteps this issue and does not seek to cure alcohol dependence in a traditional sense. It works to silence the ALDH2 gene and therefore make consuming alcohol as unpleasant of a process as possible due to the factors listed above. Pretty cool idea I think when viewed in that light.

Preclinical looks good with ALDH2 being silenced down to undetectable levels. I am especially curious what the body's reaction to levels beyond 50% silencing if patients actually consumed alcohol after treatment. I would imagine that around a little bit more than 50% is the amount of ALDH2 suppression Tekmira is targeting. People who are being treated for alcohol dependence are notoriously hard to get to take their medication, so a treatment that lasts at least a month would be ideal. Preclinical data showed a 40% knockdown after 1 month. TKM-ALDH2 has the potential to be the standard of care in a large market. Over 1 million people are in specialty clinics each year for treatment and over 10 times that have alcohol dependence. This is an absolutely huge opportunity and it would be easier to market this drug post FDA approval than a high competitive market.

Relationship With Alnylam and Litigation

Tekmira and Alnylam have a long history together and are interwoven via various contracts and agreements. I will attempt to boil this issue down to the most important aspects and provide commentary and resources so you can also draw your own conclusions.

Alnylam is the largest pure play RNAi company. I think both Alnylam and Tekmira investors would prefer both companies work together productively, but this has most defiantly been the case since Tekmira launched its lawsuit against Alnylam in March of 2011 accusing them of well - basically everything.

Alnylam is tied up every which way with Tekmira. Removing emotions from the situation, they are complementary to each other in almost every regard. Alnylam's clinical candidates use Tekmira's LNP technology and Tekmira licences all theraputic targets through Alnylam's InterfeRX program. These include 8 total licenses, ApoB, PLK1, Ebola, WEE1, CSN5 ALDH2 and two remaining picks. Back when they were getting along, they exchanged this technology for mutual growth. Not only does Tekmira license its LNP technology to Alnylam, it provides its manufacturing services as well. Manufacturing LNP is very difficult as outlined by Merck in this article (NYSE:MRK). As a side note, Merck has already spent over Tekmira's market cap on something Tekmira can already do. Alnylam (along with Roche) is is also a major shareholder in Tekmira. This is really just scratching the surface of how intertwined these two are. Suffice to say, maybe they got a little too close.

Though the lawsuit contains many elements, I view the most important issue being centered around a LNP called MC3. This is a relatively new LNP product that Alnylam claims as its own. This story is as entertaining as it gets.

When Tekmira merged with Protiva as a result of litgation and mutual interests, some employees had some issues with the management and as a result were fired. The employees quietly formed a small private company AlCana (which sounds remarkably similar to Alnylam Canada) and modified Tekmira's MC2 (with 2 carbon atoms) to make it MC3 (with 3 carbon atoms). AlCana allowed Alnylam use of their "invention" and Alnylam claims this as proprietary technology - both to investors and potential partners. Once AlCana's role was discovered by Tekmira over the course of the proceedings, they amended their complaint to include AlCana. These former employees were subject to non compete agreements but argued they did not base their MC3 findings on Tekmira's MC2. They argue MC3 is completely new and novel and had nothing to do with MC2.

This argument at face value seems hard to swallow, but it have might have been a little bit easier to believe if these now ex-employees had not been caught stealing over 10,000 documents containing Tekmira's trade secrets. Tekmira filed for and was granted an injunction relating to the theft of these documents Stock price shot up with the news of this theft and resulting injunction as a important victory belonged to Tekmira. Alnylam is accused of using AlCana as a way to funnel Tekmira's technology into Alnylam and violated a whole host of agreements in which makes them liable for damages.

It is my opinion that Alnylam knew exactly what they were doing in their dealings. They are desperate for delivery technology they can call their own. Pinning it back on Alnylam might be harder and it depends on the facts of the case. Tekmira has some pretty strong charges. I have a feeling that they may attempt a strategy of ignorance and completely sell AlCana down the river. It's a pretty transparent strategy though, so I'm not sure how effective it may be. It is a complicated case, and a jury could be unpredictable.

Additional developments may give clues to into how the lawsuit is progressing. After 4 years of service, Alnylam's general counsel left the company mid litigation. Also, despite a strong balance sheet with cash in hand, they announced a shelf registration after the lawsuit was filed. The amount they were attempting to raise would likely be in the ballpark of what some sort of resolution would cost. They recently announced the public offering of stock and restructured their company by laying off 33% of its workforce and giving up on its 5x15 strategy. This response is likely just as related to the issue of the extremely important Baulcombe patient as it is with litigation. The Baulcombe patient covers basically any gene silencing for all practical therapeutic intents and purposes. This patient weakens Alnylam's IP estate dramatically. They are now going to be licensing both their delivery technology and their gene silencing technology. This will increase the difficulty of successful commercialization of their drugs. MC3 was a desperate attempt to get a hold of something related to delivery. Now they don't even control the method of silencing, delivery IP becomes even more important. Litigation resolution and or acquiring delivery technology was likely a contributing factor in the stock offering and workforce reduction.

While a merger out some sort of buyout would make the most logical sense, it may not be just around the corner. I suspect that talks of a buyout or settlement were in play at one point. Tekmira's very public display of their litigation documents on their main page disappeared for a while, but has since reappeared. I imagine this is a situation where cooler heads are not prevailing. The language of the court documents says it all. It's very bitter. For pretrial settlement, Tekmira probably wants too much and Alnylam probably wants to give too little.

Aside from what conclusions you may choose to draw about the likelihood of a takeover or settlement of some sort, Alnylam's strategy thus far has been to go on the offensive and aimed at dragging out the litigation past Tekmira's current cash runway. The court agrees with this assessment and said in a recent order, "This court remains troubled by what it perceives to be a strategy on the part of the defendants to delay resolution of this matter."

Tekmira adjusted their strategy by securing a 3 million dollar loan from silicon valley bank. They may or may not choose to draw against this loan. If they choose to use it, they will pay monthly starting in October until 2015 at 8% interest. It seems this loan will be used if they go to trial. They have also raised $4,000,000 in private placement offering to be used for the legal battle. New shareholders in the private placement must hold the shares for at least 4 months. This offering extends their cash runway to second half of 2013. These two moves were important in increasing their leverage at the bargaining table.

A court date is set for October 30th, 2012. It is my sincere belief that the litigation will be resolved shortly prior to the court date with both parties claiming some sort of victory. The litigation results will be an additional catalyst in 2012. This stock will more than double Tekmira scores even a partial win. If Tekmira loses the lawsuit, with the issue of the broad LNP patient, they have to pay Tekmira for MC3 anyway. Consistent with Alnylam behavior would be to challenge the LNP patient some how. I wouldn't put it past them.

Value at current PPS and how to trade Tekmira

Tekmira's market cap is a little over 30 million. It is grossly and absurdly undervalued in my view. The Ebola contract alone values the company at significantly more than that. This whole company knows how to pinch a penny and is essentially developing and validating their technology on other people's dimes. They will reap the reward of this strategy as drug candidates using their technology advance through the clinic. The sky is the limit with this new class of medications. There are a number of catalysts in the form of clinical results and litigation results that can work for this stock in 2012. In short, it could be a big opportunity to get in at these very low prices. ALNY shareholders can also use TKMR as a hedge against negative litigation and vice-versa - though I tend to think that ALNY is over inflated in value at the moment and patience will be rewarded.

You do not see much day trading of this stock since all that remains are the most loyal of shareholders who will stick it out through thick and thin. There is a very low percentage of people who short the stock. The people who are invested in Tekmira generally want to keep it until the science runs its course. As a result, the investors in TKMR are very tightly knit and there is not much trading action throughout the day.

If you are looking to buy, I would recommend building a position patiently as this stock is very thinly traded. Be patient when acquiring and you will get it at a better price. Don't forget to include "TKM" in your watch list and remember it is in CAD when comparing the two.

I will close with two essential resources for you to do additional research and to stay informed about the latest happenings.

The first of is Dirk Haussecker's blog. Dirk has a passion for RNAi that is unmatched. He is an Assistant Professor at Dongguk University in Korea and his regularly updated blog contains invaluable scientific information that is readily understandable for average people. Have you ever invested in a start up biotech company and just got bored due to lack of news? This won't happen if you are a regular reader. His blog wont miss a beat about anything substantial happening in RNAi. I read it from beginning to end before I invested in both Alnylam and Tekmira.

The second is Investor Village's TKMR message board. It's the best message board for TKMR and is free of spam and people trying to drive down the price of the stock.

Disclosure: I am long TKMR.