In A Shaky Biotech Market, Alnylam's Prospects Are Getting Stronger

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Summary

Alnylam has assembled a collection of clinical candidates that offer multiple shots on goal with sales potential of $1B or more.

Alnylam's partnership with Sanofi adds marketing power, development funding, and capital.

Having multiple potential billion-dollar drugs targeting the liver is good, but developing delivery technology with broader utility would be a major win.

Biotech investing is not where you go if you want an easy investing life, but the profits of patience and good stock selection can be significant. Investors are clearly nervous about biotech now, and there is a threat that sector-wide selling in these notoriously fickle stocks will put them in hibernation until the cycle turns around again.

Specific to Alnylam (NASDAQ:ALNY), though, I would argue the company has never been stronger. The company is on pace to exceed its target of having five compounds in human studies by the end of 2015 ("5 x 15"), and a recent deal with Sanofi (NYSE:SNY) gives Alnylam development funding, a motivated commercial partner, and the perception that it has been vetted by a large pharmaceutical company with a significant presence in rare diseases.

Alnylam is absolutely a risky pick, and investors should not ignore the risk that not only may the company's drugs fail in the clinic or in the marketplace, but that investors indiscriminately bailing out of the sector could weigh on the share price at times. On the flip side, I cannot ignore that Alnylam has multiple potential billion dollar-plus drugs in the clinic and a very strong R&D position in what could prove to be one of the next major therapeutic alternatives. With that, I see almost 50% upside in Alnylam shares today.

Leveraging Potential Into The Clinic

Isis Pharmaceuticals (ISIS) and Alnylam have been working on RNA-based therapeutics for a long time and are now starting to see real clinical fruits for those efforts. Alnylam has over 300 patents issued in the U.S., Europe, and Japan related to siRNA and delivery technologies, making it one of the strongest players in this space.

Alnylam has leveraged this IP into actual clinical candidates, with a particular focus on liver-centric genetic disease. The most advanced active development program is in transthyretin-mediated amyloidosis. TTR amyloidosis is just one of the many subtype of amyloidosis, a group of conditions characterized by cells producing insoluble proteins that aggregate into fibrils, accumulate in the organs, and cause dysfunction and damage.

Alnylam has patisiran (ALN-TTR02) in Phase III development for familial amyloid polyneuropathy (or FAP), a disease that affects around 10,000 patients in the U.S. and EU. Almost always fatal within a decade of onset, only liver transplant offers an effective long-term option. Prior clinical work has confirmed a link between TTR gene knockdown and reduced amyloid formation, and Alnylam's drug has shown mean knockdowns in the mid-80%'s and maximum knockdown of 96%.

Isis has a drug for this indication in Phase III studies (partnered with Glaxo), but Alnylam's drug has shown more potent knockdown effects (with TTR knockdown in the 70% to 80% range). Comparing across studies is tricky and it will take final results from both drugs to make a fair comparison. Even so, 45% share of the addressable market still should allow for over $1 billion in revenue for this drug, with Sanofi marketing it outside North America and the EU.

Alnylam is also well into clinical development of ALN-TTRsc, a subcutaneous siRNA treatment for familial amyloidotic cardiomyopathy - a different amyloid condition that leads to heart failure and rapid mortality (less than two years from onset of symptoms). Early studies showed a greater than 80% gene knockdown and top-line Phase II data should be available later this year. Alnylam has a global partnership with Sanofi for this drug, and that could be vital in patient identification / recruitment and pricing, as though the costs of treating heart failure patients is high, this is a largely Medicare population and that can create pricing challenges.

Numerous Ongoing Programs

Alnylam is going to be very busy over the next couple of years advancing additional preclinical programs into human testing. Many, if not most, of these address markets worth $1 billion or more.

ALN-AT3 is a therapy targeted at hemophilia, a sizable market for Baxter (NYSE:BAX), and one that has attracted increasing attention from Biogen Idec (NASDAQ:BIIB) and Novo Nordisk (NYSE:NVO). Alnylam isn't looking to position ALN-AT3 as a front-line hemophilia therapy, but rather one for patients with particularly serious/rare forms and/or inhibitors to other therapies. AT3 could address up to about 10% of the 50,000-patient market and likely at a premium price. This compound is now in Phase I testing.

A little further behind are ALN-AS1 and ALN-CC5. ALN-AS1 is targeted at intermittent porphyria, a rare disease (40,000 or fewer patients) with few good treatment options. ALN-CC5 could conceivably target many of the same diseases as Alexion's (NASDAQ:ALXN) blockbuster Soliris, but Alexion has already started arguing that ALN-CC5's less-than-perfect profile (up to 98% serum C5 knockdown in non-human primates, up to 94% inhibition in hemolytic activity) won't be good enough. Time will tell; 80% knockdown has shown clinical benefit and Alnylam has been looking to optimize and improve the final clinical candidate.

Further down the road are ALN-TMP for blood disorders like beta-thalassemia, ALN-AAT for alpha-1-antitrypsin deficiency-related disease, and ALN-ANG for varieties of hyperlipidemia and hypertriglyceridemia. Alnylam has formed a partnership with The Medicines Company (NASDAQ:MDCO) to develop PSCK9-targeting RNAi therapies (to potentially compete with the PCSK9 inhibitors being developed by Sanofi, Amgen, and Pfizer), and also had now-stalled partnerships covering RSV and liver cancer.

Building Capabilities And Adding A Big Partner

One of the long-term keys to competing in the RNAi/siRNA space is likely to be having the right delivery technology. These compounds are particularly fragile and require relatively advanced delivery mechanisms to get them into their targeted cells.

Through internal R&D and cross-licensing with Tekmira (TKMR), Alynlam has lipid nanoparticle (or LNP) delivery capabilities and a license with Arrowhead (NASDAQ:ARWR) allows them to use dynamic polyconjugate (or DPC) delivery technology. Alnylam has also developed the GalNAc delivery platform that delivers therapy through uptake by the asialoglycoprotein receptor on hepatocytes and allows for sub-q administration. At present, Alnylam's delivery capabilities don't seem to stretch beyond the liver, but developing more broadly useful delivery technology appears to be a priority, and likely was a big part of the motivation to acquire Merck's (NYSE:MRK) Sirna assets.

Earlier this year, Alnylam gained a significant endorsement with a major partnership agreement with Sanofi. In this deal, Sanofi gained broader rights to patisiran, worldwide rights to ALN-TTRsc (with co-development/promotion in the U.S. and EU), the right to two other rare-disease drugs, and an option to commercialize additional rare disease drugs from Alnylam's pipeline through 2020. Commercialized drugs that are not co-promoted will bring milestones and royalty payments to Alnylam, and Sanofi is also taking an initial 12% stake in ALNY with the option to increase that stake up to 30% over time.

Estimating The Value

Obviously, there is considerable guesswork in projecting the value of any biotech, and one of the concerns I have about Alnylam is that some of the more bullish analysts have already started regarding the approval of patisiran as a certainty.

Patisiran is the most advanced drug in the pipeline, and I calculate a per-share value of almost $34. I am assuming 45% market penetration (in part to account for competition with Isis) and using a 65% chance of approval (on par with the success rate of novel drugs in Phase III). For ALN-TTRsc, I calculate a value of almost $50 on the basis of a larger treatable population (4x as large) and over $3 billion in potential sales, discounted by a 35% chance of approval and an eight-year timeline to peak sales.

As neither the hemophilia (AT-3) or porphyria (AS1) drugs have cleared Phase I, I use very low approval odds (15% and 5%, respectively). That reduces what could be two billion-dollar drugs to current per-share values of roughly $3 and $1, but also means there's significant upside here as further clinical development de-risks their value. I calculate a further $1 per share in value for the PCKS9 partnership and slightly more for the preclinical pipeline (outside of porphyria).

The Bottom Line

Even with the assumption of sub-50% market shares, and less than 50% approval odds for the pipeline outside of patisiran, I calculate a fair value of almost $90 for Alnylam. I'd also observe that the company is flush with cash and can afford to devote considerable resources toward further delivery technology development and preclinical candidate research. There is also considerable potential to be had from de-risking the pipeline, as fully derisking patisiran would add about $20/share in value and fully derisking ALN-TTRsc would be worth more than the current share price.

There is certainly a risk that investors will continue to flee biotech stocks and go back to prior assumptions about discount rates and "appropriate" future revenue multiples. That would pressure Alnylam shares in the short run, but this company's broad pipeline and strong RNA interference knowledge base makes it a good stock to keep in mind for new biotech investments.

Disclosure: I am long ALNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.