Is Alnylam In 2020 Worth $9 Billion Now?

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Summary

Alnylam is a leader in RNAi therapies.

The pipeline is quite impressive.

While looking good long term, short-term risk is high.

Alnylam's (NASDAQ:ALNY) RNAi paradigm for medical therapies is outside the current mainstream, which is having great success with variants on monoclonal antibodies (MABs) and traditional small molecules.

RNAi (RNA interference) silences DNA segments, or genes, by interfering with the process that translates genetic instructions into proteins. The effect of RNAi is temporary; it must be introduced continuously into cells to work. If a disease is caused by a malformed protein (typically from a mutation in the gene), in theory it can be treated with an RNAi.

That is a pretty exciting concept, and it has already shown some good results in preclinical and clinical trials. That is why a company that has no approved commercial therapy can have a market capitalization of about $9 billion.

Patisiran Latest Clinical Results

Alnylam's stock price spiked to a 52-week high of $132.99 on April 21, after the release of positive results for Patisiran in its Phase 2 open label extension study for FAP (Familial Amyloidotic Polyneuropathy), a form of ATTR (see below). Compared to historical data, the results indicated that Patisiran has the potential to stop neuropathic progression resulting from the disease, as measured by a standard neuropathy test. In addition, testing showed that levels of TTR (transthyretin) in the blood were greatly reduced. These were 12-month interim results, with 18-month results expected before the end of the year.

These results should be seen as confirmatory of both the RNAi platform and of Patisiran. Note they are from an extension of a study that had already produced positive results. Given the pipeline value that already depends on Patisiran's success, the extension study data should not have changed the overall valuation substantially. And in fact Alnylam has dropped over 18% from that peak, to $108.43 per share at close on April 27, including participation in the day's biotechnology sell-off.

Pipeline Progress

Alnylam's pipeline includes four therapies covering three diseases that are in human, clinical trials. It also has a swarm of pre-clinical RNAi therapies.

The most advanced candidate is Patisiran (ALN-TTR02) for ATTR, TTR-mediated Amyloidosis, which is being developed in partnership with Genzyme/Sanofi (NYSE:SNY). ATTR is a deadly orphan disease, but has about 50,000 potential patients worldwide. ATTR is due to any of a number of genetic mutations that affect amyloid production. Results from a Phase 2 trial were positive, with an ongoing extension that will continue to produce data in 2015. A Phase 3 trial is underway, with possible 2017 submission to the FDA. That means 2018 before significant revenue.

Another candidate, Revusiran (ALN-TTRsc) is also being tested for a variant of ATTR called FAC, or Familial Amyloidotic Cardiomyopathy. Phase 2 results reported last November showed Revusiran knocked down the levels of TTR known to cause the disease by a mean maximum of 87.2%. FAC is generally fatal within 5 years of diagnosis. A phase 3 trial is already enrolling patients. Revusiran development is also a partnership with Genzyme.

In addition, ALN-AT3 has entered Phase 1 for Hemophilia, and a Phase 2 study could start later this year. ALN-PCSsc has entered Phase 1 for control of cholesterol. ALN-CC5 for complement-mediated diseases is scheduled to start a Phase 1/2 study in 2015.

There are at least eleven therapies in preclinical development broadly covering genetic diseases, cardio-metabolic diseases, and infections of the liver.

Alnylam is guiding to having 3 commercially marketed products by 2020. However, no guidance as to how much revenue those products might generate at that time has been provided.

Cash and Time Line

Turning to finances, Alnylam won't report on the first quarter of 2015 until later in May, so I will use data from the fourth quarter of 2014, which was reported on February 12.

Revenue from collaborators was $24.0 million in the quarter; recall that Alnylam does not have any products approved for commercialization yet. Research and development expense was $55.5 million, which is small for a company with this size of pipeline, likely due to help from collaborators. Total operating expenses were $69.7 million. A $22.1 million income tax benefit and smaller items led to a GAAP net loss of $21.4 million.

Cash and equivalents were $882 million. That means that Alnylam has raised a lot of money from investors. Cash looks like enough to get it through Phase 3 trials of its initial candidates, and then some.

Conclusion

Alnylam is an impressive company with a platform that is already delivering positive clinical results for several therapies. It seems likely that it will achieve its goal of having 3 commercial therapies by 2020. However, it is important to remember that many therapies have failed in Phase 3 or have failed in commercialization.

It is easy to understand why value and conservative investors shy away from development-stage biotechnology companies that already have multi-billion dollar market capitalizations. Things can go wrong, and have in the past. Most commonly when larger groups of patients are tested in Phase 3 trials, or even later when a drug is sold commercially, adverse reactions that did not appear in smaller trials may crop up. That may lead to failure to get FDA approval, or to a smaller-than-anticipated patient uptake.

I believe in the value of biotechnology therapy pipelines, but I also like to see appropriate discounting to account for the downside risk.

Many biotechnology investors hope that their investments will pay off when a larger company acquires them. This accounts for some of the large market capitalizations on the market at any given time. However, it is worth noting that Celgene announced on April 15 that it had added a director of Alnylam, Michael W. Bonney to its own board. Bonney was the CEO of Cubist Pharmaceuticals until December 31, 2014. I don't know whether this is an expression of interest in Alnylam's platform, or Cubist, or just in Mr. Bonney's expertise.

Since I started researching this article last week, Alnylam's market capitalization has declined from about $10 billion to about $9 billion. I point that out to show the short-term risk involved. It is not just a matter of the possibility of bad news leading to a fall. When you have that much market capitalization this much in advance of the first product commercialization, a lot depends on investor confidence.

I generally invest with a 3 to 5 year time horizon, which I have found to be the sweet spot for my investment style. My impression is that it is more likely than not that in 2020 Alnylam will be approaching where Alexion (NASDAQ:ALXN) and Vertex (NASDAQ:VRTX) are today, with respective market capitalizations of $34.9 billion and $31 billion. So I would be comfortable starting to build a position in ALNY even at today's market capitalization.

But ALNY has to compete for my cash with a host of other biotechnology stocks. I own and know of other development-stage stocks that may also have bright prospects in five years, but have not yet had their prices driven up quite so high in anticipation of large future rewards.

Over time, I will likely accumulate Alnylam because I think RNAi is an important technology that could complement or even displace older pharmaceutical technologies.

Disclosure: The author is long ALXN.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.