Alnylam: Rally On No News Leaves Room For Downside

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Since we wrote our first article on Alnylam (NASDAQ:ALNY), the stock has risen 30%, making what was previously merely an overvalued stock now reach nosebleed levels. The main event that has transpired since that time was a secondary offering by JP Morgan and the company's presentation at the JP Morgan Healthcare conference from January 7 to 11. Neither event seemed material to us, and the recent rise in the stock price seems unwarranted from a fundamental perspective.

Secondary Equity Raise

On January 16, the company raised $174 million in a secondary offering. Given that the company had $228m of cash as of September 30, it does not appear that the company needed the additional capital for any near-term reasons. According to its prospectus, the use of proceeds were the company's ALN-TTR02, ALN-TTRsc, ALN-AT3, and ALN-AS1 programs, which are the same programs that ALNY had been budgeting for prior to the capital raise.

Rather, we believe that Alnylam was simply taking advantage of an unusually strong biotech market to raise capital before the market re-rated the company's valuation to a more reasonable level.

We have reviewed recent equity research reports published over the past month, and have not seen any additional data or commentary that warrants the sharp rise in the share price this month. The company's lead underwriter for the secondary offering is JP Morgan, and they issued short research reports on January 6 and January 9, mainly a preview and post-presentation commentary for the company's investor presentation at the JP Morgan Healthcare conference two weeks ago. We saw little in the research updates that indicated any particular progress in the company's pipeline. As previously discussed, ALNY currently has no drugs in Phase III trial, and has a far weaker pipeline than Isis Pharmaceuticals (ISIS), the other pure-play RNAi player, and yet trades at a comparable valuation. ALNY has a market capitalization of $1.3bn, compared to $1.4bn for ISIS.

We continue to believe that ALNY and ISIS will see their valuations diverge as investors begin to better differentiate between the drug portfolios of the two companies.

JP Morgan Healthcare Conference

Alnylam presented at the JP Morgan healthcare conference earlier this month and a transcript is available here. In reviewing the transcript, we find little to suggest that Alnylam has a pipeline worth $1.3bn. Most of its drugs remain predominantly in Phase I trials, and we've noted key problems with the trial data provided thus far for its ALN-TTR02 candidate. According to the transcript, the company doesn't project a start date for a Phase III clinical study of the drug in FAP patients until the end of 2013 at the earliest, and that's contingent on promising results in the current Phase II clinical study. Those Phase II results are due in the middle of this year.

Furthermore, Alnylam's ALN-TTR02 candidate is only one of three clinical programs for the rare genetic disorder caused by a dysfunction of the transthyretin (TTR) protein, called Familial transthyretin amyloidosis (FAP) / TTR-mediated amyloidosis (ATTR), as discussed by Chimera Research. And Alynylam's candidate is the furthest behind. Pfizer's (NYSE:PFE) Vyndaqel therapy is currently approved in Europe, and is undergoing a more in-depth Phase III trial to respond to an FDA complete response letter. In second place is Isis Pharmaceuticals' ISIS-TRRx, which is partnered with GlaxoSmithKline (NYSE:GSK). Isis and Glaxo have announced a Phase II/III study that was set to begin enrollment by the end of last year.

Alnylam, in contrast, does not have a partner, and its trial is only studying the drug once every four weeks for two cycles (2 doses), thus limiting the amount of data that will be available to determine the safety and efficacy of the drug.

Finally, FAP's market size is limited -- the dysfunction affects only roughly 5,000 to 10,000 patients worldwide. Given that the earliest ALNY's drug could come to market is likely 2017 onwards, and that it trails both Pfizer and Isis in progress thus far, we find the company's current market capitalization as wildly over-optimistic about ALN-TTR02's prospects.

Alnylam's other Phase II trial, in ALN-RSV01, reported disappointing results last year and has been placed on the backburner. The RSV program was barely mentioned in the JP Morgan conference presentation. The rest of Alnylam's drug candidates are in Phase I.

Yet the company trades at a $1.3 billion market capitalization. We don't think this makes sense. We recognize that biotech stocks routinely garner several hundred millions of dollars of market capitalization despite drug candidates being in only Phase I or Phase II trials and having long shot odds of ever receiving FDA approval. Yet for a company with this sort of uninspiring drug portfolio to garner a $1.3 billion market cap is highly unusual.

Alnylam seems to be caught up with the broad-based biotech and market rally this month. The S&P Biotech index (XBI US EQUITY on Bloomberg) is up 9% in January, and it makes sense that Alnylam's 30% rally since the start of the year is several multiples of that given its smallcap and speculative nature. That said, the stock's rise does not seem to be supported by the fundamentals. As well, the stock has witnessed no insider buying in almost a year, with the last insider purchase occurring in February of last year. In fact, insiders have been selling since that time, disposing of more than 1.6 million shares in the open market. In particular, the global pharmaceutical company Novartis (NYSE:NVS), which acquired 13% of ALNY several years ago as part of a collaboration agreement, dumped 1.55m shares at $19.42 in September. If the smart money is selling, we question who is buying at prices 30% higher.

Disclosure: I am short ALNY.

Business relationship disclosure: My research firm provides research services to clients and manages funds for compensation, and I therefore benefit to the extent shares in ALNY decline.