Alnylam Far From Primetime, But Still An Intriguing Prospect

Here at the midpoint, 2012 is looking like a strong year for biotech and some risky names have done quite well. Although not coming close to the gains seen in Arena Pharmaceuticals (NASDAQ:ARNA), Amylin Pharmaceuticals (AMLN), or Lexicon Pharmaceuticals (NASDAQ:LXRX), RNA interference specialist Alnylam Pharmaceuticals (NASDAQ:ALNY) has come on strong with encouraging early-stage data and a greater risk tolerance on the part of investors.

All of the standard warnings apply to Alnylam, as the company is indeed many years from potential product approvals and none of the company's programs are in advanced trials. Upping the risk even more is the fact that RNA interference is still an unproven approach and many Big Pharma companies appear to have backed away from the technology. All that said, this company has a broad clinical program, numerous high-value targets, deep IP, and a healthy balance sheet.

5x15 Program Coming Into View

When I last wrote about Alnylam, the company was mostly a technology/intellectual property play, and the company's "5x15" program was still coming together. Now, however, there is early-stage data on multiple programs and a clearer vision for the company's near-term research and development efforts.

As it stands today, 5x15 covers programs for transthyretin-mediated amyloidosis, hypercholesterolemia, refractory anemia, hemophilia, and various hemoglobinopathies including sickle-cell and beta-thalassemia. Phase I data is already available for the first two programs (and has been encouraging), and the company is looking to form partnerships to accelerate clinical development while not overspending its resources.

ALN-TTR02 Should Be First To Market

Assuming that all goes well with clinical development, ALN-TTR02 will be Alnylam's first drug to market. A predecessor drug showed impressive efficacy, but early stage trial data due in the third quarter of this year will be a significant event for shareholders. Given the orphan drug nature of this condition, Alnylam can look forward to an accelerated clinical development program that could have it on the market in 2015.

With potential peak sales of over $1 billion and no approved treatment (other than liver transplant), this is not a trivial opportunity for the company. Of course, there are no guarantees -- Pfizer (NYSE:PFE) thought it had a potential winner in TTR-FAP before a tough panel meeting for its drug Vyndaquel, and the FDA's rejection (asking for another clinical study).

Will ALN-PCS Be Good Enough?

Alnylam also has Phase I data in the books on ALN-PCS, its PCSK9 inhibitor for hypercholesterolemia. While Sanofi (NYSE:SNY) and Isis (ISIS) are moving forward with their mipomersen antisense therapy for familial hypercholesterolemia, Alnylam is targeting the larger "high cholesterol" market.

Alnylam is not alone here; Amgen (NASDAQ:AMGN) and Regeneron (NASDAQ:REGN) are both developing PCSK9 inhibitor drugs, and their early clinical data has looked strong. There's an apples-to-oranges dynamic at work here, though, as Regeneron's REGN727 showed a 73% reduction in PCSK expression against ALN-PCS's 66% reduction (at the highest dosage), but the Amgen and Regeneron trials were done with statin users. There's no reason at this point to think that ALN-PCS won't work well with statins, but the company will have to prove this to get the benefit of the doubt.

Aggressive Early Partnering Is Good News/Bad News

Alnylam appears to want to keep ALN-TTR02 in-house for now, and there's no reason not to -- biotechs have proven before that they don't need Big Pharma to make hay in orphan drugs. Likewise, the company's desire to partner ALN-PCS makes sense as a market as large as cholesterol can benefit from the detailing that is Big Pharma's marketing bread and butter.

Trying to partner ALN-HPN (refractory anemia), ALN-TMP (blood disorders), and ALN-APC (hemophilia) before Phase I is a riskier proposition. While conserving resources and leaning on the expertise of a larger partner makes a certain amount of sense, it's often difficult to secure favorable upfront payments and strong royalty rates at such early points in development. So while these partnerships would de-risk the programs and give a much-needed vote of confidence to Alnylam's technology, the company may find itself leaving some value on the table in exchange.

Plenty Of Risk Remains

It should go without saying that a company with no drugs in late-stage trials and pursuing a so far unproven therapy is a risky pick. It doesn't help matters that there is still the potential for further IP battles -- Alnylam appears to have a robust patent estate, but companies like Merck (NYSE:MRK) may challenge that if the therapies appear to work, and the company is already fighting in court with its erstwhile delivery technology partner Tekmira (TKMR).

The Bottom Line

There are always grey areas and a lot of guesswork when it comes to valuing biotechs, and that's even truer when a company is at such an early stage. Nevertheless, on the basis of $500 million in TTR-FAP revenue in 2020 and $300 million in ALN-PCS revenue, an 8 times revenue multiple, and a 35% discount rate, these shares seem to be worth over $10.50. In addition to that figure, Alnylam ought to get some valuation credit for its early-stage pipeline, its Regulus Therapeutics JV with Isis, and its IP estate. In all, I believe you can arrive at a $16.50 price target with pretty conservative assumptions; a little more optimism or aggression pushes that north of $20 fairly quickly.

I'm feeling good about my Alnylam position today, but I am aware of the risk of confusing a strong biotech market with good stock picking (in the same way that falling into a river of gold doesn't make you a great prospector). This is a risky pick, but one of the relatively few "platform technology" biotechs still trading at an interesting valuation.

Disclosure: I am long ALNY, AMLN, LXRX.